---

Energy Bill

My Lords, I am delighted that the noble Lord, Lord Jenkin, and I are able to resume our constructive relationship regarding this Bill. When we considered the Bill on Report on the previous occasion, we made some progress on the amendments he tabled, and today he has again identified a significant issue which affects this group of operators. In order to give the noble Lord a constructive response to his amendment, while not fully accepting it, I need to embellish one or two points he made—although in deploying his case he did accurately identify the issue. This is a technical matter and therefore the House will recognise that I am obliged to indulge in some technicalities. Requests for network connections most commonly arise in the context of new developments—for example, a new housing or commercial development or industrial site. They can also be required by smaller users such as people building their own homes on sites that are not already connected to the grid. It is a statutory obligation for a distribution network operator to provide a connection offer. On considering an application with a view to making an offer for connection, DNOs incur assessment and design costs. As the noble Lord made clear, these costs can be significant. They relate to expenses on the design carried out by the distributor for the connection between the customer’s premises and the network and the costs of assessing the most appropriate point on its distribution system for the connection, including whether upstream reinforcement is required. These costs can be incurred by the DNOs even if an offer for a network connection is not accepted and a network connection not provided. There are several reasons why the costs might still obtain even if the connection is not effected. First, connection requests can be of a speculative nature, especially those related to new build housing developments and retail parks. Developers often request a formal connection offer when assessing the viability of certain projects to ensure that the required capacity can be delivered and to obtain certainty over connection costs. Such requests, which often involve a number of large schemes, can be more expensive to address in terms of complexity and time spent on detailed technical study, which is the burden of one of the noble Lord’s points. Another reason stems from arrangements put in place by Ofgem in 2000 to allow other players to compete with DNOs to provide network connections. Competition has led to the emergence of independent connection providers, many of whom are also independent distribution network operators. These have been allowed to compete to provide connections and Ofgem regarded this competition to be healthy and in the consumers’ interests. Competition for certain elements of the network connection means that there may be several ICPs bidding for a connection, but only one—or perhaps none—will secure the contract. But the DNO, because of its statutory obligation, has nevertheless to carry out the assessment and design work for each bid and, of course, incur the costs involved in that exercise. Until recently, with Ofgem approval, the DNOs charged an up-front payment of assessment and design costs from connection applications. This practice was set out in their charging methodologies and allowed the DNOs to charge in the event that an applicant decided not to proceed with a network connection, thereby, of course, limiting the number of otherwise speculative applications. Earlier this year—the noble Lord reflected on this point—an independent distribution network operator filed a complaint about this charging methodology on the basis that it was anti-competitive and unlawful. Since the case was brought forward, legal advice has confirmed that up-front charging for assessment and design fees is not supported in statute through Section 16A of the Electricity Act 1989 and is, therefore, unlawful. Following a letter from Ofgem in August, the DNOs have stopped charging up front for assessment and design fees. Of course the Government and Ofgem have sympathy with the position in which the DNOs now find themselves. The practice of up-front charging has been a feature of how the market has operated in recent years. We concur that the practice is a reasonable and efficient way of recompensing the DNOs for the work that they do while at the same time providing protection against the abuse of a DNO’s obligation to provide an offer to connect on request from a wildly speculative initiative. However, Ofgem acknowledges the need to do further work to establish the degree of merit in the complaint from the DNO about the practice of up-front charging being anti-competitive. So, while Ofgem is willing to support a mechanism whereby DNOs could charge for work that they carry out for assessment and design of network connections in certain circumstances, it wants to ensure that there is a proper and appropriate balance to be struck between compensating the DNOs, protecting consumers and facilitating competition. Although we appreciate that DNOs have not previously charged for small domestic connections, we need to be careful and to guard against allowing for up-front charges to be levied for such connections as a result of any change in primary legislation. In sum, we agree with the intention of the noble Lord’s amendments, and he will draw solace from that. I hope I can satisfy him by saying that, although I am not prepared to accept this amendment today, I accept the concept of it. We will table an amendment at Third Reading to return to this issue. There are aspects of the amendment that he has tabled which we would not be content to accept as it is drafted, and we will look to bring something back that better reflects legal precedent while allowing the Secretary of State and Ofgem the right level of control over charging through regulations. I hope the noble Lord will accept that, yet again, I have tried to be constructive in response to his very constructive point on this issue. We want to think further about it and we will come back at Third Reading with a carefully drafted amendment, if he will withdraw his today.