Notification to Suppliers Engagement of Auditors Regarding Certification for the PSO Levy Reference CER/17/021 Date Published 22/02/2017 Closing Date N.A.
Executive Summary In the 2016/17 Public Service Obligation (PSO) levy decision paper (CER/16/251), the Commission for Energy Regulation (CER) committed to reviewing its annual process for the administration and evaluation of PSO cost submissions. As part of this review, the CER is now publishing requirements in order to clarify and improve upon existing PSO auditing arrangements. Specifically, this Notification of Requirements provides clarification to suppliers, when seeking the CER s approval of their PSO costs, by identifying what information is required to be contained within the certificate of the auditor with whom the supply company engages to certify eligible PSO costs. In order to comply with the governing PSO legislation, the CER requires that the annual submission of claims from supply companies for the recovery of PSO related costs be accompanied by an independent auditor s certificate. However, this auditing requirement is not explained or further elaborated-upon within legislation. This has resulted in variation in auditors certification of suppliers PSO costs. Consequently, the CER is now introducing measures, with immediate effect, to address variability in the quality and content of auditors certifications of PSO outturn submissions. This CER initiative to standardise and regularise the auditing of suppliers PSO costs should be viewed as an initial step towards improved PSO submission and reporting arrangements. The CER plans to review the level of compliance with these arrangements. Further requirements may then be considered by the CER in addition to the measures communicated in this Notification of Requirements. Page 1 of 13
Table of Contents EXECUTIVE SUMMARY... 1 TABLE OF CONTENTS... 2 GLOSSARY OF TERMS AND ABBREVIATIONS... 3 1. INTRODUCTION... 4 1.1 THE COMMISSION FOR ENERGY REGULATION... 4 1.2 PURPOSE OF THIS DOCUMENT... 4 1.2 STRUCTURE OF PAPER... 6 2. LEGISLATION GOVERNING SUBMISSIONS... 7 3. SCOPE & APPLICABILITY... 8 3.1 APPLICABILITY... 8 3.2 EXEMPTIONS... 8 3.3 EXCEPTIONS... 8 4. KEY INFORMATION REQUIRED... 9 4.1 KEY INFORMATION... 9 4.2 ALLOWANCE OF CERTIFIED COSTS... 11 5. SUBMISSION OF AUDITOR S CERTIFICATE... 12 6. NEXT STEPS... 13 Page 2 of 13
Glossary of Terms and Abbreviations Abbreviation or Term AER CADA CER MPRN PPA PSO REFIT S.I. Definition or Meaning Alternative Energy Requirement Capacity and Differences Agreement Commission for Energy Regulation Meter Point Reference Number Power Purchase Agreement Public Service Obligation Renewable Energy Feed in Tariff Statutory Instrument Page 3 of 13
1. Introduction 1.1 The Commission for Energy Regulation The Commission for Energy Regulation (CER) is Ireland s independent energy and water regulator. The CER was established in 1999 and now has a wide range of economic, customer protection and safety responsibilities in energy. The CER is also the regulator of Ireland s public water and wastewater systems. The CER s primary economic responsibilities in energy cover electricity generation, electricity and gas networks, and electricity and gas supply activities. As part of its role, the CER jointly regulates the all-island wholesale Single Electricity Market (SEM) with the Utility Regulator in Belfast. The SEM is governed by a decision-making body known as the SEM Committee, consisting of the CER, the Utility Regulator and an independent member. The overall aim of the CER s economic role is to protect the interests of energy customers. The CER has an important related function in customer protection by resolving complaints that customers have with energy companies. The CER s core focus in safety is to protect lives and property across a range of areas in the energy sector. This includes safety regulation of electrical contractors, gas installers and gas pipelines. In addition, the CER is the safety regulator of upstream petroleum safety extraction and exploration activities, including on-shore and offshore gas and oil. In 2014, the CER was appointed as Ireland's economic regulator of the Irish public water and wastewater sector. Further information on the CER s role and relevant legislation can be found on the CER s website at www.cer.ie. 1.2 Purpose of this Document In the 2016/17 Public Service Obligation (PSO) levy 1 decision paper (CER/16/251 2 ), the Commission for Energy Regulation (CER) committed to reviewing its annual process for the administration and evaluation of PSO cost submissions. 1 The PSO Levy is charged to all electricity customers in Ireland. It covers various subsidy schemes designed by the Irish Government to support its national policy objectives related to renewable energy, indigenous fuels and security of supply. The proceeds of the levy are used to contribute to the additional relevant costs incurred by PSO-supported electricity generation, which are not recovered in the electricity market, typically via contracts that electricity suppliers have in place with electricity generators. 2 Available at: http://www.cer.ie/docs/001074/cer16252%20pso%20levy%202016-17%20- %20Revised%20Decision%20Paper.pdf Page 4 of 13
As part of this review, the CER is now publishing a Notification of Requirements in order to improve on and augment existing PSO auditing arrangements. Specifically, this Notification of Requirements sets out the requirements which are acceptable to the CER in order to fulfil a supplier s statutory obligation to provide an auditor s certificate. In accordance with the governing legislation 3, the CER is required to calculate the PSO Levy and help ensure that the scheme is administered appropriately and efficiently by, inter-alia, certifying the PSO costs incurred by suppliers when contracting with PSO-supported generators. In order to fulfil its statutory obligations, the CER in part relies on an independent auditor s certificate, which provides a certification of a supplier s eligible outturn PSO costs. However, the CER notes that the auditing requirement for suppliers PSO costs is not explained or further elaborated upon within governing legislation or in the terms and conditions of PSO schemes, such as REFIT. Based on its experience to-date from administering the PSO Levy, the CER is of the view that the absence of such clarity has contributed to significant variation in the form, content and detail of auditors certificates, when certifying suppliers PSO costs. Such variation poses a potential challenge to the CER when administering the PSO Levy. Consequently, the CER has prepared this Notification of Requirements, which details the key information that the CER requires to be contained within an independent auditor s certificate, when appointed by a supplier to certify that their PSO costs have been incurred, as submitted. This CER initiative to standardise and regularise the auditing of suppliers PSO costs should be viewed as an initial step towards improved PSO submissions and reporting arrangements. The CER plans to review the level of compliance with these arrangements. Further requirements may then be considered by the CER in addition to the measures communicated in this Notification of Requirements. 3 Electricity Regulation Act, 1999 (as amended) and Statutory Instrument (S.I.) No. 217 of 2002 Page 5 of 13
1.2 Structure of Paper This Notification of Requirements document is structured as follows: Section One: Provides background information and outlines the purpose of this document; Section Two: Outlines the legislative framework governing the auditing of suppliers PSO costs; Section Three: Clarifies the scope and application of this Information Note; Section Four: Identifies the key information and statements that are required to be contained within an auditor s certificate when certifying suppliers PSO costs; Section Five: Clarifies the submission process for auditor certificates; and Section Six: Outlines next steps. Page 6 of 13
2. Legislation Governing Submissions As part of the annual PSO calculation and determination process, suppliers are required to submit estimates for electricity production of all contracted generators for the forthcoming PSO period and a certificate from an auditor - for the previous PSO year - of actual additional costs and eligible administrative expenses incurred in sourcing the electricity which they have contracted to procure under the public service obligation. Specifically, Section 10 (1) of Electricity Regulation Act 1999 (Public Service Obligations) Order 2002, as amended, requires the following: 10. (1) (ab) each supplier on whom an obligation is imposed by Article 6D shall provide the Commission details of the actual additional costs incurred by that supplier in complying with the obligation imposed on it by that Article, and 10. (1) (b) suppliers, the distribution system operator and the transmission system operator shall provide details to the Commission of the actual administrative expenses incurred by them and referred to in Article 8(1)(c) and (d) together in each case with a separate auditor s certificate, detailing the actual amounts of the costs and expenses referred to in subparagraphs (a), (ab) and (b), as appropriate, and certifying that the costs and expenses in question have been incurred and the amounts recorded have been properly extracted from the books and records of the company. Separately, it should be noted that - in accordance with Section 10 (2) of the PSO Order 2002, as amended, - the CER is required to certify the total amount of the PSO Levy in respect of each PSO Levy period and to separately certify the amount of each constituent element of the PSO Levy as specified in Article 8(1), which includes suppliers additional costs and administrative expenses. Page 7 of 13
3. Scope & Applicability 3.1 Applicability The compliance measures set out by the CER in this Notification of Requirements apply, with immediate effect, to electricity supply companies who have executed Power Purchase Agreements (PPAs) in relation to the Renewable Energy Feed in Tariff (REFIT) support schemes and/or are supported by the PSO Levy. These requirements apply to all submissions to the CER by electricity suppliers of PSO (including REFIT) related outturn costs, subject to the costs being eligible for recovery via the PSO Levy. For clarity this includes submissions for the following periods: i. for actual costs and data for the 2015/16 PSO period, as will be included by the CER in the calculation of the supplier s R-factor 4 in the 2017/18 PSO Levy; and, ii. for all future PSO outturn submissions by suppliers to the CER, unless determined otherwise by the CER. 3.2 Exemptions In the event that a supply company cannot comply in part or in full with these requirements, the company - as part of their PSO submission - is required to explain, to the satisfaction of the CER, the reasons for non-compliance and request an exemption from the CER. Without an exemption, the costs will not be allowed. See Section 4.2 (under Allowance of Certified Costs ) for further details. 3.3 Exceptions For clarity, these measures do not apply to PSO submissions from suppliers who have REFIT PPA contracts with generation projects which are new to the PSO Levy for the 2017/18 PSO year or the 2016/17 PSO year. This is because the calculation and determination - by the CER - of the 2017/18 PSO Levy includes the submission - from all PSO-contracted supply companies - of outturn data and costs only for the 2015/16 PSO period in order to calculate the relevant R-factors. 4 CER/08/236: Calculation of the R-Factor in Determining the PSO Levy Page 8 of 13
4. Key Information Required 4.1 Key Information In accordance with the governing PSO legislation, the CER requires an auditor s certificate in the form of a certificate or statement from an independent auditor. The auditor s certification should be based on agreed-upon-procedures 5, whereby a supplier s independent auditor reports on and certifies factual findings based on evidence obtained. The following information has been identified by the CER as being necessary for the supplier s independent auditor to provide when submitting an auditor s certificate: a) The name of the licensed supply company supported by the PSO Levy; b) A statement regarding the gross monetary value of the PSO costs and administrative expenses, for the 12-month PSO period in question, and a statement certifying that the costs and expenses in question have been incurred and the amounts recorded have been properly extracted from the books and records of the company. c) A listing to include the submitted outturn cost and metered generation exported for each generator - which is contracted by the supply company under REFIT - for which PSO-related costs are being submitted to the CER, to include the REFIT reference number identifier for each project supported; d) A breakdown of the metered outturn generation (MWh) eligible for support as applies to each of the two portions of the respective calendar years that apply to the PSO year (e.g. Q4 2015 and Q1-Q3 of 2016 for the outturn for the 2015/16 PSO period as included in the 2017/18 PSO Levy calculations); e) A breakdown of the outturn cost - for each generator - as applies to each of the two portions of the respective calendar years that apply to the PSO year (e.g. Q4 2015 and Q1-Q3 of 2016 for the outturn for the 2015/16 PSO period as included in the 2017/18 PSO Levy calculations); f) A statement confirming that the correct REFIT rates (with reference to DCCAE s published rates) have been applied in the audited figures, and that the REFIT support rate 6 (the reference price) applied to each generator matches the REFIT technologies; 5 An example of the standard which apply to agreed upon procedures includes international standard ISRS 4400 Engagements to perform Agreed-upon-Procedures regarding Financial Information. 6 For official REFIT support rates refer to the DCCAE s REFIT webpages. Page 9 of 13
g) A statement confirming that the correct two REFIT rates for each particular technology have been applied to each of the respective PSO calendar years spanning the PSO Levy period (e.g. REFIT rates for calendar 2015 and calendar 2016 for the outturn for the 2015/16 PSO period as included in the 2017/18 PSO Levy calculations); h) A statement confirming that the calculations and claimed costs are in accordance with CER/08/236 Calculation of the R-factor in determining the Public Service Obligation Levy ; i) With reference to Section 4 of CER/08/236 a listing for each contracted generator - of the PSO-related additional costs included in the supply company s submission [i.e. Balancing Cost + Technology Difference + Opportunity Cost including a breakdown of all relevant market revenues, and relevant costs]; j) Details on how many generators of the supplier s portfolio have been selected for auditing by the independent auditor and the method for selecting same (noting that in most cases the sample quantity of projects for auditing is one) and the items which were checked; k) A statement confirming that the dedicated MPRN corresponds solely to the particular generator; and, l) A statement of administration expenses, as eligible. In the case of projects where support is for electricity generated from a biomass source, the CER requires the following additional information to be provided within an auditor s certificate for each generator: m) A statement that the relevant adjustments for biomass (e.g. REFIT 3) projects are applied (where applicable); Renewable fraction; REFIT energy crop rate versus non-energy-crop rate; and Percentage HECHP-certified electricity applied. n) A statement that the renewable fraction as applicable is calculated and independently validated based on outturn data for the PSO period being audited and a statement describing the methodology used; o) A statement confirming the percentage of electricity which is certified as HECHP (based on actual outturn data) as applies to the PSO period (where applicable). Page 10 of 13
4.2 Allowance of Certified Costs Each of items a) to l) above is required to be specifically included in the signed auditor s certification of the supplier s PSO submission. In the case of biomass projects the additional information specified in m), n) and o) is required to be provided, where applicable. The CER s policy in relation to outturn PSO costs is to allow costs which are eligible and which are independently certified by an auditor as being factually correct. Where a supply company is not in a position to provide any one of the items specified in a) to o) above, the CER s practice will be to deem the associated costs ineligible for inclusion for recovery via the PSO Levy, but subject to the exemptions set out in the subsection Exemptions in Section 3 of this Notification of Requirements. The generality of the requirements in this Notification of Requirements also applies to the submissions of PSO outturn costs as relate to AER schemes, CADA contracts and support for the electricity from the combustion of peat, noting that the PSO-related contracts under each of these categories of support are bespoke contracts that predate REFIT and are more complex than the REFIT schemes. Page 11 of 13
5. Submission of Auditor s Certificate Prior to submission to the CER, suppliers should ensure that the auditor s certificate complies with the key requirements set out in Section 4.1. Additionally, the supply company should satisfy itself as to the contracted-auditor s certified PSO costs and data, taking guidance from - and making reference to - the CER s annual PSO Request for Information notification to suppliers (i.e. CER/17/022 as applies for the 2017/18 PSO Levy) and that all of the required information has been submitted, including the completed Outturn Spreadsheet. The auditor s certification of the additional outturn PSO costs is required to be addressed to the supply company who engages the auditor and should - following approval by the supply company - be submitted to the CER (i.e. it should not be addressed to the CER or sent directly to the CER by the auditing body). Page 12 of 13
6. Next Steps The CER will apply the measures in this Notification of Requirements with immediate effect, including for suppliers 2015/16 outturns as are required to be submitted for the 2017/18 PSO Levy. This CER initiative to standardise and regularise the auditing of suppliers PSO costs should be viewed as an initial step towards improved PSO submission and reporting arrangements. The CER plans to review the level of compliance with these arrangements. Further requirements may then be considered by the CER in addition to the measures communicated in this Notification of Requirements. Page 13 of 13