Pipes & Wires

THE JOURNAL OF COOL ENERGY & UTILITIES STUFF

Issue 118 – January 2012

From the editor’s desk…

Welcome to Pipes & Wires #118, and to a very hot, sunny start to 2013 (including places where it’s not supposed to be hot and sunny). This issue starts with a WACC determination in New Zealand, and then focuses mainly on regulatory decisions in Australia, the UK and France. There is also a look at some industry structural change and deregulation in Australia, and a sharp shift in nuclear policy in Japan.

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...

· Providing an Engineer’s Report to support a CPP Application.

· Acting as an Expert Witness in defense of an electric company.

· Compiling asset management plans in preparation for disclosure by 31^st March 2013.

· Assisting several EDB’s with their AMMAT assessments for disclosure by 31^st March 2013.

· Analysing supply reliability against peer EDB’s

· Analysing EDB’s operating and capital costs against peer EDB’s.

Consulting services that may be of interest to clients

Utility Consultants wide expertise extends well beyond the above projects ... if you need energy network advice chances are Utility Consultants has done work in that area. Here’s a sample of work done for clients over the last few years that demonstrate the breadth of skills, insight and experience that is available....

· Advised an electricity business on the regulatory implications of bringing externally contracted field services back in-house.

· Identified economic and regulatory arguments to support inclusion of transmission interconnection charge risk into network tariffs.

· Advised lines businesses on a regulator’s proposed treatment of CapEx and OpEx.

· Advised an international investor on gas distribution policy and regulatory trends.

· Identified national energy policy implications for lines businesses.

· Assisted a lines business to identify the burden of proof implied by regulatory determinations.

· Suggested amendments to a gas transmission AMP to strengthen the economic arguments.

· Identified electricity network investment characteristics as part of an acquisition study.

· Developed an AM framework for a gas distribution business to link AM to regulatory requirements.

· Identified OpEx – CapEx tradeoffs for an electricity lines business.

· Performed various substation growth and reinforcement assessments.

· Performed network physical and business risk studies.

· Compiled disaster recovery and business continuity plans.

Pick here to download a profile of recent projects, or here to contact Phil.

New format of Pipes & Wires

Pipes & Wires has recently re-formatted to a geographical format from its long-standing discipline format, and I’d be interested to get readers perceptions of that. Please pick one of the following links...

· Prefer new geographical arrangement of articles.

· Prefer original discipline-based arrangement of articles.

CPEng status

I’m pleased to announce that I am now a Chartered Professional Engineer (CPEng), and am available 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.

A bit of light-hearted humor

What if price control had been around in the 1920’s and 1930’s ? A collection of photo’s with humorous captions looks at some of the salient features of price control. Pick here to download.

New Zealand

NZ – determining the WACC for gas distribution and transmission

Introduction

Late last year the Commerce Commission released its Decision NZCC38/2012 setting out the weighted average cost of capital (WACC) that will apply to the following gas distribution and transmission services....

· All gas distribution and gas transmission Default Price Paths (DPP’s) proposed to start on 1^st July 2013.

· Any gas distribution or gas transmission Customised Price Path (CPP) proposed by Vector in the 12 months following the decision.

· Any gas distribution CPP proposed by GasNet in the 12 months following this decision.

This article examines that determination.

Background

Pipes & Wires #116 examined the Commerce Commission’s WACC decision that will apply to Powerco’s gas distribution business for the 2013 Information Disclosure year. That decision was a Vanilla WACC of 6.83% and a post-tax WACC of 6.12% for the 2013 Information disclosure year.

The determination

The determination sets out the following mid-point Vanilla WACC’s...

· DPP 5 year Vanilla WACC – 6.63%.

· CPP 3 year Vanilla WACC – 6.39%.

· CPP 4 year Vanilla WACC – 6.50%.

· CPP 5 year Vanilla WACC – 6.63%.

These WACC’s assume an equity beta of 0.79 and a leverage of 44%.

Australia

Aus – water under pressure in Victoria

Introduction

The Essential Services Commission (ESC) of Victoria is currently compiling the price controls that will apply to Victoria’s metropolitan water (and sewage) businesses for the 5 year regulatory period starting on 1^st July 2013. This article examines the legal framework within which the price controls are set, and then examines the price increases signaled in the Water Plans.

Legal framework

The legal framework for regulating water and sewage prices and performance includes the Water Act 1989, s4D of the Water Industry Act 1994 and Part 3A of the Essential Services Commission Act 2001 (revised to 2008). The current price control is being compiled pursuant to the Water Industry Regulatory Order 2012 (WIRO).

The regulated water companies

The five regulated companies whose prices will be subject to the WIRO are...

· Melbourne Water – manages the catchments, supplies treated drinking water and treats sewage in the wider Melbourne area.

· City West Water – supplies about 93,000,000,000 liters of water to customers in Melbourne’s western areas, and transfers 94% of sewage to Melbourne Water whilst treating the remaining 6% itself.

· South East Water – supplies 1,600,000 customers in Melbourne’s south-eastern areas through 23,000km of pipelines.

· Yarra Valley Water – operates 18,000km of water mains and sewers to supply 1,700,000 people in Melbourne’s northern and eastern areas.

· Western Water - supplies 58,000 customer connections to the west of Melbourne.

Progress to date

To date the ESC has published its Guidance Paper, received the Water Plans from the regulated businesses and published a Summary Paper.

Expected price increased signaled in the Water Plans

The price increases signaled are broadly as follows (note that the ESC has re-calculated these from the prices stated in the individual Water Plans by weighting each tariff by its share of 2013/14 revenue)...

Company	Water Plan		Draft Decision		Final Decision
Company	P₀	X_1-5	P₀	X_1-5	P₀	X_1-5
Melbourne	60.4%	0.5%
City West	33.9%	0.0%
South East	33.6%	0.0%
Yarra Valley	33.7%	0.0%
Western	6.1%	-6.2%

Note that a negative X_1-5 represents a price increase (the opposite of the format used by the ESC in its Summary Paper).

Next steps

The ESC expects to release its Draft Decision in March 2013 and its Final Decision in June 2013. Pipes & Wires will comment further as those Decisions emerge.

Aus – fully deregulating electricity retailing in SA

Introduction

As part of the on-going reform of Australia’s energy markets, the South Australian government recently announced the full deregulation of its’ retail electricity market. This article examines the transition from a somewhat regulated market to a fully deregulated market and what might be in store for customers.

SA’s somewhat regulated retail electricity market

Although electricity customers have been able to choose their retailer since 1^st January 2003 (under the Full Retail Contestability scheme), the standing contract prices for customers using less than 160,000 kWh per year were still regulated to provide some protection. Australian Gas Light (AGL) acts as the prescribed electricity retailer in South Australia and has its prescribed prices set by the Essential Services Commission (ESCOSA). Other retailers are free to set their prices in a competitive market.

Fully deregulating electricity retail

In December 2012, the South Australian government announced that as part of an agreement with AGL, the electricity market would be fully deregulated in return for reducing the standing contract prices by 9.1% for residential and 4.5% for small businesses for 2 years from 1^st January 2013.

The background to this agreement was AGL’s Supreme Court challenge to ESCOSA’s Draft Price Determination that would’ve reduced the standing electricity contract price by 8.1%. Following the deregulation announcement, AGL suspended its challenge whilst ESCOSA suspended the Wholesale Electricity Cost Review that resulted in the Draft Price Determination.

So what might be in it for customers ?

Some salient issues include...

· Customers have already been able to choose their (electricity) retailer for 10 years so presumably those who have crunched the numbers and concluded that savings are possible would’ve already switched retailers.

· Residential customers who stay with AGL’s prescribed tariff will be able to save 9.1% instead of 8.1%, so they would appear less likely to switch.

· Small business customers who planned to save 8.1% by staying with AGL’s prescribed tariff will only be able to save 4.5%, so they would appear more likely to switch.

· Given AGL’s agreement to the new prescribed tariffs, it is possible that the prescribed tariff shifts will work out about revenue neutral for AGL based on estimated switching.

I think at this early stage it’s a bit hard to tell with certainty, but we could well expect to see a tranche of small businesses who previously figured there was nothing in it now wanting to switch retailers.

Aus – water under pressure in SA

Introduction

Over the past 2½ years legislation has been passed in South Australia establishing the regulatory framework for the water industry. This article examines that framework, looks at how the states’ major water company, SA Water, might be regulated, and then examines the key features of the Regulated Business Proposal.

Legal framework

After a consultative process between the Treasurer and the Essential Services Commission (ESCOSA), the Water Industry Act 2012 was passed into law on 17^th April 2012. In particular s17 declares the water industry to be regulated for the purposes of the Essential Services Commission Act 2002, whilst s35 provides for price regulation by way of the Treasurer issuing a Pricing Order.

SA Water’s activities

SA Water is a state-owned company that provides water supply services to 1,576,000 people and sewage removal services to 1,254,000 people through dams, reservoirs, 35,000km of pipes, 30 water treatment plants and 24 sewage treatment plants.

How might SA Water be regulated ?

A read of SA Water’s Regulatory Business Proposal reveals that ESCOSA will regulate SA Water’s direct control services (which appears very similar to the definition for direct electricity control services) on a building block basis similar to how electricity and gas transmission and distribution services are regulated.

Key features of SA Water’s Proposal

Key features of SA Water’s Proposal for the regulatory period 1^st July 2013 to 30^th June 2016 are as follows. Similar to Pipes & Wires analysis of electricity and gas price determinations, blank columns are included for the Draft Decision, any Revised Proposal, and the Final Decision.

Parameter	Proposal	Draft Decision	Revised Proposal	Final Decision
CapEx	$1,100m
OpEx	$1,400m
Opening asset base	$7,075m
Nominal vanilla WACC	7.98%
Real vanilla WACC	5.57%

Pipes & Wires will comment further as this price determination progresses.

Aus – the draft SA electricity transmission decision

Introduction

Pipes & Wires #114 introduced the revenue control for the South Australian electricity transmission grid for the 5 year period starting on 1^st July 2013. This article examines the Australian Energy Regulator’s (AER) recently released Draft Decision.

Progress to date

ElectraNet submitted its Regulatory Proposal in May 2012, as required by the National Electricity Rules. The AER responded with its Draft Decision in November 2012.

Key parameters of the Proposal

Key parameters of ElectraNet’s Proposal include...

Parameter	Proposal	Draft Decision	Revised Proposal	Final Decision
Total OpEx ($2012/13)	$478m	$398m
Total CapEx ($2012/13)	$894m	$642m
Opening capital base ($nominal)	$2,100m	$2,078m
Post-tax nominal vanilla WACC	7.73%	7.11%
Maximum allowable revenue ($nominal)	$1,726m	$1,507m

It would appear that ElectraNet has taken a big hit on all the key parameters. Pipes & Wires will make further comment as the Revised Proposal and the Final Decision emerge.

Aus – reshuffling the Tasmanian electricity sector

Introduction

Pipes & Wires #113 examined the Tasmanian governments’ plans to amalgamate Aurora Energy’s distribution business with the Transend transmission business. This article notes the appointment of investment bank Lazard to sell Aurora’s retail business.

Likely bidders for Aurora’s retail business

Not surprisingly, the likely bidders for Aurora’s retail business are expected to include Origin Energy and EnergyAustralia (formerly TRUenergy).

Back in 2010, Origin and TRUenergy paid about $1,300 per customer for their respective retail customer bases and associated energy contract and development rights in New South Wales. It’s not clear whether the Aurora Energy retail business will have any associated energy contracts, but if it does we might expect bids in the order of $320m.

At that time, Australian Gas Light (AGL) indicated that those per customer costs were about 8x its’ (AGL’s) costs of organic customer acquisition of $150 per customer, so it was planning to poach Origin and TRUenergy’s customers. AGL went on to publically state that its bid was substantially below the successful bids. So it is possible that AGL might make a very modest bid for Aurora’s retail business and then if that bid proves unsuccessful, seek to organically acquire (former) Aurora customers from the successful bidder. This suggests that the likely bidders have vastly differing views on customer retention and churn.

The likely shape of the Tasmanian industry

Once the retail business is sold, the most obvious features of the Tasmanian industry will power stations, pylons and poles ... with the pylons and poles merged into a single business. A little thought, however, would suggest that the generation business will need to guard its revenue by contracting to retailers, so inclusion of energy sale and purchase contracts is very likely.

Pipes & wires will comment further once the sale concludes.

Asia

Japan – could nuclear make a come-back ?

Introduction

Japan’s recently elected Liberal Democrat Party (LDP) has a distinct pro-nuclear stance, so its re-election to power in December 2012 may see a resumption of both nuclear generation and new nuclear construction. This article examines the recent policy shift and considers what that might mean for companies such as Tokyo Electric Power Company (TEPCO).

Previous events

Prior to the Fukushima earthquake in 2011, Japan had an apparently very happy 45 year operating history of nuclear power based around a policy position of securing energy supply. Immediately after the earthquake, Fukushima #1, #2 and #3 were shutdown so not surprisingly, by June 2011 Japan’s reserve capacity margin declined to between 9% and 12% after substantial energy savings by customers and with 40% of the nuclear capacity still operating. In the months following this, all but 1 of Japan’s operating reactors closed down.

Likely policy shifts under the new LDP

The new government has already signaled that it has no intention of following the previous governments’ aim of phasing out nuclear power by 2030. The nuclear energy industry is, however, less optimistic due to the vast tide of public anti-nuclear sentiment.

The newly elected Prime Minister Shinzo Abe toured Fukushima within 2 weeks of winning the election which could be interpreted as a strong liking for nuclear energy. Abe went on to claim that new nuclear stations will be built with the consent of the Japanese people.

What could that mean for companies like TEPCO ?

After seeing its shares drop miserably to about 90% of their pre-earthquake value, TEPCO saw its shares surge by about 30% after the LDP’s election. That could well be just post-election jubilation as there is still the Fukushima clean up to fund and possible lawsuits, but it certainly is a step in the right direction.

So beyond the immediate term and the one-off financial hits, prospects could be very good for the nuclear generators such as TEPCO if the importance of security of primary energy is re-emphasised as a policy objective.

UK and Europe

UK – the RIIO - GD1 Final Proposals

Introduction

UK electricity and gas regulator OFGEM recently announced its Final Proposals for RIIO – GD1, the first gas distribution price control under the Regulation = Incentives + Innovation + Outputs model that will apply for the 8 years from 1^st April 2013 to 31^st March 2021. This article examines the key features of the Final Proposal and compares those features to the Initial Proposal, whilst the companion article examines the RIIO – T1 Final Proposals.

Background

The impending price controls (well, more technically, revenue and performance controls) will be set under OFGEM’s RIIO model, which represents a significant break from the RPI-X model used since the late 1980’s. Pipes & Wires #112 summarised OFGEM’s key process steps, whilst #115 set out some of the key features of the Initial Proposals.

Key features of the Final Proposals

Key features of the Final Proposals include (along with comparisons to the Initial Proposals)...

Parameter	Initial Proposal	Final Proposals
Customer service including satisfaction, complaints and engagement	Revenue incentive of +1%.	Revenue incentive of +1%.
Requirement to connect up to 80,000 “fuel-poor” households	Penalty for under delivery.	Penalty for under delivery.
Maintain current guaranteed connection standards	Penalty payments.	Penalty payments.
Innovative network developments	Revenue incentive up to either 0.5% or 1% (final decision awaited).	Revenue incentive of 0.5% for Wales & West and for Scotia, and 0.7% for National Grid and for Northern.
Reductions to proposed costs	Between 5% and 12% relative to 1^st Plans.	Between 1% and 13% relative to 2^nd Plans.
Post-tax real cost of equity	6.7%.	6.7%.
Notional gearing	65%.	65%.

This concludes Pipes & Wires analysis of the RIIO – GD1 process.

France – compiling the 5^th gas transmission tariff

Introduction

The French energy regulator, the Commission de Regulation de l’Energie (CRE) has been compiling the tariffs that will apply to gas transmission system operators (TSO’s) GRTgaz and TIGF for the control period starting on 1^st April 2013, known as ATRT5.

The TSO’s

The TSO’s are as follows...

· GRTgaz operates 32,000km of high-pressure transmission pipelines across all of France except the south-west, and transmits about 2,500PJ of gas annually. Annual revenues are about €1.56b.

· TIGF operates 5,000km of high-pressure transmission pipelines in the south-west of France, transmitting about 290PJ annually. Annual revenues are about €208m.

Legal framework

The CRE derives its statutory powers from the Code de l’Energie, which was adopted into French law on 13^th July 2005. In particular, Article L452 sets out the framework for gas transmission and distribution tariffs.

Basis of the current tariff

The basis of the current tariff (ATRT4) is the well-known building block configuration with a few incentive mechanisms attached to each building block. A particularly innovative incentive has been allowing a TSO to adopt a higher WACC for new investments during ATRT3 and ATRT4 that fulfill energy policy objectives such as reducing bottle-necking or increasing market liquidity.

The proposed ATRT5 tariffs

Key features of the ATRT5 tariffs include....

· Retaining a 4 year regulatory period, despite requests for 8 years from GRTgaz and 6 years from TIGF.

· Setting a 4 year OpEx trajectory that includes productivity gain targets, with a mid-term review to accommodate underlying price movements, amended regulatory obligations and connected user capacity demands.

· Amending the clawback mechanism included in ATRT4.

· Continued use of a 3% WACC premium to incentivise new investment only for 2 major projects (the Bourgogne looping to merge the North and South zones, and centralised deodorisation).

· Allowing a WACC for specific projects based on the difference between the estimated and actual costs.

· Amending the service quality incentives to incentivise further quality improvements.

The CRE has consulted on these and other issues, so Pipes & Wires will comment further on ATRT5 as the CRE releases its final decision.

UK – the RIIO – T1 Final Proposals

Introduction

OFGEM recently announced its’ Final Proposals for RIIO – T1, the price controls that will apply to National Grid’s electricity transmission and gas transmission businesses for the 8 year control period from 1^st April 2013 to 31^st March 2021. This article examines those Final Proposals, and continues on from previous articles.

Background

Pipes & Wires #115 examined OFGEM’s RIIO – T1 Initial Proposals in detail.

Key feature of the Final Proposals

Key features of the RIIO – T1 electricity transmission Final Proposal include...

Parameter	Initial Proposal	Final Proposal
Supply reliability	An incentive of £16,000/MWh not supplied due to interruption, with a limit of 3% of revenue.	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.
Financial parameters	Cost of equity of 7%, notional gearing of 60%.	Cost of equity of 7%, notional gearing of 60%.
Proposed costs for Transmission Operator function.	Proposed reduction of total costs from £16.092b to £13.849b.	Proposed reduction of total costs from £16.092b to £14.560b.

Key features of the RIIO – T1 gas transmission Final Proposal include...

Parameter	Initial Proposal	Final Proposal
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.
Financial parameters		Vanilla WACC 4.4%, notional gearing 62.5%.
Proposed costs for Transmission Operator function.	Reduction of £2.0b.	Reduction of £1.96b.

The Final Proposals include a slight uplift in proposed costs viz-a-viz the Initial Proposal, similar to what has occurred with RPI-X. This concludes Pipes & Wires coverage of the RIIO – T1 process.

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…

· Wonders Of World Engineering (published 1937) – in particular editions 1 to 27.

· 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...

· Electricity Industry Fundamentals – Auckland, 4^th – 5^th March 2013.

· Electricity Industry Fundamentals – Wellington, 18^th – 19^th March 2013

· Infrastructure, Investment & Regulation Conference – Sydney, 30^th – 31^st May 2013.

· CIGRE International Symposium – Auckland, 16^th – 17^th September 2013.

House-keeping stuff

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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 contents of Pipes & Wires including any loss, damage or exposure to offensive material from linking to any websites contained herein, or from any republishing by a third-party whether authorised or not, nor from any comments posted on Linked In, Face Book or similar by other parties.