Exempt ion appl icat ion f or t h e Br it Ned-in t er con n ect or as submit t ed by Br it Ned Devel opmen t Lt d
Advisor y Repor t by DTe The Hague, December 2006
Contents
1 INTRODUCTION ... 4
1.1 BACKGROUND... 4
1.2 LEGAL FRAMEWORK... 4
1.3 PROCEDURE FOLLOWED... 5
1.4 READER'S GUIDE TO THIS ADVICE... 6
2 DOES THE APPLICATION FOR EXEMPTION MEET THE CONDITIONS CONTAINED IN ARTICLE 7 OF REGULATION (EC) NO. 1228/2003 ON CONDITIONS FOR ACCESS TO THE NETWORK FOR CROSS-BORDER EXCHANGES IN ELECTRICITY?... 6
2.1 THE INVESTMENT MUST ENHANCE COMPETITION IN ELECTRICITY SUPPLY (CONDITION A)... 6
2.1.1 Assessment framework ... 6
2.1.2 Analysis ... 6
2.1.3 Conclusions ... 9
2.2 THE LEVEL OF RISK ATTACHED TO THE INVESTMENT IS SUCH THAT THE INVESTMENT WOULD NOT TAKE PLACE UNLESS AN EXEMPTION IS GRANTED (CONDITION B) ... 10
2.2.1 Assessment framework ... 10
2.2.2 Analysis ... 10
2.2.3 Conclusions ... 12
2.3 THE INTERCONNECTOR MUST BE OWNED BY A NATURAL OR LEGAL PERSON WHICH IS SEPARATE AT LEAST IN TERMS OF ITS LEGAL FORM FROM THE SYSTEM OPERATORS IN WHOSE SYSTEMS THAT INTERCONNECTOR WILL BE BUILT (CONDITION C) ... 12
2.3.1 Assessment framework ... 12
2.3.2 Analysis ... 13
2.3.3 Conclusions ... 15
2.4 CHARGES ARE LEVIED ON USERS OF THAT INTERCONNECTOR (CONDITION D)... 16
2.4.1 Assessment framework ... 16
2.4.2 Analysis ... 16
2.4.3 Conclusions ... 16
2.5 SINCE THE PARTIAL MARKET OPENING REFERRED TO IN ARTICLE 19 OF DIRECTIVE 96/92/EC, NO PART OF THE CAPITAL OR OPERATING COSTS OF THE INTERCONNECTOR HAS BEEN RECOVERED FROM ANY COMPONENT OF CHARGES MADE FOR THE USE OF TRANSMISSION OR DISTRIBUTION SYSTEMS LINKED BY THE INTERCONNECTOR (CONDITION E) ... 17
2.5.1 Assessment framework ... 17
2.5.2 Analysis ... 17
2.5.3 Conclusions ... 17
2.6 THE EXEMPTION IS NOT TO THE DETRIMENT OF COMPETITION OR THE EFFECTIVE FUNCTIONING OF THE INTERNAL ELECTRICITY MARKET, OR THE EFFICIENT FUNCTIONING OF THE REGULATED SYSTEM TO WHICH THE INTERCONNECTOR IS LINKED (CONDITION F) ... 18
2.6.1 Assessment framework ... 18
2.6.2 Analysis ... 18
2.6.3 Conclusions ... 21
3 SCOPE OF THE EXEMPTION... 21
3.1 EXEMPTION HOLDER... 21
3.2 DURATION AND SCOPE OF THE EXEMPTION... 21
4 ADVICE AND CONDITIONS ATTACHED TO THE EXEMPTION ... 23
4.1 SUMMARY OF THE ASSESSMENT AS TO WHETHER THE APPLICATION FOR EXEMPTION MEETS THE CONDITIONS FOR EXEMPTION... 23
4.2 ADVICE IN RELATION TO CONDITIONS ATTACHED TO A POSSIBLE POSITIVE DECISION ON THE EXEMPTION... 25
5 ADDENDUM: QUESTIONNAIRE IN RELATION TO INTRAGROUP FINANCING OF ENERGY COMPANIES... 30
1
Introduction
1. BritNed Development Ltd (hereinafter "BritNed") intends to construct a connection (hereinafter "the interconnector" or "the cable") between the electricity transmission systems in the Netherlands and the United Kingdom. BritNed is a joint venture of NLink International B.V. (hereinafter "NLink"), a fully-owned subsidiary of TenneT Holding B.V. and National Grid International Ltd, a fully-owned subsidiary of the British National Grid plc. The project is referred to as the "BritNed interconnector" or "BritNed cable".
2. For the realisation of the project, BritNed has applied for an exemption, as referred to in Article 7 of Regulation (EC) No. 1228/ 2003 (hereinafter "the Regulation").1 The duration of the exemption, desired
by BritNed, is 25 years, calculated from the date on which the cable becomes operational. BritNed expects the cable to become operational in the year 2010. BritNed intends to make the capacity of the cable available to users through implicit and short-term explicit auctions of rights to the capacity of the cable. According to the application for exemption, no long-term reserving of capacity will occur.
3. On the basis of Decision No. 1229/ 2003/ EC, the BritNed cable is one of the trans-European investment projects which have priority with regard to the granting of financial assistance by the Community. BritNed has stated that it will receive a subsidy from the European Union during the feasibility study phase of the BritNed cable. BritNed has also stated that it is still unclear whether BritNed is also eligible for financial support during the construction phase.
4. In accordance with Article 7 of the Regulation, new interconnectors may be exempted on request from Article 6(6) of the Regulation and from the relevant sections of the Electricity Act of 1998 (hereinafter "the Electricity Act"), which implement Article 20 and Article 23(2), (3) and (4) of European Directive 2003/ 54/ EC. Briefly, these articles and sections regulate the allocation of revenues, the access for third parties and the powers of the regulatory authorities to determine methods, and the tariffs and
conditions applicable to these.
5. In accordance with section 86c of the Electricity Act, the Minister of Economic Affairs decides on applications for exemptions, as referred to in Article 7 of the Regulation. In accordance with section 86c of the Electricity Act, the Board of Directors of the Netherlands Competition Authority (hereinafter "the Board ") advises the Minister in relation to the decision on the application for exemption.
6. The conditions which a new interconnector must meet to qualify for exemption are set out in Article 7 of the Regulation. The six conditions are:
a. the investment must enhance competition in electricity supply;
1 Regulation (EC) No. 1228/ 2003 of the European Parliament and of the Council of 26 June 2003 on conditions for access to the network for cross-border exchanges in electricity, OJ L 176, 15.7.2003, p. 1–10.
b. the level of risk attached to the investment is such that the investment would not take place unless an exemption is granted;
c. the interconnector must be owned by a natural or legal person which is separate at least in terms of its legal form from the system operators in whose systems that interconnector will be built;
d. charges are levied on users of that interconnector;
e. since the partial market opening referred to in Article 19 of Directive 96/ 92/ EC, no part of the capital or operating costs of the interconnector has been recovered from any component of charges made for the use of transmission or distribution systems linked by the interconnector; f. the exemption is not to the detriment of competition or the effective functioning of the internal
electricity market, or the efficient functioning of the regulated system to which the interconnector is linked.
7. On 15 June 2006, the Board received a copy of an application for exemption submitted by BritNed to the Minister of Economic Affairs. Several exploratory discussions took place with BritNed prior to the application.
8. On 15 June 2006, the Board received a copy of the letter of 12 June 2006 sent by BritNed to the Minister of Economic Affairs in which BritNed answers questions put to BritNed and TenneT by the Ministry of Economic Affairs in its letter of 5 April 2006.
9. On 23 June 2006, the Board received a copy of a letter sent on 22 June 2006 by BritNed to the Ministry of Economic Affairs, with which letter were enclosed TenneT's answers to several questions posed in the letter of 5 April 2006.
10. On 10 August 2006, the Board received a summary in Dutch of the application for exemption from BritNed. In this document, BritNed requests an exemption from section 6(6) of the Regulation and the relevant articles of the legislation which implements Articles 20 and 23 of European Regulation 2003/ 54/ EC. In particular, BritNed applied for exemption from the obligations pursuant to
sections 26(1), 27, 28, 29, 30, 30a, 31, 32, 33, 36, 37, 38, 39, 40, 40a and 42 of the Electricity Act.
11. In a letter of 21 August 2006, the Minister requested the Board to advise him.
12. On 1 September 2006, in a letter of 25 August 2006, the Board received answers from BritNed to questions put to BritNed by the Ministry of Economic Affairs in a letter of 29 July 2006.
13. On 1 September 2006, the Board received a copy of a study carried out on behalf of TenneT Holding B.V. by The Brattle Group.2 The purpose of this study was to answer two questions posed in the letter
of 5 April 2006 with regard to TenneT's role in a commercial participation in the BritNed cable.
2 Study entitled "TenneT’s Participation in the BritNed Cable: An Analysis of Possible Discrimination Concerns", August 2006, The Brattle Group, Ltd.
14. On 21 September 2006, the Board received answers from BritNed in its letter of 20 September 2006 to questions which the Board had put to BritNed in its letter of 4 September 2006.
15. In this advice, the following aspects are discussed in turn.
a. Does the application for exemption meet the conditions stipulated in Article 7 of the Regulation? In this regard, the assessment framework applied by the Board, an analysis and the conclusions as to whether, in the Board's opinion, the specific condition is met are outlined.
b. What should the scope of the exemption be?
A substantiated recommendation is given with regard to the duration and the extent of the exemption.
c. What is the advice with regard to this application for exemption?
In this section, the advice and conditions for the exemption are discussed.
2
Does the application for exemption meet the conditions contained in
Article 7 of Regulation (EC) No. 1228/ 2003 on conditions for access to
the network for cross-border exchanges in electricity?
16. In this chapter, the specific conditions applicable to exemptions, contained in Article 7 of the Regulation, will be discussed. The assessment framework applied the Board to each condition for exemption will be outlined per condition. This is followed by an analysis per condition for exemption, which in turn is followed by a conclusion which the Board draws depending on whether the specific condition is or is not met.
2.1.1 Assessment framework
17. To assess the effects on competition, the Board assesses the effects which the cable is expected to have on market concentration, liquidity,3 the wholesale price of electricity and price stability. The Board
also assesses the allocation mechanism which determines how the capacity of the cable is made available to the market and is therefore a strong determinant of the effect of the cable on competition.
18. The Board carries out this assessment on both the Dutch and the British markets. In this regard, the Board commissioned a study by Cambridge Economic Policy Associates, which is attached to this advice as an addendum.4
2.1.2 Analysis
General
19. To assess the effect of the cable on competition, BritNed commissioned a study from Frontier Economics, which is added as an addendum to the application for exemption. BritNed states that the
3 In this advice, liquidity is understood to be the sensitivity of wholesale prices to individual transactions.
4 Study entitled “ Proposed BritNed Electricity Interconnector, Advice on Economic Issues” , Cambridge Economic Policy Associates Ltd., October 2006. The study contains confidential business information relating to BritNed.
most important conclusion from the study by Frontier Economics is that the cable will enhance competition. BritNed also argues that neither BritNed's proposed ownership structure, nor BritNed's allocation model (corresponding to regulated third-party access) will jeopardise the contribution made to competition.
20. Due to the construction of the cable, the direct transmission of electricity in the Netherlands and the United Kingdom will be possible. The Board is of the opinion that the possibility of direct transmission gives British producers more scope to compete on the Dutch wholesale market and gives Dutch suppliers more opportunities to procure electricity on the British market.
21. The Board expects the effect of the cable on the British market to be limited due to the relatively small capacity of the cable compared to the British market, which is 3 to 3.5 times the level of consumption and production on the Dutch market. Furthermore, there is more competition on the British market than on the Dutch market. The Board therefore focuses its analysis below on the effects of the cable on competition on the Dutch market.
Market concentration
22. The effect of the cable on market concentration depends on how the capacity is made available to the market (the allocation mechanism) and which parties acquire the capacity. The allocation mechanism proposed by BritNed, which is based on implicit and short-term explicit auctions, makes it possible for all existing and potential entrants to the market to acquire capacity. At the same time, the
transmission capacity on the cross-border grid available to each buyer, supplier or trader is limited to 400 MW.5 The 400 MW limit makes it impossible for a single market party to acquire all the capacity
of the cable and the allocation mechanism allows all existing and potential entrants to acquire capacity on the cable. The Board therefore expects the cable to have a positive effect on market concentration.
Liquidity
23. Liquidity is an important condition for the efficient operation of the Dutch electricity market.6 The
cable makes additional foreign supplies of electricity possible from other parties active at present on the British market, but not yet active on the Dutch market, and vice versa. At the time at which this advice was drawn up, for instance, 25 parties were admitted to the British power exchange, but not to the Dutch power exchange. These include several large British producers. In addition, 26 parties have been admitted to the Dutch power exchange, but not to the British exchange. The proposed allocation mechanism, based on short-term auctions, is expected to have a positive effect on the liquidity of the market. The Board therefore expects the cable to have a positive effect on the liquidity of the market.
Allocation mechanism
24. In the application for exemption, BritNed indicates that access to the capacity of the interconnector will consist of a mix of implicit auctions throguh the spot market and short-term explicit auctions of physical capacity rights. Furthermore, BritNed states that it will comply with future "Use-It-Or-Lose-It (UIOLI)” / "Use-It-Or-Sell-It" guidelines and intraday trade. These key features of the proposed allocation mechanism fit well within the framework which the European Commission has stipulated with regard to allocation mechanisms in its draft decision amending the addendum to the Regulation.
5 Section 31a(1) Electricity Act.
25. In answer to the questions posed by the Ministry of Economic Affairs (on 19 July 2006), BritNed states that the capacity which will be auctioned explicitly or implicitly, and the terms for which this will be auctioned explicitly, have not yet been determined. BritNed has also stated that the conditions which apply to explicit auctions are different to those which apply to explicit auctions in the regulated domain (these are set out in chapter 5.6 of the Grid Code7). BritNed has not yet formulated the conditions for
the auctions in concrete terms. 8
26. Article 7(4) of the Regulation stipulates that in deciding on an exemption attention must be paid, for instance, to non-discriminatory access to the interconnector. Article 7(4) also stipulates that in granting an exemption, the authorised authority may approve or fix the rules and/ or mechanisms with regard to the management and allocation of capacity.
27. Article 20 of European Directive 2003/ 54/ EC stipulates furthermore that Member States must ensure the introduction of a system for third-party access to the transmission and distribution systems, based on published tariffs, applicable to all eligible customers and applied objectively and without
discrimination between system users. Member States must ensure that these tariffs, or the methodologies underlying their calculation, are approved prior to their entry into force and that the methodologies, where only methodologies are approved, are published prior to their entry into force. 28. The Board is of the opinion that the method to be applied in relation to the management and methods
and the conditions applicable to the allocation of cable capacity, the use of the cable capacity and the provision of information are critical factors in relation to competition in the area of electricity supply and the efficient operation of the internal electricity market. The aforementioned activities, in the Board's opinion, therefore have a direct effect on the conditions which the new interconnector must meet in order to qualify for an exemption (as referred to in Article 7 of the Regulation).
29. The Board is of the opinion that the method to be applied in relation to the management and methods and conditions with regard to the allocation of cable capacity, the use of the cable capacity and the provision of information in relation to these activities must be submitted for approval to the Board to ensure that the above-mentioned activities will be in line with the market, and that they will be non- discriminatory and transparent, and will comply with Article 7 of the Regulation. The Board advises the Minister to include this condition in a possible decision granting exemption, in line with Article 7(4) of the Regulation. The Board also advises the Minister to include a number of specific requirements in relation to the above-mentioned activities in any positive decision granting an exemption, which BritNed must at least meet in the proposal to be presented to the Board for its approval. Chapter 4 of this advice contains conditions and criteria in this regard.
Price effects
30. It emerges from the study carried out by Cambridge Economic Policy Associates at the Board's request that the cable may result in lower and more stable prices. Table 1 shows what effect a 1000 MW BritNed cable would have been on prices on APX, the Dutch power exchange, in years 2002 to 2004. The effect of the 700 MW NorNed cable is also included because this cable is scheduled to come into operation in 2008, in other words before the BritNed cable is scheduled to come on stream in 2010. The average price decreases, as expected, because the downward pressure on prices due to imports is
7 The conditions, as referred to in section 31(1)(a) of the Electricity Act.
stronger than the upward pressure on prices due to exports (which usually takes place outside of peak hours when demand and prices are low). Price stability increases because high prices are dampened by imports and low prices increase due to exports.
Table 1 – Effect on APX prices (average and standard deviation in Euros/ MWh)
Prior to BritNed, prior to NorNed
Prior to BritNed, after NorNed
After BritNed, after NorNed
After BritNed, after NorNed with restrictions on imports Average Standard deviation Average Standard deviation Average Standard deviation Average Standard deviation 2002 30.0 41.4 26.9 29.7 26.1 24.9 26.6 27.6 2003 31.2 45.6 27.6 32.6 26.3 27.1 27.0 30.3 2004 39.0 73.8 35.1 53.0 33.4 44.0 34.3 49.2 Average 33.4 53.6 29.9 38.5 28.6 32.0 29.3 35.7
31. TenneT has stated that during the initial period, from the moment at which it becomes operational, the cable may possibly not be utilised fully for imports of electricity from the United Kingdom to the Netherlands.9 Full utilisation for imports will only be possible once the so-called 380 kV South Circuit
has been completed in the Randstad, the western coastal region of the Netherlands. TenneT has also stated that if BritNed wishes to have full capacity to import electricity earlier, TenneT will have to invest in strengthening the underlying 150 kV grid and that, in TenneT's view, BritNed ought to contribute to strengthening this grid. According to TenneT, there are no restrictions on the exporting of electricity. If the cable cannot be fully utilised in the initial years for imports, this will have no effect on prices. Table 1 shows the effect on prices of a restriction on imports of 400 MW for the first five years after the cable comes into operation. The effect on prices of restrictions on imports appears to be small. The expected price falls, even if import restrictions apply.
2.1.3 Conclusions
32. The Board concludes that the BritNed cable is expected to have little effect on competition on the Dutch market because the cable may reduce market concentration, may improve liquidity, and is expected to result, on average, in lower and more stable prices. The effect of the cable on the British market is limited due to the relatively low capacity of the cable compared to the competitive market in the United Kingdom.
33. The allocation mechanism has a strong effect in determining competition. The allocation mechanism proposed by BritNed is based on short-term auctions and has a positive effect on competition. The method and conditions applicable to the allocation mechanism have not yet been formulated by BritNed in concrete terms. The Board's advice is therefore to have the allocation mechanism approved by the Board before the cable becomes operational and, where necessary, to make adjustments to this after the cable has become operational in consultation with BritNed to ensure that the cable makes a permanent contribution to competition. The Board therefore advises the Minister to attach the conditions summarised in chapter 4 to any exemption which is granted.
2.2.1 Assessment framework
34. The Board is of the opinion that the granting of an exemption must correspond (with regard to its duration and scope) to the level of private financial risks. Any exemption must therefore not be broader than is strictly necessary to ensure that the investment takes place.
35. In its explanation of the regulation, the European Commission draws attention to the importance of meticulously ascertaining whether an exemption from the regulatory regime is essential.10 The
European Commission states, for instance, in this explanation that:
“ Exemptions will therefore only be granted exceptionally and on a case-by-case basis.”
36. Due to the importance of meticulously ascertaining whether an exemption from the regulatory regime is essential, the Board assesses the extent to which the exemption reduces the risks compared to a situation where the cable is constructed under the regulatory regime.
2.2.2 Analysis
37. In its application for exemption, BritNed refers to a number of risks which, according to BritNed, would result in the cable's not being constructed without the exemption. The risks relate to the development, construction, bringing into operation and management of the cable, the strong fluctuations from year to year in revenues and regulation.
Risks relating to revenues and costs
38. In the application for exemption, BritNed states that the annual revenues are expected to fluctuate considerably because the price differences between the British and Dutch electricity markets may be great or small. BritNed also states that the cable is capital intensive and that revenues for good years are required to compensate for years with low revenues in order to recover the investment during the period of 25 years, for which an exemption is requested.
39. The Board has assessed the revenues, costs and risks of the cable.11 The Board is of the opinion that
the risk that the revenues will be lower than expected due to the future development of prices is difficult to predict and furthermore the revenues may differ considerably from year to year as a result of strong fluctuations in price differences from one year to the next. The turnover is partly uncertain due to the effect on prices of possible future increases in interconnector capacity with other countries, for instance Germany. Another factor which makes the turnover uncertain is uncertainty with regard to the future development of product capacity, which will also have an effect on prices. In addition, in the Board's opinion, a large infrastructural project, such as the BritNed cable, inherently brings with it the risk of additional costs in relation to its construction, risks due to the fact that the cost of the
investment is exceeded, delays in the cable's being brought into operation and disruptions to its operation in the initial period after it has come into operation. In addition to this, the Board notes, on the basis of the available information, that the definitive level of the risks in quantitative terms and the
10 Note of DG Energy & Transport on Directives 2003/ 54-55 and Regulation 1228/ 03 in the electricity and gas internal market, exemptions from certain provisions of the third party access regime, January 2004, available from:
http:/ / ec.europa.eu
11 To assess the revenues, costs and risks of the cable, the Board made use of the expertise of an independent external consultant. See paragraph 18.
effectiveness of BritNed's risk management measures are still not clear. For this reason, for the time being the Board will take into account the possibility that BritNed will exceed the present budget estimate of investment costs. Finally, the economic study confirms that it is possible that the cable will not be sufficiently profitable. The Board concludes that the period of exemption requested for the full capacity of the cable, namely 25 years, is reasonable due to the expected revenues, costs and risks of the project.
Regulatory risk
40. The Board notes that the British Department of Trade & Industry (DTI) and the regulator, Ofgem, consider cables to be risky and do not wish to impose these risks on customers by financing the cable from the regulated tariffs. In a views paper with regard to LNG and interconnectors, DTI and Ofgem state: 12
“ The DTI and Ofgem continue to believe, as discussed in the initial views paper, that the development of potentially risky investments such as interconnectors and LNG infrastructure would not normally fit within the class of infrastructure developments that would ordinarily be allowed to recover costs as part of the Transco or NGC network activity remuneration.”
41. British legislation and regulations define participation in an interconnector as a separate activity requiring an interconnector licence. In the United Kingdom, a legal entity, which holds an
interconnector licence, may not also hold a transmission licence.13 A situation where the cable and
transmission systems are in the same hands therefore does not occur in the United Kingdom. This means that the British TSO (National Grid Electricity Transmission plc) may not hold an
interconnector licence. However, the licence may be applied for by and on behalf of a separate legal entity. National Grid has set up the subsidiary National Grid International Ltd for this purpose,.
42. Since the British TSO cannot participate in a cable, socialisation of the costs of the cable is not possible in the United Kingdom. A party which wishes to invest in a cable will therefore have to finance the costs from other (private) sources. However, this does not mean that regulation of the cable in United Kingdom is not possible. The main rule contained in the regulations applicable to
interconnector licences is certainly that the tariffs and conditions must be regulated.
43. BritNed states that under the regulated regime, the British regulatory authority has the power to require an increase in the capacity of the cable. This gives the regulatory authority the possibility to cream off the profits of the BritNed project without providing compensation for losses which, according to BritNed, results in asymmetry in the risks of the project. As a result, according to BritNed, the expected return will fall below the level which is acceptable to investors.
44. BritNed states that it will only construct the proposed cable if the exemption from the regulatory regime which is requested is obtained from the regulatory authorities in United Kingdom and if this is endorsed by the European Commission. If the exemption is granted, it would not be possible for the British regulatory authorities to require an increase in the capacity of the cable. According to BritNed, the exemption requested will ensure that risk and return are in balance for the entire period of the
12 Source: LNG facilities and interconnectors: EU legislation and regulatory regime, DTI/ Ofgem final views, November 2003.
exemption. An exemption, such as that requested from the United Kingdom, is also required from the Dutch regulatory authorities, according to BritNed.
45. BritNed also states that it has examined the option of a hybrid structure for the BritNed joint venture, in other words a structure in which the revenues and costs in the Netherlands are socialised and those in United Kingdom are not.14 The cable would then be a regulated cable with respect to the Dutch part
and a commercial (non-regulated cable) with regard to the British part. BritNed concludes that a hybrid structure such as this does not appear to be opportune, due to the conflicting interests within the joint venture and possible cross-subsidisation of the regulated and commercial parts of the joint venture.
46. The Board concludes that the United Kingdom appears to have a policy preference for commercial cables rather than regulated cables. In addition, BritNed apparently perceives the risk of future British regulation to be so great that the Board deems it is plausible that under a regulated British regime the investment will not be realised. This does not mean that the Dutch part of the cable could not be regulated. As is stated above, the Board deems both the risk that the revenues will be lower than expected and the risk of additional costs in relation to the construction to be realistic. In the case of a regulated cable, grid users will, in fact, bear the risk through the grid tariffs, although they would be able to exert hardly any influence on these risks. In the case of a commercial cable, the risk lies with the private investor.
2.2.3 Conclusions
47. The Board expects the risk that the revenues will be lower than expected during the operation and that additional costs will be incurred for the construction of the BritNed cable to be realistic. The Board therefore has a preference for investment in a commercial cable by an entirely independent legal entity, separate from TenneT TSO B.V., rather than the possibility of investment in a regulated cable by TenneT TSO B.V.
48. The Board has reached the conclusion that the period of the exemption requested for the fall capacity of the cable, namely 25 years, is reasonable in the light of the expected revenues, costs and risks of the project.
2.3.1 Assessment framework
49. Article 7(1)(c) of Regulation 1228/ 2003:
The interconnector must be owned by a natural or legal person which is separate at least in terms of its legal form from the system operators in whose systems that interconnector will be built.
14 In the Netherlands, part of the cost of cables that can be financed from the so-called auction revenues (section 31(6) of the Electricity Act) or possibly as an appreciable investment (section 41b(2) of the Electricity Act).
50. Section 16(4) of the Electricity Act:
Producers, suppliers, traders and shareholders and group companies, as referred to in section 24b of Book 2 of the Netherlands Civil Code, associated with the grid manager shall refrain from any interference with the performance of the duties with which a grid manager is charged, in accordance with subsection (1) and (2).
2.3.2 Analysis
51. The question whether the BritNed cable is the property of a legal entity, which is at least with regard to its legal form separated from the owner of the regulated grid: TenneT TSO B.V., was assessed by the Board by determining (a) whether the legal entity, BritNed, exists as an independent legal entity within the TenneT group, (b) by assessing who the owner of the interconnector is/ will be, (c) by assessing the risk of financial crossholdings and testing whether commercial companies, such as BritNed had NLink, can exercise control over TenneT TSO B.V. and (d) assessing the risk that financiers of BritNed and NLink could recover any losses from TenneT TSO B.V.
Legal personality of BritNed and ownership of the BritNed interconnector
52. The Board requested an extract from the Chamber of Commerce and other relevant information, from which it appears that BritNed is a fully independent legal entity within the TenneT group and is or will be (part) owner of the BritNed interconnector.
53. BritNed is a company incorporated under English law.15 NLink International B.V., the private limited
liability company (established under Dutch law), holds 50% of the shares in BritNed. It appears from the organisational chart and other information provided to the Board by TenneT that NLink is separate from the companies which carry out the regulated activities within the TenneT group. In the
application for exemption, TenneT has stated that BritNed is a fully independent legal entity, separate from the two TSOs connected to each other by the BritNed cable. On request, NLink informed the Board that BritNed was set up to develop the BritNed cable. The joint-venture structure for the construction and operational phase has not yet been finalised. 16 As a result, it is not yet known who
the owner of the BritNed interconnector will be.
Other risks for TenneT TSO B.V.: financial crossholdings; control; depletion of the capital; financing of the BritNed interconnector
Financial crossholdings
54. Producers, suppliers, traders and shareholders, and group companies, as referred to in section 24b of Book 2 of the Netherlands Civil Code, associated with the grid manager, must refrain from any interference with the performance of the duties with which TenneT is charged, in accordance with section 16 of the Electricity Act. 17 TenneT TSO B.V. is prohibited from carrying art acts or activities
which may conflict with the interests of the management of the national grid. 18 Actions which are
deemed to be in conflict with the interests of grid management are deemed to be actions which may cause grid management to suffer a financial loss, such as the creation of financial crossholdings with group companies which develop commercial activities. In its application for consent to its designation as the manager of the national high-voltage grid, TenneT submitted the articles of association of
15 TenneT provided an extract from the British Companies Register. 16 Answer to question 10 in the letter from BritNed of 12 June 2006.
17 Section 16(4) of the Electricity Act and Article 2.3 of the Articles of Association. 18 Section 17a(2) of the Electricity Act.
NLink for approval to the Minister of Economic Affairs. 19 In addition, the articles of association of
TenneT TSO B.V. and those of TenneT Holding B.V. stipulate20 that TenneT TSO B.V. and TenneT
Holding B.V. may not provide security, may not issue a share price guarantee, or strengthen its position by any other means, or bind itself jointly and severally or in any other way in addition to or on behalf of third parties with a view to the acquisition or obtaining of shares in its capital or share certificates by third parties. The articles of association21 set out qualitative criteria for shareholders of
TenneT TSO B.V. and TenneT Holding B.V. Only the Kingdom of the Netherlands may be a direct or indirect shareholder of TenneT TSO B.V. and TenneT Holding B.V. TenneT TSO B.V. will not provide financing to NLink and/ or BritNed for the construction and operational phase, nor will it provide guarantees or accept joint and several liability. 22
Control of TenneT TSO B.V. by commercial group companies
55. The Board requested a detailed description of the governance regulations in respect of the companies belonging to the TenneT group which are involved in the BritNed project. In this regard, questions were asked, in particular, with regard to the nature and extent of any direct or indirect voting rights held by National Grid or BritNed in the shareholders’ meeting of TenneT TSO B.V. and voting rights at the holding level with regard to TenneT TSO B.V.
56. According to BritNed, 23 BritNed and/ or National Grid companies do not have direct or indirect voting
rights in the shareholders’ meeting of TenneT TSO B.V., nor in the shareholders’ meeting of TenneT Holding B.V. The shareholder of TenneT TSO B.V. is TenneT Holding B.V. The shareholder of TenneT Holding B.V. is the Kingdom of the Netherlands. The Supervisory Board of both TenneT TSO B.V. and TenneT Holding B.V. consists of the same people. These people are not representatives of BritNed and/ or the National Grid companies.
Depletion of TenneT TSO B.V.'s capital
57. The Board investigated the extent to which there is a risk that the capital of TenneT TSO B.V. will be depleted as a result of the BritNed project.
58. Actions which are deemed to be in conflict with the interests of good grid management are deemed to be actions which may cause grid management to suffer a financial loss. This includes not only the creation of financial crossholdings with group companies, which develop commercial activities, but also actions which result in a depletion of the capital of TenneT TSO B.V. This prohibition is also contained in the articles of association of TenneT TSO B.V. 24 Section 2:207c of the Netherlands Civil
Code stipulates that the company may not provide security, may not issue a share price guarantee, or strengthen its position by any other means, or bind itself jointly and severally or in any other way in addition to or on behalf of third parties with a view to the acquisition or obtaining of shares in its capital or share certificates by third parties. This prohibition is also confirmed by the articles of association25 of TenneT TSO B.V.
19 Letters from TenneT to the Ministry of Economic Affairs of 20 June 2006 with reference MR 06-277 and of 20 December 2005 with reference CZK 05-0043.
20 Article 2.3 of the Articles of Association of TenneT TSO B.V. of 10 February 2006. 21 Article 4.1 of the Articles of Association of TenneT TSO B.V. and TenneT Holding B.V. 22 Letter from TenneT of 20 June 2006 with reference MR 06-277.
23 Letter from BritNed of 20 September 2006, with reference NLink 06-028. 24 Article 2.1 of the Articles of Association of TenneT TSO B.V.
Opportunities for financiers of BritNed to recover their losses from TenneT TSO B.V.
59. The Board examined the extent to which it is possible for the financiers of BritNed to recover their losses from TenneT TSO B.V.
60. The precise way in which the BritNed interconnector will be financed was not yet known at the time at which this advice was requested.26 According to BritNed, the financing of BritNed's construction and
operational phase can be arranged within BritNed and NLink, or via TenneT Holding B.V. In this regard, BritNed emphasised that the financing of the interconnector will take place independently of TenneT TSO B.V. In addition, BritNed noted that the financing will be consistent with the conditions of the exemption.27 BritNed also stated that there were no other credit arrangements, bank guarantees
or contracts on the basis of which TenneT Holding B.V. may be held liable for losses incurred by NLink or BritNed. Furthermore, it was stated that the possibility cannot be excluded that guarantees or similar agreements will be entered into in the future.28 BritNed emphasises that in this case this would
take place in every respect independently of TenneT TSO B.V.
2.3.3 Conclusions
Legal personality and ownership
61. At this moment, the Board sees no reason not to assume that the BritNed cable will be the property of a legal entity which will be separate from TenneT TSO B.V. Whether condition C will actually be met once it can be determined who the owner is of the BritNed interconnector. The Board advises the Minister to require BritNed to give notice of who its owner is as soon as this becomes clear.
Financial crossholdings
62. On the basis of the available information, financial crossholdings between commercial companies and TenneT TSO B.V. cannot be excluded entirely, in the Board’s opinion, despite statutory guarantees and guarantees provided in the articles of association. The Board deems it of considerable importance that every risk be excluded whereby the interests of TenneT TSO B.V. may be adversely affected by
crossholdings with commercial companies which are part of the TenneT group.
Control of TenneT TSO B.V. by commercial group companies
63. The Board concludes that neither the commercial group companies of TenneT nor those of National Grid exercise control over TenneT TSO B.V. through shareholdings. The risk that TenneT TSO B.V. will be influenced by commercial shareholders is therefore small, according to be Board. Nevertheless, the Board deems it of considerable importance that every risk that the interests of TenneT TSO B.V. may be adversely affected be excluded.
Depletion of TenneT TSO B.V.'s capital
64. The Board concludes that the articles of association and legislation aim to avert the depletion of the capital of TenneT TSO B.V. Nevertheless, the Board deems it of considerable importance that guarantees be provided by means of conditions attached to the exemption, which ensure that the interests of TenneT TSO B.V. cannot be adversely affected in this regard.
Opportunities for financiers of BritNed to recover their losses from TenneT TSO B.V.
65. At the time at which this advice was provided, the exact way in which the BritNed interconnector was to be financed was not yet known.29 At present, the Board sees no reason to call into question in any
important regard BritNed's explanation, from which it appears that the financing of the realisation and operation of the BritNed interconnector will take place in a manner which is independent in every respect of TenneT TSO B.V. At the same time, the Board notes that it is usual in the context of intragroup relationships for subsidiaries to accept liability for the debts of other group companies (credit arrangements). The Board also notes that in the past TenneT TSO B.V. provided an intragroup guarantee amounting to EUR 1 million and a current-account facility to NLink. 30 Often such
intragroup financing is accompanied by the provision of collateral by subsidiaries at the parent company's request. Usually the subsidiary has hardly any de facto or even legal scope to refuse such a request.31 Once the subsidiary participates in the arrangement, this implies greater financial room for
manoeuvre for the group, but also greater foreclosure risk if developments are unfavourable. The Board therefore deems it is of considerable importance that guarantees be provided by means of the exemption conditions and that it should be possible to verify that the financing is, in fact, arranged in such a way that the financiers cannot recover their losses from TenneT TSO B.V.
The conditions described in chapter 4 of this advice
66. In accordance with the above considerations, the Board recommends attaching the conditions described in chapter 4 to any exemption.
2.4.1 Assessment framework
67. For the assessment of this condition, the Board assesses the way in which BritNed will charge users for use of the cable.
2.4.2 Analysis
68. BritNed intends making the cable available to the market through auctions of implicit and explicit capacity titles. The price of the capacity allocated to the auctions is the tariff that users pay for the (implicit) capacity titles.
69. In the application for exemption, BritNed states that all the costs (capital and operating costs) will be covered exclusively by the users of the cable. It is therefore essential to the existence of BritNed that charges are levied on users.
2.4.3 Conclusions
70. Due to the fact that BritNed intends to auction the capacity of the cable, the Board assumes that charges will also actually be levied on users for the use of the BritNed cable.
71. The Board advises the Minister to take a positive decision with regard to condition D and to test this assumption in practice.
29 Letter from BritNed of 25 August 2006, with reference NLink 06-024, answer to question 2.
30 In section 2.5, the Board discusses the intragroup guarantee and current-account relationship in more detail. 31 Financiers wish to have as much certainty as possible and therefore also wish to have certainty in relation to the financially strongest company of the group.
2.5.1 Assessment framework
72. Article 7(1)(e) of Regulation No. 1228/ 2003 EC:
Since the partial market opening referred to in Article 19 of Directive 96/ 92/ EC, no part of the capital or operating costs of the interconnector has been recovered from any component of charges made for the use of transmission or distribution systems linked by the interconnector.
2.5.2 Analysis
73. To assess this condition, the Board examined whether the capital costs of the BritNed interconnector can be recovered in any way whatsoever from the tariffs charged for the use of the Dutch high-voltage grid. To do so, at the Board requested a detailed description of the way in which the TenneT group ensures that no part whatsoever of the capital or operating costs of the BritNed interconnector is or will be financed from the tariff revenues of TenneT TSO B.V. In this regard, the Board requested, in particular, an explanation of information provided earlier by BritNed32 from which it appears that
TenneT TSO B.V. issued an intragroup guarantee amounting to EUR 1 million to NLink, the group company of TenneT which, together with National Grid, has set up the joint venture, BritNed. In addition, it appeared from this information that, in addition to the intragroup guarantee, 50% of BritNed's operating deficits were covered by NLink and that TenneT TSO B.V. covered NLink's operating deficits through a current-account relationship. The Board asked, in particular, whether the intragroup guarantee was used in any way whatsoever to finance the BritNed interconnector.
74. According to BritNed,33 TenneT TSO B.V. was required to provide an intragroup guarantee in the past
in its capacity as a shareholder of NLink. This guarantee provided security for the performance of NLink's obligations arising from the shareholder agreement which it entered into in 2001 with National Grid International, the other 50% shareholder of BritNed. The liability arising from this amounts to a maximum of EUR 1 million. According to BritNed, no claims have been made on the basis of this guarantee to date. In the very short term, according to BritNed, the current-account relationship with TenneT TSO B.V. and the intragroup guarantee issued in the name of TenneT TSO B.V. will be transferred to TenneT Holding B.V., which was set up in 2005 to separate the regulated and non-regulated activities. The Board of Management and the Supervisory Board of TenneT TSO B.V. have decided on this. NLink will report to the Minister of Economic Affairs and the Board of the NMa once the intragroup guarantee has been transferred. Finally, BritNed stated that TenneT TSO B.V. will not provide finance in the future to NLink and/ or BritNed, neither in the realisation phase, nor in the operational phase. According to BritNed, TenneT TSO B.V. will also not provide guarantees or accept joint or several liability in this regard.
2.5.3 Conclusions
75. The Board concludes that neither the intragroup guarantee, nor the current-account relationship have been used to finance the capital costs of the interconnector. Condition E has therefore been met. The Board deems it of great importance that every risk be excluded, which may have a detrimental effect
32 Letter from TenneT of 20 June 2006 with reference MR 06-277.
on the interests of TenneT TSO B.V. due to the fact that any liability arising from the intragroup guarantee issued by TenneT TSO B.V. to NLink and the current-account relationship.34 The Board
therefore advises the Minister to attach the conditions summarised in chapter 4 to any exemption which may be granted.
2.6.1 Assessment framework
76. Due to the fact that the effects on competition of the construction of the cable have already been discussed in section 2.1, in respect of this condition for exemption the Board assesses the effects which exemption of the cable will have on the regulated system.
77. In doing so, the Board assesses the possible effects on the regulated system of a situation where a commercial subsidiary of TenneT Holding B.V. invests in the cable. The Board also discusses the possible risks in relation to the situation which will arise after the exemption period.
2.6.2 Analysis
Conflict of interests between regulated and commercial tasks
78. As a result of the participation by TenneT's commercial subsidiary, NLink, in the BritNed joint venture, a conflict of interests may arise in TenneT's case between its regulated tasks, carried out by its
subsidiary TenneT TSO B.V., and the commercial interest in the BritNed cable of the subsidiary, NLink. It may be possible for TenneT to influence the revenues of the commercial BritNed cable through its regulated tasks, for which TenneT TSO B.V. is responsible. This conflict of interests may occur if capacity is made available to the market through TenneT TSO B.V. on existing regulated cross-border connections, in investment plans for the expansion of these connections and in agreements entered into between BritNed and TenneT TSO B.V. The situation after conclusion of the exemption period may also give rise to a conflict of interests.
Making capacity on regulated cross-border connections available to the market
79. TenneT TSO B.V. is responsible for determining the cross-border transmission capacity available to the market on the regulated connections with Germany, Belgium and, in the future, Norway and any other countries. The capacity which TenneT TSO B.V. makes available to the market on the regulated connections has an effect on electricity prices.
80. For instance, if electricity prices in other countries are lower, market parties will utilise the available import capacity to transmit cheaper electricity to the Netherlands. The supply of cheaper foreign electricity will result in lower electricity prices in the Netherlands. Less than maximum utilisation of import capacity will result in an increase in the price of electricity in the Netherlands compared to the situation of the maximum utilisation.
81. This means that depending on the price differences with neighbouring countries, if TenneT TSO B.V. restricts the import capacity available to the market, the difference between Dutch and British
electricity prices may increase or even decrease. In Table 2, two scenarios are given as examples. In scenario 1, TenneT has an incentive to restrict import capacity on the Dutch-German border in favour of BritNed, but to the disadvantage of Dutch consumers, who will pay higher prices as a result. In scenario 2, TenneT has an incentive to make additional capacity available on the Dutch-German border, from which both BritNed and Dutch consumers benefit due to lower prices on the Dutch market.
Table 2 – Two price scenarios and the difference in incentives resulting from these (notional prices in euros/ MWh)
United Kingdom Netherlands Germany
Scenario 1 20 25 20
Scenario 2 25 20 15
82. It is therefore important that TenneT TSO B.V. make the maximum possible import capacity available to the market on the regulated cross-border connections and that the reasons for the restrictions imposed on this import capacity are transparent for the market.
83. Chapter 5.7 of the Grid Code specify in detail the method which TenneT TSO B.V. must apply in determining the secure, available cross-border transmission capacity and the data which TenneT TSO B.V. must publish in this regard.35 For effective supervision of whether TenneT TSO B.V. makes the
correct level of regulated cross-border transmission capacity available to the market, additional regulatory effort is essential, utilising all the specialist knowledge, software, information and coordination with foreign grid managers, which is necessary for this. Making the maximum possible level of cross-border transmission capacity available is even more important when the BritNed cable is operational.
Investment plans for regulated cross-border connections
84. Another area in which a conflict of interests may arise relates to the investment plans of TenneT TSO B.V. for the expansion of regulated cross-border transmission capacity. This expansion may effect electricity prices in the countries involved and as a result of the revenues of the BritNed cable. If an expansion were to result in lower expected revenues from the BritNed cable, this could mean that the expansion will not take place or will not take place in a timely manner. This may result in a decrease in welfare in the Netherlands, due to the fact that consumers profit less from imports of cheaper foreign electricity and electricity producers profit less from export opportunities.
85. The Board is the opinion that there is a risk that the investment plans of TenneT TSO B.V. for regulated cross-border transmission capacity will not take place or will not take place in a timely manner. The Board expects this risk is to be limited in so far as it relates to countries other than the United Kingdom. The preparations for the investment plans take place over a lengthy period and the economic life of the cross-border connections extends over many years. The uncertainty with regard to the development of electricity prices throughout this lengthy period is great. In the Board's opinion, TenneT’s interest in BritNed therefore brings with it a small risk that the increase in investments in regulated cross-border transmission capacity with other countries will not be made available in a timely manner, in so far as this does not relate to the United Kingdom. The risk that the investment
plans of TenneT TSO B.V. in relation to any additional cross-border transmission capacity with the United Kingdom will not be realised or will not be realised in a timely manner is great, in the opinion of the Board; after all, such investments have a negative effect on the profitability of BritNed. If necessary, the Minister can require TenneT TSO B.V. to create provisions to ensure that adequate transmission of electricity will take place. 36
Agreements between BritNed and TenneT TSO B.V.
86. The negotiations and agreements on the mutual provision of services between BritNed and TenneT TSO B.V. are an area in which a conflict of interests may arise. BritNed will have to enter into
agreements with TenneT TSO B.V. with regard to the management of the cable and the connection of the cable to the high-voltage grid. It is also possible, for instance, that BritNed will enter into
agreements with TenneT TSO B.V. with regard to the supply of power to enable TenneT TSO B.V. to carry out system services. Two subsidiaries of TenneT will be involved in these negotiations, namely NLink and TenneT TSO B.V.
87. The Board recommends attaching to any exemption a condition requiring agreements which BritNed entered into with TenneT TSO B.V. to be submitted to the Board for its prior approval, together with a declaration in which it is stated that the agreements will not have an adverse affect on the proper management of the grid by TenneT TSO B.V. and that the agreements have been entered into subject to conditions which are in line with the market.
Situation after the conclusion of the exemption period
88. The Board draws attention especially to the situation which will arise after the conclusion of the exemption period. By law the BritNed interconnector is part of the national high-voltage grid. 37 By law
TenneT TSO B.V. is therefore the grid manager. 38 TenneT TSO B.V. is legally obliged to maintain,
repair and modernise the BritNed interconnector.39 The Board is not aware of whether and how
TenneT wishes to exclude a situation where the maintenance costs and, in particular, modernisation costs (caused, for instance, by maintenance backlogs) may come to bear upon TenneT TSO B.V. after the end of the exemption period. The Board therefore recommends attaching a condition to the decision granting the exemption, requiring the party to whom the exemption is granted to indemnify TenneT TSO B.V. for the financial liabilities arising at the end of the exemption period in relation to the maintenance, repair and modernisation of the BritNed interconnector.
89. Another important matter requiring attention, in the Board's opinion, is the ownership of the
interconnector. NLink and NGIL will presumably become co-owners of the interconnector (on a 50/ 50 basis). The exemption and management by TenneT TSO B.V. will not affect this. It is of considerable importance, in the Board's opinion, that every risk that TenneT TSO B.V. will have to contribute financially to any transfer at the end of the exemption period be excluded by the holder of the exemption .
36 Section 22 of the Electricity Act.
37 Section 1(i) read in conjunction with section 10(1) of the Electricity Act. 38 Section 10(4) read in conjunction with section 16(6) of the Electricity Act. 39 Section 16(1)(c) of the Electricity Act.
2.6.3 Conclusions
90. In the event of a commercial participation by TenneT Holding B.V. in the BritNed cable, a conflict of interests may arise between the regulated tasks, which are carried out by the subsidiary, TenneT TSO B.V., and the commercial interests of the BritNed cable. After all, on the basis of its regulated tasks, TenneT TSO B.V. may be in a position to influence the revenues of the commercial BritNed cable and this may have a negative effect on the efficient operation of the regulated system. For effective supervision of whether TenneT TSO B.V. makes the correct level of regulated cross-border
transmission capacity available to the market, additional regulatory effort is essential, utilising all the specialist knowledge, software, information and coordination with foreign grid managers, which is necessary for this.
91. A condition should also be attached to any exemption, which requires BritNed to provide the Board with evidence that agreements entered into with TenneT TSO B.V. are non-discriminatory and in line with the market. Furthermore a condition should be attached to the exemption to the effect that the party to whom the exemption is granted must indemnify TenneT TSO B.V. for all financial liabilities in relation to the maintenance, repair and modernisation of the BritNed cable. The Board therefore advises the Minister to attach the conditions summarised in chapter 4 to a possible exemption.
3
Scope of the exemption
92. This chapter provides a substantiation of the Board's advice in relation to the scope of the possible exemption. The Board outlines this advice on the basis of three topics:
a. the possible holder of the exemption ; b. the duration and scope of the exemption;
c. the part of the capacity for which the exemption is granted.
93. BritNed has requested the Minister to grant an exemption comprising the following: a. designation of BritNed Development Limited as the holder of the exemption; b. the granting of an exemption for a period of 25 years;
c. exemption from Article 6(6) of the Regulation;
d. exemption from the relevant sections of Dutch legislation which implement Articles 20 and 23 (2), (3) and (4) of European Directive 2003/ 54/ EC.
94. The Board advises the Minister to grant a possible exemption to BritNed Development Limited.
95. In accordance with Article 7(4) of the Regulation, any exemption must stipulate the duration and the scope (full or partial capacity) of the exemption.
96. BritNed has included confidential financial information in its application for exemption with regard to, for instance, the period in which the investment in the cable will be recovered to substantiate the requested duration of the exemption, namely 25 years.
97. The Board has assessed the revenues, costs and risks of the cable.40 On the basis of this assessment,
the Board is of the opinion that the application for exemption provides sufficient reasons why, if an exemption is granted, a period of the exemption of 25 years for the full capacity of the cable is necessary to recover the investment in the cable. The Board refers in this regard to the
recommendation that conditions be attached to any exemption, providing for prior approval of the method of financing and the allocation mechanism and the possibility of revoking the decision granting an exemption during the exemption period in certain circumstances. The purpose of these conditions is to guarantee the permanent contribution of the cable to competition, so that no detrimental effects on competition are expected due to the duration of the exemption requested. 98. BritNed requests an exemption from Article 6(6) of the Regulation. The Board is of the opinion that in
the event of a possible exemption, an exemption from Article 6(6) of the Regulation would be necessary to provide BritNed with sufficient security that BritNed will retain the revenues from the cable.
99. BritNed also requests an exemption from the relevant articles of legislation implementing Articles 20 and 23 of European Directive 2003/ 54/ EC. In particular, exemption from the obligations arising from sections 26 (1), 27, 28, 29, 30, 30a, 31, 32, 33, 36, 37, 38, 39, 40, 40a and 42 of the Electricity Act is requested.
100. As was stated in paragraph 34, the Board is of the opinion that an exemption should not be broader in scope than is strictly necessary to allow the investment to take place. BritNed has not provided sufficient grounds in the application as to why, in their view, an exemption from the articles and sections listed in paragraph 99 is necessary for the BritNed cable. As a result, the Board has not been able to assess whether an exemption from these articles and sections is necessary and proportional. A possible exemption must therefore remain limited to the articles and sections relating to the allocation of the revenues and the conditions subject to which the capacity can be offered to the market.
101. In this regard, the Board wishes to draw attention, in particular, to the absence of any substantiation of the request for exemption from the regulations in or pursuant to section 31 of the Electricity Act. These regulations are essential to the proper functioning of the Dutch electricity supply system. A general exemption from the obligations arising from section 31 is therefore not possible, according to the Board. The Board advises the Minister, in any event, not to take a decision on the application for exemption before BritNed has provided reasons as to why an exemption of the articles and sections listed in paragraph 99 is necessary for the BritNed cable.
102. BritNed has not provided any definitive information on the capacity of the cable which, according to the application for exemption, may lie between 700 MW and 1320 MW. The average capacity of the cable, according to BritNed, is 1000 MW.
40 To assess the revenues, costs and risks of the cable, the Board made use of the expertise of an independent external consultant.
103. The Board's advice in relation to a possible exemption is that this exemption should be granted for the capacity of the cable at the moment that the cable becomes operational, subject to a maximum of 1320 MW in both directions. The moment at which the cable becomes operational is the moment at which BritNed starts offering transmission capacity to the market through the mix of implicit and explicit auctions.
104. If the capacity of the cable is increased relative to the capacity for which an exemption is granted, BritNed should be required to apply for a separate exemption in relation to this expansion.
4
Advice and conditions attached to the exemption
105. In chapter 2, the Board assessed whether the application for exemption meets the conditions applicable to exemptions in accordance with Article 7 of Regulation (EC) No. 1228/ 2003.
106. The investment must enhance competition in electricity supply.
The Board expects the cable to enhance competition on the Dutch market, to result in lower and more stable prices and to result in an increase in the liquidity of the market. The effect of the cable on the British market is expected to be small due to the relatively small capacity of the cable compared to the competitive market in the United Kingdom. The Board expects the allocation mechanism proposed by BritNed, which is based on implicit and short-term explicit auctions, to enhance competition, although the allocation mechanism has not yet been formulated in concrete terms by BritNed. The Board recommends that the allocation mechanism be submitted to the Board for approval before the cable becomes operational.
107. The level of risk attached to the investment is such that the investment would not take place unless an exemption is granted.
The Board expects that there is a risk that the revenues will be lower than expected and that additional costs will be incurred for the construction. The Board therefore has a preference for investment in a commercial cable by a fully independent legal entity, separate from TenneT TSO B.V., rather than the option of investment by TenneT TSO B.V. in a regulated cable. With regard to the commercial risk, the Board considers the exemption period of 25 years for the entire capacity of the cable requested by BritNed to be reasonable in the light of the expected revenues, costs and risks of the cable.
108. The interconnector must be owned by a natural or legal person which is separate at least in terms of its legal form from the system operators in whose systems that interconnector will be built.
With regard to the ownership and financing of the cable, the Board recommends assessing the financing structure and rights of ownership in respect of the cable against the criteria set out in Article 7 of the Regulation, before taking a decision on the application for exemption, and attaching conditions to any exemption to indemnify TenneT TSO B.V. for financial risks and to guarantee independent and proper national grid management.
109. Charges are levied on users of that interconnector.
The Board concludes that the condition that charges should be levied on the users of the cable will be met.
110. Since the partial market opening referred to in Article 19 of Directive 96/ 92/ EC, no part of the capital or operating costs of the interconnector has been recovered from any component of charges made for the use of transmission or distribution systems linked by the interconnector.
The Board concludes that no capital costs of the cable had been paid from regulated tariffs for the transmission or distribution systems to which the cable will be connected. The Board deems it to be of considerable importance that every risk be excluded as a result of which the interests of TenneT TSO B.V. may be adversely affected by the transfer of liability due to the intragroup guarantee provided by TenneT TSO B.V. to NLink and the current-account relationship.41 The Board recommends that
BritNed be required to report on the way in which the risk of a transfer of liability is excluded before taking a decision on the application for exemption.
111. The exemption is not to the detriment of competition or the effective functioning of the internal electricity market, or the efficient functioning of the regulated system to which the interconnector is linked.
The Board concludes that TenneT may be confronted with a conflict of interests between the regulated activities, carried out by the subsidiary, TenneT TSO B.V., and the commercial interests in the BritNed cable of the subsidiary, NLink,. The transmission capacity on the regulated cross-border connections, which TenneT TSO B.V. makes available to the market, affects BritNed's revenues. It is important that TenneT TSO B.V. make the maximum possible transmission capacity available to the market and that it make transparent any reasons for restrictions. This will become even more important once the BritNed cable has become operational. For effective supervision of whether TenneT TSO B.V. makes the correct level of regulated cross-border transmission capacity available to the market, additional regulatory effort is essential, utilising all the specialist knowledge, software, information and coordination with foreign grid managers, which is necessary for this.
112. From the point of view of limiting the risks arising from the conflict of interests, the Board
recommends that BritNed provide the Board with evidence that the agreements which BritNed enters into with TenneT TSO B.V. cannot have a detrimental effect on the proper management of the grid by TenneT TSO B.V., that they are non-discriminatory and that they are in line with the market. In addition, a condition will have to be attached to any exemption to the effect that on conclusion of the exemption period the holder of the exemption indemnifies TenneT TSO B.V. for all financial liabilities relating to maintenance, repairs and/ or modernisation of the BritNed cable.
Scope of the exemption
113. The exemption period requested by BritNed, namely 25 years, for the entire capacity of the cable is reasonable in the light of the expected revenues, costs and risks of the cable. With a view to the length of the exemption period (namely 25 years), the Board deems it important that conditions are attached to any positive decision granting an exemption for the purpose of guaranteeing that the cable makes a permanent contribution to the proper functioning of the internal electricity market throughout the exemption period.
