House of Lords - Explanatory Note
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PART IV: AMENDMENT OF THE ELECTRICITY ACT 1989

Clauses 27 - 42: Electricity licensing; and clauses 73 - 74, 80 - 82 and 84 - 87: Gas licensing

54. Clause 27: Prohibition on unlicensed distribution of electricity. Section 4 of the 1989 Act provides at present that it is an offence to generate, transmit or supply electricity unless authorised by virtue of a licence or exemption under the Act. Since unauthorised distribution of electricity is not at present an offence, an electricity distributor whose activities do not extend to supply, transmission or generation does not require a licence or exemption. Distribution is not defined in the 1989 Act and it is currently regulated only through conditions in the licences of electricity suppliers (especially the public electricity suppliers who operate the distribution systems serving the great majority of customers).

55. This clause amends section 4 of the 1989 Act in order to make unauthorised electricity distribution a prohibited activity and to define that activity. As a result, the unauthorised distribution of electricity will become an offence in the same way as the other activities referred to above. Distribution will be authorised by means of either a licence granted by the Authority or an exemption order made by the Secretary of State (see clauses 28 and 29). Additionally, the clause substitutes a revised definition of "supply" which accommodates the creation of the new prohibition on unauthorised distribution.

56. Clauses 28 (Exemptions from electricity licensing), 74 (Exceptions from section 5 of the 1986 Act) and 85 (Exemptions from gas licensing). These clauses all deal with the case in which a person is carrying out one or more of the activities for which a licence would normally be required but where licensing would be unnecessarily onerous. Examples might be the owner of a caravan site who resupplies power to each of the caravans, or a local authority which operates a combined heat and power scheme for a block of flats. The clauses provide powers for the exemption of such persons. Exemptions may only be granted by the Secretary of State, and may be granted either to a class of persons or to an individual person. In order to protect the interests of consumers and to allow the Authority to perform its duties, the Secretary of State may attach conditions to any exemption, and may revoke or withdraw the exemption if, for example, such a condition is breached. The effect of revocation or withdrawal of an exemption is that, unless a licence is obtained, the continued carrying on of the activity authorised by the exemption becomes an offence.

57. Section 6A of the 1986 Act and section 5 of the 1989 Act contain similar provisions, although the opportunity has been taken to clarify the ability of the Secretary of State to attach conditions to exemptions and to align the provisions in the two Acts. Section 5(2) of the 1986 Act, which gives effect to Schedule 2A of that Act, provides a system by which certain activities are excepted from the licensing requirement. It is thought to be unnecessary to have two methods of achieving the same result, and clause 74 therefore repeals section 5(2) and Schedule 2A of the 1986 Act. But it is the Government's intention to make exemption orders under the new powers which will replicate the exceptions currently provided for by Schedule 2A.

58. Clause 29: Licences authorising supply etc of electricity. This clause replaces section 6 of the 1989 Act with three new sections. The effect of new section 6 is that the Authority alone, in future, will have the power to grant electricity licences, bringing electricity into line with gas in this respect. It also achieves several significant effects relating to the separation of supply and distribution, namely the creation of:

  • a power to grant a licence authorising electricity distribution (see the new section 6(1)(c) of the 1989 Act);

  • a single category of electricity supply licence and, hence, the removal of the concept of public electricity suppliers (see the new sections 6(1)(d) and 6(3) of the 1989 Act) ; and

  • a statutory bar on the same legal person holding both an electricity supply licence and an electricity distribution licence (see the new section 6(2) of the 1989 Act).

59. The new section 6A lays down the procedures to be applied in respect of the grant, extension or restriction of electricity licences and provides a power for the Authority to make regulations governing these procedures. The introduction of these provisions will bring the 1989 Act more closely into line in this respect with the 1986 Act. The new section 6B sets out additional procedures which apply in the case of electricity transmission, where the concept of geographically exclusive "authorised areas" is retained.

60. Clause 30: Enactments referring to public electricity suppliers. This clause provides that:

  • references in legislation to public electricity suppliers are, after the commencement of this provision and according to the nature of the activities carried out by the persons referred to, to be taken to be references to electricity suppliers or distributors, or both, as defined in the Bill;

  • references to the supply of electricity are to be taken to be references to the supply or distribution of electricity, or both, according to the nature of the activity referred to; and

  • references to holders of supply licences under section 6(2) of the current Act (ie so called 'second tier' supply licences, as opposed to the supply licences granted under section 6(1)(c) to the public electricity suppliers) are to be taken to be references to supply licences as provided for by this Bill.

61. Clauses 31 and 73: Electricity licence conditions and gas licence conditions. These clauses amend section 7 of the 1989 Act and section 7B of the 1986 Act respectively. The purpose of these amendments is to align the powers in the two Acts in relation to the inclusion of conditions in licences.

62. Clauses 32 and 80: Standard conditions of electricity and gas licences. Clause 32 brings the 1989 Act into line with the 1986 Act (as amended by the Gas Act 1995) by introducing the concept of standard conditions of licences into electricity. Standard conditions of licences are designed to ensure that all holders of a particular licence type are subject to the same licence conditions as far as appropriate and facilitate a procedure whereby licence conditions may be modified collectively (see clause 34). Subsection (1), which follows the model established by section 8(2) of the Gas Act 1995, gives the Secretary of State the power to draw up and publish the standard conditions of the licences before a specified date. As is the case for gas, after that date, the Secretary of State will have no further role in making licence conditions, save that he may veto proposals made by the Authority to modify the standard conditions he has established, either when granting a licence or subsequently.

63. Subsection (3) incorporates the standard conditions established under the power in subsection (1) into all future licences by reference. (Part I of Schedule 7 provides for the incorporation of standard conditions into existing electricity licences). It also gives the Authority a power to modify the standard conditions established by the Secretary of State when granting a licence and sets out the necessary process required for this including, in line with the existing provisions of the 1989 Act, a power for the Secretary of State to veto such modifications.

64. The passage of this Bill will give rise to the need to revise some of the standard conditions of gas licences. It is thought that the simplest way of achieving this is to replace completely the existing sets of standard conditions with new sets (even though many of the existing conditions will be replicated in these new sets). This is done in subsections (2) and (3) of clause 80 by provisions which mirror those described above for electricity.

65. Both of these clauses introduce a power to include conditions in licences which: (i) allow other conditions not to have effect until brought into operation; and (ii) switch other conditions on or off, in both cases in the manner and circumstances set out in the licence. This is designed to allow the Authority when granting licences to tailor the application of licence conditions more closely to the circumstances of each case. It also provides a basis in certain circumstances for determining whether the views of a given licence holder on a collective licence modification proposed by the Authority should be counted in determining whether the Authority may proceed (see clauses 34 and 81).

66. Clauses 33 - 39 and 81 - 82: implement revised arrangements for the modification of electricity and gas licence conditions by the Authority and for licence modification references to the Competition Commission.

67. Clause 33 replaces subsection 11(1) of the 1989 Act, which deals with modification of licence conditions by agreement, to reflect the introduction into electricity licences of standard conditions (see clause 32) and in order to bring arrangements for modifying individual electricity licences into line with the existing arrangements in gas. The new subsection (1) provides that section 11 (as amended) relates to the modification of conditions of a particular licence. Further, the clause provides that if the effect would be to modify a standard condition of an individual electricity licence the Authority should not have the power to unduly discriminate against any other holder of a licence of that type. It also provides that where a condition is modified in part, the unmodified part of the condition continues to be considered as a standard condition of the licence.

68. Clause 34 provides for the collective modification by the Authority of the standard conditions of all electricity licences of a given type and for the making of any such incidental and consequential modifications as the Authority deems necessary. It sets out the procedures to be followed by the Authority where it seeks to make a collective modification. The Authority must give notice of its proposals to each "relevant licence holder" (see below), the Council and the Secretary of State (who may veto the proposed modification). Licence holders must be given an opportunity to give their views on the Authority's proposals.

69. The proposed modifications may not be made if the proportion of licence holders who register an objection to the proposal exceeds either of two blocking minority thresholds. These thresholds relate to: (i) the proportion of "relevant licence holders" who object (expressed as a percentage of all relevant licence holders); and (ii) the same proportion, weighted by the market share of the objectors. "Relevant licence holders" are defined as, in the case of a modification which creates new conditions, all holders of the given licence type and, in the case of modification or omission of existing conditions, any licence holder in whose licence the relevant conditions are operative. "Operative" means that a condition has not been made inoperative by the exercise of a direction under a licence condition included in the licence by virtue of the power in clause 32(2).

70. The clause provides that the Secretary of State may determine by order (subject to affirmative resolution procedures) the values of the blocking minority thresholds for each test for each licence type, and the means by which licence holders' market share is to be determined for the purposes of the second test.

71. Clause 81 (save for subsection (1)) amends section 23 of the 1986 Act so that the provisions for collective modification of gas licences mirror those described in the preceding paragraphs for electricity. Subsection (1) amends section 8(7) of that Act to align it with section 8A of the 1989 Act as introduced by subsection (3) of clause 32.

72. Clauses 35-37 and 39 are concerned with licence modification references to the Competition Commission. They amend sections 12 to 15 of the 1989 Act respectively. Sections 12 to 14 of that Act relate to licence modification references to the Competition Commission by the Director, reports on such references and modifications of licences which may result. Section 15 provides for licences to be modified by the Secretary of State following adverse public interest findings by the Commission made under other Acts of Parliament. The amendments made by clause 35 to section 12 allow the Authority to make licence modification references to the Competition Committee either in the case of individual licences or in respect of the standard conditions of all licences of a given type. The changes made by clauses 36 and 37 to sections 13 and 14 are largely consequent on this new power. The changes made by clause 39 to section 15 allow the Secretary of State, following a reference report by the Commission made under another Act, either to modify the conditions of individual licences or the standard conditions of all licences of a given type. The resulting provisions of the 1989 Act will mirror very closely the existing provisions of section 24 to 27 of the 1986 Act. These clauses also include changes consequent upon the separation of supply and distribution and on the establishment of the Council.

73. Clauses 38 and 82: Modification of electricity and gas conditions following Competition Commission report. These clauses require the Competition Commission to review the Authority's proposals to modify electricity licences and gas licences (respectively) following the Commission's report on a reference. If it appears to the Commission that the proposed modifications are not requisite for the purpose of remedying or preventing the adverse effects specified in its report, the Commission is required to substitute its own licence modifications which are requisite for that purpose. These clauses set out procedures for the notification by the Commission of its intention to substitute its own modifications and for consultation on the modifications themselves.

74. Clause 40 (Transfer of electricity licences) and 84 (Transfer of gas licences). Currently, section 8AA of the 1986 Act permits a licence to be assigned, with the consent of the Director General of Gas Supply, to another party. In deciding whether to consent to assignment of a licence, the Director has to take into account the same considerations as he would take into account if he were granting a new licence to the assignee. There is no corresponding provision in the 1989 Act.

75. These clauses provide for a similar procedure (now described as "transfer" rather than "assignment") to be adopted for both gas and electricity licences. In addition, the opportunity has been taken to amend the procedures set out in section 8AA of the 1986 Act, both to remove procedural hurdles (such as the requirement that the licence must contain a condition authorising assignment) and to ensure that there is proper consultation in appropriate cases before the Authority consents to a transfer. The purpose is to simplify procedures in cases of restructuring within the industry without removing any necessary consumer protection.

76. Clauses 41 and 86: Reasons for decisions under the 1986 Act and the 1989 Act. These clauses require the Authority and the Secretary of State to give reasons for certain of the key decisions that they take. The clauses specify the decisions to which this requirement applies.

77. In these cases, the Authority (or Secretary of State, as the case may be) is required to produce a notice giving the reasons for its decision and to publish it in a manner appropriate for the purpose of bringing it to the attention of those likely to be interested. A copy must also be sent to the licence-holder to whose licence, or to whom, the decision relates.

78. Clauses 42 and 87: Altering activities requiring licence or exemption in electricity and gas. Under the current gas and electricity regimes, neither the Secretary of State nor the regulator has the ability to add to the list of activities prohibited without a licence or exemption, or to remove activities from regulatory control. The only means currently available to achieve this is primary legislation. The purpose of these clauses is to introduce more flexibility into the regulatory system to adapt to developments in the structure of the electricity and gas markets. Clause 42 covers the case of electricity and clause 87 covers gas, the provisions being identical in substance.

79. The effect of the clauses will be to give the Secretary of State an order-making power to create new licensable activities for gas and electricity, with certain restrictions, or to remove the need for a licence or exemption. Any order would be subject to the affirmative resolution procedure.

80. The key restrictions on the ability to create new licensable activities are :

  • the Secretary of State may only exercise the power at the instigation of the Authority;

  • activities may only become licensable if they are activities connected with those already within the scope of existing licences or exemptions;

  • before the power can be exercised, notice must be given to those carrying on, or intending to carry on the activities in question, and to the Gas and Electricity Consumer Council; and,

  • if a reference to the Competition Commission is made as a result of an objection (from a person carrying on or intending to carry on the activities) or for any other reason, the Commission must have clearly concluded that the absence of a licensing requirement for those particular activities operates against the public interest.

81. In the case of a proposal to de-regulate an activity, either the Secretary of State or the Authority may initiate the process. All those likely to be affected, the Council (and in the case of gas, the Health and Safety Executive) would be consulted before any decision to proceed with an Order.

Clauses 43 - 49: Duties of electricity distributors

82. Clause 43: Duty to connect on request. This clause replaces the existing sections 16 and 17 of the 1989 Act with three new sections. The new section 16 places on electricity distributors an obligation to provide, and subsequently to keep in good repair and not disconnect, a connection between their systems and premises when requested to do so either by the owner or occupier of the premises or by an authorised electricity supplier acting on his behalf. This provision includes a duty to provide connections on request to embedded generation plant (that is to say, generation plant connected directly to distribution systems). Electricity distributors are also required to provide a connection to a distribution system run by an authorised distributor at his request.

83. The new section 16A establishes the procedural arrangements relating to the duty to connect, including arrangements whereby the distributor must notify the party wishing to be connected of, inter alia, any information he requires in order to make the connection, his charges and any security he may require in advance. Powers in relation to the setting of charges and the requiring of security by the distributor are dealt with in clauses 45 and 46.

84. The new section 17 establishes the circumstances in which the duty to connect does not arise. This is where:

  • the making of a connection is prevented for reasons beyond the distributor's control;

  • the making of a connection would or might breach electricity safety regulations (and the distributor has done all he can reasonably do to ensure that this would not be the case);

  • it would be unreasonable to expect the distributor to make a connection;

  • to do so would require the powers set out in Schedules 3 and 4 of the 1989 Act and the electricity distributor has not been given those powers in his licence.

85. Clause 44: Abolition of tariffs. This clause repeals section 18 of the 1989 Act. Section 18 provides for tariff supply by public electricity suppliers and its repeal means that all supply will be on the basis of a contract between a supplier and a customer.

86. Clause 45: Power to recover expenditure. This clause amends section 19 of the 1989 Act, so that public electricity suppliers' powers to recover expenditure for the provision of plant and line, in order to make a connection, apply to distributors instead, as the duty to connect now lies with them.

87. Clause 46: Power to require security. This clause amends section 20 of the 1989 Act, so that the public electricity suppliers' powers to require security for payment in respect of the provision of plant or line to make a connection apply to distributors instead. The deletions of subsections (2) and (4) are consequential amendments, since both subsections relate to supply rather than to distribution

88. Clause 47: Additional terms of connection. This clause amends section 21 of the 1989 Act so that it relates to the provision of a connection by a distributor rather than, as before, to supply by a public electricity supplier. It allows for the imposition by a distributor on a person requesting a connection of: (i) any restrictions made necessary by the Electricity Supply Regulations made under section 29 of the Act; and (ii) any terms restricting liability for economic loss resulting from negligence with respect to the operation of a distribution system which it is reasonable for the person requiring the connection to be required to accept.

89. Clause 48: Special agreements with respect to connection. This clause replaces the existing section 22 of the 1989 Act. It provides that a person requiring a connection and a distributor may enter into an agreement for the purposes of making a connection under terms agreed between them which might not include those terms which are stipulated for inclusion in any agreement under section 16A of the 1989 Act (as inserted by clause 42).

90. Clause 49: General duties of electricity distributors. This clause sets down the general duties of licensed electricity distributors in respect of the development of their systems and the use of them to facilitate competition in supply and generation (which would include embedded generation). These duties are the same as those which already apply to holders of electricity transmission licences. The existing reference to the general duties of public electricity suppliers is repealed.

Clauses 50 - 52, 83 and Schedules 4 and 5: Electricity licence holders (and 'The gas code')

91. Clause 50: The electricity code. This clause paves the way for Schedule 4.

92. Schedule 4: Schedule to be substituted for Schedule 6 to the 1989 Act. The schedule replaces Schedule 6 of the Electricity Act ('The Public Electricity Supply Code') with a revised schedule ('The Electricity Code'). Schedule 6 deals largely with rights of entry to premises and powers of disconnection. It applies to public electricity suppliers only.

93. The revisions are mainly consequential and are needed because:

  • the Bill does away with the concept of a public electricity supplier and separates the activities of supply and distribution; and

  • the various rights and obligations contained in the old schedule do not apply uniformly to supply and distribution and must be distributed between the two separate activities.

94. In general, the changes provide that distributors have rights of entry in relation to electric line and plant, because plant and line is part of distribution. Suppliers are to have rights of entry in relation to non-payment of supply charges and to meters and metering, because metering is an adjunct of the activity of supply and not distribution.

95. There are three changes which are not just consequential:

  • a supplier may install a pre-payment meter as an alternative to disconnection where a customer has not paid his supply charges;

  • a supplier may only disconnect premises for non-payment of supply charges owed for supply to those premises; and

  • a distributor may not disconnect premises for non-payment of the costs of connecting the premises to his distribution system.

96. Clause 51: Amendment of Schedule 7 to the 1989 Act. This clause brings into effect Schedule 5, which amends Schedule 7 of the 1989 Act on the use of electricity meters.

97. Schedule 5: Electricity metering. Paragraph 2 makes a technical change to Schedule 7 of the 1989 Act to reflect the new definition of authorised supplier inserted into the 1989 Act (see paragraph 32(3) of Schedule 6 of this Bill). Paragraph 2(2) deletes the current interpretation of "electricity supplier" previously contained in paragraph 13 of Schedule 7. Any reference to the term "electricity supplier" now means a licensed electricity supplier whereas "authorised supplier" means someone authorised either by licence or exemption. The effect of the changes is that the coverage of Schedule 7 remains the same.

98. Paragraph 3(2) allows the Authority to make exceptions to the general rule that where electricity is charged for by reference to quantity supplied, such supply must be given through an appropriate meter. This is intended to cover "virtual meters" which are used for calculating electricity charges for appliances such as street lights. Paragraph 4 makes it possible to prevent use of such an exception resulting in the commission of an offence under paragraph 3 of Schedule 7.

99. Paragraphs 3(3) and 7 distinguish between two cases: generally the supplier is responsible for providing a meter and related services, but the customer may choose to procure one himself from someone other than the supplier (with the latter's permission). This is in contrast to the existing wording of paragraphs 1 and 10 of Schedule 7, which might be unclear in the case where a customer has procured the meter from the supplier.

100. Paragraphs 3(4) and 3(5) are intended to apportion responsibilities appropriately, given the ending of the licence category of "public electricity suppliers". Paragraphs 5 and 6 do the same, in relation to who may be authorised to test meters and take on the responsibilities which that entails. In future, the Authority may authorise anyone whom it sees fit, including, if it wishes, companies which used to be part of a public electricity supplier.

101. The 1989 Act contains a prohibition on the use of a pre-payment meter for the recovery of charges other than those owing for the supply of electricity, the provision of a meter, or the provision of plant and line. Provision of plant and line will in future be a matter for distributors and not suppliers. Paragraph 8 provides that distributors will be able to require security for payment of the costs of making a connection but will not be able to disconnect for non-payment of these costs.

102. Clause 83: The gas code. Subsection (2) introduces into gas a prohibition on the use of pre-payment meters for recovery of non-supply charges, similar to that in electricity.

103. Subsections 3(b) and (c) allow a supplier to fit a pre-payment meter as an alternative to disconnection for non-payment of charges but remove the right to demand a deposit (or fit a pre-payment meter if a deposit is not provided). The intention is to have similar regimes in electricity and gas. (See paragraph 2(1)(a) of the new Schedule 6 to be inserted into the 1989 Act by Schedule 4 of this Bill).

104. Clause 52: Powers of licence holders. Section 10 of the 1989 Act gives effect to Schedules 3 and 4. These schedules confer substantial powers which impact on the rights of third parties: the compulsory purchase of land; street works; protection from electrical interference; the acquisition of wayleaves; the felling and lopping of trees; and the entry upon land for the purposes of exploration. The new clause amends section 10 to reflect the creation of the licensable activity of distribution and to remove references to public electricity suppliers. Subsection (2) of this clause allows for these powers to be made available to electricity distributors to the extent specified in their licences. Subsections (3) and (5) are consequent upon the changes made to section 6 of the 1989 Act by clause 29.

105. Subsection (4) inserts a new subsection 3A into section 10 of the 1989 Act in order to allow the powers in Schedule 4 of that Act (principally relating to streetworks) to be available to licence holders wishing to develop cooling systems based on combined heat and power generation.

 
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