From the editor’s
desk…
Welcome
to Pipes & Wires #115.
This
month we start with some analysis of the world’s largest electricity blackout.
We then we look at the DPP Draft Decision and the possibility of extending the
Maui gas field life in New Zealand. Then we take a quick look at some
transmission line cancellations in the US, nuclear policy in Belgium and
France, and some regulatory decisions in the UK.
General stuff
What have I been doing lately ?
A
couple of interesting projects I’ve been involved with lately that might be of
interest to others include...
·
Performing customer surveys for a
couple of EDB’s, to determine customers’ views and preferences for a range of
matters including price-quality trade-offs.
·
Compiling asset management plans in
preparation for disclosure by 31st March 2013.
·
Analysing supply reliability against
peer EDB’s
·
Analysing EDB’s operating and capital
costs against peer EDB’s.
CPEng status
I’m pleased
to announce that I am now a Chartered Professional Engineer (CPEng), and am
availabe to undertake work for which the Commerce Commission requires an
Independent Engineer.
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.
Asia
India – keeping the lights on
Introduction
Twenty of
India’s 28 state power grids experienced simultaneous blackouts a few weeks
ago, plunging about 670,000,000 people (yes, over 10% of the world’s
population) into darkness. This article examines the likely causes of those
blackouts, and tries to form a view on whether it was lack of capacity
investment (as the popular media claim) or whether it was something less
systemic like a protection mal-operation that cascaded.
What appears to have happened ?
It
appears that the following sequence of events occurred....
·
On 30th July, the Northern
Grid failed leaving 350,000,000 in the dark.
·
On 31st July, the Northern
Grid failed again. This failure was then quickly followed by the failure of the
Eastern
Grid and then the failure of the North-Eastern
Grid, leaving 670,000,000 people in the dark. It is alleged that 2 states
overdrew their power allocation whilst grid frequency was falling, suggesting
mismanagement by load dispatch offices.
The Southern
Grid and Western Grid
were unaffected, and assisted in restoring supply.
Some wider analysis
On
the face of it, low hydro inflows, high irrigation requirements for substitute
crops and high ambient temperatures driving up air-con demand are thought to be
the immediate causes however even a little thought would suggest that proper
planning would have mitigated those possible causes.
Some
further analysis would suggest that the Government did have an extensive
investment plan - something like $1,000b – for both grids and peak generation
but that was reduced in the face of sluggish economic growth of only 6%.
Meanwhile demand for air-con and plasma TV’s bounded ahead from an
ever-expanding middle-class, possibly highlighting a critical issue that
perhaps demand and the economic growth that funds capacity to meet that demand
maybe less connected that we thought.
So
the early picture is that the probable cause was a widespread lack of peak
capacity investment.
New Zealand
NZ – the Draft Decision on the DPP
reset
Introduction
Compilation
of the mid-term reset of the Default Price Path (applicable to non-exempt
electricity distribution businesses) was interrupted by legal action in
September 2011. After several court battles, the Commerce Commission has released its Draft
Decision which this article examines.
Background
Electricity
distribution businesses (EDB’s) that do not meet the consumer ownership
criteria in s54D
of the Commerce Act 1986 are initially subject to a Default
Price Path (DPP).
That
DPP was initially set for the period 1st April 2010 to 31st
March 2015 with the added provision that it could be re-set partway through
because the detail of the regulatory framework was still to be finalised when
the DPP started. That reset was interrupted by legal proceedings brought by
electricity and gas distributor Vector.
Key events in the DPP reset process
Key
events in the DPP reset process to date include....
·
April 2011 – the Commerce Commission
releases the Starting Price Adjustment paper, relying on s54K(3)
of the Commerce Act 1986.
·
July 2011 - the Commerce Commission
released its draft
decision on resetting the default price paths (DPP) for the years ending 31st
March 2013, 2014 and 2015.
·
September 2011 – the High
Court ruled in Vector’s favor, noting that the Commission had misinterpreted
Part 4 to the extent inter alia that
it had not determined a starting price adjustment Input Methodology. As a
result, the mid-term reset was suspended.
·
June
2012 – the Court Of Appeal overturns the High Court’s ruling, ruling in favor of the Commission
by broadly concluded that the High Court ruling interpreted s54k(3) too
narrowly and that a wider basis for resetting prices is permitted.
So
that brings us to the point where the Commission could continue work on the
mid-term reset, which has resulted in the current Draft Decision. A second,
separate legal challenge brought by Vector (discussed in Pipes
& Wires #110) has been excluded from the above sequence of events to
avoid confusion.
The Draft Decision
The
allowable revenues and prices under the Draft Decision are compared with the
originally proposed revenues and prices in the following table...
|
EDB |
Original
mid-term reset (April 2011) |
Draft Decision
(August 2012) |
|||
|
MAR3 |
P3 |
X4,5 |
MAR4 |
X 4 |
|
|
$30.2m |
15% |
-5% |
$30m |
CPI + 15% |
|
|
$57.7m |
4% |
0% |
$60m |
CPI - 0% |
|
|
$7.9m |
13% |
-10% |
$8m |
CPI + 15% |
|
|
$20.5m |
-2% |
0% |
$21m |
CPI – 0% |
|
|
$29.0m |
10% |
0% |
$30m |
CPI - 0% |
|
|
$12.8m |
3% |
0% |
$13m |
CPI – 0% |
|
|
$19.5m |
-10% |
0% |
$21m |
CPI – 0% |
|
|
$6.7m |
3% |
0% |
$7m |
CPI – 0% |
|
|
$28.4m |
8% |
0% |
$29m |
CPI – 0% |
|
|
$22.5m |
8% |
0% |
$24m |
CPI + 11% |
|
|
$220.9m |
-9% |
0% |
$255m |
CPI – 0% |
|
|
$29.9m |
14% |
-5% |
$30m |
CPI + 15% |
|
|
$29.6m |
20% |
-10% |
$28m |
CPI + 15% |
|
|
$90.7m |
7% |
0% |
$95m |
CPI – 0% |
|
|
$399.4m |
-9% |
0% |
$414m |
CPI – 0% |
|
|
$109.1m |
-4% |
0% |
$109m |
CPI – 0% |
|
Next steps
The
Commission will receive submissions on the Draft Decision until 1st
October 2012.
NZ – extending the life of Maui
Introduction
Most
of us have some idea that the Maui gas
field has been depleting for the last few years. This article examines the
welcome news that Maui may have a few more years left than expected.
What exactly is the Maui gas field
The
Maui filed is located about 35km off the coast of Taranaki, where the water is
about 110m deep. Maui was discovered in 1969 and since then has produced about
3,400PJ of gas and about 180,000,000 barrels of liquid and condensate. Annual
production peaked at about 135 PJ in 2000, and has rapidly declined to about
30PJ since then. Depletion was estimated at about 91% by 2005.
Extending the life
Conventional
drilling can leave gas stranded in pockets that maybe only a few meters thick.
The Maui operator (Shell Todd Oil Services)
will attempt to recover this stranded gas using a technique known as
sidetracking, which uses a small diameter, steerable drill to extend
horizontally up to 4km.
STOS
has spent about $100m to date and hopes to get between 3 and 10 years of extra
life from Maui (which appears to be somewhere between 100 and 300 extra PJ’s).
NZ – the final Information Disclosure
Requirements
The Commerce
Commission has recently announced that the electricity distribution business (EDB)
Information Disclosure Final Determination will be released around about
the 30th September 2012. For the avoidance of doubt, electricity
AMP’s must comply with the new Information Disclosure requirements by 31st
March 2013.
North America
US – cancelling new grid capacity
Introduction
Pipes
& Wires has previously examined the regulatory and planning processes for 2
major transmission lines, the Potomac
Appalachian Transmission Highline (PATH) and the Mid Atlantic Power Pathway
(MAPP). This article examines recent news that grid operator PJM will recommend
cancelling these 2 lines.
The lines
The
2 lines are as follows...
·
The PATH was a $1.8b, 275 mile, 765kV
line from West Virginia to Maryland proposed by American
Electric Power and FirstEnergy.
·
The MAPP was originally a $1.4b, 152
mile, 500kV line from Virginia to New Jersey proposed by Potomac Electric Power Company (PEPCo).
Reasons for cancelling the lines
Both
lines were planned to provide additional west-to-east capacity and overall grid
stability, however lower than expected economic growth since the initial
planning phases has reduced forecast demand and hence the need for both lines.
The PJM notes that its recent capacity auctions have
included 4,900MW of new generation and a very encouraging 14,800MW of demand
response initiatives, which will more than off-set the planned closure of
16,000MW of older (mostly coal-fired) generation within the PJM footprint.
The editor comments
Both
PATH and MAPP have had long and tortuous journeys through the regulatory and
planning processes, so it might seem rather disappointing that all that work
appears to be for nothing. However the 14,800MW of demand response would seem
to be a real cause for celebration.
Australia
Aus – amending the electricity and gas
regulatory regimes
Background
The
processes for setting the 5 year revenues for electricity distribution,
electricity transmission and gas distribution businesses in the National
Electricity Market (NEM) are set out in the National
Electricity Rules (NER) and the National
Gas Rules (NGR) respectively. This article examines some recent draft
amendments to those Rules.
Using the Rules in practice
In
practice, the Rules are made by the Australian
Energy Markets Commission (AEMC) and used by the Australian Energy Regulator (AER).
The AEMC’s proposals
The
AEMC’s proposals include...
·
A new framework for calculating rate of
return, including a requirement to re-visit that framework every 3 years.
·
Providing additional tools to
incentivise CapEx.
·
Clarifying the AER’s powers to
interrogate, review and amend CapEx and OpEx proposals.
·
A requirement to publish annual
benchmarking reports.
·
Enhancing stakeholder involvement (which will
include a lengthening of the regulatory determination process by 6 months)
Next steps
The
AEMC will receive submissions on the proposed changes until 4th
October 2012, and expects to make a Final Determination in November 2012.
UK and
Europe
Belgium – closing the nuclear stations
Introduction
Closing
nuclear power stations seems to be very fashionable at the moment, despite some
clear lessons from Germany such as wholesale price increases, more CO2
and more imports of nuclear generation. This article examines the recently
announced forced closure of Belgium’s 5,900MW of nuclear generators.
The closure schedule
The closure
schedule broadly corresponds to the 40th anniversary of each
reactor and will start with Doel #1 and
#2 in 2015 and conclude with Tihange
#1, #2 and #3 in 2025. The exception will be Tihange #1 which be allowed to run
to 50 years old in 2025 to avoid blackouts, albeit with €500m of safety
modifications which owner Electrabel
understandably wanting assurance that the extra investment can be recovered
over 10 years.
Encouraging investment in new
generation
Underpinning
the closure schedule is a law change that prevents the closure schedule being
altered or over-turned, making the closure “final”. According to the Belgian
government this “should create a favorable investment climate which will allow
us to gradually phase out nuclear power” and allow it to “achieve ambitious
goals ... in terms of security of supply, environment and price”.
Given
that nuclear provides about 50% of Belgium’s electricity it is far from clear
how any of those 3 goals will be achieved.
UK – Initial Proposals for the RIIO-T1
Introduction
Electricity
and gas regulator OFGEM recently
published its Initial
Proposals for the 8 year control period from 1st April 2013 to
31st March 2021 that will apply to the UK’s high-voltage electricity
transmission grid and to the high-pressure gas transmission pipelines in
response to National
Grid’s business plans. This article examines the key features of the
RIIO-T1 Initial Proposal (which is the equivalent of a Draft Decision in
Australia).
The regulated assets
The
assets subject to RIIO-T1 are....
·
Approximately 7,200km of overhead lines,
690km of underground cable and 337 substations operating at voltages of 400kV,
275kV and 132kV.
·
Approximately 7,600km of high-pressure
pipelines and 26 compressor stations.
Key features of the Initial Proposals
Key
features of the Initial Proposals include....
|
Parameter |
Electricity
transmission incentive |
Gas
transmission incentive |
|
Supply
reliability |
An
incentive of £16,000/MWh not supplied due to interruption, with a limit of 3%
of revenue. |
|
|
Statutory
compliance |
No
revenue incentives. |
No
revenue incentives. |
|
Customer
satisfaction survey |
Incentive
of +1% of revenue. |
Incentive
of +1% of revenue. |
|
stakeholder
engagement |
Incentive
of 0.5% of revenue. |
Incentive
of 0.5% of revenue. |
|
Legal
requirements for customer connections |
Penalty
of up to 0.5% of revenue for not meeting |
|
|
Financial
parameters |
Cost
of equity of 7%, notional gearing of 60%. |
|
|
Proposed
costs |
|
Reduction
of £2.23b. |
Next steps
At
the time of writing, OFGEM is receiving submissions on the Initial Proposals
until 21st September 2012, and expects to publish its Final
Proposals in December 2012. The Final Proposals will be given effect through
License amendments on 1st April 2013.
Pipes
& Wires will examine those Final Proposals just before Christmas, and compare
with the Initial Proposals above.
France – revisiting the nuclear policy
Introduction
Pipes
& Wires #112 examined the newly elected French government’s nuclear
energy policy, and noted both the preference for reducing nuclear generation
from 75% to 50% by 2025 and the possibility that the nuclear industry would
just keep on going anyway. This article takes a quick look at the French
political scene to see if this policy preference shows any signs of being
implemented.
The politics of it all
We’ve
previously noted France’s seeming political disconnect of having left-leaning
governments that embrace nuclear power, and also the possibility that the
nuclear-industrial complex will just lumber along enjoying the profits of
nuclear generation and construction contracts.
The policy preferences
François Hollande’s
Socialist Party favors closing the 24 oldest of 58 reactors by 2025, and this
is most likely to start with Fessenheim
in 2017. This seems at odds with Hollande’s pre-election distancing of himself
to the Green’s shutdown policy under pressure from organised labor to preserve
nuclear industry jobs.
It
should be noted that Hollande’s current position is a distinct contrast to
former president Nicolas
Sarkozy’s preference for life extensions.
Has anything happened recently ?
Back
in late June, Minister for the Environment, Sustainable Development and Energy,
Nicole Bricq, was
removed from her ministerial role and reassigned as Minister for Foreign Trade
after ordering a halt to international oil exploration off the coast of French
Guiana. On the face of it, that would seem to send a strong message to the
political establishment that traditional energy interests are very powerful and
will not be messed with.
Pipes
& Wires will watch this one closely and comment as news arises.
UK – merging without concessions
Introduction
Pipes
& Wires readers will be familiar with the concessions or undertakings that
economic regulators almost always require merger partners to make. This article
examines the recent non-contiguous merger of South Staffordshire Water and Cambridge Water from the perspective
of a merger that didn’t require any undertakings.
What exactly is an undertaking or
concession ?
Most
jurisdictions have legislation to guard consumers’ interests inter alia by
limiting mergers or acquisitions that could reduce competitions and the
disciplines that it imposes on prices and service levels - examples include the
Commerce
Act 1986 in New Zealand and the Competition & Consumer
Act 2010 in Australia. In situations where a merger or acquisition may
result in reduced competition, the merger partners may offer or the regulator
may require undertakings or concessions to be made.
Recent
examples of undertakings or concessions that have crossed the pages of Pipes
& Wires include Duke
Energy and Progress Energy’s plans to sell 700MW of capacity in the
Carolina’s to 3 traders, and the requirement for the Constellation Energy – Exelon
merger to build 300MW of new generation, create 6,000 jobs and give a $250
credit to all BG&E customers.
The merger partners
The
partners to this merger are....
·
South Staffordshire Water supplies
535,000 water customers in the Black Country. Annual revenues are about £91m.
·
Cambridge Water supplies 130,000 water
customers in the Cambridge – Ely – Newmarket – Baldock area, and also collects
sewage charges on behalf of Anglian Water. Annual revenues are about £21m.
Why were there no undertakings required
?
In
sectors where regulators compare supplier performance, a reduced number of
suppliers obviously reduces the amount of comparative data available and makes
it hard for regulators to identify poor performance. To ensure that a suitable
number of independent water businesses remain, the Water Industry Act 1991
(amended by the Enterprise Act 2002) requires the merger of any water companies
with an individual turnover of more than £10m to be automatically referred to
the Competition
Commission.
The
Commission’s role is not to apply the widely understood “substantial lessening
of competition” principle, but rather to determine whether OFWAT’s ability to
make inter-company comparisons has been prejudiced (which OFWAT has valued at £200m over 30 years for
the South-East Water and Mid-Kent Water merger). There is understandably some
criticism that this potential restriction to mergers is in fact preventing
further efficiency gains.
To
cut a rather lengthy story much shorter, the Commission did not accept OFWAT’s
assessments of detriment, instead concluding that there would be little or no
negative impact. Moreover the efficiency gains from this merger would likely
set a new industry benchmark, which would benefit all customers. Hence the
Commission decided to approve the merger unconditionally.
UK – Initial Proposals for the RIIO –
GD1
Introduction
Electricity
and gas regulator OFGEM recently
published its Initial
Proposals for the 8 year control period from 1st April 2013 to
31st March 2021 that will apply to the UK’s low pressure gas
distribution. This article examines the key features of the RIIO-GD1 Initial
Proposals (which is the equivalent of a Draft Decision in Australia).
Assets subject to RIIO-GD1
The
assets subject to RIIO-DG1 are the 8 regional gas distribution networks owned
by National Grid, Northern Gas Networks, Scotia Gas and Wales & West Utilities.
Key features of the Initial Proposals
Key
features of the Initial Proposals include....
|
Parameter |
Incentive |
|
Customer
service including satisfaction, complaints and engagement |
Revenue
incentive of +1% |
|
Requirement
to connect up to 80,000 “fuel-poor” households |
Penalty
for under delivery |
|
Maintain
current guaranteed connection standards |
Penalty
payments |
|
Innovative
network developments |
Revenue
incentive up to either 0.5% or 1% (final decision awaited). |
|
Reductions
to proposed costs |
Between
5% and 12%. |
|
Post-tax
real cost of equity |
6.7% |
|
Notional
gearing |
65% |
Next steps
At
the time of writing, OFGEM is receiving submissions on the Initial Proposals
until 21st September 2012, and expects to publish its Final
Proposals in December 2012. The Final Proposals will be given effect through
License amendments on 1st April 2013.
Pipes
& Wires will examine those Final Proposals just before Christmas, compare
with the Initial Proposals above.
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.
·
Southern Africa Oil & Gas
Summit – Cape Town, 26th – 27th 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. These articles also summarise lengthy documents, and
it is important that readers refer to those documents in forming opinions or
taking action.
Utility
Consultants Ltd accepts no liability for action or inaction based on the
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