From the editor’s
desk…
Welcome
to Pipes & Wires #112. This issue is jam-packed with regulatory decisions
from Australia and the UK, but also takes a quick look at the closing of a big
merger in the US and a couple of policy issues.
Utility
Consultants has also recently launched a new Face Book page, primarily as a
portal to the main website, but also to post topical comments. If you haven’t
already done so, could you please pick this link and then
hit the Like.
Pipes & Wires won’t go audio
Thanks
to all those who replied about Pipes & Wires being available as .mp3
downloads. The vast majority of respondents were happy enough to read it, so
unfortunately Pipes & Wires will not be available as .mp3 downloads.
Guide to NZ electricity laws
I’ve
compiled a “wall chart” setting out the relationship between various past and
present electricity Acts, Regulations, Codes etc in sort of a chronological
progression. To request your free copy, pick here.
Mergers & acquisitions
US – closing the NStar – NU merger
Introduction
About 18 months ago Northeast Utilities
launched a $4.17b bid for NStar
in order to create a merged company that would supply 2,990,000 electric
customers and 505,000 gas customers. This article examines the completion of
that merger.
Key
features of the deal
Key features of the deal include....
·
NStar (formerly Boston Edison and
Commonwealth Energy) is the largest investor-owned utility in Massachusetts,
supplying 1,100,000 electric and 300,000 gas customers. Northeast Utilities,
meanwhile, supplies 1,890,000 electric customers and 205,000 gas customers in
Connecticut, Massachusetts and New Hampshire.
·
Northeast has a clear strategy of
growing its regulated electric and gas businesses, so acquisition of NStar and
integration of proximate service territories makes good sense. The merger will
also help achieve Northeast and NStar’s recent joint agreement to build $1.1b
of transmission lines to bring hydro electricity from Quebec to New England.
·
The basis of the deal is that NStar
shareholders will receive 1.312 common Northeast shares for each NStar share
they own.
Some of the regulatory hurdles encountered
A few of the regulatory hurdles encountered
include....
·
The Connecticut Department of Public
Utility Control sought public input to help decide whether it had any
jurisdiction over the deal.
·
The Massachusetts Department of Public
Utilities sought to impose a “demonstrate nett benefits to customers” burden of
proof rather than the “no nett harm to consumers” criteria that has been used
previously.
The
deal closes
In mid-April 2012 the merger finally
closed, following the Massachusetts DPU approval based on long-term customer
savings and environmental benefits. This article marks the end of Pipes &
Wires coverage of this merger.
Regulatory
decisions
Aus
– the final electricity transmission decision for Queensland
Introduction
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. The Draft Decision and Revised Proposal
were examined by Pipes
& Wires #108 and #109
respectively. This short article summarises Powerlink’s Final Decision and
marks the end of this coverage.
Key features of the Final Decision
Key
features of the Powerlink’s Final Decision include...
|
Parameter |
Proposal |
Draft Decision |
Revised Proposal |
Final Decision |
|
Total
OpEx |
$1,002m |
$920m |
$1,010.3m |
$1,025.1m |
|
Total
CapEx |
$3,484m |
$2,360m |
$3,319m |
$2,519m |
|
Opening
capital base |
$6,579m |
$6,576m |
$6,486m |
$6,429m |
|
Rate
of return |
10.30% |
8.31% |
8.68% |
8.61% |
|
Revenue
requirement |
$5,954m |
$4,563m |
$5,004m |
$4,679.1m |
UK
– final decisions for the Scottish electricity transmission businesses
Introduction
The UK energy regulator OFGEM recently released its Final Proposals
for the 2 Scottish electricity transmission grids as part of the RIIO-T1 price
control. This article firstly examines the key principles of the RIIO model,
and then examines the Final Proposals that will apply from 1st April
2013 to 31st March 2021.
Key
principles of the RIIO model
The underlying principle of the Revenue
= Incentives + Innovation + Outputs (RIIO) model is a greater emphasis on
the incentives to drive innovation and outputs rather than focusing on the
detail as the RPI – X model did. Parties such as customers, competing suppliers
of network service outcomes, and wider stakeholders are expected to play a
wider role.
The
respective transmission businesses
The respective transmission businesses
are...
·
Scottish Power Transmission
Networks is a subsidiary of Scottish
Power which owns 4,100km of 400kV, 275kV and 132kV lines and cables
throughout the south of Scotland.
·
Scottish Hydro Electric Transmission is a
subsidiary of Scottish & Southern Energy
which owns 5,000km of 275kv and 132kV lines and cables s throughout the north
of Scotland.
The
Scottish Power (SPTL) and Scottish Hydro (SHETL) decisions
The decisions themselves are rather
lengthy, and would be repetitive to re-create here, so pick here
to read the Final Proposals. Key components of the Final Proposals include...
·
Outcomes
of safety, reliability, availability, customer satisfaction, new connections
and environmental that must be achieved. There is a mix of incentives to create
these outcomes, including no financial incentives for meeting safety and
availability outcomes, a downside penalty for not meeting new connection
objectives, and balanced upside-downside incentives for reliability and
customer satisfaction.
·
Specific
incentives for innovation that were initially set at 0.5% of allowable revenue,
but can be set higher if a sound business case is presented.
·
Recovery
of expected CapEx and OpEx (similar to RPI-X).
·
Recovery
of expected financing costs eg. cost of equity, cost of debt, gearing,
depreciation etc (again, similar to RPI-X).
·
An
efficiency incentive rate which will determine how much of any under-spend or
over-spend that the transmission business will be allowed to keep (in this case
50% for both transmission businesses).
The resulting parameters of RIIO are
obviously a lot broader than the simply $$$ outcomes (or (£££ as the case may
be) that other price control models generate.
The RIIO-T1 will apply from 1st
April 2013 via modifications to the respective Transmission Licences.
Aus
– the Roma to Brisbane Pipeline Access Arrangement
Introduction
This article examines progress on the
Access Arrangement submitted to the Australian
Energy Regulator (AER) by APT Petroleum
Pipeline Ltd in regard to the Roma
– Brisbane Pipeline (RBP) for the control period 12th April 2012
to 30th June 2017.
Legal
framework
The prevailing legal framework is the Natural
Gas Law, and Part 8 of the Natural
Gas Rules.
The
RBP
The RBP stretches 435km across Queensland
from Wallumbilla to Brisbane, and was opened in March 1969. The pipeline
comprises welded steel sections each about 14m long, and of 250mm diameter as
far as the western suburbs of Brisbane where the diameter increases to 300mm.
The design pressures are 71 bar for the 250mm segment and 46 bar for the 300mm
section. The pipeline also includes laterals at Lytton and Peat.
Key
features of the process to date
Key features of the process to date are set
out in the following table to enable comparisons...
|
Parameter |
Original AA |
Draft Decision |
Revised AA |
Final Decision |
|
Capacity tariff 1st July 2012
($/GJ of MDQ/day) |
0.5586 |
0.5149 |
0.5922 |
|
|
Throughput tariff 1st July
2012 ($/GJ) |
0.0283 |
0.0344 |
0.0396 |
|
|
X factor 1st July 2013 |
-13.0% |
-4.00% |
-13.0% |
|
|
X factor 1st July 2014 |
-13.0% |
-4.00% |
-13.0% |
|
|
X factor 1st July 2015 |
-13.0% |
-4.00% |
-13.0% |
|
|
X factor 1st July 2016 |
-13.0% |
-4.00% |
-13.0% |
|
Note that the AER’s initial examination of
the originally proposed Access Arrangement concluded that there were a number
of omissions around underlying parameters such as risk-free rate, debt-risk
premium, customer numbers and demand. APT was been given the opportunity to add
further information.
UK
– progress on the first RIIO gas price control
Introduction
The UK energy regulator OFGEM recently announced the publication of
the Gas Distribution Networks’ (GDN’s) second business plans as part of
compiling the RIIO
– GD1 price control that will commence on 1st April 2013. This
article examines the content of those business plans, and refers the reader to
the parallel article in this issue of Pipes & Wires on the RIIO
– T1 price control for Scotland.
The
respective GDN’s
The respective GDN’s are...
·
National
Grid Gas plc supplies about 317,000 GWh of gas per year to 10,800,000
customers in the Midlands and north-west of England through 132,000km of
pipelines. National Grid also owns a gas business in the US (which is excluded
from RIIO – GD1).
·
Scotia Gas Networks supplies gas to 5,800,000
customers in Scotland and the south and south-east of England through 74,000km
of pipelines
·
Wales & West Utilities supplies
gas to 2,500,000 customers in Wales and the south-west of England through 35,000km of pipelines.
·
Northern Gas Networks supplies
gas to 2,600,000 customers in the north of England through 37,000km of
pipelines.
The
process to date
In March 2011 OFGEM set out the key
elements of the RIIO-GD1 regulatory framework, including the proposed outputs
that each GDN would need to deliver, the accompanying financial parameters and
the proposed incentive framework. The first business plans were submitted by
the GDN’s in November 2011, with OFGEM publishing its initial assessments of
those plans in mid-February 2012. OFGEM noted that while these plans included a
high level of stakeholder engagement, there were a number of material
shortcomings in the first business plans that merited a second round of
business plan submissions.
OFGEM’s
consultation process
At the time of writing, OFGEM is seeking
submissions from stakeholders on whether the second business plans adequately
reflect previous stakeholder input, whether the CapEx and OpEx is clearly
linked to proposed outcomes, and whether future uncertainties have been
adequately addressed.
Next
steps
OFGEM will consider stakeholders comments
on the second business plans, and will then publish its initial proposals for
each GDN in late July 2012.
Aus
– the final electricity distribution decision for Tasmania
Introduction
Aurora
Energy is the electricity distributor in the Australian state of Tasmania.
Over the past 2 years, Aurora has been in the process of having its allowable
revenue for the 5 year period beginning 1st July 2012 determined by
the Australian Energy Regulator. This
article summarises the key features of the AER’s recently announced Final
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...
|
Parameter |
Proposal (Addendum) |
Draft Decision |
Revised Proposal |
Final Decision |
|
CapEx ($2009/10) |
$672.3m |
$535.8m |
$617.9m |
$535.4m |
|
OpEx ($2009/10) |
$340.1m |
$311.0m |
$360.4m |
$341.9m |
|
Revenue ($ nominal) |
$1,536.3m |
$1,305.4m |
$1,545.3m |
$1,410.44m |
|
Opening RAB |
$1,484.9m |
$1,439.0m |
$1,474.6m |
$1,445.2m |
|
Closing RAB |
$1,891.2m |
$1,740.7m |
$1,847.1m |
$1,750.4m |
|
Nominal vanilla WACC |
10.33% |
8.08% |
9.97% |
8.28% |
This concludes Pipes & Wires analysis
of Aurora’s revenue determination.
Disclosure
of interest
Utility Consultants advised Aurora Energy
on parts of its Proposal.
Energy policy
France – will the new government stay
pro-nuclear ?
Introduction
French
politics has taken a big swing from the Right to the Left over the last few
weeks. This article considers whether François Hollande’s
new government is likely to continue with France’s nuclear power program.
The politics of it all
As a
broad generalisation, the political Right tends to embrace nuclear power whilst
the Left tend to shun it. Pipes
& Wires #80 noted France as a somewhat curious exception to this trend,
with the Left historically embracing nuclear power. A possible reason for this
could be that France’s political Left has been influenced by the high number of
union jobs that depend on nuclear power, rather than the environmental movement
that hates nuclear power.
Hollande’s position on nuclear energy
Hollande’s
preferred position is to reduce France’s dependence on nuclear from 75% of all
generation to about 50% by 2025 by improving the share of renewables. This
represents a significant break from previous mainstream thinking, and suggests
that the Left’s underlying thinking could now be dominated by the environment rather
than by organised labor.
The likely response of the
establishment
For
many in France this will be fighting talk, with some commentators already
suggesting that the French nuclear-industrial complex will just keep lumbering
forwards irrespective of its political masters’ wishes. For a start France is
exporting more electricity to Germany (the profits of which will be flowing to
the French government via Electricité de France),
and it also appears that the French nuclear construction industry already has
its sights firmly on the UK’s planned new nuclear fleet (which seemed a bit
shaky last time we looked), estimated to cost about £110b.
So
... while it appears that the official line will be a softening of the
pro-nuclear approach, perhaps the real question is whether various government
agencies will re-align to official policy.
US – smart meters in the gun – again
!!!
Introduction
Pipes
& Wires has been examining smart meter policies in the US states of
California, Maryland and Illinois, and in particular the emerging gap between
“the best laid plans of men” at a policy level, and how the roll-out and
funding all actually happens. This article continues that theme by examining
the latest happenings, this time in Nevada.
NV Energy’s Energize program
NV Energy’s Energize
smart meter and smart grid program is all about giving customers control over
their energy usage, including the options of participating in a dynamic pricing
trial, and demand response. NVEnergize wouldn’t appear to be much different to
all the smart meter and smart grid programs offered by other electric
companies.
The opt-out plan
Due
to customer pressure, the Public
Utilities Commission of Nevada recently approved an opt-out plan in which
NV Energy customers can opt-out of the Energize roll-out, but not quite to the
extent those customers had hoped for. Customers objecting to the Energize
roll-out on health, privacy and security reasons were hoping for a return to
manually read analog meters, however the PUC’s opt-out option is to have a
smart meter replaced by a digital once-per-month drive-by meter.
NV Energy’s view
For
its part, NV Energy has argued that a return to manually-read analog meters
would erode the cost savings of remote reading, as well as being technically
difficult due to the obsolescence of analog meters. Similar to what Pacific Gas & Electric are pushing for in
California, NV Energy is pushing for an up-front opt-out fee of $110 followed
by $15 per month.
The emerging picture
So
the emerging picture certainly is one of policy-level plans coming unstuck
firstly at a regulatory level (ie. recovering the cost of smart meters through
regulated tariffs) and now at a customer advocacy level (ie. customers want
choice, and want their energy usage patterns to be private). But it also
appears that in terms of numbers, the actual customer objections are very, very
low (like 0.01%) so it would seem that smart meters are here to stay despite a
few bumps in the road.
Regulatory policy
UK – compiling the next electricity
distribution price control
Introduction
The
UK electricity and gas regulator OFGEM
has several RIIO work streams in progress at the moment (refer to the other UK
price control articles in Pipes & Wires #112). This article examines the
early stages of the 1st electricity distribution price control RIIO
– ED1 that will commence on 1st April 2015 and is proposed to
run for 8 years.
Progress with RIIO
OFGEM
has already completed the 2 Scottish electricity transmission price controls
under RIIO
– T1, and is making progress on the 1st gas distribution RIIO
– GD1 price control. A couple of the more evident features of RIIO appear
to be...
·
A significant incentive of concluding
the price control process early if the applicant’s business plan is considered
to be of a sufficiently high quality.
·
Additional incentives of increased
allowable revenue if the applicant’s business plan is sound.
·
Decisions that include a lot of words
(as distinct from numbers under RPI – X).
The early stage of RIIO – ED1
A
few months ago OFGEM published an open letter to interested parties seeking
views on how various pressing issues such as smart grids, feed-in tariffs, low
carbon technologies, efficient costs, whether RIIO - ED1 should be 8 or 9
years, and what level of stakeholder engagement might be considered enough. It
is fairly obvious that the uncertainty implicit in most if not all of the above
issues would make a highly quantitative price control difficult to compile.
Pipes & Wires will examine RIIO –
ED1 as OFGEM publishes further material.
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...
·
17th Asia Oil Week 2012
– Singapore, 25th – 27th June, 2012.
·
Certified Energy
Manager – Gauteng, 15th – 19th October, 2012.
·
Certified
Measurement & Verification Professional – Gauteng, 17th – 19th
October, 2012.
·
Certified Energy
Auditor – Gauteng, 15th – 18th October, 2012
·
19th Africa Oil Week
2012 – Cape Town, 29th October – 2nd November, 2012.
·
Fundamentals
of the NZ Electricity Industry – Wellington, 6th – 7th
November, 2012.
·
Fundamentals
of the NZ Electricity Industry – Auckland, 21st – 22nd
November, 2012.
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Disclaimer
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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Consultants Ltd accepts no liability for action or inaction based on the
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