From the
editor’s desk…
Welcome
to Pipes & Wires #120. This month we examine some gas regulatory decisions
in New Zealand and then look at a wide range of technology, regulatory policy
and industry structural issues in the United States. We then look at the
importance of gas-fired generation in England and then examine some industry
reforms and regulatory decisions in Africa. This issue concludes with a look at
a water regulatory decision from Australia.
New Zealand
NZ – the gas DPP Final Decisions
Introduction
Pipes
& Wires #116 examined the Commerce
Commission’s resetting of the Default Price Paths (DPP) that will apply to
certain gas distribution and gas transmission services from 1st July
2013. This article examines the Commission’s
final decisions.
Background
The gas distribution businesses belonging to Vector and Powerco were subject to the 2003 Gas Pipeline
Enquiry, and as a result were placed under control by the Commerce
(Control of Natural Gas Services) Order 2005. On 31st October
2008 that Control was extended by the Gas Authorisations, which will expire on
1st July 2012.
This was in part overtaken by Part
4 of the Commerce Act 1986 which requires the Commission to set the Initial DPP’s for certain
suppliers of gas pipeline services. Those DPP’s must embody the following elements....
·
The prices or
revenue that can be charged at the start of the DPP.
·
The annual rate of
change in prices or revenue that are allowed to occur in subsequent years of
the DPP.
·
The quality
standards that must be met.
The gas distribution decisions
The
gas distribution starting prices (expressed as MAR) are as follows....
|
Business |
Maximum
Allowable Revenue |
|
$4.578m |
|
|
Powerco |
$48.620m |
|
Vector |
$69.693m |
The gas transmission decisions
The
gas transmission starting prices (expressed as MAR) are as follows...
|
Business |
Maximum
Allowable Revenue |
|
$39.805m |
|
|
Vector |
$88.983m |
This
concludes Pipes & Wires analysis of the gas DPP’s.
NZ – amending the gas Input
Methodologies
Introduction
Regulatory regimes require a high degree of
prescription for calculated parameters to provide investment certainty. This
article examines some recent amendments
to the gas Input Methodologies in New Zealand.
What exactly is an Input Methodology
Essentially an Input Methodology (IM) is a
prescription of how parameters such as depreciation and weighted average cost
of capital (WACC) must be calculated, or how classes of costs must be treated.
Understandably electric and gas companies have a keen interest in IM’s as they
ultimately determine the profitability of assets.
Amendments to the gas distribution IM
Key amendments to the Gas Distribution
Services Input Methodologies Determination 2012 NZCC27 include amending
the formula used to calculate notional deductible interest, and amending the
requirements for describing and justifying controllable OpEx.
Amendments to the gas transmission IM
Key amendments to the Gas Transmission
Services Input Methodologies Determination 2012 NZCC28 include amending the
formula used to calculate notional deductible interest, and amending the
requirements for describing and justifying controllable OpEx.
North America
US – emerging grid storage technologies
Introduction
Most
of us have a sense that solar has somehow plateaued ... feed-in tariffs are being ramped down in many
jurisdictions as concern mounts over how those tariffs may have escalated
prices. This article examines an emerging pattern of cleantech money heading towards grid and energy storage technologies.
The present cleantech sector
The
present cleantech sector ... largely comprising wind and solar
.... seems to have plateaued or matured. The technologies are all sorted, manufacturers
seem all kitted up to produce and install, costs and prices seem to be well
understood by the market place. Like any industry, profits decline as
consolidation and maturity. And of course the cleantech sector is facing increasing concern over rising prices and
its intermittent nature.
The emerging cleantech sector
The
emerging picture that venture capital seems to be heading towards grid storage
technologies would seem to reflect the following issues....
·
That
electric grid stakeholders
(particularly the utility – customer compact) are recognising the importance of a continuously reliable supply.
·
That the next frontier is serious peak
chopping and off-peak energy storage.
Pipes
& Wires will check back on this issue, and feel the pulse of this trend
later in the year.
US – recovering the cost of smart grids
Introduction
Pipes
& Wires #119 examined the Colorado
Public Utility Commission’s (PUC) decision to prevent Xcel Energy subsidiary Public Service
Company of Colorado (PSCo) from recovering the final $16.6m of
costs of the Boulder SmartGridCity program.
This article notes the PUC’s final ruling rejecting that recovery.
A bit about the SmartGridCity
SmartGridCity is a technology pilot program that allows electric
customers to explore smart grid applications in the real context of their own
electricity consumption. Key principles include...
·
Provision of real time electricity
pricing that enables customers to reduce energy demand.
·
Detection of power outages.
·
Improving billing accuracy.
The
Boulder SmartGridCity involved 23,000 smart meters, and ended up costing
something like $45m of which Xcel Energy recovered $27.9m. In all fairness, much
of the cost over-run was due to the under-estimated hardness of the rock in
which the fiber network was buried.
The PUC’s final decision
In
March 2013 the PUC ruled that Xcel would not be allowed to recover the
remaining $16.6m costs until customer benefits were demonstrated, upholding the
February 2013 administrative law ruling. The basis of the ruling is that Xcel
were unable to demonstrate customer benefits (a point that Xcel vigorously
disputes) however it appears that some customers did not use the technology.
What could this mean for smart grids ?
In
jurisdictions where cost recovery is heavily regulated and appears to be
increasingly uncertain this might well make electric companies think twice
about clever initiatives. Long-time readers might remember the policy –
regulatory disconnect that Baltimore Gas &
Electric encountered a few years ago (refer to Pipes
& Wires #93 and #94)
in which the much-touted benefits of smart meters suddenly became “largely indirect, highly contingent and a long way off”
when BG&E sought to recover the costs from customers.
US – the pressure to muni’ise investor owned utilities
Introduction
Pressure
by city councils to purchase electricity distribution businesses from investor
owned utilities (ostensibly to reduce tariffs) rears its head every so often.
As Pipes
& Wires #119 noted, the City Of Boulder,
Colorado wants to buy Xcel Energy’s
distribution network. This article examines what appears to be steadily
increasing pressure to muni’ise
IOU’s.
The likely advantages of muni’ising
The
most visible reasons for muni’ising an
IOU appear to be....
·
Lowering tariffs to end use customers.
That can happen in 2 ways .... either
the full economic cost of supply is reduced, or the City subsidises the cost. Let’s examine the line of thinking that the City
can supply electricity cheaper than an IOU because the City won’t charge a
profit component. How is the City going to fund the purchase of the electric business
in the first place ? Unless it has heaps of $$$ lying
around doing nothing (in which case the city fathers should be horse-whipped)
the city will probably need to borrow real money from a bank or raise real
money by selling municipal bonds, both of which have a very real interest cost.
How’s that different from an IOU’s cost of debt ? And
we haven’t even got started on issues like loss of scale, duplication and
arguing over the asset valuation and operating costs, access to cheap
generation, and unjustified assumptions about services being provided to the muni for free by other electric companies.
·
Building more renewable generation. If
the city really wants to do that, why not do it by way of a by-law requiring
all electric companies to buy a minimum percentage of their energy from
renewable generators (although at a rough guess, I’d say such a by-law would be unenforceable). Anyway the emerging picture is that increasing renewable
generation is driving up costs, so it is not clear how these 2 goals are not in
direct conflict.
·
Improving storm response. The US has
been really whacked with some big storms of late, and I’m not sure that the
response times are actually that unreasonable. However civic authorities
obviously think otherwise and have successfully whipped the voters into a frenzy.
Boulder’s attempt to muni’ise Xcel
As
noted in Pipes
& Wires #119 the City Of Boulder plans a vote in April 2013, and it is
expected that the votes will favor forming a muni. Pipes & Wires will follow that as a separate issue.
The emerging pressure to muni’ise
The
media has noted that Boulder stands apart as having a high level of activism,
however at a more measured pace both Santa Fe, New Mexico and Minneapolis,
Minnesota are exploring muni’ing
options whilst the State of Massachusetts is considering policy changes to make
it easier for cities to form muni’s.
Not surprisingly, increased renewable generation is one of the more visible
reasons for wanting to muni. Pipes &
Wires will watch and comment as this issue unfolds, but in the mean time
perhaps electric customers should be careful what they wish for.
UK and
Europe
UK – keeping the lights on and the gas
flowing
Concern seems to
be heightening over the UK’s security of supply margins, especially as snow
comes early. Alistair Buchanan, chief executive of OFGEM, takes a look at the decade ahead in
this video
clip. It is about 85 minutes long including questions, but is well worth
watching.
UK – the importance of gas-fired
generation
Introduction
In
amongst the UK’s headlong charge into renewables, there is an increasing advocacy for new gas fired generation.
This article examines some recent comments
from UK gas supplier Centrica and also recaps the salient points of Pipes
& Wires recent articles.
The comments by Centrica
Centrica’s chief executive, Sam Laidlaw,
has recently warned of an imminent energy gap in the UK, noting in particular
the closure of old coal-fired generation. He goes on to emphasise the important role of gas-fired generation to buffer the intermittent
nature of renewables, but perhaps more importantly also emphasises that perhaps the UK has more indigenous gas than previous
thought.
Some of the wider comments
As
Pipes & Wires has previous noted, the UK electricity sector faces the
following crunch issues...
·
Increasing demand growth (albeit
dampened a bit by the economic downturn).
·
Closure of coal-fired generation under
the EU’s Large
Combustion Plant Directive.
·
Closure of the aging MagNOx nuclear generation.
·
Concern over security of gas supply
from Russia and the Middle East, although somewhat offset by alternative
supplies from Norway and Qatar.
·
The increasing controversies over the
proposed new nuclear stations that now seem a long way off and are demanding
guaranteed price increases.
So
... what do we make of all this, this complex swirling mass of ever changing
issues and drivers ? If I’m reading current media
reports correctly, this winter could prove very critical for the UK.
Africa
Nigeria – progress on the electricity
roadmap
Introduction
Pipes
& Wires #117 examined the August 2010 announcement of a 700kV super
grid by Nigeria’s President Goodluck Jonathan which formed part of a
wide-ranging electricity sector roadmap. This article takes a look at overall
progress on the roadmap as we anticipate a revised roadmap sometime around
April 2013.
Some success
stories so far
Just a few of the success stories to
date include....
·
Implementation of the Multi-Year Tariff Order (MYTO2), which raised prices
sufficient to attract investment.
·
An additional 1,000MW of new generation capacity.
·
The 79 bids for the successor
companies to the Power Holding Company.
·
The successful bids for the 5 generation companies
·
The successful bids for the 11 distribution companies.
Next steps
Pipes
& Wires will check back later in 2013 for further progress on the privatisation process, and also for progress on the 700kV super grid.
Kenya – raising electricity tariffs
Introduction
Chronic under-funding of the
electricity sectors in developing countries seems very prevalent. This article
examines the recently proposed tariff increases in Kenya, and then takes a look
at some of the wider economic policy issues.
The proposed tariff increases
Kenya Power has recently
proposed a wide range of tariff increases to the Energy Regulatory
Commission, including...
·
A 300% increase in manufacturing sector electricity tariffs over
the next 3 years.
·
A 150% increase in domestic sector electricity tariffs over the
next 3 years.
Both tariffs proposed their
first increment in March 2013.
Kenya Power’s proposed spend up
Kenya Power’s proposed spend
up includes....
·
US$210m on distribution expansion projects.
·
US$530m on other distribution projects.
·
US$200m on transmission grid improvements.
The ERC’s response
The ERC’s supports the
proposed tariff increases, noting that Kenya Power has absorbed past operating
costs, but now must look toward recovering the cost of new capital investment.
Some wider economic policy issues
Electricity costs and prices
can have a significant impact on a region or country’s economy, especially if
price increases are of several hundred percent. So we seem caught between
keeping industrial electricity tariffs low to improve the global
competitiveness of exports on the one hand, and moving to fully cost reflective
prices on the other hand that seem to ignore global issues. In Kenya’s
particular case, there is an expectation that tariffs will....
·
Reflect the true cost of supply to various classes of customers.
·
Be economically efficient.
·
Ensure that the sector remains financially viable.
·
Provide a measure of social equity.
We could try to keep
industrial tariffs low to enhance global competitiveness, but that would
require higher tariffs to the domestic and commercial customers which is straight away at odds with the policy expectations. We
could try subsidising any
number of customer classes, but that too is at odds with the policy
expectations and is also politically risky.
So it would appear that there
is no easy way to get from historically low tariffs to sustainable, efficient,
cost-reflective tariffs.
South Africa – increasing electric
tariffs
Introduction
Continuing
the theme of tariff increases (refer to the article on Kenya in Pipes &
Wires #120), this article examines the controversial tariff increase that Eskom recently proposed to the National Energy Regulator of South Africa
(NERSA) for the 5 year control period starting on 1st April 2013
(known as MYPD3).
Eskom’s proposal
In
October 2012, Eskom applied
to NERSA to increase its average tariff by 16% for each year of the MYPD3.
These tariff increase would result in R1,091b revenue
over the 5 years. Eskom has clearly indicated that any lesser revenue allowance
would result in its debt climbing above the government guarantee. The proposal
also included some significant tariff restructurings.
NERSA’s decision and its basis
NERSA
has approved an average tariff increase of 8% for each year, which would result
in revenues of R907b, or about R180b less than what Eskom sought.
Reconciling the gap
Unlike
other jurisdictions where the regulator openly provides a project-by-project
analysis of why various costs may have been disallowed as part of its Decision,
any such analysis from NERSA is far from clear. NERSA has issued a media statement
showing the high level costs it will allow Eskom to recover, but certainly no
clear working or analysis.
The wider economic policy issues
Understandably
NERSA would be concerned about rising electricity prices, and their impact on
South Africa’s export competitiveness. On the other hand, Eskom has clearly
stated that its proposed 16% average tariff increase is the minimum needed to
keep the lights on. It doesn’t require much thought to see that the lights
going out will almost certainly damage export effectiveness.
Australia
SA – the water Draft Decision
Introduction
Pipes
& Wires #118 has examined the first step in the compilation of the
water & sewage price controls in South Australia. This article examines the
Essential Services Commission of South Australia’s recent Draft
Decision.
Key features of the Draft Decision
Key
features of SA
Water’s Proposal for the regulatory period 1st July 2013 to 30th
June 2016 and the Draft Decision 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 |
$963m |
|
|
|
OpEx |
$1,400m |
$1,280m |
|
|
|
Opening
asset base |
$7,075m |
To be stated in Final Decision |
|
|
|
Nominal
vanilla WACC |
7.98% |
Use of NV WACC disallowed |
|
|
|
Real
vanilla WACC |
5.57% |
4.87% |
|
|
Pipes
& Wires will comment further as this price determination progresses.
General stuff
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.
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.
Conferences & training courses
The following
conferences and training courses are planned...
· ACCC / AER
Regulatory Conference – Brisbane, 25th – 26th July
2013.
· Infrastructure, Investment &
Regulation Conference – Sydney, 30th – 31st May 2013.
· CIGRE
International Symposium – Auckland, 16th – 17th
September 2013.
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.
·
Distribution Of Electricity – W T
Henley (the cable manufacturer).
·
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.
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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
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