STROOM - changes in tariff regulation

This fourth part in a series on the Dutch STROOM Bill focuses on the changes in the tariff regulation of the new Dutch Electricity and Gas Act that was submitted to the Dutch House of Representatives on 4 May 2015.

Tariff regulation aims to stimulate system operators to operate efficiently, realize a reasonable yield of return and to fulfill the objectives of the energy legislation. The basic principle behind the existing tariff structure is that only the efficient cost of system operators, including a reasonable yield of return, is reimbursed to the system operators. The current system is however found to have several flaws. With the introduction of the STROOM Bill, several aspects of the current tariff regulation are reviewed in order to achieve a more transparent and efficient system. In this newsflash we will address the tariff regulation process and the tariff structures, as adjusted by the STROOM Bill.

Flaws of the current system

The tariff regulations have evolved over the years and were changed and adjusted numerous times. This has led to unexplainable discrepancies between the Gas Act and the Electricity Act 1998 on one hand and between national and European legislation on the other hand. In addition, the tariff regulations are currently fragmented over the respective acts, implementing regulations and codes, leading to a lack of transparency and the tariff regulation procedures have become unnecessarily complex, which has lead to clerical, administrative and regulatory burdens. It is furthermore felt that the basic principles for the tariff allocation to the different categories of connected parties have to be simplified, impediments for renewable and de-central energy production have to be removed and a level playing field for producers should be created. Finally, the STROOM Bill should also provide the prerequisites for the tariff regulation of the offshore grid.

Tariff regulation process

Currently the tariff regulation is carried out in three steps, being the adoption of a 'method decision' in which for a period of 3 to 5 years, the method to realize an efficient cost level for system operators is determined, secondly the adoption of the 'X-factor decisions', in which an annual tariff reduction is determined that aims to result in an efficient cost level and finally the adoption of a yearly 'tariff decision', determining the tariffs for the system operators for the next year. The tariff decision is determined by the regulator, the Netherlands Authority for Consumers and Markets (ACM), on the basis of a proposal from the system operator. In this proposal the tariffs are based on the total income that is derived from the income of the previous year plus inflation compensation and corrected with the X-factor.

In order to align the Gas Act and the Electricity Act 1998 and achieving a more efficient, transparent and simpler tariff regulation, the STROOM Bill contains several amendments in relation to the tariff regulation process:

• The X-factor decisions will be replaced by 'revenue decisions' that provide for more flexibility of the calculation of costs and savings, simplification because there is no need for subsequent correction and more room to not apply efficiency reductions in relation to costs that cannot be influenced or controlled by the system operators.
• A prolonged regulation period of 4 to 6 years, instead of 3 to 5 years, avoiding objection and appeal proceedings in relation to preceding regulation periods to continue during a new regulation period and providing an extended period of secured revenues for the system operators.
• For each type of system operators there shall be only one method decision, unlike under the current energy legislation, which requires separate decisions for certain tasks of the system operators.

Tariff structure

Beside the tariff regulation process, the STROOM Bill attempts to improve the tariff structure for the different system operators by:

• Aligning the terminology of the tariff structures for gas and electricity, where possible, providing more legal certainty.
• Providing the possibility of customized tariffs for the performance of specific tasks in addition to the tariffs determined by the regulator in relation to the connection, the metering and the transportation tasks. For such specific tasks there will not be ex ante price determination but only ex post tariff supervision by the regulator.

Entry and exit-points

The transportation tariff will not apply to feeding electricity and (green) gas into the grid. This already was the case for electricity and now results in an equal tariff system for distribution of gas and electricity. However, this remains different for gas transmission, where transportation and connection costs may be charged per entry and exit point.

Cost allocation

The current cost allocation principles will remain unchanged, but will now be laid down by law: the cumulative multi-stage system (cascade systematiek), the principle of cost units (tariefdragers) and the capacity tariff for small scale connections (capaciteitstarief voor aangeslotene met een kleine aansluiting).

Investment costs

In the current system, the transmission operator can only charge for investment costs for projects that have already been put into use, de facto leading to a prefinance obligation. The new system provides for the possibility to charge capital costs for certain investments already during construction and reduce interest expenses on debt capital.

It remains to be seen whether the legislator has succeeded in its attempt to combine and streamline the Gas and Electricity Acts to achieve more transparency and modernize the system of tariff regulation. According to the Dutch council of state, combining the Gas and Electricity Act will be complex due to key differences in the sectors, which may result in less accessible regulation. We will find out whether the STROOM Bill provides simpler and better tariff regulation once it enters into force and the first tariff decisions based on the new tariff regulation procedure have been taken.

The above is intended to provide an overview of important aspects of the tariff regulation of the STROOM Bill and not a complete enumeration of all the changes. If you have any questions or remarks regarding this newsflash or would like to receive our previous newsflashes on this topic, please do not hesitate to contact us.