Regulatory Observer Issue 37 19 April 2012
Issue 37, 19April 2012
Contents
US Congress Ratifies FCC Incentive Auctions 1International Regulatory Round-up2 Australian Regulatory Round-up 6
1
US CONGRESS RATIFIES FCC INCENTIVE AUCTIONS
The US Congress has ratified a policy authorising the Federal Communications Commission (FCC) to conduct incentive auctions of the US spectrum. Spectrum is used to transmit information by mobile networks and other telecommunications services such as television, radio and Wi-Fi.
The development of new technologies means that the commercial demand for spectrum changes over time. For example, consumers increasingly use spectrum to watch video content on smart phones and tablets. The National Broadband Plan (NBP) hasrecommended that an additional 500 MHz of spectrum be made available for commercial use. President Obama has calledfor a near doubling of the spectrum available for wireless broadband.
Incentive auctions are designed to provide broadcasters with an incentive to return unused spectrum licences to the FCC. The spectrum could then be auctioned to companiesoffering mobile data services. Participation is voluntary and broadcasters receive a share of the revenue raised from selling their spectrum.
The ratification follows an open letter by 112 prominent economists, including Nobel laureates, former members of the White House Council of Economic Advisers, and former FCC Chief Economists, endorsing the use of incentive auctions (available at The economists argued that similar spectrum auctions that occurred in 1993 had led to a more efficient allocation of the spectrum and that the auction process had since been adopted in other countries around the world.
Changing technologies, demand and relative costs have resulted in old spectrum allocations that are inefficient and that waste spectrum resources, according to the open letter. Further, incentive auctions facilitate the reallocation of spectrum from inefficient uses to more valuable uses, while minimising the transaction costs incurred. This, in turn, increases social welfare. The economists argue: ‘Voluntary transactions in free markets ensure that trades happen only when the buyer and seller both benefit. Just as for most assets, when radio spectrum is used inefficiently and appropriate property rights are in place, the potential buyers and sellers will be encouraged to find terms that capture and share the benefits of transitioning spectrum to higher valued uses.’
The FCC has announced the appointment of Paul Milgrom and other leading auction experts to advise in relation to the incentive auction design and implementation process. The FCC will alsoconsult with broadcasters and other interested parties.
1
INTERNATIONAL REGULATORY ROUND-UP
Communications
Europe
Germany: The Bundesnetzagentur Prohibits Telekom Deutschland GmbH’s Price Model
The Bundesnetzagentur has released a decision to prohibit Telekom Deutschland GmbH from selling VDSL bitstream access under a new price model. Telekom Deutschland GmbH had informed the Bundesnetzagentur of its plans to introduce a price model known as the VDSL contingent model. The model effectively offered a volume-based discount for use of existing infrastructure. In conjunction with the term of the lease, this may make it unattractive for competitors to develop new infrastructure. As a result, the Ruling Chamber concluded that the model hampered competitive opportunities of other companies. The European Commission and national regulatory authorities of the other EU Member States have one month to submit comments.
UK: Ofcom Publishes Consultationon Strategy for UHF bands
The Ofcom has published a consultation on a proposed long-term approach for spectrum UHF bands IV and V in Great Britain. The spectrum is in demand by a wide range of services including: digital terrestrial television (DTT), mobile broadband, local TV, programme making and special events (PMSE), emergency services, and applications using white space devices (WSD). Further, the use of high-power DTT transmitters in this spectrum requires international agreements to co-ordinate significant changes to its use. The consultation includes a proposed approach to release the 700 MHz band. The closing date for responses is 7 June 2012.
Oceania
NZ: Customers Switch for Better Broadband and Cheaper Mobile
A New Zealand-wide surveyhas been conducted for the Commerce Commission in relation to consumer-switching behaviour of broadband, mobile and other telecommunications services. The survey results suggest that the main reason consumers switch fixed-line telecommunications service providers is to obtain better broadband services. In contrast, the main reason for switching mobile telecommunications service providers is to obtain a cheaper rate. The survey involved analysis of behaviour of 12000 consumers in New Zealand, and 1053 telephone interviews with mobile and fixed-line customers throughout New Zealand.
Energy
Europe
EU: Madrid Forum Endorses Gas Target Model
The participants at the European Gas Regulatory Forum (Madrid Forum), have endorsedthe Council for European Energy Regulator’s (CEER’s) Gas Target Model. They have invited Member States to commence implementation work to reach the Internal Gas Market Target Model by 2014. The aims of the CEER’s Gas Target Model include: the promotion of a sustainable internal gas market and functioning wholesale markets where they currently do not exist; efficient use of existing infrastructure; well-functioning wholesale markets throughout Europe; the connection of wholesale markets; secure supply patterns that ensure gas flow to Europe; and to ensure investment in the industry.
EU: CEER and GLE Improve Access to European LNG terminals
CEER and Gas LNG Europe (GLE) have jointly released a ‘Transparency Template’at the European Gas Regulatory Forum (Madrid Forum)designed to more clearly identify existing requirements and access conditions to use Liquefied Natural Gas (LNG) terminals. The Templateaddresses problems identified by a 2011 study on congestion management procedures and anti-hoarding mechanisms in European LNG terminals. The study concluded that areas for improvement included amending information provided on the LNG System Operators (LSOs) website that isrequired by shippers to book capacity at the terminals. The study found that this information was not easily accessible or understandable, and may otherwise hinder the access of new participants to LNG terminals.
UK: Mitigating Network Charging Volatility
The Ofgem has issued a consultation paper that outlines five options designed to mitigate network charging volatility arising from the recent price-control settlement. As part of the network price-control consultation process, the Ofgem was asked to consider the impact of the price-control settlement on network charging volatility. Suppliers have included a risk premium in customers’ energy bills in order to compensate for unforeseen changes in network charges. Suppliers argued that charging volatility can act as a barrier to entry to the energy retail market, particularly in relation to entry by small suppliers. The closing date to respond to the consultation paper is 11 June 2012.
UK: Guidance on the Regulated Third Party Access Regime for Liquefied Natural Gas facilities in Great Britain
The Ofgem has published a guidance documentthat aims to provide greater certainty and clarity in relation to the provisions relating to regulated third-party access (rTPA) arrangements for LNG facilities. From 3 March 2011, LNG facilities in Great Britain have had an obligation to comply with the EU Third Internal Energy Package (the Third Package). The guidance document provides the Ofgem’s views on aspects of the Third Package, including: that auctions and open seasons are the most appropriate market-based mechanisms to determine tariffs under rTPA arrangements; that equitable and timely access to information facilitates informed decision making by market participants; that improved transparency will reduce barriers to entry and facilitate competitive markets; and that the Ofgem should adopt a mix of monitoring and industry engagement to determine whether LNG system operators are complying with regulatory requirements.
UK: Proposal to Amend Treatment of Manifest Errors Rejected
The Ofgem hasrejecteda proposal by npower Limited (DCP104) that sought to amend the Distribution Connection and Use of System Agreement (DCUSA) to allow adjustments to Distribution Use of System (DUoS) charges resulting from manifest errors to be smoothed over three years. ‘Manifest errors’ are the result of human error and occur when data are inputted incorrectly into a Distribution Network Operator’s (DNO’s) charging methodology model. This may result in an over or under recovery of allowed revenue. The proposal was rejected on the basis that it would conflict with DNOs’ licence regulations, including a requirement to correct any over or under recovery within a single regulatory year.
UK: Ofgem Produces Electricity and Gas Supply Market Indicators
The Ofgem hasproducedan estimate of the net margin on supplying a typical standard tariff for a dual fuel customer for the next 12 months. The calculations suggest that, for the period from April 2012, the net margin for a typical, standard tariff dual fuel customer is approximately £55 per customer. This represents a £5 decrease from the 28 March 2012 update. It is a result of increased wholesale costs. It is expected that the 12 month margin will fall to around £45 over the next six months, mainly due to changes in wholesale prices.
UK:Response to the Deputy Prime Minister’s Announcement on Energy Tariffs
The Ofgem has welcomed initiatives announced by the UK Government on energy tariffs. As part of the proposals, the major energy companies will write to customers annually to inform them of the most cost-effective tariff, given their past consumption. Vulnerable customers will be contacted twice a year. Customers will also be offered the best tariff whentheir contract comes to an end, orafter customers have contacted their supplier. There are currently more than 120 different tariffs in the UK. It is estimated that seven out of ten people are not on the best tariff.
UK: Rejection of Proposal to Amend Non-Intermittent Generator Tariffs
The Ofgem hasrejected a proposal by the UK Power Networks (UKPN) (DCP108) to make non-intermittent generator tariffs available to intermittent generators. The Common Distribution Charging Methodology (CDCM) was implemented in April 2010 and provided credit to generators for offsetting demand on the distribution networks. Non-intermittent generators had access to a three-rate tariff, while intermittent generators had access to a one-rate tariff. The structures of the tariff reflect the ability of the different generators to export electricity at peak times. The UKPN argued that intermittent generators should not be restricted to a one-rate tariff if exports coincide with peak demand. The proposal was rejected on the basis that it does not facilitate the achievement of objectives of the relevant legislation.
UK: Consultation of Transmission Investment Incentives
The Ofgem has published a consultationin relation to extending the Transmission Investment Incentives (TII) framework to 2012-13. The TII framework was introduced to provide project-specific, interim funding for critical, large-scale investment projects that Transmission Owners (TOs) identify are required to support achievement of the Government’s 2020 renewable energy targets. Originally applying to the price-control period (TPCR4) which ended on 31 March 2012, the Ofgem has proposed to extend the TII under the one-year adapted rollover of TPCR4 (TPCR4 rollover) which ends on 31 March 2013. The closing date for submissions is 8 May 2012.
UK: Guidance on Monitoring Suppliers’ Performance in Relation to Domestic Customers
The Ofgem has published a guidance documentthat sets out revised reporting arrangements for monitoring domestic electricity and gas suppliers’ performance in relation to domestic customers. The document provides an overview of the data that must be provided to the Ofgem, the process to submit the data, and detailed guidance notes. The document requires that a variety of data are provided at different intervals, including quarterly and annually, to the Ofgem on areas such as debt levels;disconnection rates; prepayment meters; payment methods used by customers; and help for vulnerable customers.
UK: OFT Secures Voluntary Changes to Bulk LPG Contracts
The Office of Fair Trading (OFT)has secured voluntary agreements from the major liquefied petroleum gas (LPG) suppliers to amend their domestic bulk-customer contracts and improve transparency in relation to customers’ switching and cancellation rights. The OFT action follows its 2011 Off-Grid Energy Market Study, which raised concerns in relation to the contractual arrangements between suppliers and domestic bulk LPG customers. For example, many customers with large supplier-owned LPG tanks on their premises have entered into contracts for the supply of domestic bulk LPG that included a two-year exclusive-supply arrangement. During this time, the customer was tied to the supplier and was unable to obtain supply from a competitor.
Northern Ireland: Utility Regulator Refers PNGL to Competition Commission
The Utility Regulator has referred the Phoenix Natural Gas Ltd (PNGL) price-control licence conditions to the Competition Commission. This follows PNGL’s rejection of the Utility Regulator’s price-control determination and proposed licence modifications. The Competition Commission will assess whether the PNGL price-control licence conditions operate against the public interest. The Competition Commission is expected to report within six months. The Utility Regulator has stated that the price-control determination would lead to lower business and domestic consumer prices. In contrast, the PNGL proposals would increase domestic consumer bills by £25 per annum.
Northern Ireland: The Utility Regulator Publishes Consultation Regarding Global Settlement in the Single Electricity Market
The Utility Regulator has published aconsultation on the changes that are required to implement the Global Settlement in the Single Electricity Market for Northern Ireland (the Northern jurisdiction). The proposed implementation date is September 2012. The Utility Regulator is consulting on two separate changes – the proportion of the residual volume for each trading period that will be allocated to suppliers’ meter volumes derived from different types of meters; and the changes required to Power NI’s supply licence. The closing date is28 May 2012.
Water
Europe
UK: The Ofwat Proposes Flexible Price Setting Arrangements
The UK Water Services Regulation Authority(theOfwat) has published an information notice in relation to proposals to modify the conditions of appointment of water-and-sewerage and water-only companies. This includes proposals to amend the way in which prices are set. A single price limit is currently set for a five-year period. The Ofwat has proposed to introduce a flexible price-setting arrangement, where the price limit is based on the nature, form, number and duration of the price limits at each review. The information notice provides that the Ofwat has extended the timetable for consultation and will publish proposed future price limits in May 2012.
Rail
Europe
UK: ORR Capability Review Published
The Office of Rail Regulation (ORR) has published an external review of its organisation. The review’s scope included an assessment of the ORR’s current capabilities and a comparison with its current functions, and against a proposed expansion of its current role. The proposed expansion includes monitoring train performances and service standards. The review also highlighted areas in which ORR can improve, including in relation to the way the ORR handles change, and in relation to enhancing skills within the ORR.
Post
Europe
UK: The Ofcom Announces Measures in Relation to UK’s Universal Postal Service
The Ofcom has set out measures that provide Royal Mail with greater freedom to sets prices. Royal Mail will be able to set prices for the majority of its products, including First Class stamps and most business mail. Safeguards have also been introduced that are designed to protect consumers and competition. These include a cap on the price of Second Class stamps for standard letters; a cap on the price of Second Class small parcels and large letters; monitoring of Royal Mail’s performance; and requiring Royal Mail to continue to provide network access to its competitors. The regulatory framework will apply for seven years. The Ofcom will retain the ability to intervene if the new regime fails to safeguard the universal service and the affordability of mail services.
Ireland: ComReg Initiates Legal Proceedings against An Post
The Commission for Communications Regulation (ComReg) has initiated legal proceedings against An Post in relation to An Post’s quality of universal postal service. ComReg published the results of the ninth annual monitor report for the calendar year 2011. The report shows that 83 per cent of single piece priority mail was delivered within one working day throughout the State. This is a two per cent decline on the figure achieved in 2010. Ninety-eight per cent of mail was delivered within three working days, a one per cent decline on 2010. The 2004 direction issued by ComReg to An Post set a next-day delivery standard of 94 per cent for single piece priority mail posted in the State for delivery in the State, and a 99.5 per cent standard for delivery of this mail within three working days.