Retrospective connections queue reforms raise risk of legal challenges

The Electricity System Operator’s proposal to apply its new connections process to the existing queue raises the risk of legal challenges from developers who lose their current place.

Partners at the law firm TLT said retrospective changes of this nature are generally considered “unusual just as a matter of legal culture,” although there are some circumstances in which they may be permissible.

Last week, the Electricity System Operator (ESO) issued an update on its proposals for reforming the connections process for the transmission network to prioritise viable projects that are ready to connect.

The changes are being made in response to massive surge in connection applications over the last several years, many of which are thought to be for speculative projects that have little chance of being ready any time soon.

Under the ESO’s proposed “first ready, first connected” process, projects would only be able to apply for a connection during annual windows and would undergo initial assessments in these batches. Projects that passed this first ‘gate’ would receive an indicative connection date that could move forward or backwards.

However, they would not be allocated a place in the connections queue until they passed the second gate, which would require them to secure land rights and a date for submitting their planning application.

The ESO said projects would be grouped together for gate 2 assessments at regular intervals throughout the year but would be assigned a queue position based on the date by which they demonstrated having met the associated criteria.

In contrast to its previous position, the ESO said this process would apply to projects in the existing queue, which would be given a period of time prior to its implementation to demonstrate whether they have met the gate 2 criteria.

Those that met the criteria would have the option to retain their existing connection date or request an accelerated connection based on the reformed queue. Those that did not would move to an indicative connection date.

The ESO is aiming to implement the new process at the beginning of next year.

Asked by Utility Week whether developers in the existing queue could mount legal challenges to avoid losing their places, TLT partner Juliet Stradling said there are three potential routes: a contractual challenge, an appeal to the Competition and Markets Authority (CMA) and an application for a judicial review. 

Stradling, who specialises in providing commercial and regulatory advice to energy sector clients, suggested that contractual challenges are the least viable option available to developers.

She explained that the agreements between network operators and users are “all issued under the framework of the CUSC [Connection and Use of System Code] so you can, by way of a CUSC modification, make amendments to bilateral agreements so long as that CUSC modification goes through the process and is lawful etc.

“There’s also a specific clause in the construction agreement that obliges the ESO and user to implement any changes required by Ofgem as a result of something changing in the CUSC.

“When you sign up to your transmission connection you do sign up to this ability for your contract to change if the CUSC changes,” she remarked.

Stradling said a CMA appeal could only be made once Ofgem had approved a CUSC modification and if its decision went against the recommendations of the CUSC panel: “Assuming the modification panel is happy and then Ofgem consents you wouldn’t actually have the right to go to the CMA.”

However, this route would allow developers more scope to bring in the merits of a decision when compared to a judicial review, which just looks at its “lawfulness” but could be sought before the decision has been made.

Stradling said there are three principal grounds for a judicial review, the first being illegality: “That’s where you might say actually the ESO doesn’t have the power to bring forward a retrospective amendment to the CUSC. Obviously, there has just been a retrospective amendment to the CUSC in the queue management provisions that have gone through.”

Second, there is irrationality – “it’s so unreasonable that no one could possibly do it” – and third, there is procedural unfairness – “it doesn’t go through all the necessary process consultation and so on.”

“Whether or not the ESO has the power to bring forward retrospective CUSC modifications is an interesting one because there’s no explicit power for them to do that in the regulatory framework,” said Stradling.

Nick Pincott, a partner in TLT’s projects, infrastructure and construction team, said: “Generally speaking, any kind of retrospective change is more unusual just as a matter of legal culture, but there are some circumstances where retrospective changes are permitted.”

Stradling said the recent introduction of new queue management provisions via a CUSC modification “does sort of create a precedent, but I don’t think the fact that no one’s challenged it means that they couldn’t later challenge it because the court will look at whether you have got the power to introduce a retrospective modification.”

She said one thing that will be important is what Ofgem has said previously about retrospective CUSC modifications: “I did see something in a document where they talk about urgency criteria for CUSC modifications and when that track will be appropriate.

“They did say in there, generally we don’t like retrospective changes, but in a few scenarios we think that it could be appropriate. And one of those is a big change in circumstances…

“Arguably the rush of people applying for connections… could count as that kind of changing circumstance.”

She said the ESO and Ofgem could argue that “people always knew that the CUSC could be applied retrospectively in extreme circumstances. That might be part of a defence.”

Stradling said there is also a question over what exactly is considered retrospective: “What’s generally accepted is that if you announce something like the ESO announced on 16 April and it takes some time to implement that, then once it’s implemented you can apply it retrospectively to the date of the announcement. What’s very unusual is to then apply it to people before that date.”

Pincott said if the ESO changes the criteria in future this could “reset” what is considered retrospective. Stradling said that “you’re bound to get some proposals to change the gate 2 criteria because of the way the CUSC process works. You have these working groups that come up with their alternative modifications. There’s going to be a lot of variations to wade through.”

Overall, Stradling said it is “very hard to have a firm view at this stage” about the likelihood or merits of any legal challenge. She said the extent of harm suffered by parties that are pushed back in the queue will matter.

“I think quite a lot of it depends on exactly what projects are affected and also have a good case,” she added. “Some people will be quite conscious of the PR of bringing an appeal.”

Pincott noted that the currently proposed gate 2 criteria for obtaining a place in the queue do not set a particularly high bar – merely requiring developers to have secured land rights and have a date for the submission of their planning application: “That threshold is quite low.”

Stradling said this could help the ESO avoid legal challenges: “You suggest something initially that isn’t too bad for most people. They think: ‘Oh, I can meet that.’ The principle is accepted and then it develops. It’s this incremental decision making that actually makes it hard for people to challenge regulatory decisions.”

Pincott said something to watch is “whether those criteria stay that way and how they get changed and who gets to change them in future,” adding that the ESO are “leaving the door open to introduce other things as part of those gate 2 criteria”.

He said the ESO could, for example, use technological and geographical criteria to apply a degree of central planning to the makeup of the energy system.

Since the ESO issued its update, Ofgem has given its backing to the proposed model, which it described as “an ambitious idea”.