Memorandum submitted by the Energy Networks Association (EN 04)
Mandate for a National Smart Metering Rollout
1. The Energy Networks Association (ENA) makes the following submission on behalf the energy network companies and suppliers as represented by their respective trade associations. The Energy Retail Association (ERA) and its member companies have stated consistently that the national rollout of a smart metering programme for gas and electricity consumers, particularly in relation to household premises, will need to be mandated by the government. The ENA also favours the introduction of smart metering on the back of a government mandate.
2. This paper, reflecting the above consensus, proposes that the mandate required would best be expressed by making appropriate provision within the current Energy Bill, and includes illustrative statutory drafting for this purpose.
B. Identifying the appropriate legal mechanism
3. In its recent consultation paper, BERR proposed to require the introduction of smart meters to certain segments of the business market via modifications inserted into gas and electricity supply licences using regulations made under section 2(2) of the European Communities Act 1972, pursuant to the provisions of Article 13 of EC Directive 2006/32 (the Energy Services Directive). We understand BERR to believe that the same mechanism would be appropriate for a national rollout of smart metering to all premises supplied with gas and/or electricity in Great Britain.
4. We think that it would be risky to rely on section 2(2) regulations for a smart metering rollout, because the powers conferred by the Energy Services Directive are too narrow for the complex and demanding project that this entails. In particular:
(a) The powers under the Energy Services Directive for a national rollout are dependent on the costs being proportionate to the potential energy savings. However, while the energy and carbon savings are an important part of the overall business case for smart metering, the main part of the benefits of the rollout will come from the better and more cost-effective service that can be offered across the board to customers, and that can only be achieved through a national co-ordinated dual-fuel programme.
(b) The Energy Services Directive requires meters to reflect customers' actual energy consumption and to provide information on actual time of use. It does not require such information to be remotely submitted to the supplier or the necessary IT systems and protocols to be in place. Nor would it allow for regulation requiring information on supply status to be passed to the network operator (if this was decided to be part of the functionality).
5. In short, proceeding by regulations under section 2(2) risks the possibility of legal challenges by any parties opposed to the process, as well as discovery that any powers the Directive gives cover only half the job. We believe that, with a legislative vehicle currently available, the use of primary legislation is both lower risk and supplies additional parliamentary legitimacy to a major modernisation project that is likely to require very substantial changes to the industry's existing physical, commercial, and legal arrangements.
6. At the same time, the scale and intrusiveness of a national rollout is likely to be regarded by the public as having much greater legitimacy if it can be seen to have been authorised by Parliament under primary legislation. A national rollout will constitute the largest and most intensive home-visiting programme undertaken in this country since the old British Gas Corporation converted all of the nation's gas- burning appliances to North Sea gas in the 1970s. The use of primary legislation will assist in avoiding any negative association of such a programme with greater EU regulation, and this in practice will help to make its delivery easier.
C. Energy Bill should build upon restructuring precedents
7. Against this backdrop, the obvious legislative means to mandate and facilitate a national smart metering rollout is the current Energy Bill.
8. It should be noted that the industry's existing primary legislation, especially in relation to electricity, contains strong precedents for an effective statutory treatment of the very large industry/market restructuring required for a national rollout programme. In particular, the legislative provision made by the Utilities Act 2000 to facilitate the successful introduction of the New Electricity Trading Arrangements, and later by the Energy Act 2004 to provide for the creation of the British Electricity Trading and Transmission Arrangements, are helpful pointers to the way forward.
9. Relying - and building - on those precedents, this paper recommends that the Energy Bill should include a broad enabling framework for the implementation of smart metering arrangements in relation to all gas and electricity consumer premises over a ten-year period beginning in January 2010. Assuming that the Bill receives Royal Assent by the summer of 2008, this would allow the industry 18 months of preparation before the implementation period came into force. The framework would include powers for the Secretary of State to amend any of the conditions of industry licences to the extent necessary to support and facilitate the rollout.
10. This paper also presents some illustrative statutory drafting (attached) which is designed to show, in principle, how the Energy Bill could give effect to key aspects of the recommendation. The drafting is largely self-explanatory, but is supported by notes to ensure full clarity. It is important to recognise that the form in which the mandate is constructed is neutral to questions of market design/structure and how the specific logistics of the rollout should be organised. This is because it would be inappropriate for the legislation to predetermine such matters.
11. The conferring of the special licence modification power on the Secretary of State, rather than Ofgem, is squarely in line with the NETA and BETTA precedents and reflects both the industry/market restructuring nature of the programme and also the fact that it is being undertaken to deliver a major public policy objective.
12. This paper makes proposals, on behalf of the energy industry, that are considered essential to the creation of an effective and authoritative mandate for a national smart metering rollout.
Illustrative drafting for a smart metering mandate
NEW METERING ARRANGEMENTS
78 Interpretation of this Part
(1) The relevant licensees for the purposes of this Part are -
(a) gas suppliers and gas transporters within the meaning of Part 1 of the Gas Act 1986; and
(b) electricity suppliers and electricity distributors within the meaning of Part 1 of the Electricity Act 1989.
(2) The effective date for the purposes of this Part is the date which is ten years after the date on which section 79 comes into force.
(3) Expressions used in this Part have the same meaning as in Part 1 of the Gas Act 1986 or Part 1 of the Electricity Act 1989, as the case may be.
79 Implementation of new metering arrangements
(1) The purposes of this Part are -
(a) to ensure that new metering arrangements for each premises in Great Britain to which gas or electricity is supplied are implemented by the effective date; and
(b) to make such provision for or in relation to the activities of relevant licensees as may be necessary to secure that objective.
(2) As from the effective date, a relevant licensee must not supply gas or electricity to any premises that is not subject to new metering arrangements.
(3) The Secretary of State may exempt any relevant licensee from the prohibition imposed by subsection (2) in relation to such premises, for such period of time, and subject to such conditions as he considers appropriate in all the circumstances of the case.
(4) References in this Part to new metering arrangements are to arrangements (including the provision and operation of any necessary communications and data-handling infrastructure) designed to ensure that, by the effective date, every premises supplied with gas or electricity in Great Britain is and will continue to be so supplied through a meter that conforms to the following three requirements.
(5) The first requirement is that the meter must record and be able to store measured consumption data for multiple time periods.
(6) The second requirement is that the meter, either on its own or with an ancillary device, must facilitate remote access to such data.
(7) The third requirement is that the meter must meet any specifications that may be set out in any regulations made by the Secretary of State under this Part, pursuant to his duties under Part 1 of the Gas Act 1986 and Part 1 of the Electricity Act 1989, for the purposes of facilitating the introduction of new metering arrangements.
(8) This section may not be brought into force before 1 January 2010.
80 Power to modify licence conditions
(1) The Secretary of State may, in accordance with this section, modify -
(a) the conditions of a particular licence held under section 7(1) or 7A(1) or (2) of the Gas Act 1986 or under section 6(1) of the Electricity Act 1989; or
(b) the standard conditions of licences of any type mentioned in those subsections,
if he considers it necessary or expedient to do so for the purpose of securing the implementation of new metering arrangements.
(2) The power to make modifications under paragraph (a) or (b) of subsection (1) includes power -
(a) to make modifications requiring licence holders, or classes of licence holder, to co-operate together, under arrangements approved by the Gas and Electricity Markets Authority ("the Authority"), for the purpose of ensuring that the purposes of this Part are achieved;
(b) to make modifications requiring any relevant licensee to take or refrain from taking any specified action, whether in relation to premises supplied with gas or electricity or otherwise, for the purpose of ensuring that the purposes of this Part are achieved;
(c) to make modifications relating to the operation of, access to, or use of pipe-line systems and distribution systems; and
(d) to make incidental, consequential, or transitional modifications.
(3) Before making modifications under this section, the Secretary of State must consult the Authority, the holder of any licence being modified, and such other persons as he considers appropriate.
(4) Subsection (3) may be satisfied by consultation undertaken before, as well as by consultation undertaken after, the commencement of this section.
(5) Any modification under subsection (1)(b) of part of a standard condition of a licence shall not prevent any other part of the condition from continuing to be regarded as a standard condition for the purposes of Part 1 of the Gas Act 1986 or Part 1 of the Electricity Act 1989, as the case may be.
(6) Where the Secretary of State modifies the standard conditions of licences of any type under subsection (1)(b), the Authority must make (as nearly as may be) the same modifications of those standard conditions for the purposes of their incorporation into licences of that type granted after that time.
(7) The Secretary of State must publish any modifications under this section in such manner as he considers appropriate.
(8) The power of the Secretary of State under this section may not be exercised after the end of the period of five years beginning with the passing of this Act.
Part 5: New metering arrangements
In line with the organisation of the Energy Bill, the relevant three sections are grouped into a single Part because of their unifying theme.
Section 78: Interpretation of this Part
Subsection (1): This ensures that the persons to whom Part 5 primarily applies are the licensed suppliers and transporters of gas, and licensed suppliers and distributors of electricity, under the main industry statutes.
Subsection (2): This establishes the date (i.e. ten years after the commencement date) by which it is intended that new metering arrangements will be fully implemented.
Subsection (3): This ensures that expressions used in this Part that are also used in the industry's principal legislation (such as meter, distribution system, licence holder, pipe-line system, premises, standard conditions, and supply) have the same meaning as they have in that legislation.
Section 79: Implementation of new metering arrangements
Subsection (1): This sets out the purposes of Part 5, i.e. to ensure that new metering arrangements in relation to all premises supplied with electricity or gas in Great Britain are implemented by the effective date, and to make appropriate provision in relation to the activities of relevant licensees for securing that objective.
Subsection (2): This makes it unlawful to supply gas or electricity on or after the full implementation date to premises not covered by the new metering arrangements.
Subsection (3): This allows the Secretary of State to exempt a particular supplier, or all suppliers, from the supply prohibition under subsection (2), in whole or in part, and subject to conditions, if the circumstances require this. There are two reasons for this exempting power. The first is that, without the benefit of this, a supplier might be at risk of breach through the failures or omissions of others.
The second reason is to enable government to exempt from the coverage of a national rollout those premises, or categories of premises, particularly in the large business and industrial sector, that already have sophisticated metering technology installed that provides remote access to consumption data recorded for multiple time periods.
Subsection (4): This, taken in conjunction with the next two subsections, clarifies the nature of the new metering arrangements that are intended to be implemented. These arrangements may be physical, commercial, or legal in their nature, and are envisaged to include the provision and operation of any necessary communications infrastructure, with the purpose of ensuring that every meter installed at premises within the ten-year period is able to satisfy three key requirements.
Subsection (5): This describes the first such requirement, i.e. that the meter must be able to record and store measured consumption data for multiple time periods.
Subsection (6): This describes the second such requirement, i.e. that the meter (on its own or with support from an ancillary device) must be able to facilitate remote access to the consumption data.
Note: the content of subsections (4) to (6) reflects, with some adaptations, the draft legal definition of smart metering in BERR's consultation paper.
Subsection (7): This describes the third requirement, i.e. that the meter must comply with any additional specifications set out in regulations made as a statutory instrument by the Secretary of State to facilitate new metering arrangements. (This instrument would also be able to make any necessary changes to those schedules of the Electricity and Gas Acts that deal with matters related to meters, subject (by virtue of current clauses 88 and 89 of the Bill) to an affirmative resolution procedure in Parliament.)
Subsection (8): This ensures that the earliest date on which the section can be brought into force is 1 January 2010, which would thus be the earliest commencement date for the mandated implementation of the new metering arrangements.
Section 80: Power to modify licence conditions
Subsection (1): This provides a wide power for the Secretary of State to modify the conditions of a particular gas or electricity licence, or the standard conditions of any type of gas or electricity licence, for the purpose of facilitating the implementation or operation of the new metering arrangements.
Note: Although the licences requiring new or amended standard conditions to support a smart metering rollout will be mainly supply and distribution licences, the power should cover all types of licence in order to cater for all eventualities. Power to modify special licence conditions (i.e. the conditions of a particular licence) will also be necessary as a backstop measure in order, for example, to ensure appropriate price control treatment for stranded legacy metering assets.
Subsection (2): This ensures that the power to modify licences under subsection (1) includes, in particular, power to make the following:
* modifications requiring licence holders, or classes of licence holder, to co-operate together, under arrangements approved by Ofgem, with a view to ensuring that the purposes of Part 5 are achieved;
* modifications requiring relevant licensees, whether individually or otherwise, to act in relation to premises supplied with gas or electricity in such a way as to ensure that the purposes of Part 5 are achieved;
* modifications relating to the operation or use of gas and/or electricity networks (for example, in relation to the carrying of communications and data); and
* consequential and transitional modifications.
Subsection (3): This requires the Secretary of State to consult appropriately on any proposed licence modifications.
Subsection (4): This permits any consultation undertaken before the section comes into effect to count for the purposes of subsection (3).
Subsection (5): This ensures that the modification, under this section, of a part of a standard condition does not affect the status of the rest of the condition.
Subsection (6): This requires any modifications, under this section, of any standard licence conditions to be replicated by the Authority for incorporation into all future licences of that type.
Subsection (7): This requires the Secretary of State to publish any modifications of licence conditions under this section.
Subsection (8): This limits the period for exercising the power to modify licences under this section to five years from the passing of this Energy Act.
It would be undesirable to maintain the power indefinitely, as that would override the protections for companies contained in the usual statutory processes for modifying licences. On the other hand, an early sunset clause (of the kind provided in the Utilities Act 2000 for the NETA licence modification power) would be too restrictive, since clearly the rules for rolling out the new arrangements may need to be refined during the course of the rollout period.
A period of five years from Royal Assent, so that the power would cease during the fourth year of the rollout period, should be sufficient for the purpose.