Pipes & Wires


Issue 113 – July 2012


From the editor’s desk…


Welcome to Pipes & Wires #113. This month we start be examining a raft of energy policy issues from around the world before examining 2 current deals. We then look at a recent Court ruling in New Zealand, and then focus on Australia where we look at a draft regulatory decision and 2 industry reshufflings.


Re-vamped website   


My website has been substantially re-vamped, with some up-dated content to better reflect my experience and emerging industry issues. Please pick here and take a browse around.


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.


Guide to UK energy policy


Arup have compiled a really cool Emissions – Energy – Efficiency timeline setting out the various policy frameworks and for the UK - pick here to download a copy. Thanks to Steve Argent for pointing this out.


Energy policy


UK – re-thinking energy policy




The UK’s difficult energy position is no stranger to the pages of Pipes & Wires. This article examines a Draft Energy Bill introduced by Energy & Climate Change Secretary Ed Davey in May 2012 that is intended to remedy the situation.


Recapping the UK’s problems


A quick recap of the UK’s energy woes include...


·       About half of the UK’s electricity is generated by gas. Much of this gas is sourced from Russia, which has demonstrated a tendency toward “gas tap diplomacy”.


·       A further quarter of all generation is from coal. Many of these coal stations will be closed to comply with the EU Directive on Large Combustion Plant.


·       The closure of the old nuclear stations.


·       A contribution from renewables of about 7%, a figure that languishes far behind government targets.


·       An estimated spend requirement of between £110b and £200b by 2020 depending on sources (about 2.5x to 5x the current annual spend) when customers are already struggling to pay their electric and gas bills.


·       Increasing demand as the uptake of electric transport increases.


Davey’s Draft Energy Bill


The full text of Davey’s Draft Bill is 308 pages, however the DECC’s website provides a succinct summary. The Draft Bill was laid before Parliament in May for scrutiny before appearing as a Full Bill in autumn of 2012.


The key thrust of Davey’s Draft Bill is to ensure that the private sector faces strong and correct incentives to actually make the £110b of required spend occur. The Draft Bill has a short term recognition of the importance of gas (and sets an emissions limit that effectively side-lines coal), but its’ long-term focus is renewables and a transformation to a low-carbon economy.


What do we make of all this ?


A couple of observations from where I sit (pretty much diagonally opposite on the world)...


·       The Draft Bill doesn’t appear to recognise the possible role of shale gas as a low-cost and secure generation fuel.


·       Care will be needed to ensure that the government’s incentives actually encourage investment rather than simply not discourage investment.


·       The lines sector and the nuclear and fossil generation sectors have been seeking improved investment incentives for years to little avail ... how come the renewable sector gets them now ?


·       UK energy commentators are already questioning the wisdom of Davey’s policy.


Pipes & Wires will comment further later in 2012 as the Full Bill enters Parliament. 


US – recharging electric cars gets some official recognition




Whilst many of us in the industry fully understand the need to recharge electric cars at off-peak periods, the message seemed to be getting lost at policy-maker level. This article briefly examines a recent forum held by the Pennsylvania Public Utilities Commission to explore this and other related issues.


The forum


The forum was hosted by the PPUC at Drexel University on 31st May to “explore policies to support investments in natural gas and electric vehicles” (although this article will limit its’ focus to electric vehicles). Whilst promoters of electric vehicles advocated policy frameworks that encourage investors to build recharging stations and prevent regulated utilities competing with private suppliers, the PUC pondered the possibility of electric vehicles overwhelming the electric grids.


Peak time recharging


According to the regional grid operator, PJM, smart recharging between midnight and 7am could cope with about 25,000,000 electric cars (the good news) but uncontrolled recharging eg. after work at 5pm could easily cause a voltage collapse (the bad news). Nothing new there, but it is very comforting to know that a state regulator is seriously considering the implications of peak time recharging.


Competition for recharging


One of the less obvious issues that seems to be emerging is private recharging suppliers advocating for a policy framework that prevents the incumbent regulated utility from competing with them. Would that be the same regulated utility that will be supplying their recharging stations ? I guess the next step will be that the recharging station owners will be lobbying to prevent the incumbent regulated utility from imposing a peak-demand charge so the recharging station owners can capture all the margin and transfer the growth CapEx costs on to the local electric company.


Europe – a new role for pumped storage




Most of us have at least some idea that increasing penetration of renewable generation will require the intermittent nature of that generation to be mitigated. This article examines the recent signing of an agreement between Germany, Switzerland and Austria to support joint development of pumped storage specifically to mitigate that intermittent nature.


The role of pumped storage


Most of us are familiar with the role that pumped storage plants were originally designed for, namely day-night balancing of must-run generation such as nuclear. In many areas that role has now changed to one of unplanned fast response for situations such as forced outages. As wind farms in particular become larger and more common, the need for unplanned fast responses in the order of several hundred MW is increasing.


The dilemma of pumped storage


The mountainous regions of Central Europe would appear to be ideal for pumped storage, but community opposition to a pumped storage plant already under construction in the Black Forest is high. Indeed, many knowledgeable energy sector commentators are expressing concern that feasible, large-scale energy storage schemes are still decades away.


The agreement


The agreement calls for the development of more pumped storage plants, declaring that pumped storage is essential to Europe’s energy and climate policy objectives. The initiative also notes that pumped storage is “the only industrially available storage technology at present” and that the development of pumped storage is essential to “offset the volatile supply of wind and solar systems”.


It’s pleasing to see this issue being recognised at a policy level. No doubt other countries will also pick up on the potential usefulness of pumped storage.


US – enshrining Michigan’s renewable targets in law




The US state of Michigan is proposing to enshrine its target of 25% renewable energy target by the year 2025 into law. This article examines Michigan’s target, the current pressures on that target, and whether enshrining it in law might be a good thing.


Michigan’s target


Michigan’s current renewable target is 10% by 2015. However current renewable energy is about 4% due to inter-state imports of coal-fired electricity, which makes the target of 25% by 2025 seem a long stretch.


Moving beyond whether 25% is an appropriate or achievable target, the current issues are whether that target should be enshrined in law, and even more so whether that enshrining should be done by the state legislature or by a popular vote.


Current pressures on that target


Most of us accept that renewable generation is more expensive than coal-fired generation, even when the price of carbon is included. Cheap gas from the impending shale gas revolution is likely to make renewable generation even more expensive vis-a-vis the cheapest alternative.


Might enshrining 25 x 25 in law be a good thing ?


Undoubtedly the answer depends on which side of the renewable divide one sits. Understandably the pro-renewable side is keen for the targets to be enshrined in law, and is working hard to secure the 322,000 signatures necessary to get the matter on to the ballot paper for 6th November. Correspondingly the electric companies and large energy consumers are concerned that enshrining the targets in law will result in an inflexible energy policy that is likely to increase costs.


Court rulings


NZ – the Court of Appeal decision on the Input Methodologies




The current regulatory framework for inter alia electricity distribution is set out in Part 4 of the Commerce Act 1986. Subpart 3 provides for Input Methodologies to be compiled by the Commerce Commission to provide regulated suppliers with increased certainty.


This article recaps the recent Court action taken by Vector arguing that the mid-term re-set of the Default Price Path should be covered by an Input Methodology, and notes the Appeal Court’s ruling in favor of the Commerce Commission.


Mid-term re-set of the DPP


Non-exempt electricity distribution businesses have been subject to a default price-quality path (DPP) since April 2010. The regulatory framework provides for the Commerce Commission to reset that DPP if the recently developed Input Methodologies would have resulted in a materially different DPP had they applied in April 2010. The operative component of the regulatory framework is s54K(3) of the Commerce Act 1986 which states “If an input methodology is published after 1 April 2010 and if, had that methodology applied at the time the default price-quality paths were reset as required by subsection (1), it would have resulted in a materially different path being set, then the Commission may reset the default price-quality paths in accordance with section 53P and may apply claw-back, despite section 53ZB(1)”.


Events to date


Key events to date include....


·       The Commerce Commission releases its Draft Decision to re-set the DPP’s mid-term (refer to Pipes & Wires #104).


·       Vector challenges the Draft Decision on the basis that Parliament clearly intended that the Input Methodologies would include such matters as re-setting prices (refer to Pipes & Wires #106). The Commission argues that its legal authority to reset prices should be certainty enough, and that an electricity lines business that is not satisfied with its’ DPP can apply for a CPP.


·       The High Court ruled in favor of Vector, concluding that had misinterpreted Part 4 to the extent inter alia that it had not determined a starting price adjustment Input Methodology. Relief included the compilation of a stand-alone starting price adjustment Input Methodology.


·       The Commission suspended further work on the mid-term re-set.


·       The Commission announces that it will appeal the High Court decision.


·       The Court of Appeal overturns the High Court’s ruling, ruling in favor of the Commerce Commission (refer below).


The Court of Appeal ruling


The Court of Appeal released its ruling on 1st June 2012, which broadly concluded that the High Court ruling interpreted s54k(3) too narrowly and that a wider basis for resetting prices is permitted.


Vector’s response


In late June 2012, Vector announced that it will appeal the Court of Appeal ruling to the Supreme Court.


Mergers & acquisitions


US – the Duke & Progress merger – almost there !!




Last time we looked at the Duke EnergyProgress Energy merger (Pipes & Wires #109), the Federal Energy Regulatory Commission (FERC) rejected the merger partners’ proposal to mitigate diminished competition in the Carolina’s. This article notes the FERC’s issuing of “conditional orders” that is expected to bring the deal to a rapid completion.


The merger proposal


Duke offered Progress’ shareholders 2.6125 Duke shares for each Progress share, as well as Duke assuming $12.2b of Progress’ debt. If successful, the merged companies would have about 56,000MW of generation and supply about 7,100,000 electric customers in North Carolina, South Carolina, Indiana, Kentucky, Ohio and Florida (Pipes & Wires #100, #102, #105, #106 and #109).


Diminished competition in the Carolina’s


Diminished competition resulting from mergers is obviously a major concern to regulators, and one that Pipes & Wires has closely examined on several previous occasions. In this instance, the FERC is concerned that competition in the Carolina’s wholesale electricity market would be diminished, and suggested that the following possible concessions could be considered...


·       Sale of generation plant to unrelated parties.


·       Placing control of transmission lines with a Regional Transmission Operator (RTO).


·       Building new transmission lines.


Not only could any of these possible concessions prevent Duke and Progress’ consolidating market power, they could potentially diminish their market power with respect to existing levels. Understandably, equity analysts are nervous about this whole issue.


Duke and Progress responded with a single proposed concession to limit prices to cost plus 10% for 8 years, which the FERC rejected claiming that it “does not remedy the proposed adverse effects on competition”. Duke and Progress subsequently offered to build $110m of new transmission grids to improve competitor access to the Carolina’s, as well as divesting 700MW of generation capacity.


The FERC’s recent ruling


In mid-June 2012 the FERC issued “conditional orders” which relate specifically to the diminished competition in the Carolina’s. Although the orders added further conditions to the merger, it was also taken as a signal of the FERC’s broad approval.


The conditional orders include requiring transmission capacity to be dedicated to moving wholesale power, and expanding the role of third-party oversight of implementing the conditions.


Additional state regulatory approval


At the time of writing, the merger partners still required approval from the North Carolina Utilities Commission and the Public Service Commission of South Carolina.


Pipes & Wires will make final comment (hopefully next month) once the merger closes.


Germany – E.On sells Open Grid Europe


Pipes & Wires #107 and #109 examined E.On’s plans to divest its gas transmission business Open Grid Europe. This article briefly describes Open Grid and notes its sale to a consortium led by Macquarie Group infrastructure fund.


What exactly is Open Grid Europe ?


Open Grid Europe (OGE) is a gas transmission business comprising 11,500km of high-pressure pipelines that sits within E.On’s subsidiary Ruhr Gas. Annual gas throughput is about 75 billion cubic meters. OGE was functionally separated from Ruhr Gas on 1st September 2009 to provide independent system operator functions.


The sale to Macquarie


The winning bid was from a consortium comprising Macquarie, British Columbia Investment Management, Infinity Investments (Saudi Arabia) and Munich Ergo Asset Management.


The sale price valued Open Grid’s equity at €2.9b, or about 10x EBITDA. Including adjustments for miscellaneous assets and pension liabilities, the final sale price was about €3.2b. It is recognised that intense bidding from 4 consortia drove up the sale price.


The editor comments


Two of the unsuccessful consortia included European gas transmission utilities (GDF Suez, and Fluxys). That a non-utility entity was able to make a higher bid would seem contrary to popular thought on the basis that a utility entity could bid more due to operating synergies. Interesting thought, that...


Regulatory decisions


Aus – the Victorian gas distribution Access Arrangements




This article notes the Access Arrangements currently being compiled by the Australian Energy Regulator (AER) for the 1st January 2013 – 31st December 2017 period for the gas distributors Envestra, MultiNet and SP AusNet in Victoria.


Legal framework


The prevailing legal framework is the National Gas Law and Part 8 of the National Gas Rules.


Summary of the AA


Each of the respective Proposals set out the applicants’ proposed Reference Tariffs in Part B. These Reference Tariffs are more complicated than the corresponding electricity Proposals, and don’t easily lend themselves to tabular comparison. Follow these links to read in detail....


·       Envestra (Victoria)


·       MultiNet


·       SP AusNet


Pipes & Wires will make some “word” comparisons as the AER’s decisions emerge.  


Industry re-shuffling


Aus – amalgamating distribution in New South Wales




Amalgamating electricity distributors to capture economies of scale seems like a bit of a holy grail for many governments, and is certainly no stranger to the pages of Pipes & Wires. This article examines the recently announced plans to amalgamate the 3 electricity distributors in the Australian state of New South Wales (NSW) on 1st July 2012.


Amalgamations to date


The NSW distributors have been amalgamated twice already....


·       In 1996 the 25 distributors were amalgamated into 6 (noting that 80% of energy sales came from the 4 metro distributors).


·       In 2001 these 6 distributors were further consolidated into 3 distributors (which then sold the electricity retail businesses in 2011). 


History records that individual distributors were also subject to ad-hoc amalgamations eg. the formation of Sydney Electricity.


Recent announcements


Rumors of further consolidation from 3 to 2 distributors have occasionally hit the papers, however back in March the Minister for Resources & Energy announced that the 3 distributors would be united under a single State-owned corporation whilst retaining their 3 respective brands. 


The NSW transmission grid TransGrid will remain as a separate business.


The stated objectives


The Minister’s stated objectives are...


·       To deliver more than $400m of cost and efficiency gains over 4 years, part of which will result from cutting about 780 jobs.


·       To maintain front-line services and front-line staff numbers.


·       To fund low-income rebates partly from the efficiency gains.


Not surprisingly, there has been much criticism from the Opposition parties which will presumably add some further unstated objectives eg. the need to ensure that the merged entities push-back power against the AER is limited, and ensuring that rural depots remain open.


Aus – amalgamating transmission and distribution in Tasmania




Amalgamating transmission and distribution (as distinct from amalgamating distributors) is not something we encounter very often, especially not an amalgamation that takes the industry almost right around the full circle to its original starting point. This article examines the Tasmanian government’s plans to amalgamate its currently separate transmission and distribution networks.


The proposed reshuffling


In May 2012 the Minister for Energy & Resources, Bryan Green, announced an extensive package of reforms which has been guided by an Expert Panel. Green considered that it was a good time to reflect on 15 years of incremental change to both the Tasmanian electricity industry and the National Electricity Market (NEM) and confirm whether the current structure and business models are optimal.


Amalgamating transmission and distribution


A seemingly secondary priority of the reform package is the amalgamation of Aurora’s distribution business with the Transend transmission business, which is expected to save about $8m per year.


A little thought would suggest that the direct cost savings probably will only be of that order ... probably a few senior positions being disestablished, maybe some consolidation of field services contracts, but apart from that probably not much else. Given the extent of annual planning information that is publicly disclosed by Transend (and by all the other grid companies in the NEM) it is not clear that amalgamation will result in a more economically efficient grid configuration.


Pipes & Wires will check back on this reshuffling in a few months.


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...


·       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.


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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