Ofgem publishes consultation on proposed modifications to Income Adjusting Event regime in Offshore Transmission Licences

United Kingdom

On 26 August 2020 Ofgem published a statutory consultation in which it proposed a range of modifications to the OFTO licence, including those proposed in its November 2018 policy decision on Income Adjusting Events which are intended to apply to Standard Condition E12-J3 “Restriction of Transmission Revenue: Allowed Pass-through Items” in all OFTO licences. The consultation also sets out further minor and clarificatory modifications to the same condition which were not set out in the November 2018 policy decision, as well as some additional modifications applicable to certain tender rounds 1-3 licences.

Modifications to the Income Adjusting Event regime

The proposed changes in relation to Standard Condition E12-J3 “Restriction of Transmission Revenue: Allowed Pass-through Items” and the Income Adjusting Event regime reflect those indicated in the November 2018 Policy Document, namely:

  • Deductible applicable to claims for uninsurable latent defects – Ofgem intends to apply a deductible to all successful Income Adjusting Events in respect of an uninsurable latent defect.
    • In relation to OFTOs licensed prior to 28 November 2018, it will set the deductible as the same amount as the insurance deductible set out in each OFTO’s invitation to tender questionnaire as part of its bid. 
    • In relation to OFTOs licensed after that date (which includes tender round 5 and 6 projects), it intends to set the deductible at £5,000,000 or the insurance deductible set out in the OFTO’s bid, whichever is higher. 
    • Ofgem has also invited comments on its proposed guidance on the definition of “uninsurable”, which relates to physical loss or damage caused by a latent defect (and not the damage arising out of it) and captures circumstances where there is a lack of insurance coverage available on the worldwide offshore transmission asset insurance market or where the premium payable is at such a level that the risk is not deemed insurable. These modifications will impact all OFTO licences (both existing and future).
  • De-linking the definition of “force majeure” from the STC – Ofgem has proposed to amend limb (a) of the definition of Income Adjusting Event to remove the reference to “an event or circumstance constituting force majeure under the STC”. The proposed replacement definition (i) excludes reference to the fault of plant and apparatus; and (ii) removes the requirement not to be able to perform an obligation under the STC. This modification will impact all OFTO licences (both existing and future).
  • Additional threshold bands – From tender round 6 onwards, it intends to introduce two new bands of Income Adjusting Event thresholds to ensure that the amount is appropriately linked to the transfer value of the OFTO assets.  These new bands are £2,000,000 where the project transfer value exceeds £500,000,000 and £4,000,000 where the transfer value exceeds £1,000,000,000. This modification will only impact those OFTO licences granted in tender round 6 and future tender rounds.

In addition, further modifications to the same condition are proposed which will impact all OFTO licences (both existing and future). The most significant of these is wording which specifies that any Income Adjusting Event revenue adjustment granted by Ofgem shall be offset by the amount of any commercial recourse that is recovered by the OFTO from third parties. Ofgem states that it acknowledges that processes of commercial recourse may take some time to be completed and so it also proposes to include an explicit right for it to direct partial revenue adjustments pending final determination of the total adjustment.

Other modifications proposed to this condition include:

  • expanding Ofgem’s audit rights when assessing any Income Adjusting Event claim by allowing for more than one request for supporting evidence and permitting the extension of the one month deadline for the OFTO’s response;
  • excluding the period of consultation with the OFTO from the 3 month period Ofgem has to make determinations in response to an Income Adjusting Event claim;
  • introducing flexibility into Ofgem’s obligation to publish any Income Adjusting Event notice to permit it to consult with the OFTO and redact confidential information;
  • supplementing Ofgem’s existing right to revoke any adjustment with the consent of the OFTO with a right to amend the adjustment; and
  • certain other drafting modifications to introduce greater consistency into the licence wording.

Other modifications proposed to certain OFTO licences

Ofgem has also proposed a range of minor or licence-specific modifications. The most significant of these is the amendment to Amended Standard Condition E12-J9 “Basis of Transmission Owner Charges”, which removes the requirement for revised changing statements to be approved by Ofgem. Submission of these will still be required for Ofgem’s information. This modification will apply to licences issued in tender rounds 1 to 3 (as it already applies to licences granted in tender round 4 and onwards).

Next steps and conclusion

The consultation is open to responses submitted on or before 24 September 2020. No indication has been given of when Ofgem intends to provide a decision following its review of responses.

Given the impact of certain modifications on future OFTO licences, Ofgem has encouraged potential bidders for future licences, including preferred bidders who have already been identified, to respond to those modifications.  Of course, current licensees who will also be impacted may also wish to submit a response.

In respect of the changes to the Income Adjusting Event regime, it remains to be seen how these amendments will function in practice and whether the hurdles for making a claim for an Income Adjusting Event are still too high, as we considered in our analysis on the recent decision on a claim by Gwynt y Mor OFTO plc.