Determination of 2010 Transmission Allowed Revenue and Use of System Tariffs

Determination of 2010 Transmission Allowed Revenue and Use of System Tariffs DOCUMENT TYPE: REFERENCE: DATE PUBLISHED: QUERIES TO: Determination Paper CER/09/140 2 September 2009 Jamie Burke (jburke@cer.ie) The Commission for Energy Regulation, The Exchange, Belgard Square North, Tallaght, Dublin 24. www.cer.ie

CER Information Page Abstract: This paper sets out the decision by the Commission on the electricity transmission business s ex-post allowed revenue for 2008, revised revenue for 2009 and ex-ante allowed revenue for 2010. The transmission revenue for 2010 is divided between revenue for the TSO and the TAO, EirGrid and ESB Networks respectively, and feeds into the transmission tariffs shown in Appendix A to this paper. Target Audience: This determination will be of interest to those who wish to understand the basis and extent of transmission revenue and tariffs from 1 st October 2009. This includes users of the transmission system, consisting of both generation and demand users connected directly to the transmission system or indirectly via the distribution system. Related Documents: 1. CER/09/141; Information Note on LEU Customer Credits 27 th August 2009. 2. CER/09/117; Electricity Networks Tariffs Overview 27 th July 2009. 3. CER/09/115: Proposed Determination of 2010 Transmission Allowed Revenue and Use of System Tariffs 27 th July 2009. 4. CER/08/178; Determination of Transmission Allowed Revenue and Use of System Tariffs 26 th September 2008. 5. CER/05/143; 2006-2010 Transmission Price Control Review Decision Paper. 6. AIP/SEM/07/93; Decision to align PES tariffs in Northern Ireland and the Republic of Ireland. 7. CER/07/184; Determination of Transmission Allowed Revenue and Use of System Tariffs for 2008 19 th October 2007. 8. CER/06/199; Commission s Determination of Transmission Allowed Revenue and Use of System Tariffs Paper 10 th October 2006. 9. Explanatory Paper for the 2007/2008 Statement of Charges on EirGrid s website. 10. SEM 09-001 All-Island Transmission Use of System Charging & Loss Factors 16 th January 2009. 11. CER/08/131; Interim Electricity Price Increase 1 st August 2008.

For further information on this transmission revenue decision paper, please contact Jamie Burke at the CER as follows: Jamie Burke Analyst Electricity Transmission Commission for Energy Regulation The Exchange Belgard Square North Tallaght Dublin 24. Telephone: +353 1 4000800 Fax: +353 1 4000850 Email: jburke@cer.ie 3

Executive Summary 1. Introduction This paper sets out a determination by the Commission on the electricity transmission business s ex-post allowed revenue for 2008, revised forecast revenue for 2009 and ex-ante allowed revenue for 2010. The transmission revenue for 2010 is divided between revenue for the TSO and the TAO, EirGrid and ESB Networks respectively, and feeds into the 2009/2010 transmission tariffs shown in Appendix A to this paper. All figures shown in this paper are in 2008 prices unless otherwise indicated. This paper follows a proposed determination on transmission revenues/tariffs published by the Commission on 27 th July (CER/09/115) for consultation, which included draft transmission use of system (TUoS) tariffs to apply for the tariff period from 1 st October 2009 to 30 th September 2010. The Commission issues this final determination on the allowed 2010 transmission revenue - and associated tariffs from 1 st October 2009 to 30 th September 2010 - to the TSO and TAO, pursuant to Section 35 of the Electricity Regulation Act, 1999. 2. Total Transmission Revenue for 2010 The Commission allows the following revenue for the transmission business in 2010, which is to be 237.36 million in 2010 prices, as shown in the table below. This feeds into the transmission tariffs shown in Appendix A. m 2008 m 2010 prices prices 1 2010 TSO Revenue 98.65 94.12 2010 TAO Revenue 159.23 151.91 Total 2010 Transmission Revenue 257.89 246.03 Less 2008 Over-recovery 0.11 0.11 Less 2009 Revised Forecast 5.83 Less 2009 re-profiled Transmission revenue 2.72 Total allowed Transmission Revenue for 2010 257.78 237.36 1 2010 prices based on inflation of the 2008 prices by assumed rates of -4.6% in 2009 and 0% in 2010. 4

This represents a nominal decrease in the allowed transmission revenue between 2009 and 2010 of 21.59 million or 8.3%, as below: Nominal Prices Transmission (TSO & TAO) Revenue 2009 m 2010 m Change m % Change 258.95 237.36-21.59-8.3% However it is expected that electricity consumption will fall over the period; it is estimated, for the transmission system, that this fall will be approximately 8% from previous estimates of consumption. Therefore, based on the above annual revenues and the estimated consumption, the average unit transmission tariff, for the period from 1 st October 2009 to 30 th September 2010, is estimated to be approximately 0.9 cent/kwh. In other words there is no significant change in the average unit transmission tariff. Overall the key reasons for the decrease in annual revenues between 2009 and 2010 are as follows: A lower than anticipated 2008 outturn cost for Ancillary Services from that which was allowed ex-ante combined with a lower than anticipated Ancillary Services cost forecast for 2009 and 2010; A repayment of 4.5 million of the depreciation and return associated with elements of non-network capex not expended up to 2010; Revised CPI and energy throughput figures for 2009 have led the Commission to re-profile the previously determined 2009 transmission revenue. This re-profiling has helped reduce the allowed 2010 transmission revenue by 2.72 million; The revised forecasts to the 2009 and 2010 TAO allowed revenues on account of the average underspends of Local Authority Rates, which has resulted in a reduction of 1.92 million in TAO allowed revenues in 2009 and 2.02 million in 2010; The Commission s decision to further reduce the 2010 transmission revenue by 5.94 million to reflect TAO capital underspends from 2006 to 2008; The Commission s decision to also reduce the 2010 transmission revenue by 3.82 million to reflect TAO underspend within the cost category Insurance and Compensations from 2006 to 2008; and Somewhat offsetting the above are lower than previously predicted energy throughput figures for 2010, which limits the change in the unit tariff. 5

3. Revenue Allowed in Price Control The following are the allowed revenues for 2009 and 2010 as determined in the 2006 to 2010 price control for the transmission business 2. Trans. Revenue 2004 prices, m Trans. Revenue Nominal prices 3, m 2009 m 2010 m Change m % Change 264.5 274.6 10.1 3.8% 293.74 304.95 11.22 3.8% The 11.22 million nominal increase in transmission revenue from 2009 to 2010 allowed for in the price control, which is driven significantly by the 550 million transmission network investment programme, has been impacted on by subsequent adjustments made to the 2009 4 revenue and the adjustment to the 2010 revenue. The latter is summarised below and discussed in greater detail in this paper. 4. Ex-Post Allowed Revenue for 2008 This section summarises the transmission business s revenue for 2008 as previously allowed and the changes now made, on an ex-post basis. This is then compared with the actual revenue received from market participants, to calculate the total allowed transmission under or over-recovery of revenue for 2008. TSO Allowed Revenue for 2008 The TSO s previously allowed revenue for 2008 was 102.15 million, compared with EirGrid s submitted actual outturn of 93.01 million. Following its review of relevant TSO costs, the Commission has decided to allow the TSO revenue of 93.01 million for 2008, shown in the table below and discussed in section 3 of the paper. 2 As per the Commission s 2006-2010 Transmission Price Control Review Decision Paper (CER/05/143) published on 9th September 2005. 3 Assumes inflation applied as follows: 2005: 2.5%, 2006: 4.0%, 2007: 4.9%, 2008: 4.1%, 2009:-4.6% and 2010: 0%. 4 Refer to the October 2008 Determination of Transmission Allowed Revenue and Use of System Tariffs for 2009 (CER/08/178). 6

m, 2008 Prices Ex-Ante Allowed 5 Revenue sought by TSO 2008 Revenue allowed by CER External Costs Ancillary Services 44.23 35.9 35.9 Constraints 0 0 0 Regulatory Levy 1.26 0.7 0.7 Inter TSO Compensation 0 1.6 1.6 Other (incl. DSO Wires ) 0.37 0.3 0.3 Total External Costs 45.85 38.5 38.5 Internal Costs Operating Costs 40.74 40.73 40.73 Non Operating Depreciation 4.87 4.87 4.87 EirGrid Once Off 0.19 0.19 0.19 EirGrid On Going 2.51 2.51 2.51 Operating Return on Assets 1.20 1.09 1.09 Working Capital 0.52 1.45 1.45 Promotion of Research 0.34 0.34 0.34 Total Internal Costs 50.38 51.18 51.18 Adjustments System Performance Incentives (2008) 0 0.95 0.95 Adjustment allowed in Revenue Determination for '07 Cost 4.56 1.87 1.87 Adjustment for EirGrid readiness costs for SEM 1.92 1.08 1.08 Adjustment to Payroll Costs Arising from SEM -0.57-0.57-0.57 Total Adjustments Total TSO Costs TAO Allowed Revenue for 2008 5.91 3.33 3.33 102.15 93.01 93.01 Having adjusted the TAO s RAB to take account of the opening asset base for 2006 and the underspend in Capital Expenditure by the TAO in 2006, 2007 and 5 As per the Commission s 2006-2010 Transmission Price Control Review Decision Paper CER/05/143 as amended by the Commission s Determination of Transmission Allowed Revenue and Use of System Tariffs Paper, October 2007 CER 07/184. 2008 prices based on inflation of 2.5% in 2005, 4.0% in 2006,4.9%in 2007, and 4.1% in 2008 - http://www.cso.ie/statistics/conpriceindex.htm 7

estimated 2008 6, the TAO s allowed expenditure for 2008 is largely fixed under the price control and is adjusted annually ex-post only for pass-through costs such as Local Authority Rates. Following subsequent Commission decisions on the matters, there is also an adjustment for payment to the TAO by ESB Telecoms for the lease of fibre optic cables on high voltage lines, as well as for the TAO s allowed expenditure addressing the ESB pension deficit as also allowed by the Commission 7. The net impact of applying the adjustments is that the TAO s allowed revenue for 2008 is 150.63 million, as shown in the following table. 2008 Prices 2008 Ex-Ante Allowed in millions 2008 TAO Revenue allowed by CER in millions Total TAO Allowed Revenue after updated profile 152.01 152.01 Shortfall in 2004 Underrecovery 0.09 0.09 Additional Use of System Adjustment 1.63 0.78 Adjustment for ESB Pension deficit 0.44 0.46 Adjustment for Local Authority Rates 0-2.7 TAO Revenue allowed for 2008 154.17 150.63 Total Allowed Revenue for 2008 The following table combines the ex-post allowed TSO and TAO revenues for 2008, compares this to the actual income received and shows an allowed overrecovery for the transmission business for 2008 of 0.11 million. This 0.11 million over-recovery will be used to reduce the 2010 allowed transmission revenue. 6 Please see 2009 Transmission revenue decision paper CER/08/178 published on 26 th September 2008. 7 Please see 2007 Transmission revenue decision paper CER/07/184 published on 19 th October 2007. 8

Over-recovery for 2008 (in millions 2008 prices) Allowed Revenue Revenue received Overrecovery TSO Revenue 93.01 101.55 8.54 TAO Revenue 150.63 153.20 2.57 Minus Transmission under-recovery in 2006 8-11.00 Total Revenue Allowed 243.64 Total Revenue Collected 254.75 Over-recovery in 2008 0.11 5. TSO and TAO Revised Forecast Revenue for 2009 The Commission welcomes EirGrid s earlier proposal to review some components of the allowed 2009 TSO revenue at this juncture, in an attempt to keep tariffs as low as possible for the next tariff period, in view of the current Irish economic circumstances. This step will be taken now as opposed to waiting until the ex-post review in 2010, which would normally be the case. Based on this the Commission now deems it appropriate to provide for a revised forecast to the TSO allowed revenue for 2009 with respect to Ancillary Services to reflect the anticipated underspend of what was previously allowed ex-ante, as detailed in CER/08/178. This calculation is shown in the table below. 2009 prices ( millions) Ancillary Services Ex-ante 2009 allowed CER revised allowed amount 42.47 38.8 3.67 Difference between ex-ante allowed and current allowed Working with the TAO and in light of the current Irish economic circumstances, the Commission has reviewed one of the components of the allowed 2009 TAO revenue. The Commission provides for the pass-through of certain costs, which are deemed to be outside the control of the TAO, one of these being the Local Authority Rates. Upon review of the 2008 (CER/07/184) and 2009 (CER/08/178) revenue determinations and the 2010 submission made by the TAO, which provides the 2008 outturn figure, the Commission has noted that ex-ante allowed amounts for this particular cost-category have been over-estimated for the revenue years 2006, 2007 and now 2008. The Commission therefore has decided to take the average of the three years of over-estimation (2006 to 2008) for TAO local authority rates so as to provide for a 8 Please see CER/07/184 and section 3.5 of this paper 9

revised forecast to the TAO allowed revenue for 2009. The average underspend from 2006 to 2008 amounts to 2.02 million in 2008 prices ( 1.92 million in 2009 prices). The results of the revised 2009 TAO forecast (see table below) will, feed into the total ex-ante allowed 2010 transmission revenue. 2009 prices ( millions) Ex-ante 2009 Allowed CER revised allowed Difference between ex-ante allowed and CER revised allowed Local Authority Rates 22.06 20.13 1.92 The total 2009 revised forecast to be feed into the 2010 transmission revenue amounts to 5.59 million (i.e. 3.67 million + 1.92 million). 6. Total Over-recovery for 2008 and 2009 Applying interest to the transmission businesses combined allowed overrecovery for 2008 and revised forecast for 2009, results in a total over-recovery of 5.95 million (rounded) in 2010 prices. This sum is to be used to reduce the allowed transmission revenue for 2010, as shown below. 2008 m, 2010 prices Over-recovery in 2008 with Interest 0.11 Forecast of Over-recovery in 2009 with Interest 5.83 Over-recovery to be allocated to 2010 (with interest) 5.95 7. Re-profiled 2009 Transmission Revenue In a further effort to reduce transmission tariffs for the forthcoming tariff period the Commission has decided to take the step of re-profiling the allowed transmission revenue for 2009 (minus TSO and TAO external costs), previously decided upon last September in CER/08/178 rather than waiting until next year. This re-profiling will take account of updated CPI inflation figures and revised 2009 energy throughput figures, both of which are significantly changed due to the deteriorated economic situation. In CER/08/178 the Commission originally assumed an inflation figure of 3.4% for 2008 and 2.2% for 2009 9, with an assumed energy throughput figure for 2009 of 28,759 GWh, in order to derive the 1 st October 2008 to 30 th September 2009 transmission tariffs. EirGrid has recently stated that total energy throughput at the trading point in 2008 was 27,844GWh. EirGrid now believes that a reasonable 9 Please see CER 08/178, Determination of Transmission Allowed Revenue and Use of System Tariffs for 2009, published 26 th September 2008. 10

energy throughput estimate at this point in time for 2009 is 4% below the 2008 outturn figure, which equates to 26,730 GWh. The Commission has now decided to apply the actual 2008 CPI figure of 4.1% 10, the assumed 2009 CPI inflation figure used in this paper of -4.6%, and the new 2009 energy throughput forecast of 26,730 GWh, to the ex-ante 2009 transmission allowed revenue decided upon in CER/08/178 (minus TSO and TAO external costs). The reason that TSO and TAO external costs, such as Ancillary Services and Local Authority Rates, are not included in this re-profiling is because they are pass-through actual costs and are not subject to fluctuations in indexation. Also, the Commission has already decided to allow revised forecasts for both Ancillary Services and TAO Local Authority Rates for 2009. Applying the updated inflation figures to the ex-ante 2009 transmission allowed revenue (minus TSO and TAO external costs) results in a reduction of 11.22 million, in the 2009 revenue profiles as shown in the following table. Update re-profiling of 2009 Transmission CER/08/178 Revenue m 2009 prices 11 m 2009 prices 12 Total TSO Revenue 105.62 99.26 Total TAO Revenue 164.51 154.61 Total Revenue Allowed 270.14 253.87 Less TSO External Costs 49.14 46.18 Less TAO External Costs 26.70 25.09 Less 2007 Over-recovery allocation 3.67 3.64 Deduction relating to Capex Underspend 12.02 11.30 Additional provision for tariff period extension 4.50 4.23 Total TUoS Revenue 183.10 171.88 Difference 11.22 However, the revised energy throughput forecast for 2009 of 26,730 GWh means that energy throughput for the calendar year 2009 will be circa 7% less than that forecast at the time tariffs were set in 2008. The Commission therefore estimates that this is approximately 5% less for the 9 month period 1 st January 2009 to 30 th September 2009 (i.e. three-quarters of 7%). In conjunction with EirGrid, the Commission estimates that a 5% reduction in energy throughput for 2009 translates into a reduced transmission income of approximately 8.5 million, based on the mix of capacity versus energy and day versus night KWh rates. 10 http://www.cso.ie/statistics/conpriceindex.htm 11 Actual 2007 CPI of 4.9%, 3.4% in 2008 and 2.2% in 2009. 12 Actual 2007 CPI of 4.9%, Actual 2008 CPI of 4.1% in 2008 and estimated CPI of -4.6% in 2009. 11

The net difference between the re-profiled revenues and the loss in income due to the reduction in energy throughput is 2.72 million ( 11.22 million minus 8.5 million) as shown below. This 2.72 million will be used to reduce the allowed exante 2010 transmission revenue. Difference in Revenues in millions - Updated inflation for 2009 11.22 Difference in Revenues in millions - revised throughput of 26,730 GWh for 2009 8.5 Revenue to be re-profiled into 2010 in millions 2.72 The revised assumed inflation and energy throughput figures used in the reprofiling of allowed 2009 transmission revenue will be subject to final ex-post correction in 2010. It should be noted that in accordance with the Commission s Price Control decision paper (CER/05/143), TSO and TAO payroll costs are fixed annually from 2006 to 2010 and are subject only to inflation (or deflation as the case in 2009) in line with CPI. Therefore, based on the current best estimate for 2009, gross TSO and TAO allowed payroll costs are expected to decrease by the assumed 2009 deflation figure of 4.6%. The assumed 0% inflation figure for 2010 will also be applicable to TSO and TAO payroll costs in 2010. This decrease in TSO and TAO payroll costs is reflected in the transmission tariffs for 2009/2010 as detailed in Appendix A of this paper. 8. Ex-Ante Allowed Revenue for 2010 This section summarises the ex-ante allowed revenue for the transmission business for 2010. TSO Allowed Revenue for 2010 The TSO s previously allowed revenue provided for in the price control, and including adjustments made from 2006 to 2008 for 2010 was 104.43 million, compared with EirGrid s recent submission of 99.13 million and the amount now decided upon by the Commission of 98.65 million. 12

m, 2008 Prices Ex-Ante Allowed Proposed by TSO 2010 Revenue Allowed by CER Ancillary Services 44.35 42.62 42.62 Regulatory Levy 0.81 0.81 0.81 Inter-TSO Compensation 0.00 1.60 1.12 Other (includes DSO Wires Costs) 1.16 0.3 0.3 Interconnector Services 0 0.63 0.63 Constraint banking fees 0.0 0.35 0.35 TSO External Costs 46.33 46.31 45.83 Internal (capped) Costs 40.63 40.63 40.63 Non Operating Depreciation 6.18 1.68 1.68 Operating Return on Assets 1.40 1.18 1.18 Working Capital 0.47 1.36 1.36 EirGrid Ongoing 2.51 2.51 2.51 Promotion of Research 0.35 0.34 0.34 Operating Costs 51.54 47.70 47.70 Adjustment for costs associated with EirGrid 1.92 1.03 1.03 Readiness for SEM Adjustments to Payroll allowance post SEM 0-0.57-0.57 Arm s Length Premises Cost 1.86 1.87 1.87 Incremental Premises Separation Cost 2.78 2.79 2.79 Sub Total Adjustments 6.56 5.12 5.12 Total TSO Revenue 104.43 99.13 98.65 TAO Allowed Revenue The TAO s allowed revenue for 2010 is provided for in the price control and, including adjustments, is set at 169.77 million for 2010. When further adjustments are made including 2.02 million taken away for the reduced 2010 Local Authority Rates forecast, 5.94 million for capital expenditure underspend from 2006 to 2008 and a TAO estimated underspend of 3.82 million for Insurance and Compensation, the TAO s allowed revenue is 159.23 million (rounded). 13

Ex-Ante Allowed million, 2008 Prices Total TAO Allowed Revenue after profile 169.77 Less Capex underspend -5.94 Less TAO Insurance and Compensations underspend -3.82 Less adjustment to Local Authority Rates allowance -2.02 Add adjustment for ESB Pension deficit 0.49 Add adjustment for Use of System by ESB Telecoms 0.77 TAO Revenue allowed for 2010 159.23 14

Table of Contents Executive Summary... 4 1.0 Introduction... 16 1.1 The Commission for Energy Regulation... 16 1.2 Purpose of this Determination paper... 16 1.3 Comments Received... 16 1.4 Background Information... 17 1.5 Structure of this paper... 19 2.0 Application of Price Control... 20 2.1 Introduction... 20 2.2 Revenue for 2008... 20 2.3 Revised Revenue for 2009... 21 2.4 Revenue for 2010... 21 3.0 Ex-Post Allowed Revenue for 2008 & Revenue Forecast for 2009... 22 3.1 Overview of TSO Revenue for 2008... 22 TSO s Costs and Revenues by Category... 22 3.2 External TSO Costs... 24 3.3 Internal TSO Costs... 25 3.4 Overview of TAO revenue for 2008... 29 3.5 Combined TSO & TAO Ex-post Allowed for 2008...30 3.6 TSO and TAO Revised Forecast Revenue for 2009... 32 3.7 Interest Provision for 2008 Over-Recovery and 2009 TSO/TAO Revised Forecast... 34 3.8 Re-profiled 2009 Transmission Revenue... 34 4.0 Ex-Ante Allowed 2010 Revenue... 38 4.1 Overview of TSO Revenue for 2010... 38 4.2 External TSO costs... 40 Ancillary Services... 40 4.3 Internal TSO Costs... 42 4.4 Overview of TAO Revenue for 2010... 46 5.0 Combined 2010 TSO & TAO Revenue... 50 6.0 Demand Side Management... 52 7.0 Rebates... 53 Appendix A Transmission Tariffs 2009/2010... 55 15

1.0 Introduction 1.1 The Commission for Energy Regulation The Commission for Energy Regulation ( the Commission ) is the independent body responsible for overseeing the regulation of Ireland's electricity and gas sectors. The Commission was initially established and granted regulatory powers over the electricity market under the Electricity Regulation Act, 1999. The enactment of the Gas (Interim) (Regulation) Act, 2002 expanded the Commission s jurisdiction to include regulation of the natural gas market, while the Energy (Miscellaneous Provisions) Act 2006 granted the Commission additional powers in relation to gas and electricity safety. The Electricity Regulation Amendment (SEM) Act 2007 outlined the Commission s functions in relation to the Single Electricity Market (SEM) for the island of Ireland. This market is regulated by the Commission and the Northern Ireland Authority for Utility Regulation (NIAUR). The Commission is working to ensure that consumers benefit from regulation and the introduction of competition in the energy sector. 1.2 Purpose of this Determination paper This decision paper sets out the electricity transmission business s ex-post allowed revenue for 2008, the revised revenue forecast for 2009 and the ex-ante allowed revenue for 2010. The allowed 2010 revenue for the business feeds into the 2009/2010 transmission tariffs listed in Appendix A of this paper. The electricity transmission business consists of EirGrid, licensed as the Transmission System Operator (TSO) and ESB Networks, licensed as the Transmission Asset Owner (TAO). This paper follows a proposed determination on transmission revenues/tariffs published by the Commission on 27 th July (CER/09/115) for consultation, which included draft TUoS tariffs to apply for the tariff period from 1 st October 2009 to 30 th September 2010. 1.3 Comments Received The Commission received two responses to the proposed determination paper (CER/09/115). The responses were from Airtricity and EirGrid. Comments received to CER/09/115 are now published and are summarised and responded to in this final determination of 2010 transmission revenue. Comments are also responded to by the Commission in the appropriate section. In addition, 16

comments made in relation to the LEU rebate scheme which is to apply for the tariff period 1 st October 2009 to 30 th September 2010 are also addressed in the Information Note on LEU Customer Credits, CER/09/141. 1.3.1 Summary of Comments Received The Commission s responses to specific comments are included in the appropriate sections. The following is a summary of the comments received. The response from Airtricity relates to section seven of CER/09/115 Rebates. Airtricity have queried the functioning of the Large Energy User (LEU) rebate scheme for the upcoming tariff period, 1 st October 2009 to 30 th September 2010. Comments from EirGrid are concerned with CPI indexation applied to transmission revenues, working capital allowances related to the TSO and administration of the rebate to LEUs for the upcoming 2009/2010 tariff period. 1.3.2 Response to General Comments General comments which do not apply to a specific section are responded to below. EirGrid have stated that an underlying CPI indexation currently applied to transmission revenues requires an ongoing real efficiency in their costs in order to be able to live within the allowable revenues. EirGrid argue that under the current regulatory model, and given the extent of the current deflationary environment, the TSO business faces significantly reduced revenues in both 2009 and 2010. Furthermore, given their cost structure is not fully aligned with the drivers of that deflation, the level of implied efficiency which will have to be achieved to operate within the revenue allowed will be greater than assumed when the control was set. The Commission has throughout the 2006-2010 electricity price (PR2) control used CPI as the indexation value for transmission revenue. As stated in the 2009 revenue decision paper (CER/08/178) the Commission has previously considered as to whether it would be appropriate to switch to HICP or to continue with CPI, with the latter option being chosen. Looking ahead to the next electricity price control (PR3), the Commission would welcome any submissions from interested parties on the appropriateness of CPI being used as the indexation value for transmission revenue. 1.4 Background Information 17

A 5-year revenue control is in place for the TSO and TAO for 2006 to 2010, as set out in the Commission s determination of allowable revenues for the transmission business 13. Accordingly, most of the allowed expenditure for the business is not subject to annual review and is already predetermined for 5 years under this control. Pursuant to Statutory Instrument No. 445 of 2000, EirGrid is the statutory body licensed by the Commission to act as the operator of Ireland s electricity transmission system. The TSO s responsibilities include the operation, maintenance and development of Ireland s electricity transmission system in a safe, secure, reliable, economical and efficient manner. The body which previously undertook the TSO s functions prior to the establishment of EirGrid on 1 st July 2006 was ESB National Grid. ESB Networks is licensed by the Commission under this Statutory Instrument as the owner of Ireland s electricity transmission system. The TAO is required to maintain the transmission system and carry out construction work for its development in accordance with the TSO s development plan. The Commission issues this determination to the TSO and the TAO on their expost allowed revenues for 2008, revised revenue forecast for 2009 and ex-ante allowed revenue for 2010. All prices in this paper are in 2008 prices unless otherwise indicated. Any difference between the outturn transmission income for 2008 and revenues that are now allowed in this review, having reviewed the relevant actual costs incurred in 2008, will feed into the ex-ante allowed revenues for the TSO and TAO for 2010. Account has also been made in the ex-ante allowed revenue for 2010 of any revised forecast of allowed revenues for this calendar year, 2009. The transmission tariffs associated with the 2010 transmission business revenue will apply from 1 st October 2009 to 30 th September 2010. They consist of postalised demand tariffs and locational generator tariffs, which recoup 75% and 25% of the wires component of the allowed transmission revenue (the bulk of the revenue) respectively. All allowed non-wires costs, such as ancillary services, are recovered through demand tariffs. It should be noted that it is envisaged that generator tariffs will be harmonised in an all-island basis with Northern Ireland in the future please see SEM-09-001 14 published by the Regulatory Authorities (the Commission and NIAUR) on 16 th January 2009. Attention is also drawn to the recent publication of SEM-09-060 15 on the AIP website. This consultation paper from the System Operators presents a wide range of methodology options to be considered for the implementation of location signals (TUoS and TLAFs) on the island of Ireland. 13 Refer to 2006-2010 Transmission Price Control Review Decision Paper CER 05/143. 14 http://www.allislandproject.org/en/transmission.aspx?article=2541126d-c86d-4ee3-b1f7-5aa7a0c5da55 15 http://www.allislandproject.org/en/transmission.aspx?article=f0d5c282-c88e-4463-b7ba-d4276ba012cf 18

1.5 Structure of this paper Sections 2 to 5 will outline the detail of the substantive issues of this decision paper; application of the price control, ex-post allowed revenue for 2008, the revised revenue forecast for 2009, the ex-ante allowed 2010 revenue for the TSO and TAO and the combined allowed revenue for the transmission business; Section 6 discusses the Demand Side Management scheme administered by EirGrid as TSO; and Section 7 discusses the LEUs rebate scheme. Appendix A details the transmission tariffs to apply from 1 st October 2009 to the 30 th September 2010. 19

2.0 Application of Price Control 2.1 Introduction On 9 th September 2005 the Commission set out its determination of allowable revenues for the transmission business for 2006 to 2010, for both the TSO and TAO 16. The following are the allowed revenues for 2009 and 2010 as determined in the 2006 to 2010 price control. 2009 m 2010 m Change m % Change Transmission Revenue 2004 prices, m Transmission Revenue Nominal prices 17, m 264.5 274.6 10.1 3.8% 293.74 304.95 11.22 3.8% The 520 million transmission capital investment programme, designed to ensure that Ireland has adequate transmission infrastructure to meet its electricity demand and generation requirements, is a significant component of the 11.22 million increase in transmission revenue from 2009 to 2010. However this revenue allowed for in the price control has been impacted on by subsequent adjustments made to the allowed revenue for 2009 which is already decided 18 and 2010 s allowed revenue. For example, constraint costs associated with the balancing of the transmission systems in the SEM are recovered by the SEMO since the introduction of the SEM and are no longer recovered through transmission tariffs. The adjustments to 2010 s allowed revenue are discussed in this paper. 2.2 Revenue for 2008 Much of the TSO s and most of the TAO s allowed expenditure for 2008 is fixed under the five-year price control and will not be subject to review when determining the allowed ex-post revenue for 2008. For the TSO, annual internal (controllable) costs such as payroll, professional fees, IT operating costs and facilities are fixed for the duration of the price control, whereas an annual adjustment to account for outturn costs will be made 16 Refer to: 2006-2010 Transmission Price Control Review Decision Paper CER/05/143 17 Assumes inflation applied as follows: 2005: 2.5%, 2006: 4.0%, 2007: 4.9%, 2008: 4.1%, 2009: -4.6% and 2010:0%. 18 Refer to Determination of Transmission Allowed Revenue and Use of System Tariffs for 2009 (CER 08/178) 20

for external (uncontrollable) costs such as ancillary services. Adjustments will also be made for changes in uncertain costs such as those associated with the vesting of EirGrid as a separate entity from ESB. For the TAO, the total annual costs are largely fixed for the duration of the price control except for certain costs which are treated as pass-through costs such as the TAO s Local Authority Rates and the Regulatory Levy. The Commission s ex-post allowed revenue for the transmission business in 2008 is discussed in detail in section 3 of this paper. 2.3 Revised Revenue for 2009 The Commission now deems it appropriate to allow for a revised forecast to the TSO allowed revenue for 2009 with respect to Ancillary Services to reflect the anticipated underspend of what was previously allowed ex-ante 19. The Commission has decided to allow for a revised forecast to the TAO allowed revenue for 2009 to reflect an anticipated underspend in Local Authority Rates. Thirdly, the Commission has also decided to re-profile the ex-ante allowed transmission revenue for 2009, which was decided upon last September in CER/08/178. This re-profiling will take account of updated CPI inflation figures and revised energy throughput figures, both of which are significantly changed due to the deteriorated national economic situation. The Commission s revised revenue forecast for the transmission business in 2009 is also discussed in detail in section 3 of this paper. The results of these revised forecasts for 2009, coupled with the ex-post review of the 2008 allowed revenue, will feed into the total ex-ante allowed 2010 transmission revenue. 2.4 Revenue for 2010 The five year price control also applies to the allowed revenues for 2010 in the same manner as 2008 and 2009. The Commission s ex-ante allowed revenue for the transmission business in 2010 is discussed in detail in section 4 of this paper. 19 As detailed in 2009 Transmission Determination paper CER 08/178, published 26th September 2008. 21

3.0 Ex-Post Allowed Revenue for 2008 & Revenue Forecast for 2009 3.1 Overview of TSO Revenue for 2008 The TSO s previously allowed revenue for 2008 was 102.15 million, compared with EirGrid s submitted actual outturn of 93.01 million. Following its review of relevant TSO costs, the Commission allows the TSO revenue of 93.01 million for 2008, shown in Table 1 below. The main contributor to the reduced ex-post revenue for the TSO was outturn figures for Ancillary Services. Table 1: TSO Costs/Revenues, m, 2008 prices 20 Ex-Ante Allowed 2008 Revenue sought by the TSO 2008 Revenue allowed by CER TSO External Costs 45.85 38.5 38.5 Internal Costs 50.38 51.18 51.18 Adjustments 5.91 3.33 3.33 Total TSO Revenue 102.15 93.01 93.01 TSO s Costs and Revenues by Category This section provides a more detailed breakdown of the TSO s costs and revenues. It should be noted that the Commission s ex-ante determination of allowed transmission revenues for 2008, CER/07/184, allowed for the inclusion of new TSO costs in 2008 for which the TSO had requested revenue and which was different to the amount set out in the price control. These included uncertain cost categories which could not reasonably have been foreseen or quantified at the time of the price control review in 2005 and which now undergo an ex-post review in this paper. These costs are as follows: a) Adjustment for costs associated with EirGrid Readiness for SEM; b) Adjustment to Payroll Costs Arising from SEM c) Adjustments allowed in revenue determination for 2007. 20 2008 prices based on inflation of 2.5% in 2005, 4.0% in 2006, 4.9% in 2007 and 4.1% in 2008 (http://www.cso.ie/statistics/conpriceindex.htm) 22

It was also stated in CER/07/184 that the TSO was expected to ensure that allowed additional uncertain costs, as discussed later in this section, would be incurred in an efficient manner. Table 2 below shows the detailed cost categories. The breakdown is divided into external costs and internal costs, as well as uncertain costs and adjustments. Following Table 2, there is a discussion of the costs and revenue categories. Table 2: TSO Costs for 2008, m, 2008 prices Ex-Ante Allowed 21 Revenue sought by TSO 2008 revenue allowed by CER External Costs Ancillary Services 44.23 35.9 35.9 Constraints 0 0 0 Regulatory Levy 1.26 0.7 0.7 Inter TSO Compensation 0.00 1.6 1.6 Other (including DSO Wires) 0.37 0.3 0.3 Total External Costs 45.85 38.5 38.5 Internal Costs Operating Costs 40.74 40.73 40.73 Non Operating Depreciation 4.87 4.87 4.87 EirGrid Once-Off 0.19 0.19 0.19 EirGrid On Going 2.51 2.51 2.51 Operating Return on Assets 1.20 1.09 1.09 Working Capital 0.52 1.45 1.45 Promotion of Research 0.34 0.34 0.34 Total Internal Costs 50.38 51.18 51.18 Adjustments System Performance Incentives 2008 0 0.95 0.95 Adjustment allowed in Revenue Determination 4.56 1.87 1.87 for '07 Adjustment for EirGrid readiness costs for SEM 1.92 1.08 1.08 Adjustment to Payroll Costs Arising from SEM -0.57-0.57-0.57 Total Other Costs 5.91 3.33 3.33 Total TSO Costs 102.15 93.01 93.01 21 As per the Commission s 2006-2010 Transmission Price Control Review Decision Paper CER/05/143 as amended by the Commission s Determination of Transmission Allowed Revenue and Use of System Tariffs Paper, CER 07/184. 2008 prices based on inflation of 2.5% in 2005, 4.0% in 2006, 4.9% in 2007 and 4.1% in 2008 (http://www.cso.ie/statistics/conpriceindex.htm). 23

3.2 External TSO Costs External costs are those costs which are to a large degree outside the TSO s control and are therefore particularly difficult to estimate in advance. An annual ex-post adjustment is made for external costs on receipt of outturn costs from the TSO. In total, the outturn external expenditure amounts to 38.5 million in 2008, 7.35 million less than that previously allowed. Each of the external categories is discussed separately below. Ancillary Services The allowed ancillary services comprise Operating Reserve, Reactive Power, Black Start, System Support and Interruptible Load. The outturn for ancillary services costs for 2008, at 35.9 million, is 8.33 million lower than the amount previously provided for. The lower outturn is due to the continued desire for a further black start facility in the East Coast region which has not yet been procured and a slower than anticipated take up by wind of ancillary services payments. The Commission continues to allow ancillary services as a pass-through cost for 2008 and therefore allows 35.9 million for 2008. Regulatory Levy In the price control the Commission allowed projected costs of 0.75 million per annum throughout the review period to cover the Commission regulatory levy. Due to increases in the regulatory levy, largely associated with Commission resources required for the SEM project, the regulatory levy was increased to 1.26 million for 2007. It was believed at the time of publication of CER/07/184 that extra resources for work on the implementation of the SEM would continue on into 2008; hence the increase in the regulatory levy amount 0.75 million to 1.26 for 2008. However, with the introduction of the SEM on 1 st November 2007 the regulatory levy has decreased for 2008 to 0.7 million. Therefore the allowed ex-post cost for the regulatory levy is 0.7 million. Inter-TSO compensation European Regulation 1228/2003, which took effect from 1 st July 2004, requires that TSOs are compensated for hosting cross-jurisdictional flows of electricity from those TSOs where the flows arise and where they end. A voluntary European ITC scheme, of which Ireland is a member, has been introduced and the outturn net contribution for the scheme for EirGrid for 2008 was 1.6 million. 24

The Commission allows this cost of 1.6 million. DSO Wires Costs The Commission allowed an ex-ante amount of 0.37 million for Other external costs for 2008. This category includes DSO Wires Costs, which relate to the cost paid by EirGrid to the DSO associated with the solitary 110kV connected customer that is classified as distribution rather than transmission due its location in the Dublin area. This is to prevent discrimination against this single customer. The TSO s actual cost for 2008 was 0.3 million. The Commission allows this cost. 3.3 Internal TSO Costs Operating Costs Operating Costs are those which are directly controllable by the management decisions of the TSO. The allowed revenue for operating costs for 2008 covers the following categories: Payroll; Professional Fees; Premises and Facilities Costs; Maintenance and Professional Fees; IT Operating Costs; and Business Overheads. The allowed revenue for internal operating costs for 2008 is set in the five-year price control and is not subject to review. The price control, as amended by the October 2007 Determination of Transmission Allowed Revenue (CER/07/184) allows 37.31 million (2006 prices) for the above operating costs for 2008. When adjusted for inflation, the allowed revenue is 40.73 million in 2008 prices. Non Operating Depreciation Non operating depreciation refers to EirGrid s non-network capital expenditure requirements, e.g. depreciation on its IT systems required for its transmission and market operation functions. The outturn for non operating depreciation for 2008 is 4.87 million. The Commission allows this cost of 4.87 million. EirGrid Once Off The establishment of EirGrid as a stand-alone entity on 1 st July 2006 gave rise to additional once-off or start-up costs. The once-off costs were primarily associated with recruitment for those vacancies for staff who did not transfer from ESB to 25

EirGrid, meeting any operational shortfalls with short-term contractors, and the media costs associated with the launch of EirGrid. The costs allowed for this are detailed in the October 2006 decision paper on transmission revenue (CER/06/199). The Commission allowed 1.44 million in respect of EirGrid once-off costs compared with 2.09 million sought by the TSO. The allowed costs of 1.44 million were apportioned over the four years from 2006 to 2009 with 0.17 million allowed for 2008 (in 2005 prices) 22. It was decided that this cost was not subject to annual review by the Commission. Accordingly, when adjusted for inflation the allowed revenue for EirGrid once-off costs is 0.19 million. The Commission allows this cost of 0.19 million. EirGrid Ongoing EirGrid ongoing costs are the costs associated with the ongoing and continued operation of EirGrid as a fully independent, stand-alone transmission system operator business following its establishment as a stand-alone business on 1 st July 2006. The ongoing costs that the TSO identified are associated with the new roles being taken on by EirGrid in particular the costs of the Client Engineer, managing the Infrastructure Agreement, managing the relationship with the TAO, managing media relations and additional corporate reporting and financial requirements appropriate to a stand-alone company. It was decided in CER/06/199 that this cost was not subject to annual review by the Commission. When adjusted for inflation the allowed revenue for EirGrid ongoing costs in 2008 is 2.51 million. The Commission allows this cost of 2.51 million. Operating Return on Assets The 2008 transmission revenue paper (CER/07/184) provides EirGrid with an operating return on its assets and investments of 1.1 million in 2006 prices, which is 1.2 million in 2008 prices. This operating return is the Weighted Average Cost of Capital (WACC) of 5.63% provided to EirGrid in the 2005 Price Control. EirGrid have submitted for an operating return of 1.09 million for 2008, 0.11 million lower than previously allowed for. This is due to a lower than expected spend on non-network assets since the start of this price review, which feeds into a lower operating return on these non-network assets (please see section 4.3 of the paper). The Commission allows this cost of 1.09 million for EirGrid. 22 Please see CER/06/199 published on the 10 th October 2006. 26

Working Capital The 2008 transmission revenue paper (CER/07/184) provides EirGrid with a working capital of 0.52 million to provide for EirGrid s internal efficiency and its short-term financial health. Under new working capital arrangements 23 EirGrid have submitted for an outturn cost of 1.45 million. The new working capital arrangements allow for a working capital provision of 20% of EirGrid s external costs under TUoS (excluding the TAO Charge) and 20% of its share (75%) of the imperfections charge forecast for the following tariff year at the rate of return of 5.63%. The Commission allows 1.45 million to EirGrid for working capital, which, as stated, includes 20% of its share (75%) of the imperfections charge for the tariff year 2007/2008. Promotion of Research In its October 2006 determination of transmission allowed revenue the Commission agreed to the provision of 0.3 million per annum to fund research and development, subject to certain conditions, as follows: compatibility with the two methods described in Section 9 the 1999 Electricity Regulation Act; applicability to solving existing or anticipated transmission-related problems, or potential to lead to both lower costs and a better level of service for network customers; and, it does not duplicate any similar research and development already funded by the Commission or carried out by entities regulated by the Commission. When adjusted for inflation the allowed revenue for the promotion of research is 0.34 million. The Commission allows this cost of 0.34 million for the TSO. System Performance Incentives (2008) The Commission s 2006-2010 price control provides for the revenue incentivisation of the TSO for the continued improvement of transmission system performance and of the management of external costs. It should be noted that the areas of incentives for EirGrid for 2008 remained largely the same from 2006, i.e. ancillary services (excluding constraint costs), system minutes lost, system frequency and fault clearance rates. However, the targets for 2008, for the most part became more stringent. The maximum amount applicable to each category for 2008 was circa 0.238 million, meaning that a maximum incentive of circa 0.95 million was available to EirGrid if it met all the performance incentives 24. The Commission has verified 23 Please see CER/08/178. 24 http://www.cer.ie/en/electricity-transmission-network-current--consultations.aspx?article=decf3b52-6d3d- 4be1-b99d-efa0d186a3bb 27

the outturn figures for each of these incentivisation categories and these outturn figures are detailed in the EirGrid Transmission System Performance report 2008 25. EirGrid has reached its targets successfully in each category and therefore the Commission allows this 0.95 million adjustment to be added to the TSO revenue for 2008. Adjustments Allowed in 2007 Determination Adjustments were made in 2006 to the allowed TSO revenue for 2007 and subsequent years to account for the establishment of EirGrid on 1 st July 2006 in terms of the impact of the charges levied on the TSO for corporate centre /shared services costs by the ESB. These latter costs relate to the use by the TSO of ESB s office buildings and shared services such as light and heat, cleaning, facilities, security, mailing, switchboard and catering. Details of these costs and the Commission s determination are contained in the Determination of Transmission Allowed Revenue and Use of System Tariffs for 2007 (CER/06/199). EirGrid had submitted for costs of 1.87 million for costs in this category. The Commission allows this 1.87 million. Adjustment for Costs Associated with EirGrid Readiness for SEM EirGrid had requested revenue for 2008 associated with business Readiness Projects to support the all-island SEM. This was a new category for which no provision had been made in the price control. The objective of each of the Readiness Projects was to investigate and implement the required changes to processes, systems and staffing to allow EirGrid to perform its role as Transmission System Operator under the SEM. The EirGrid Readiness costs were reviewed and agreed by the Regulatory Authorities, the Commission and NIAUR. The agreed method of recovery of these costs was that all capital expenditure, staffing costs and consultancy costs incurred by the TSO due to the delivery of the agreed TSO Readiness Plan prior to the SEM go live date (1 st November 2007) would be capitalised and recovered after the go live date. On this basis, EirGrid readiness costs were to be depreciated over 5 years from January 2008. The TSO was therefore allowed in the October 2007 revenue determination paper CER/07/184, a depreciation charge and a return on assets for the capitalised costs over 5 years, starting in 2008. This resulted in a depreciation cost of 1.43 million for 2008 and a return on assets of 0.4 million based on the cost of capital of 5.63%. The total net additional revenue impact was therefore 1.76 million in 2006 prices or 1.92 million in 2008 prices. However, EirGrid submitted a 2008 outturn figure of 1.08 million, 0.84 million lower than the ex- 25 http://www.eirgrid.com/eirgridportal/uploads/publications/system%20performance%20report%202008.pdf 28

ante allowed amount. This is due to outturn costs for SEM readiness being lower than those allocated in the EirGrid budget for this cost item. The Commission allows 1.08 million for this cost category. Adjustment to Payroll Costs Arising from SEM The introduction of the SEM resulted in a reduction or elimination of some existing functions undertaken by the TSO, the introduction of some new TSO functions and the extension of the scope of some existing TSO functions. A revenue adjustment for the TSO s allowed payroll was required in 2007 to reflect these changes. It was acknowledged by the Commission in the October 2007 revenue paper that there was some uncertainty in estimating those costs for 2008 on account of the new nature of the market. In CER/07/184 the Commission decided on a net reduction for the TSO s staffing in 2008 of 4.5 FTEs (full time equivalents), equivalent to a reduction of 0.52 million, ( 0.57 million in 2008 prices) in EirGrid s allowed payroll costs, on account of the introduction of the SEM. Therefore an ex-post review is now taking place with this paper and the Commission allows for a reduction of 0.57 million in EirGrid s allowed payroll costs. 3.4 Overview of TAO revenue for 2008 The TAO s allowed expenditure for 2008 is largely fixed under the 2006 to 2010 price control and is not subject to annual review when determining the allowed ex-post revenue for 2008 except for adjustments for pass-through costs and inflation. The price control has already been adjusted to take account of the outturn capital expenditure in 2005 and revised inflation forecasts. Accordingly, following adjustment of the opening asset base for 2006 based on the closing asset base at the end of 2005, and taking into account the revised inflation forecasts the allowed revenue for the TAO for 2008 is 150.63 million (2008 prices) as shown in the table below. The basis for this figure is detailed in the October 2007 determination of transmission allowed revenue (CER/07/184) and is also outlined below. 29

Table 3: TAO 2008 Allowed Revenue after Over-Recovery 2008 prices Ex-Ante Allowed million Total TAO Allowed Revenue after profile 152.01 Shortfall in 2004 Under-recovery 0.09 Additional Use of System Adjustment 0.78 Adjustment for ESB Pension deficit 0.46 Adjustment for Local Authority Rates -2.7 TAO Revenue allowed for 2008 150.63 Adjustments for shortfall in 2004 Under-recovery The ex-post determination of under-recovery from 2004 to be carried forward to 2006 was 1.7 million. The under-recovery from 2004 which was actually carried forward to 2006 was 1.62 million. The shortfall of 0.09 million (2008 prices) relates to the overall transmission business, TSO and TAO included. As the entire transmission business was carried out by ESB at that time the Commission believes that it is reasonable to account for the shortfall in the TAO allowed revenue for 2008. Consequently, the shortfall of 0.09 million, ( 0.091 million with interest applied), is to be added to the 2008 revenue for the TAO. Adjustment for Use of System by ESB Telecoms The Additional Use of System revenue netted off the TUoS revenue in 2008, as determined in the 2006-2010 Transmission Price Control Decision paper was 1.378 million (in 2004 prices). Of this 1.378 million, 1.1 million (in 2004 prices) is attributable to charges payable by ESB Telecoms to ESB Networks for the lease of fibre optic cable on high voltage power lines. Applying inflation to the 1.1 million, the fibre wrap amount to be netted off is 1.28 million (in 2008 prices). Following a review in March 2007 the Commission decided to apply an annual charge based on a fixed percentage of ESB Telecom s fibre revenue rather than a rate/km of installed fibre optic cable. The internal transfer charge payable by ESB Telecoms to ESB Networks for the right to install fibre optic cable on overhead lines in 2008 was, using this new formula, 0.998 million with 50% to be offset against TUoS revenue and 50% retained by ESB Networks. As a result the fibre wrap revenue to be offset against TUoS revenue in 2008 is 0.499 million rather than 1.28m netted off in the price control. 30

Accordingly an adjustment is made to the TAO s allowed revenue for 2008. The amount to be added to the TAO s revenue for 2008 is 0.78 million. Pension Fund Adjustment The TAO s allowable costs for 2008 include additional payroll costs, approved by the Commission in 2006, associated with ESB addressing its pension fund deficit. In 2008 the TAO business unit was allowed an additional 0.46 million in 2008 prices. Pass Through Costs Local Authority Rates The Commission provides for the pass-through of certain costs, which are deemed to be outside the control of the TAO, such as Local Authority Rates. An allowance of 19.24 million was provided for this cost in the price control. The TAO has reported costs of 16.54 million for local authority rates for 2008. Therefore, the Commission has reduced the TAO 2008 revenue by 2.7 million to account for this reduced cost. 3.5 Combined TSO & TAO Ex-post allowed for 2008 The transmission income in 2008 amounts to 254.75 million as detailed in Table 4 below. Table 4: Income for 2008 Income m, 2008 prices Transmission Use of System 253.8 Regulated Fee Based Income 0.25 Commissioning Charges 0.7 Total Income for 2008 254.75 Regulated fee based income is the fee income from certain regulated activities such as pre-feasibility studies relating to the processing of connection offers. In the CER/07/184 the Commission decided that from 2007 onwards EirGrid would be allowed to retain the fee income in excess of the provision of 0.25 million. Commissioning charges, amounting to 0.7 million, relate to charges to generation stations in respect of the TSO s incremental costs for ancillary services and congestion during the commissioning phase of generators. Table 5 below combines the ex-post allowed TSO and TAO revenues for 2008 and compares this to the actual income received. The result is an over-recovery of 0.11 million for 2008, which will be subtracted from the total allowed ex-ante 2010 transmission revenue. 31

Table 5: Over-Recovery for 2008 Over-recovery for 2008 (in millions 2008 prices) Allowed Revenue Revenue received Overrecovery TSO Revenue 93.01 101.55 8.54 TAO Revenue 150.63 153.20 2.57 Minus Transmission under-recovery in 2006 26-11.00 Total Revenue Allowed 243.64 Total Revenue Collected 254.75 Over-recovery in 2008 0.11 3.6 TSO and TAO Revised Forecast Revenue for 2009 The Commission welcomes EirGrid s willingness to review some components of the allowed 2009 TSO revenue at this juncture in an attempt to keep tariffs as low as possible for the next tariff period, in view of the current Irish economic circumstances. This step will be taken now as opposed to waiting until the expost review in 2010, which would normally be the case. Based on this the Commission now deems it appropriate to provide for a revised forecast to the TSO allowed revenue for 2009 with respect to Ancillary Services to reflect the anticipated underspend of what was previously allowed ex-ante, as detailed in CER/08/178. Account has already been made for the changes in their cost categories for 2008 and 2010, as detailed in sections two to four of this paper. The results of the revised 2009 TSO forecast will, in tandem with the ex-post review of the 2008 TSO allowed revenue, feed into the total ex-ante allowed 2010 transmission revenue. The table below sets out the ex-ante 2009 allowed revenue for Ancillary Services and the revised forecast for this item which will, as stated above, be allocated to the 2010 ex-ante allowed TSO revenue. 26 Please see CER/07/184. The 11 million under-recovery for 2006 is provided for in 2008 as it was part of the assumed revenue recovery for 2008. The 31.9m of a potential over-recovery provided for in 2007 was dealt with as follows: 5.1m was provided for in 2007 itself (Nov/Dec with the change in tariff in November 2007) and adjusted for last year as part of that process. The remainder was not provided for in the tariff recovery for 2008 and was therefore added to the amount recovered from tariffs received to determine the overall revenue recovery for 2008. Thus in 2008, the ex-ante allowable revenue was 260.3 million in nominal 2008 prices, but the tariffs were set to recover 228.42 million in nominal 2008 prices. 32

Before interest, 3.67 million will be subtracted from the total allowed ex-ante 2010 transmission revenue on account of a forecasted over-recovery for 2009, as shown below. Table 6: 2009 Ancillary Services revised forecast 2009 prices ( millions) Ancillary Services Ex-ante 2009 allowed CER revised allowed amount 42.47 38.8 3.67 Difference between ex-ante allowed and allowed amount Working with the TAO and in light of the current Irish economic circumstances, the Commission has decided to review one of the components of the allowed 2009 TAO revenue at this juncture. The Commission provides for the passthrough of certain costs, which are deemed to be outside the control of the TAO, one of these being the Local Authority Rates. Upon review of the 2008 (CER/07/184) and 2009 (CER/08/178) revenue determinations and now the 2010 submission made by the TAO, which provides the 2008 outturn figure, the Commission has noted that ex-ante allowed amounts for this particular costcategory have been over-estimated for the revenue years 2006, 2007 and now 2008. In CER/07/184 and CER/08/178, the Commission reduced the TAO allowed expost revenue for 2006 and 2007 revenue years by 1.79 million and 1.56 million (2008 prices), respectively. The TAO has submitted a 2008 outturn figure of 16.54 million (please see section 3.4 of this paper), with 19.24 million having been allowed for in the 2006-2010 Price Control (CER/05/143). As outlined above this has resulted in a reduction of 2.7 million in the 2008 ex-post allowed costs for the TAO, which will be fed into the ex-ante allowed revenue for 2010. The Commission has therefore decided to take the average of these three years of over-estimation for TAO local authority rates so as to provide for a revised forecast to the TAO allowed revenue for 2009 (as detailed in CER/08/178). This average underspend from 2006 to 2008 amounts to 2.02 million ( 1.92 million in 2009 prices). The results of this revised 2009 TAO forecast (see table below) will, in tandem with the revised 2009 TSO forecast and the ex-post review of the 2008 transmission allowed revenue, feed into the total ex-ante allowed 2010 transmission revenue. 33

Table 7: 2009 TAO revised forecast millions Ex-ante 2009 (2009 prices) Allowed CER revised allowed Difference between ex-ante allowed and CER allowed amount Local Authority Rates 22.06 20.13 1.92 The total 2009 revised forecast to be feed into the 2010 transmission revenue amounts to 5.59 million ( 3.67 million + 1.92 million). 3.7 Interest Provision for 2008 Over-Recovery and 2009 TSO/TAO Revised Forecast As stated in the price control, the mechanism for inter-year adjustments for under or over-recovery is to apply interest at the three month average Euribor rate. The interest rate (I) that is applied to under and over-recoveries of transmission revenue for the previous year (t-1) is as follows: It-1 is the mean of the twelve monthly average three month Euribor rate between April and March of the year t-1 (i.e. April of year t-2 to March year t-1). Applying an interest rate of 4.4% in 2008 and forecast rate of 4.3% for 2009 to the 2008 over-recovery, and 4.3% to the revised forecast for 2009, results in 0.11 million, 3.82 million (TSO) and 2.01 million (TAO) respectively being deducted from the 2010 allowed revenue. Therefore the total to be deducted is 5.95 million (rounded), as shown below. Table 8: Over-recoveries in 2008 and 2009 with Interest m 2010 prices (rounded) Over-recovery in 2008 (with interest) 0.11 2009 Revised Forecast total (with Interest) 5.83 Over-recovery to be allocated to 2010 5.95 Transmission revenue (with interest) 3.8 Re-profiled 2009 Transmission Revenue In a further effort to reduce transmission tariffs for the forthcoming tariff period the Commission has decided to take the step of re-profiling the allowed transmission revenue for 2009 (minus TSO and TAO external costs), previously decided upon last September in CER/08/178 rather than waiting until next year. This re-profiling will take account of updated CPI inflation figures and revised 2009 energy 34

throughput figures, both of which are significantly changed due to the deteriorated economic situation. In CER/08/178 the Commission originally assumed an inflation figure of 3.4% for 2008 and 2.2% for 2009 27, with an assumed energy throughput figure for 2009 of 28,759 GWh, in order to derive the 1 st October 2008 to 30 th September 2009 transmission tariffs. EirGrid, has recently stated that total energy throughput at the trading point in 2008 was 27,844GWh. EirGrid now believes that a reasonable energy throughput estimate at this point in time for 2009 is 4% below the 2008 outturn figure, which equates to 26,730 GWh. The Commission has now decided to apply the actual 2008 CPI figure of 4.1% 28, the assumed 2009 CPI inflation figure used in this paper of -4.6%, and the new 2009 energy throughput forecast of 26,730 GWh, to the ex-ante 2009 transmission allowed revenue decided upon in CER/08/178 (minus TSO and TAO external costs). The reason that TSO and TAO external costs, such as Ancillary Services and Local Authority Rates, are not included in this re-profiling is because they are pass-through actual costs and are not subject to fluctuations in indexation. Also, the Commission has already decided to allow revised forecasts for both Ancillary Services and TAO Local Authority Rates for 2009. Applying the updated inflation figures to the ex-ante 2009 transmission allowed revenue (minus TSO and TAO external costs) results in a reduction of 11.22 million, in the 2009 revenue profiles as shown in the following table. 27 Please see CER 08/178, Determination of Transmission Allowed Revenue and Use of System Tariffs for 2009, published 26 th September 2008. 28 http://www.cso.ie/statistics/conpriceindex.htm 35

Table 9: Re-profiled revenue amounts for 2009 Update re-profiling of 2009 Transmission CER/08/178 Revenue m 2009 prices 29 m 2009 prices 30 Total TSO Revenue 105.62 99.26 Total TAO Revenue 164.51 154.61 Total Revenue Allowed 270.14 253.87 Less TSO External Costs 49.14 46.18 Less TAO External Costs 26.70 25.09 Less 2007 Over-recovery alloc 3.67 3.64 Deduction relating to Capex Underspend 12.02 11.30 Additional provision for tariff period extension 4.50 4.23 Total TUoS Revenue 183.10 171.88 Diff 11.22 However, the revised energy throughput forecast for 2009 of 26,730 GWh means that energy throughput for the calendar year 2009 will be circa 7% less than that forecast at the time tariffs were set in 2008. The Commission therefore estimates that this is approximately 5% less for the 9 month period 1 st January 2009 to 30 th September 2009 (i.e. three-quarters of 7%). In conjunction with EirGrid, the Commission estimates that a 5% reduction in energy throughput for 2009 translates into a reduced transmission income of approximately 8.5 million, based on the mix of capacity versus energy and day versus night KWh rates. The net difference between the re-profiled revenues and the loss in income due to the reduction in energy throughput is 2.72 million ( 11.22 million minus 8.5 million) as shown below. This 2.72 million (2009 prices) will be used to reduce the ex-ante 2010 transmission revenue. Table 10: Updated inflation compared with revised throughput Difference in Revenues - Updated inflation for 2009 11.22 Difference in Revenues - revised throughput of 26,730 GWh for 2009 8.5 Revenue to be re-profiled into 2010 in millions 2.72 29 Actual 2007 CPI of 4.9%, 3.4% in 2008 and 2.2% in 2009. 30 Actual 2007 CPI of 4.9%, Actual 2008 CPI of 4.1% in 2008 and estimated CPI of -4.6% in 2009. 36

The revised assumed inflation and energy throughput figures used in the reprofiling of allowed 2009 transmission revenue will be subject to final ex-post correction in 2010. It should be noted that in accordance with the Commission s Price Control decision paper (CER/05/143), TSO and TAO payroll costs are fixed annually from 2006 to 2010 and are subject only to inflation (or deflation as the case in 2009) in line with CPI. Therefore, based on the current best estimate for 2009, gross TSO and TAO allowed payroll costs are expected to decrease by the assumed 2009 deflation figure of 4.6%. The assumed 0% inflation figure for 2010 will also be applicable to TSO and TAO payroll costs in 2010. This decrease in TSO and TAO payroll costs is reflected in the transmission tariffs for 2009/2010 as detailed in Appendix A of this paper. 37

4.0 Ex-Ante Allowed 2010 Revenue 4.1 Overview of TSO Revenue for 2010 The following table provides a summary of the allowed TSO revenue for 2010 as determined in the five-year price control and amended by the Commission s Determination of Transmission Allowed Revenue and Use of System Tariffs Paper (CER/08/178) compared with the revenue submission for 2010 made by the TSO and, following a review of this submission, the Commission s determination of the actual amount allowed for 2010. These costs are discussed in detail in the following sections. 38

Table 11: TSO Revenue for 2010 by Category 2008 Prices Ex-Ante Allowed m Proposed by TSO m CER Allowed amount m Ancillary Services 44.35 42.62 42.62 Regulatory Levy 0.81 0.81 0.81 Inter-TSO Compensation 0.00 1.6 1.12 Other (includes DSO Wires 1.16 0.3 0.3 Costs) Interconnector Services 0 0.63 0.63 Constraints Banking Fee 0 0.35 0.35 Total TSO External Costs 46.33 46.31 45.83 Internal Operating (capped) Costs 40.63 40.63 40.63 Non Operating Depreciation 6.18 1.68 1.68 Operating Return on Assets 1.40 1.18 1.18 Working Capital 0.47 1.36 1.36 EirGrid Ongoing 2.51 2.51 2.51 Promotion of Research 0.35 0.34 0.34 TSO Operating Costs 51.54 47.70 47.70 Incremental Premises Separation Cost 2.78 2.79 2.79 Adjustment for costs associated with EirGrid 1.92 1.03 1.03 Readiness for SEM Adjustments to Payroll allowance post SEM 0-0.57-0.57 Arm s Length Premises Cost 1.86 1.87 1.87 Sub Total Adjustments 6.56 5.12 5.12 Total TSO Revenue 104.43 99.13 98.65 Most of the TSO s allowed revenue for 2010 is subject to the 2006 to 2010 price control and will not be subject to review in this paper. The following applies to the TSO revenue for the period 2006 to 2010: a five-year control for TSO internal operating expenditure is in place. Thus internal costs are fixed for this period and are only revised for exceptional items; and, an annual ex-post adjustment will be made to external TSO operating expenditure to take account of actual outturn costs. 39

4.2 External TSO costs Ancillary Services In respect of ancillary services 44.35 million was originally allowed for in the 2006-2010 price control. In January 2009 the Commission s determination on Secondary Fuel Obligations (CER/09/001) 31 stated that the costs of EirGrid performing tests of generators on their secondary fuel will be remunerated through the Ancillary Services mechanism with recovery allowed for outturn costs on a pass-through basis. EirGrid, in its revenue submission to the Commission, estimated that the costs associated with testing the units on secondary fuelling to be 0.9 million. The Commission allows this 0.9 million, on an ex-ante basis, to be included in the Ancillary Services payments mechanism. The actual outturn cost for secondary fuel testing incurred by EirGrid in 2010 will be reviewed by the Commission at the appropriate stage in 2011. EirGrid has also stated in its revenue submission that the lower 2010 Ancillary Services forecast is due to a number of factors, such as the continued desire for a further black start facility in the East Coast region, which has not yet been procured, and a slower than anticipated take up by wind of ancillary services payments. Based on the 2010 revenue submission from EirGrid, the Commission allows costs for 2010 of 42.62 million. Regulatory Levy In the price control the Commission allowed projected costs of 0.7 million per annum throughout the review period to cover the Commission Regulatory Levy. Therefore the allowed ex-ante cost for the regulatory levy, when adjusted for inflation, is 0.81 million. Inter-TSO compensation European Regulation 1228/2003, which took effect from 1 st July 2004, requires that TSOs are compensated for hosting cross-jurisdictional flows of electricity from those TSOs where the flows arise and where they end. A voluntary European ITC scheme, of which Ireland is a member, has been introduced and the net contribution for the scheme for EirGrid for 2010 is forecasted to be in the region of 1.6 million. However, the Commission has decided to allow a cost of 1.12 million for this line item in 2010. 31 http://www.cer.ie/en/electricity-security-of-supply-current-consultations.aspx?article=7d14283f-b667-4cdc- 996b-61f6e56fd94e 40

Comment from EirGrid EirGrid have stated in their response that they are disappointed with the Commission s proposal to provide for only 1.12 million for the European Inter- TSO scheme as opposed to the 1.6 million forecast by EirGrid, a figure similar to that actually incurred in 2008. This effectively implies EirGrid must carry and seek facilities for this 0.5 million shortfall. EirGrid seeks confirmation from the Commission that actual incurred costs will, of course, ultimately be allowed. Commission s response As has been the case throughout the 2006-2010 electricity price control an annual ex-post adjustment will be made to external TSO operating expenditure to take account of actual outturn costs, which includes those TSO costs associated with the ITC scheme (see section 3.2 of this paper). The Commission will review the 2010 outturn costs incurred by EirGrid for the ITC scheme at the appropriate stage in 2011. Others (DSO Wires Costs) The previous ex-ante allowed amount for this cost category was 1.16 million. EirGrid have submitted for a cost of 0.3 million for 2010. This is a reduction of 0.86 million when compared with what was allowed ex-ante for 2010. Accordingly the allowed revenue for 2010 is 0.3 million. Interconnector Services This new line item for 2010 has been added to account for costs associated with SO-SO trades on the Moyle Interconnector. These costs are to be shared between EirGrid and SONI, as TSOs, on a 75:25 basis. This is consistent with the previous SEMO revenue determination (SEM/08/093) 32 and was made on the basis that the Moyle Interconnector currently provides an all island benefit and that the costs be based on a MWh basis across the island. The costs incurred can be ascribed to three main groupings; Interconnector error, administration and capacity costs associated with System Operator trading. The Interconnector Error is the difference in the volume of energy scheduled and the metered energy actually delivered at the Interconnector connection point; for Moyle this is at Auchencrosh in Scotland. There is always a difference in scheduled and metered energy, and the difference may be either positive (additional energy flow into the SEM) or negative (energy flowing out of SEM). The costs primarily arise from the differential cost of the Interconnector error 32 http://www.allislandproject.org/en/single-market-operator-overview.aspx?article=88880436-1b9d-46bb- 9518-501271ab9182 41

energy between the BETTA and SEM markets. In the Great Britain BETTA market, SONI must pay administration charges and for Balancing Services Use of System ( BSUoS ) charges relating to the transportation of the Interconnector error energy to the Interconnector delivery point to Auchencrosh. The administration costs are largely fixed and the BSUoS amount relatively small. System Operator (SO) trading across the Moyle Interconnector can be grouped into two areas the provision of static reserve, and SO-SO trading for security of supply reasons. EirGrid has submitted a revenue requirement of 0.63 million. The Commission allows this cost of 0.63 million for 2010. Constraints Banking Fee The arrangement in place since 2001 relates to the ongoing provision of working capital for the TSO business to manage cash flow differentials which result from the operation of its business: these relate not only to the management of external costs (ancillary services, constraints etc. given these have the potential to be unpredictable and volatile in their incurrence) but also the lag in receipt of revenues as a result of TUoS billing and the variances to which the TSO business is exposed to as a result of both energy volume and potential default risk. This constraints banking fee line item is separate to the general working capital arrangements contained in the allowed TSO revenue and it covers funding arrangements associated with the Imperfections charge. EirGrid have submitted for costs of 0.35 million. The Commission allows this cost for 2010. 4.3 Internal TSO Costs Operating Costs Operating Costs are those which are directly controllable by the management decisions of the TSO. The allowed revenue for operating costs for 2010 covers the following categories: Payroll; Professional Fees; Premises and Facilities Costs; Maintenance and Professional Fees; IT Operating Costs; and Business Overheads. The allowed revenue for internal operating costs for 2010 is set in the five-year price control and is not subject to review. The allowed revenue for 2010 for this cost category is 40.63 million. 42

Non Operating Depreciation Non operating depreciation refers to EirGrid s non-network capital expenditure requirements, e.g. depreciation on its IT systems required for its transmission and market operation functions. The 2006-2010 price control previously allowed for 6.18 million. In its 2010 revenue submission, EirGrid proposed to bring forward for 2010 a repayment of the depreciation and return associated with elements of capex not expended up to 2010. This repayment amounts to a once off reduction in 2010 of 4.5m based upon the accumulated savings over the 2006-2010 control period. Therefore, the allowed revenue for 2010 is 1.68 million. Operating Return on Assets The 2005 Price Control paper provides EirGrid with an operating return on its assets and investments of 1.4 million in 2008 prices. This operating return is the WACC of 5.63% provided to EirGrid in the 2005 Price Control. EirGrid have submitted for an operating return of 1.18 million, 0.22 million lower than the previously allowed amount. This is due to a lower than expected spend on nonnetwork assets since the start of this price review, which feeds into a lower operating return on these non-network assets, outlined in the paragraph above. The Commission allows this 1.18 million for EirGrid. Working Capital The 2005 Price Control paper provides EirGrid with a working capital of 0.47, in 2008 prices, to provide for EirGrid s internal efficiency and its short-term financial health. The new working capital arrangements allow for a working capital provision of 20% of EirGrid s external costs under TUoS (excluding the TAO Charge) and 20% of its share (75%) of the imperfections charge forecast for the following tariff year at the rate of return of 5.63%. The Commission allows 1.36 million to EirGrid for working capital, which includes the 20% of its share (75%) of the forecast imperfections charge for the tariff year 2009/2010 of 106 million. EirGrid Ongoing Costs Details of EirGrid s new on-going costs are contained in CER/08/178, as well as section 3 of this paper. The allowed revenue for EirGrid ongoing costs when adjusted for 2008 prices is 2.51 million, which the Commission allows. 43

Promotion of Research In its October 2006 determination of transmission allowed revenue the Commission agreed to the provision of 0.3 million per annum to fund research and development. When adjusted to 2008 prices this amounts to 0.38 million ex-ante allowed for 2010. EirGrid have submitted for a cost of 0.34 million for 2010. The Commission allows this 0.34 million for promotion of research. Commission s Other Adjustment of 2010 Allowed Revenue CER/08/178 indicated that there were a number of TSO costs for 2009 and 2010 which could not reasonably have been foreseen or quantified at the time of the price control review. These unforseen costs include: a) Adjustment for full premises separation; b) Adjustment for the introduction of the ITC mechanism (already discussed above); c) Adjustment for costs associated with EirGrid Readiness for SEM; and, d) Adjustment to the payroll allowance post SEM. It was also stated in CER/08/167 that the TSO is expected to ensure that these costs were to be incurred in an efficient manner. In the coming years, akin to all previous revenue decisions, the Commission will undertake an ex-post review of these costs and seek evidence that the TSO has taken reasonable steps to minimise them, such that the Commission may make adjustments ex-post, if deemed necessary. Incremental Premises Separation Cost EirGrid began the move to new, separate office premises, the Oval, in 2008 for which new costs applied in place of the aforementioned costs. This move was considered appropriate given EirGrid s position as Ireland s independent TSO. EirGrid had previously submitted for costs in relation to the full premises separation of EirGrid from ESB, which were subsequently reviewed by the Commission. These costs fall into three categories; Operating costs, Capital costs and Transitional costs and the agreed amounts for each category are detailed in CER 08/178. Therefore, the Commission allows 2.79 million for incremental premises separation costs for 2010. 44

Costs associated with EirGrid Readiness for SEM The TSO is entitled to revenue for 2010 associated with business readiness projects to support the all-island SEM. No provision was made in the price control for these costs which are detailed in the October 2007 determination of transmission allowed revenue (CER/07/184). The agreed method of recovery of EirGrid Readiness costs was that all capital expenditure, staffing costs and consultancy costs incurred by the TSO due to the delivery of the agreed TSO Readiness Plan prior to the SEM go live date (1 st November 2007) should be capitalised and recovered after the go live date. On this basis, EirGrid readiness costs are depreciated over 5 years from January 2008. EirGrid have submitted for costs of 1.03 million, 0.89 million lower than previously allowed for. This is due to outturn costs for SEM readiness being lower than those allocated in the EirGrid budget for this cost item. The allowed revenue for EirGrid readiness costs is 1.03 million. Adjustment to the Payroll Costs Arising from SEM EirGrid has submitted for a reduction in payroll costs of 0.57 million for 2010 on account of the introduction of the SEM. The Commission allows this reduction of 0.57 million. This was decided upon in the 2008 revenue determination paper CER/07/184. Arm s Length Premises Cost EirGrid incurs costs to cover the charges levied by ESB Corporate Centre for the TSO s lease of a section of ESB s head office and includes charges for shared services such as light and heat, cleaning, facilities, security, mailing, switchboard and catering. This cost is an ongoing adjustment to allowed operational costs for the lease and facilities costs required by EirGrid. It is calculated by netting the allowance for lease and facilities in the 2006-2010 determination from the EirGrid required lease and facilities cost associated with the EirGrid premises separation. As detailed in the October 2006 revenue decision paper (CER/06/199) the Commission re-examined these costs in the context of the establishment of EirGrid on 1 st July 2006 and the full arms-length relationship with ESB resulting in an annual allowance of 3.8 million (2005 prices) for rental costs and shared services. Of the 3.8 million allowed, 2.15 million (2005 prices) is accounted for in the Operating Costs allowed in the price control with the remainder of 1.65 million (2005 prices) allowed as Arm s Length Premises Cost. These costs are still 45

applicable in the Oval premises as they cover items such as light, heating, security, facilities etc. When adjusted for inflation up to 2008 the allowed revenue is 1.86 million. EirGrid has submitted for costs of 1.87 million. The Commission allows 1.87 million for 2010. 4.4 Overview of TAO Revenue for 2010 Adjustment to Local Authority Rates allowance As discussed in section 3.4 of the paper the Commission has decided to review one of the components of the allowed 2010 TAO revenue at this juncture, as opposed to waiting until the ex-post review in 2011. The Commission provides for the pass-through of certain costs, which are deemed to be outside the control of the TAO, one of these being the Local Authority Rates applicable to the TAO. Upon review of the 2008 (CER/07/184) and 2009 (CER/08/178) revenue determinations and now the 2010 submission made by the TAO, which provides the 2008 outturn figure, the Commission has noted that ex-ante allowed amounts for this particular cost-category have been over-estimated for the revenue years 2006, 2007 and now 2008. The Commission has decided to take the average of the three years of overestimation (2006 to 2008) for TAO local authority rates, i.e. 1.79 million, 1.56 million and 2.7 million, so as to provide for a revised forecast to the TAO allowed revenue for 2010 (as detailed in CER/05/143). The average underspend from 2006 to 2008 amounts to 2.02 million. Therefore, the Commission has decided to reduce the TAO revenue in 2010 by 2.02 million. ESB Pension Fund Adjustment The TAO s allowable costs for 2010 include additional payroll costs, approved by the Commission in 2006, associated with ESB addressing its pension fund deficit. In 2010, the TAO business unit will be allowed an additional 0.49 million. Adjustment for Use of System by ESB Telecoms The Additional Use of System revenue netted off the TUoS revenue in 2010, as determined in the 2006-2010 Transmission Price Control Decision paper was 1.378 million (in 2004 prices). Of this 1.378 million, 1.1 million (2004 prices) is attributable to charges payable by ESB Telecoms to ESB Networks for the lease of fibre optic cable on high voltage power lines. Applying inflation to 1.1 million the fibre wrap amount netted off is 1.28 million (2008 prices). 46

Following a review in March 2007 the Commission decided to apply an annual charge based on a fixed percentage of ESB Telecom s fibre revenue rather than a rate/km of installed fibre optic cable. The internal transfer charge payable by ESB Telecom to ESB Networks for the right to install fibre optic cable on overhead lines in 2010 is forecast to be 0.98 million (2010 prices) with 50% to be offset against TUoS revenue and 50% retained by ESB Networks. As a result the fibre wrap revenue to be offset against TUoS revenue in 2010 is, using the new formula, 0.52 million (2008 prices) rather than 1.28 million netted off in the price control. Accordingly an adjustment is to be made to the TAO s allowed revenue for 2010. The amount to be added to the TAO s revenue for 2010 is 0.77 million. Reduction on account of TAO Insurance and Compensations underspend As outlined in the PR2 Decision paper (CER/05/143) the TAO is allowed three separate external uncontrollable costs Local Authority Rates, CER Levy and Insurance and Compensations. The TAO is allowed 2.03 million (2004 prices) every year for the cost item Insurance and Compensations. CER/05/143 states that, Insurance and Compensations includes Mast interference payments and forestry easements and compensation. Effectively these costs have to be paid if due and are therefore classified as non-controllable. The TAO has projected an underspend from 2006 to 2008 totalling 3.82 million (2008 prices) for this cost item, which the Commission has decided to feed into the 2010 TAO transmission revenue, as opposed to waiting until the end of the price control. Revised Forecast for Transmission Capital Expenditure As outlined in CER/08/178 the majority of the TAO s allowed revenue relates to the depreciation of network assets and a return on the capital employed in the network. The TAO s capital expenditure was set in the 2006-2010 price control at 520 million for the five year price control period. The Commission has put in place a process to monitor the capital expenditure incurred by the TAO. As of a result of the reporting on the capital expenditure the Commission requested the TAO to report specifically on the actual transmission capital spend for 2006 and 2007 and 2008. The expenditure reported by the TAO is summarised in the following table, compared to the amount allowed in the price control, where there has been a significant underspend. 47

Table 12: Capex underspend from 2006 to 2008 versus allowed in price control. Capex (2004 Actual 2006 in m Actual 2007 in m Actual 2008 in m prices) Total Capex 61 73.8 91.8 Customer -9.3-13.2-10.1 Contributions Net Network 51.7 60.5 81.7 Capex Capex (2004 prices) Allowed in Price Control Actual 2006 in m Actual 2007 in m Actual 2008 in m 114.5 92.4 77.6 As the tables above show the actual net spend for 2006 to 2008, amounts to 193.9 million (2004 prices), which represents an underspend of 90.6 million (2004 prices) when compared with the capital expenditure of 284.5 million (2004 prices) allowed in the price control. In CER/08/178 the Commission decided to reduce the 2009 transmission revenue by 11.85 million (2008 prices) to account for this capital underspend on an annual basis from 2006 to 2008. Further to examination of the capital expenditure undertaken by the TAO for 2006-2008 the Commission has decided to reduce the transmission revenue for 2010 by an additional 5.94 million (2008 prices) to account for a further overrecovery relating to the depreciation of network assets and the return (at 5.63%) on the capital employed in the network. This is given that the latest figures from the TAO confirm the underspend from 2006 to 2008. Total TAO Revenue Taking into account the above adjustments the Commission s decision for the TAO s allowed revenue for 2010 is 159.23 million (rounded) as shown in the table below. 48

Table 13: TAO 2010 Allowed Revenue after Adjustments Ex-Ante Allowed m, 2008 Prices Total TAO Allowed Revenue after 169.77 profile Less Capex Underspend -5.94 Less adjustment to Local Authority -2.02 Rates allowance Less Insurance and Compensations -3.82 underspend Add adjustment for ESB Pension deficit 0.49 Add adjustment for Use of System by 0.77 ESB Telecoms TAO Revenue allowed for 2010 159.23 49

5.0 Combined 2010 TSO & TAO Revenue The allowed transmission revenue over-recovery of 0.11 million for 2008, revised forecast amount of 5.83 million for 2009 and the 2009 re-profiled amount of 2.72 is to be deducted from the allowed revenue for the transmission business in 2010. Accordingly the Commission has decided that the allowed revenue for the transmission business in 2010 is to be 237.36 million, in 2010 prices, as shown in the table below. This feeds into the transmission tariffs shown in Appendix A. Table 14: Combined 2010 TSO & TAO Revenue m 2008 m 2010 prices prices 33 2010 TSO Revenue 98.65 94.12 2010 TAO Revenue 159.23 151.91 Total 2010 Transmission Revenue 257.89 246.03 Less 2008 Over-recovery 0.11 0.11 Less 2009 Revised Forecast 5.83 Less 2009 re-profiled Transmission revenue 2.72 Total allowed Transmission Revenue for 2010 257.78 237.36 This represents a nominal decrease in the allowed transmission revenue between 2009 (as per CER/08/178) and 2010 of 21.59 million or 8.3%, as shown below: Nominal Prices Transmission (TSO & TAO) Revenue m 2009 m 2010 m Change m % Change 258.95 237.36 21.59-8.3% However it is expected that electricity consumption will fall over the period; it is estimated, for the transmission system, that this fall will be approximately 8% from previous estimates of consumption. Therefore, based on the above annual revenues and the estimated consumption, the average unit transmission tariff, for the period from 1 st October 2009 to 30 th September 2010, is estimated to be approximately 0.9 cent/kwh. In other words there is no significant change in the average unit transmission tariff. 33 2010 prices based on inflation of the 2008 prices by assumed rates of -4.6% in 2009 and 0% in 2010. 50

Overall the key reasons for the decrease in annual revenues between 2009 and 2010 are as follows: A lower than anticipated 2008 outturn cost for Ancillary Services from that which was allowed ex-ante combined with a lower Ancillary Services cost forecast for 2009 and 2010; A repayment of 4.5 million of the depreciation and return associated with elements of non-network capex not expended up to 2010; Revised CPI and energy throughput figures for 2009 have led the Commission to re-profile the previously determined 2009 transmission revenue. This re-profiling has helped reduce the allowed 2010 transmission revenue by 2.72 million; The revised forecasts to the 2009 and 2010 TAO allowed revenues on account of the average underspends of Local Authority Rates, which has resulted in a reduction of 1.92 million in TAO allowed revenues in 2009 and 2.02 million in 2010; The Commission s decision to further reduce the 2010 transmission revenue by 5.94 to reflect TAO capital underspend from 2006 to 2008; The Commission s decision to also reduce the 2010 transmission revenue by 3.82 million to reflect TAO underspend within the cost category Insurance and Compensations from 2006 to 2008; and Somewhat offsetting the above are lower than previously predicted energy throughput figures for 2010, which limits the change in the unit tariff. 51

6.0 Demand Side Management Separate to the transmission allowed revenue, the Demand Side Management (DSM) charge will allow EirGrid to recover 7.5 million associated with demand side management schemes administered by EirGrid for the period 1 st October 2009 to 30 th September 2010. The resulting DSM charge is 0.3563/MWh. 52

7.0 Rebates As outlined in the Electricity Networks Information note (CER/09/117) published in tandem with CER/09/115, the Commission has worked with the Government and ESB to put in place measures that would offset the impact of price increases driven by the increases in international fuel prices. This led to the implementation of a rebate scheme, funded by ESB that operated through the electricity network tariffs from 1 st January 2009. In addition, a deferral of distribution revenue from 1 st May 2009 led to further reductions. These rebates and revenue deferral schemes will come to an end on 30 th September 2009. The Government have stated their continuing concern about the impact of energy prices on LEUs who contribute so substantially to employment and are particularly affected by electricity prices. It has therefore been decided that there will be a continuation of the rebate scheme for LEUs. This should ensure that LEUs do not face any rise in their network tariffs from 1st October 2009. The rebate will comprise: 1.5003 cent/kwh and 11.52/kVA per annum for the period 1 st October 2009 to 30 th September 2010. It should be noted that this rebate is separate from the transmission business revenue and tariffs. The Commission will work with the System Operators, particularly EirGrid who will administer the scheme, and suppliers, to facilitate implementation of this rebate. Comment from EirGrid EirGrid have stated that they would be happy to administer the LEU rebate on the basis of full provision of credit cover for the company and that it is not exposed to either any underlying cashflow or default risk. EirGrid sought confirmation of this from the Commission in its response. Commission s response On 27 th August 2009 the Commission published a decision paper 34 on how the LEU rebates are to be administered for the upcoming tariff period 1 st October 2009 to 30 th September 2010. Comment from Airtricity Airtricity have asked in their response that the Commission provide further information and clarification on the functioning of the LEU rebate scheme. In particular Airtricity have asked for the following: Details of how the rebate is to be funded. 34 CER/09/141; Bill Impacts of LEU Customers Credits to apply from 1st October 2009 53

Details of how the rebate is to be distributed to customers. The role of suppliers in administering the rebate needs to be clearly set out. Clear information on how and when the shortfall in LEU Network charges will be recovered. Commission s response The Commission has addressed the issues raised by Airtricity in the Information Note on LEU Customer Credits, CER/09/141. 54

Appendix A Transmission Tariffs 2009/2010 1.A Demand TUoS Tariffs for the Republic of Ireland In deriving the TUoS Demand Tariffs which cover the 12 month period from 1 st October 2009 to 30 th September 2010 EirGrid has applied an energy based weighting to the tariffs derived from the transmission revenue for the full calendar year of 2009 and the full calendar year 2010. The demand TUoS tariffs are shown in the accompanying schedules below. Schedule Charges DTS-T Network Capacity Charge 1254.9800 /MW Network Transfer Charge System Services Charge DSM Charge 1.9959/MWh 2.3300/MWh 0.3563/MWh DTS-D1 Network Capacity Charge 1053.1217 /MW Network Transfer Charge System Services Charge DSM Charge 1.9959/MWh 2.3300/MWh 0.3563/MWh DTS-D2 Network Capacity Charge 4.3337/MWh Network Transfer Charge System Services Charge DSM Charge 1.9959/MWh 2.3300/MWh 0.3563/MWh The application of these tariffs is as set out in EirGrid s published Statement of Charges as approved by the Commission. 55

1.B Generator TUoS Tariffs for the Republic of Ireland The existing jurisdictional generator tariff regimes will apply for the tariff period 1 st October 2009 to 30 th September 2010. The generation location based capacity charges for generators in the Republic of Ireland, for the period 1 st January 2009 to 30 th September 2009, are set out in the schedule below. It is hoped that the charges will be aligned on an all-island basis in the future. The below generator tariffs have been calculated by applying an incremental approach to the reverse-mile methodology, whereby new generators expected to come online in the upcoming tariff period have been added to existing 2009 model. This process involves adding an incremental 1MW generator to all nodes on the network, applying the resultant tariff to any new generator at that node and scaling to recover the allowable revenue. The incremental approach based on the 2009 model is reasonable considering the on-going work on the all island locational signals project which is expected to deliver in Q4 2010 a new all island tariff methodology for the island of Ireland. This new all-island tariff methodology is likely to supersede the existing methodology. SCHEDULE 1 - GENERATION LOCATION BASED CAPACITY CHARGES Station Units Contracted Maximum Export Capacity Network Capacity Charge Rate /MW/month Equivalent /kw/year Aghada 220kV AD1, AT1, AT2, AT4 528.000 MW 430.4142 5.1650 Ardnacrusha AA1, AA2, AA3, AA4 86.000 MW 179.7501 2.1570 Aughinish (Seal Rock) SK3, SK4 130.000 MW 583.4417 7.0013 Dublin Bay Power (Irishtown) DB1 415.000 MW 746.2026 8.9544 Edenderry Power (Cushaling) ED1 121.500 MW 199.5742 2.3949 Edenderry Peaker (Cushaling)* 116.000 MW 199.5742 2.3949 Erne (Cathleen's Fall) ER1, ER2 45.000 MW 278.0917 3.3371 Erne (Cliff) ER3, ER4 20.000 MW 278.0917 3.3371 Glanagow CCGT* 445.000 MW 430.4142 5.1650 Great Island 110kV GI1, GI2 108.000 MW 101.6659 1.2200 Great Island 220kV GI3 108.000 MW 293.3726 3.5205 Huntstown CT, ST 352.000 MW 510.1926 6.1223 Huntstown 2 412.000 MW 504.6009 6.0552 Lough Ree Power (Lanesboro) LA4 94.000 MW 22.8809 0.2746 Lee (Carrigadrohid) LE3 8.000 MW 227.4709 2.7297 Lee (Inniscarra) LE1, LE2 19.000 MW 193.7217 2.3247 Liffey (Pollaphuca) LI1, LI2, Ll4 34.000 MW 95.0401 1.1405 Longpoint CCGT* 431.000 MW 430.4142 5.1650 Marina** MR1, MRT 112.000 MW 14.9467 0.1794 Moneypoint MP1, MP2, MP3 862.500 MW 737.6242 8.8515 Northwall 38kV NW1, NW2, NW3 45.000 MW 407.3276 4.8879 56

Northwall 220kV NW4, NW5 227.000 MW 835.2084 10.0225 Poolbeg** PB1, PB2, PB3 461.000 MW 731.5401 8.7785 Poolbeg (Shellybanks) PB4, PB5, PB6 460.000 MW 743.2976 8.9196 Rhode (Derryiron) RH1, RH2 103.600 MW 295.7334 3.5488 Tarbert 110kV TB1, TB2 108.000 MW 703.3001 8.4396 Tarbert 220kV TB3, TB4 481.400 MW 717.6626 8.6120 Tawnaghmore Peaker 104.000 MW 396.8801 4.7626 Turlough Hill TH1, TH2, TH3, TH4 292.000 MW 805.6709 9.6681 Tynagh CT, ST 404.000 MW 644.7376 7.7369 West Offaly Power (Shannonbridge) SG4 141.000 MW 320.2026 3.8424 Transmission Connected Wind Athea* 68.000 MW 768.6542 9.2239 Ballywater 42.000 MW 234.2409 2.8109 Boggeragh* 57.000 MW 329.8917 3.9587 Booltiagh* 31.450 MW 123.8934 1.4867 Clahane 37.800 MW 689.8567 8.2783 Coomacheo* 59.225 MW 458.7909 5.5055 Coomagearlaghy 81.000 MW 458.7917 5.5055 Cunghill* 34.800 MW 340.1276 4.0815 Derrybrien 59.500 MW 377.8976 4.5348 Dromada* 46.000 MW 768.6542 9.2239 Glanlee* 35.800 MW 458.8084 5.5057 Golagh 15.000 MW 260.8951 3.1307 Garvagh* 58.225 MW 126.4001 1.5168 Lisheen* 55.000 MW 0.0000 0.0000 Meentycat* 84.960 MW 312.7134 3.7526 Ratrussan (Bindoo) 70.000 MW 78.3317 0.9400 Ratrussan (Mountain Lodge) 30.620 MW 78.3317 0.9400 Distribution Connected Wind Connected at Arklow Wind Arklow 25.200 MW 91.4584 1.0975 Ballycadden* Ballycadden 14.450 MW 234.2409 2.8109 Gibbeet Hill* Ballycadden 14.800 MW 234.2409 2.8109 Glanta Commons Wind Ballylickey 19.550 MW 0.0000 0.0000 Corkermore Wind* Binbane 15.000 MW 278.0917 3.3371 Meenachullalan Binbane 11.900 MW 278.0917 3.3371 Gortahile* Carlow 21.000 MW 0.0000 0.0000 Raheen Barr Wind Castlebar 18.700 MW 0.0000 0.0000 Derryvacoreen* Dunmanway 17.000 MW 0.0000 0.0000 Taurbeg Wind Glenlara 25.300 MW 0.0000 0.0000 Dromdeveen* Glenlara 10.500 MW 0.0000 0.0000 Knockacummer* Glenlara 87.000 MW 0.0000 0.0000 Cark Wind Letterkenny 15.000 MW 235.0101 2.8201 Culliagh Wind Letterkenny 11.880 MW 235.0101 2.8201 Carriganimma Macroom 15.000 MW 283.9176 3.4070 Gartnaneane Wind Meath Hill 15.000 MW 0.0000 0.0000 Rathcahill* Rathkeale 12.500 MW 525.8834 6.3106 Sorne Hill Wind Sorne Hill 31.500 MW 235.0101 2.8201 Lee Strand Co-op (1)* Tralee 15.000 MW 600.5884 7.2071 57

Muingnaminnane (1) Tralee 15.300 MW 600.5884 7.2071 Tursillagh (1) Tralee 15.000 MW 600.5884 7.2071 Knockawarriga Trien 22.500 MW 768.6542 9.2239 Tournafulla (2) Trien 17.200 MW 768.6542 9.2239 Beam Hill Wind Trillick 14.000 MW 235.0109 2.8201 Drumlough Hill (2)* Trillick 10.200 MW 235.0109 2.8201 Moanmore Wind Tullabrack 12.600 MW 123.8934 1.4867 Carnsore Wind Wexford 11.900 MW 31.0984 0.3732 Richfield Wind Wexford 27.000 MW 31.0984 0.3732 Notes * Expected to connect, extend or become operational during the tariff year ** Expected to decommission or partly decommission during the tariff year 58