From the
editor’s desk…
Welcome
to Pipes & Wires #122. This month we start with a look at some structural
reform issues, regulatory decisions and transactions in New Zealand, and then
look at how the US state of Missouri figures it can encourage electric grid
investment. We then examine efforts to reduce regulation of activities exposed
to competition in the UK and conclude this issue with some regulatory decisions
and a transaction in Australia.
Matters for attention (NZ)
Distribution pricing review
The
Electricity Authority will be reviewing EDB’s pricing methodologies to inter
alia ensure that each EDB’s methodology aligns to the pricing principles and is
efficient. This work stream will involve an independent review of each EDB’s
methodology, after which the Authority will release its findings, probably
around August or September 2013.
The
Authority’s focus will be on whether distribution pricing is efficient and is
supporting competition. Pick here
or call Phil on (07) 854-6541 to discuss your requirements.
Gas asset management plans
The Commerce
Commission’s decisions NZCC 23 and NZCC
24 set out the requirements for gas distribution and gas transmission
businesses (collectively referred to as gas pipeline businesses, GPB’s) to
disclose an AMP that meets specified criteria. The specific disclosure
requirements for both gas distribution and gas transmission are set out as
follows...
·
Section 2.6 of each decision sets out
the various broad requirements that an AMP must meet, such as contributing to
the Part
4 Purpose Statement, and being able to be understood by someone with a
basic knowledge of infrastructural asset management.
·
Section 2.6 sets out the dates by which
each GPB must disclose its’ AMP. Care is required, as the dates are based on
several defined terms that much be well understood.
·
Section 2.6 also describes the various
forecasts (Schedules 11a to 12b that include CapEx, OpEx, asset condition and demand).
·
Attachment A sets out the specific
clause-by-clause requirements that the AMP must include.
·
The asset management maturity
assessment tool (AMMAT) in Schedule 13 must also be completed and disclosed.
These
requirements are almost identical to the disclosure requirements for
electricity AMP’s. Pick here
or call Phil on (07) 854-6541 to discuss your requirements.
New Zealand
NZ – plans to restructure the wholesale
electricity market
Introduction
In
April 2013 the Greens and Labour both announced plans to establish a
state-owned electricity purchasing agency that would buy all generated
electricity at a “fair price” and by implication reduce domestic electricity
prices if they are elected to government in November 2014. This article
examines those proposals and considers the possible impacts on the NZ
electricity industry.
The proposals
The
proposals broadly comprise the following elements....
·
Establish a single buyer that will
negotiate cheaper electricity prices. Labour would call this agency NZ Power.
·
Provide each domestic customer with a
monthly block of low cost electricity.
·
An increased emphasis on efficiency.
Regulation v’s structural reform
So I
guess this raises the question that if reducing electricity prices is the
objective, is structural reform the best way to do it, or would simple retail
price regulation be more suitable ? Retail price
regulation could undoubtedly achieve price reductions without introducing
another agency (a monopsony buyer at that !!) so it
would seem questionable to introduce further structural complexity and costs.
Putting
aside the means of achieving price reduction, neither proposal gives any firm
clues as to how the established cost structures of existing generators will be
treated. Will they simply have to sell at a loss to the NZ Power buying agency and then have
to propped by taxpayer bail-outs ?
Possible impact on the electricity
industry
In
the immediate term, about $300m of listed electric company (Contact Energy,
Trustpower and Infratil) share market value was scrubbed out. Readers might
remember the similar share price thumpings that Telecom and Auckland Airport
took at the hands of the 5th Labour Government, so there is probably
nothing new or surprising there. The big pause that many potential Mighty River
Power share buyers have taken should also prompt a lot of thought about how
safe investor funds might be.
What
might the long-term impact be ? It’s hard to imagine
that if NZ Power becomes a reality that private equity won’t flee the industry.
Presumably that will require government funding, so electricity consumers are
likely to pay for new power stations through their taxes rather than through
their electric bills.
NZ – Vector buys Contact’s metering
business
Introduction
News
emerged in April 2013 that the Commerce
Commission has approved Vector’s
purchase of Contact Energy’s gas
metering business. This article considers what exactly Vector has bought, and
then also examines the competition aspect of this transaction.
The transaction
Vector
will pay $63m for 128,000 domestic, commercial and industrial meters that it
expects to either replace with smart meters or retrofit with technologies that
enable remote reading.
Buying what exactly ?
Some
might well ask why Vector has bought a bunch of old gas meters that are likely
to be replaced by smart meters. How will that complement Vector’s existing
energy metering business ? A little thought would
suggest that Vector has not simply bought the meters, but rather has bought the
right to measure energy flows (and many other parameters such as demand) at
specific points.
The competition aspect
A
key aspect of the Commerce Act 1986 is s47
which effectively prohibits an acquisition that would have, or would be likely
to have, the effect of substantially lessening competition in a market. In this
case, the relevant market is the market for the provision of gas metering
services.
The
Commission has concluded that there is limited competition for the provision of
gas metering services amongst Vector, Contact and other metering providers
hence it has no basis to prohibit the transaction. However the Commission still
has concerns about overall competition in the market for gas metering services
and is considering whether it should undertake an inquiry under Part
4 of the Commerce Act.
NZ – setting the WACC for electric
companies
Introduction
Most
of us fully appreciate the overarching importance of the weighted average cost
of capital (WACC) and the impact of this singularly important parameter. This
article examines the Commerce Commission’s recently released Decision
NZCC #10 that will apply to all Electricity Distribution Businesses (EDB’s)
for the disclosure year starting on 1st April 2013.
Legal framework
The
WACC is compiled pursuant to clauses 2.4.1 and 2.4.7 of the Commerce
Act (Electricity Distribution Services Input Methodologies) Determination 2010
(known to most of us Decision #710), which is itself made pursuant to Part 4 of
the Commerce Act 1986.
The WACC determination
The
following WACC’s have been calculated for the 5 year period commencing on 1st
April 2013...
|
Parameter |
Mid-point
estimate |
25th
percentile estimate |
75th
percentile estimate |
|
Vanilla
WACC |
6.11% |
5.39% |
6.83% |
|
Post-tax
WACC |
5.43% |
4.71% |
6.14% |
North America
US – reducing regulatory uncertainty
Introduction
Over
the last few years several situations have emerged where electric companies have
been saddled with the cost of worthwhile initiatives that on one hand policy
makers were keen to see implemented, but on the other hand regulators declined
to allow recovery of the costs. This article examines a Bill being considered
by the Missouri State Legislature that is
touted to incentivise “electric grid improvement”.
The apparent problem
The
apparent problem is the uncertainty of cost recovery that is implicit in the
regulatory regime not only in Missouri but in many other US states and indeed
in other countries. This generally goes under the principle of not being
allowed to roll already-spent capital into the regulatory asset base (RAB) from
which allowable profit is derived.
This
is resulting in a reluctance to spend and hence a decline in asset condition.
The Infrastructure Strengthening &
Regulatory Streamlining Bill
Senate
Bill 207 / House Bill 398 includes several
detailed provisions including...
·
Setting out the process that the
Applicant and the Public Service Commission
must follow in reviewing applications for grid replacement surcharges (tariff
increases).
·
Requires the Applicant to submit a
reconciliation of the revenues if the project proceeds and if it didn’t.
·
Sets specific lower and upper limits of
the additional revenue that can be derived from grid renewal work.
·
Specifically providing for applications
to recover the cost of grid renewal to be excluded from the restrictions around
general tariff increases.
The editor comments
There
is understandably a wide spectrum of views on allowing electric companies to
recover costs, ranging from the enemies of Big Electric who will always claim
that costs are being feather-bedded and gold-plated just to extract excess
returns, to the electric companies and their investors who conversely claim
that costs are not being adequately recovered to compensate for the risk. In
terms of a pendulum’s swing where might we be ? My
view is that electric companies are not being adequately compensated for the
risks around cost recovery, with the result that electric grids are becoming
run-down to the point where the politicians are concerned.
We
might well ask whether under-investment is really that bad, especially compared
to over-investment. There is a huge asymmetry between the two ... granted that
electric customers might pay a bit more if over-investment occurs but the
reality of electric customers paying a whole load more if under-investment
occurs is thankfully starting to feature more prominently in politicians
thinking.
Pipes
& Wires will examine the passage of SB207, especially through the critical
Committee phase which has the potential to significantly dilute the intention
of the Bill.
UK and
Europe
UK – reducing regulation of competitive
activities
Introduction
Pipes
& Wires #119 examined OFGEM’s
proposal to lift price regulation for competitive activities (in the context of
Scottish & Southern Energy’s new
connections activity). This article examines a Competition Notice submitted by UK Power Networks (UKPN) to have
the price regulation lifted on activities in 6 identified market segments.
Background
OFGEM
has recognised that competition is more likely to drive innovation, better
service and lower prices than regulation, hence as part of the DPCR5
price control several mechanisms were introduced to encourage such
innovation, including allowing electric companies to earn a regulated margin on
contestable connection activities and the ability to apply to OFGEM to have
price regulation lifted.
UK Power Network’s Competition Notice
UKPN’s
Competition
Notice has identified 6 market segments in which sufficient effective
competition exists to allow margin regulation to be lifted. These market
segments are....
·
Connection work at LV or HV.
·
Connection work at LV or HV that also
involves EHV.
·
Connection work at EHV or 132kV.
·
Connection at LV that also involves
Distributed Generation.
·
New connection of unmetered Local
Authority premises.
·
All other non- Local Authority
unmetered premise work.
UKPN
has estimated the markets for these services to be worth about Ł155m per year,
so they are certainly worth the effort to extract further value from.
Pipes
& Wires will make further comment once OFGEM’s decisions emerge.
Australia
Vic – the water & sewage Draft
Decisions
Introduction
Pipes
& Wires #118 examined the initial steps in compiling the next water
& sewage price controls that will apply to the Greater Metro Water
Businesses in the Australian state of Victoria. This article examines the
Essential Service Commission’s recent Draft Decision.
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 |
|||
|
P0 |
X1-5 |
P0 |
X1-5 |
P0 |
X1-5 |
|
|
60.4% |
0.5% |
77% water 39% sewage |
0.5% |
|
|
|
|
33.9% |
0.0% |
20.6% |
0.0% |
|
|
|
|
33.6% |
0.0% |
24.8% |
0.0% |
|
|
|
|
33.7% |
0.0% |
25.8% |
0.0% |
|
|
|
|
6.1% |
-6.2% |
5.9% |
1.1 to 1.3% |
|
|
|
Note
that a negative X1-5 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 Final Decision in June 2013. Pipes & Wires will
comment further when the Final Decision emerges.
SA – the MAPS changes owners
Introduction
Last
month the APA Group sold the Moomba – Adelaide
Pipeline System (MAPS) to QIC Global
Infrastructure (QIC) subject to final regulatory approval. This article
examines the sale from a range of different perspectives.
The pipeline – some engineering details
The
MAPS is a 1,184km welded steel pipeline of 560mm diameter, stretching from the Cooper Basin south to
Adelaide, and includes 7 compressor stations. The MAPS maximum capacity is
about 0.33 GJ/day at about 60 bar pressure. Construction began in October 1968
and the first stage was officially opened in November 1969.
The transaction
APA
Group sold the MAPS to QIC for $400.6m, which represents an enterprise value of
$423m. Prior to this the MAPS was bought by APA as part of a controlling
interest in the Hastings Diversified Utility
Fund on the condition that it would be on-sold to a buyer approved by the Australian Competition & Consumer Commission
(ACCC).
MAPS investment characteristics
It’s
worth considering what the MAPS investment characteristics might be...
·
The essential link between the Cooper
Basin and South Australia.
·
A mature asset with low annual OpEx.
·
A surplus of capacity so that
additional gas can be transmitted at pretty much zero marginal cost (really just
the cost of running the compressors a bit harder).
·
The absence of regulatory coverage,
allowing the market to set the tariffs.
·
A high chance of additional gas-fired
electricity generation in South Australia, requiring additional gas throughput.
The regulatory take on all this
Long-time
readers might remember (Pipes
& Wires #65) that the MAPS regulatory coverage was revoked because the
MAPS did not dominate access to the South Australian gas market. However APA
was required to on-sell the MAPS because its other pipeline assets could lead
to a dominant position in the South Australian market for pipeline access.
The final step – regulatory approval
At
the time of writing, ACCC approval of QIC as a buyer is awaited.
Vic - setting the electricity
transmission tariffs
Introduction
SP AusNet recently submitted a
Regulatory Proposal for its electricity transmission business in Victoria for
the 3 year period commencing on 1st April 2014 to the Australian Energy Regulator (AER). This article
examines that Proposal to set some context for further analysis.
Legal framework
The
prevailing legal framework is Chapter 6A of the National
Electricity Rules. The Rules are made pursuant to the National
Electricity Law.
Key features of the decisions to date
Key
features of the decision to date include...
|
Parameter |
Proposal |
Draft Decision |
Revised
Proposal |
Final Decision |
|
CapEx |
$575m |
|
|
|
|
OpEx |
$657.6m |
|
|
|
|
Opening
RAB |
$2,721.3m |
|
|
|
|
Depreciation |
$239.1m |
|
|
|
|
Nominal
Vanilla WACC |
7.19% |
|
|
|
|
Max
Allowable Revenue |
$1,597.8m |
|
|
|
Next steps
Pipes
& Wires will make further comment when the AER releases its Draft Decision.
SA – finalising the electricity
transmission revenue control
Introduction
Pipes
& Wires #114 and #118
introduced the revenue control for the South Australian electricity
transmission grid for the 5 year period starting on 1st July 2013.
This article examines the Australian Energy
Regulator’s (AER) recently released Final Decision.
Legal framework
The
prevailing legal framework is Chapter 6A of the National
Electricity Rules. The Rules are made pursuant to the National
Electricity Law.
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, and released its Final Decision in April 2013.
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 |
$466m |
$418m |
|
Total
CapEx ($2012/13) |
$894m |
$642m |
$750m |
$691m |
|
Opening
capital base ($nominal) |
$2,100m |
$2,078m |
$2,087m |
$2,070m |
|
Post-tax
nominal vanilla WACC |
7.73% |
7.11% |
7.5% |
7.5% |
|
Maximum
allowable revenue ($nominal) |
$1,726m |
$1,507m |
$1,608m |
$1,578m |
This
concludes Pipes & Wires coverage of ElectraNet’s revenue control, at least
for another few years.
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...
· Infrastructure, Investment &
Regulation Conference – Sydney, 30th – 31st May 2013.
· Derivatives
accounting for power & energy companies – Chicago, 12th – 13th
June 2013.
· ACCC / AER
Regulatory Conference – Brisbane, 25th – 26th July
2013.
· Fundamentals
of the NZ electricity industry – Auckland, 2nd – 3rd
September 2013.
· Fundamentals
of the NZ electricity industry – Wellington, 16th – 17th
September 2013.
· CIGRE
International Symposium – Auckland, 16th – 17th
September 2013.
Utility
Consultants takes no responsibility for the content of individual courses or
conferences, nor for any administrative or travel arrangements.
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 (WT 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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