Pipes & Wires


Issue 108 – December 2011


From the editor’s desk…


Welcome to Pipes & Wires #108. This issue starts with a look at some gas supply issues in the UK, and then looks at shifting energy policies in New Zealand, Germany and Spain. We then examine 2 mergers in the US and then conclude with a look at 4 regulatory decisions in New Zealand and Australia.


Utility Consultants has also launched a new Face Book page, primarily as a portal to the main website, but also to post topical comments. I’d also like to wish you and your families a very Merry Christmas and a Happy New Year.


Energy markets


UK – securing the gas supplies




Most of us have a vague idea that the UK’s gas supplies are becoming less and less secure – certainly those who have attended my Electricity Industry training course will be aware of this. This article takes a look at OFGEM’s recently announced investigation into the UK’s gas supplies, but first some facts.


Some UK gas facts


Some UK gas facts include....


·       The world’s first importation of LNG occurred at Canvey Island in October 1964.


·       Gas’ share of the primary energy market increased from 5% in the early 1970’s, to 40% by 2004.


·       The Interconnector between the UK and Belgium commenced operation in 1999, with a view to exporting gas from the UK. This effectively “plugged in” UK gas prices to prices in Europe, which are in turn oil-indexed.


·       Liquidity and traded volumes began to decline, pushing up prices. Moreover the UK migrated from being a significant exporter to a major importer.


·       Currently about 50% of the UK’s gas is indigenous, but this is expected to fall to about 20% by the year 2020.


·       Wholesale gas prices have continued to rise, rising 40% this year alone.


All these facts point towards tightening supply and increasing prices.


The Annual Statutory Security Of Supply Report


The Department Of Energy & Climate Change (DECC) and OFGEM recently tabled their second Annual Statutory Security Of Supply Report in Parliament. This report noted that in the short-to-medium term, Britain’s gas supply is resilient to all but the most severe supply shocks. However, in the medium-to-long term, there are likely to be “challenges”, with perhaps the most significant challenge being increased gas-fired electricity generation.


OFGEM’s investigation


Energy & Climate Change Secretary Chris Huhne has asked OFGEM to investigate whether Britain’s medium-to-long term gas supplies are secure. Key issues noted include...


·       An expected increased reliance on imported gas.


·       Political instability in the major gas exporting and gas transmission countries.


·       The knee-jerk closure of many nuclear power stations following the Fukushima earthquake, which has driven gas prices to new highs.


·       The expected role of gas-fired power stations to meet the gap between existing coal-fired plants closing and the new nuclear stations opening.


Pipes & Wires will examine OFGEM’s report when it emerges.


Energy policy


NZ – post-election energy policy




Unfortunately energy has become thoroughly politicised, and the for’s and against’s the SOE partial sell-downs as part of the 2011 election campaign are certainly no exception. This article examines New Zealand’s likely energy policy positions now that a National-led Government has returned to office for a 2nd term.


The most visible campaign claims


Certainly the most visible campaign aspect of energy policy was National’s plans to sell-down 49% of the state-owned generation companies Meridian Energy, Genesis Energy and Mighty River Power (and also 49% of Solid Energy and Air New Zealand). Opposing asset sales has equally formed one of Labour’s key policy positions, using an image of a red banner unfurled down the face of Benmore dam (the advert on TV started with threats of increased electricity bills under partial privatisation, but with no mention that electricity bills increased something like 50% in real terms when Labour were in office and they were state-owned).


Only slightly less visible are the now well understood left-of-center and right-of-center policy positions on renewables...


·       Labour vigorously promoted the 90% renewables target that was a key aspect of their energy policy when they were in office, with little thought for how a modern economy might function with an increasingly intermittent electricity supply.


·       National seemed to still have the 90% renewable target in mind, but certainly in the context that a secure electricity supply requires a balanced portfolio of generation including fossil-fired thermal generation.


Beneath this tier of policy positions is a whole tier of low-level “just get on and do it” sort of stuff like increasing the national grid capacity, insulating old houses, and improving NZ’s oil and gas exploration prospects.


Emerging policy positions


Now that the election has settled (yay .... no more endless political debates on TV), the following policy positions are starting to emerge...


·       The proposed 49% sell-off of SOE stakes seems certain to proceed, even though potential coalition partners had opposed any sell-off prior to the election.


·       The Maori Party appears to have changed its “anti-sale” position, and now seems keen for Iwi (Maori tribes) to invest in any SOE stakes.


·       A likely increase in off-shore oil and gas exploration.


·       One of the hopeful Labour-leaders claiming that a Labour-led government “would not rule out” buying back any SOE stakes that are sold.


So, probably nothing really fundamental has emerged that wasn’t immediately obvious from the results on election night. Pipes & Wires will make further comment as detailed work streams emerge.


Germany – the shifting sands of the nuclear phase out




Germany’s phase out of nuclear power has been a recurring topic of Pipes & Wires over the last few years. This article examines the “crunch time” after the most recent lurch back into anti-nuclear territory following the Fukushima earthquake and tsunami.




The following events are significant in Germany’s recent history of nuclear power (Pipes & Wires #102)...


Phase out

Back in 2000 the German coalition government announced its intention to phase out nuclear power.


Phase out of the phase out

In early 2008 Angela Merkel and her party shifted to an open opposition of the nuclear phase-out and rejected a compromise by the SPD to postpone further shutdowns in return for a ban on new nuclear plants.


Phase out of the phase out of the phase out

The radiation leaks from Fukushima prompted vigorous protests from the anti-nuclear brigade, but also prompted something of a quick policy U-turn by Merkel who announced that last year’s life extension decision of 17 plants has been suspended for 3 months, and that shutdown of the 7 oldest reactors will proceed.



Recent events


The following recent events have occurred...


·       The decision to close several reactors following the Fukushima earthquake has led to both RWE and E.On reporting 30% and 40% reductions in earnings respectively from the previous year.


·       Courts in both Hamburg and Munich have ruled that the tax on nuclear fuel ... apparently still payable even though units have been shutdown ... is probably illegal. In RWE’s case, this tax amounts to just over €200m.


·       Spot prices on the Power Exchange Central Europe (PEX) jumped about 23% after the nuclear closures.


·       After being a nett exporter of about 14,000 GWh in 2010, Germany is expected to import about 4,000 GWh this year. Funny that most of that imported electricity will almost certainly be nuclear from either France or the Czech Republic.


·       Many in Belgium are now questioning the wisdom of their own nuclear phase out, given their dependence on electricity imports from Germany which are now understandably under pressure due to Germany’s reduced exports.


So the apparently simple act of closing a few nuclear stations could well have wider implications. Pipes & Wires will follow this one over the coming months.


Spain – post-election energy policy




It seems that many center-left governments in Europe are being punished by the electorate for the nations’ economic woes, with clear swings to the center-right. As Pipes & Wires has previously noted, those swings tend to usher in dramatic changes in energy policy. This article takes a quick look at the recent change of government in Spain and considers how that might change their energy policy.


Spain’s energy policy pre-election


On the face of it, Spain’s energy policy combines the following broad elements....


·       Recognition of the EU priorities of reducing CO2 emissions and increasing bio-fuel use.


·       An orderly shut-down of nuclear power stations which, to its credit, appears to be keeping one eye on security of supply.


However below the waterline, this policy is seen as erratic and incoherent by many critics who cite the unsustainable subsidies paid to the solar industry, the decline of Spain’s domestic coal industry in the face of cheap imported coal, and the accumulating deficit between regulated tariffs and the cost of supply that the government can no longer afford to subsidise.


Characteristics of left-to-right energy policy shifts


So what are some of the policy shifts that we could see in Spain ? My guess is a mix of the following will emerge....


·       A sharp reduction in the subsidies paid to the solar industry (we are already seeing reductions in PV feed-in tariffs in many other jurisdictions).


·       A likely push-back against the CO2 emission reduction targets imposed by Brussels (we saw this resurgence of national interest pitted against pan-EU interests with the formation of energy champions a few years ago).


·       An increased understanding of the importance of security of supply in underpinning economic growth.


·       A more balanced view of nuclear power and its’ role in CO2 emission reductions.


·       Increased nervousness amongst investors of all political shades, leading to capital flight.


·       Increased certainty for coal-fired generation, perhaps something like a stay of execution.


Spain’s economic woes are likely to be a top priority for the incoming government, but given the economic impacts of renewable subsidies and doubts about reliable supply to industry, my guess is that some serious shifts in energy policy will come sooner rather than later. Pipes & Wires will revisit this in a year or so to see what has happened.


Mergers & acquisitions


US – Central Vermont and Green Mountain merger almost complete




Pipes & Wires #102, #103 and #106 examined competing bids for the Central Vermont Public Service Corp (CVPSC) from 2 Canadian utilities, Fortis and Gaz Metro Limited Partnership. Gaz Metro’s bid also paved the way for a merger with Gaz Metro’s other investment, Green Mountain Power. This article examines some final detail issues prior to the expected completion of the CVPSC acquisition and the GMP merger around April 2012.


The merged company


The merged entity will be known as Green Mountain Power, and will have about 256,000 electric customers across Vermont. The enlarged GMP is expected to have about a 70% share of the Vermont retail electricity market.


The issue of naming and branding


It would seem that much soul-searching preceded the decision to name the enlarged company Green Mountain Power, in an effort to reflect the history and local traditions of community electricity supply. The 3 GMP brands (Cow Power, Smart Power and Plug N’Go) will also be retained.


Anyone who has been through a merger will know full well that reprinting stationery and repainting vehicles is not cheap, and is an especially sensitive issue when customers face increasing electricity tariffs (which CVPSC is seeking to recover increased costs). It seems that this issue was high in the minds of both GMP’s and CVPSC’s management, as the trucks color schemes will be migrated over time to a single brand embodying GMP’s green and yellow and CVPSC’s orange and white.


Completion of the merger


The merger is expected to be completed around April 2012, so Pipes & Wires will make a few closing remarks about then.


US – progress on the Exelon – Constellation merger




Pipes & Wires #101 and #103 have examined the early stages of Exelon’s bid for Constellation Energy, and noted the approval of the Public Utilities Commission of Texas. This short article recaps the merger, notes the details of the all-important shareholder approval, and notes the outstanding regulatory approvals.


Summary of the deal


The proposed bid offered 0.93 Exelon shares for each Constellation share, valuing the deal at about $7.7b. If the merger proceeds to completion, the resulting utility will have annual revenues of about $33b, about 44,000 MW of generation and about 7,200,000 customers. Exelon shareholders would own 78% of the merged entity, with constellation shareholders owning 22%.


Shareholder approval


Of the 71% of Exelon shares that voted, 97% were in favor, and of the 78% shares of Constellation shares that voted, 87% were in favor. So ... shareholder approval has been obtained, another major step.


Outstanding regulatory approvals


The following regulatory approvals are still required...


·       Federal Energy Regulatory Commission (FERC).


·       Nuclear Regulatory Commission (NRC).


·       Maryland Public Service Commission.


·       New York Public Service Commission.


The uglier side of it all


One of the things we are seeing more of (and this deal is no exception) is calls from various interest groups and from politicians for state regulators to impose conditions, extract concessions or simply withhold approval for the deal. In this case, Senators Pipkin and Rosapepe are urging the Maryland PSC to require Constellation to spin off Baltimore Gas & Electric as a stand-alone utility prior to the merger occurring.


I guess this must put regulators in a very difficult position of trying to assess the deal against established criteria and not allowing additional or alternative criteria to be introduced. Pipes & Wires will re-examine this deal as the approvals and political machinations come to completion.


Regulatory decisions


NZ – draft gas distribution determination




In September 2011 the Commerce Commission signaled the likely features that would be embodied in the impending gas distribution and gas transmission determinations, which was examined in Pipes & Wires #105. This article examines the key features of the Commission’s recent draft gas distribution determination, whilst the parallel article below examines the gas transmission determination.


Prevailing regulatory framework


The prevailing regulatory framework is Part 4 of the Commerce Act 1986. The determination is made under s55E(2).


Key features of the determination


Key features of the gas distribution determination include...


·       The determination will commence on 1st July 2012, coinciding with the expiry of the current Gas Authorisations that apply to Powerco and to Vector’s Auckland network. The determination will conclude on 30th September 2016.


·       The starting price for Powerco and for Vector’s Auckland network will be the prices that apply at the end of the Gas Authorisations.


·       The starting price for the other networks (not subject to the Gas Authorisations) will be the prices that apply at the 30th June 2010.


·       The annual rate of change will be 0% ie. X = 0%.


Submission process


The Commission will receive submissions on this draft determination until 5pm on Monday 19th December 2011.


Aus – the Powerlink draft decision




Pipes & Wires #103 introduced the revenue reset that will apply to Queensland’s electricity transmission grid company, Powerlink, for the 5 year control period starting on 1st July 2012. This article examines the Australian Energy Regulator’s draft decision which was issued in late November 2011.


Key features of Draft Decision


Key features of the AER’s Draft Decision include...




Draft Decision

Revised Proposal

Final Decision

Total OpEx





Total CapEx





Opening capital base





Rate of return





Revenue requirement






Pipes & Wires coverage will continue as the Revised Proposal and the Final Decisions emerge.



NZ – draft gas transmission determination




In September 2011 the Commerce Commission signaled the likely features that would be embodied in the impending gas transmission and gas distribution determinations, which was examined in Pipes & wires #105. This article examines the key features of the Commission’s recent draft gas transmission determination, whilst the parallel article above examines the gas distribution determination.


Prevailing regulatory framework


The prevailing regulatory framework is Part 4 of the Commerce Act 1986. The determination is made under s55E(2).


Key features of the determination


Key features of the gas distribution determination include...


·       The determination will commence on 1st July 2012, and concludes on 30th September 2016.


·       The starting prices will be the prices that apply at the 30th June 2010.


·       The annual rate of change will be 0% ie. X = 0%.


Submission process


The Commission will receive submissions on this draft determination until 5pm on Monday 19th December 2011.


Aus – the Aurora Energy draft decision




In May 2011 Aurora Energy submitted its Regulatory Proposal for the 5 year period beginning 1st July 2012 to the Australian Energy Regulator, effectively marking the end of the 1st round of revenue decisions under the AER’s jurisdiction. This article summarises the key features of the Proposal and of the recently released Draft Decision.


Legal framework


The broad regulatory framework is Chapter 6 of the National Electricity Rules. These rules set out the issues that a distributor must address in its Proposal, and the criteria against which the AER must assess the Proposal.


Summary of key parameters


Key parameters of the decision process to date are...




Draft Decision

Revised Proposal

Final Decision
















Opening RAB





Closing RAB





Nominal vanilla WACC






Pipes & Wires will continue this article as the process progresses.


Disclosure of interest


Utility Consultants advised Aurora Energy on parts of its Proposal.


A bit of light reading…


Wanted – old electricity history books


If anyone has an old copy of the following books (or any similar books) they no longer want I’d be happy to give them a good home…


·       White Diamonds North.


·       Northwards March The Pylons.


·       Two Per Mile.


·       Live Lines (the old ESAA journal).


·       The Engineering History Of Electric Supply In New Zealand.


Conferences & training courses


The following conferences and training courses are planned...


·       Fundamentals of the NZ electricity industry – Wellington, 8th – 9th May, 2012.


·       Fundamentals of the NZ electricity industry – Auckland, 22nd – 23rd May, 2012.


·       2nd Infrastructure: Investment & Regulation Conference – Sydney, 31st May – 1st June, 2012.


House-keeping stuff


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These articles are of a general nature and are not intended as specific legal, consulting or investment advice, and are correct at the time of writing. In particular Pipes & Wires may make forward looking or speculative statements, projections or estimates of such matters as industry structural changes, merger outcomes or regulatory determinations.


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