From the
editor’s desk…
Welcome
to Pipes & Wires #123. This month we start by examining Orion’s CPP
application, and then look at the Kenyan governments’ refusal to allow electricity
tariff increases. We then look at plans to further liberalise the Japanese
electricity market, and then we look at some regulatory approvals in the US.
Then
it’s on to Europe to examine the ongoing disputes over who pays for renewable
support and over what an acceptable WACC is, along with a possible network
sale. We end this issue with a look at the final water & sewage
determination in South 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. Pick here
or call Phil on (07) 854-6541 to discuss your requirements.
Information disclosure updates
The
Commerce Commission has recently posted further material on electricity
information disclosure. Pick here
or call Phil on (07) 854-6541 to discuss how your company might comply with
these requirements.
New Zealand
NZ – update on Orion’s CPP application
Introduction
Canterbury-based
electricity distribution company Orion
recently applied to the Commerce Commission for a customised price path (CPP)
to fund recovery work from the February 2011 earthquake. This article examines
CPP’s and looks at some of the key features of Orion’s application.
Legal framework
The
regulatory framework for electricity distribution companies is set out in Part
4 of the Commerce Act 1986, with Subpart
6 dealing specifically with CPP’s. A non-exempt electricity distribution
company (subject to a Default Price Path) can apply for a CPP if it believes
that it cannot adequately fund its activities under the DPP.
Orion’s unique circumstances
Prior to submitting a CPP
application, Orion had sought an exemption from Part 4 under earthquake
recovery legislation by way of an Order in Council (OIC) to recover the costs
from the earthquake. Unfortunately the OIC was unsuccessful.
Key features of the application
Key
features of Orion’s
CPP application include....
·
A forecast CapEx that is $155m greater
than pre-earthquake estimates.
·
A step increase in prices of CPI + 15%
on 1st April 2014, followed by CPI + 1.2% for the following 4 years.
Pick
here to watch a video
clip describing the CPP application
The Commission’s assessment process
Because
of the tight statutory timeframe for assessing CPP applications, the Commission
requires applicants to engage a mutually acceptable independent verifier to
confirm that the application fulfils the CPP requirements. This is in contrast
to many other jurisdictions in which the regulator engages various consultants
after receiving the application.
Next steps
The
Commission is currently assessing Orion’s application, and expects to publish a
draft determination on 9th August 2013 followed by a final
determination on 29th November 2013. Pipes & Wires will comment
further as those determinations are made public.
Africa
Kenya – prohibiting the planned
electricity tariff increases
Introduction
Pipes
& Wires #120 examined the Kenya Power
& Lighting Company’s (KPLC) proposed tariff increases that were
supported by the Energy Regulatory
Commission (ERC). This article examines the newly elected governments’
decision to prohibit the proposed tariff increase.
Background
KPLC
had proposed some significant industrial and domestic tariff increases to fund
almost US$1b of transmission and distribution spend. The ERC supported
this proposed tariff increases, noting that KPLC has absorbed past operating
cost increases.
The governments’ response
In
May 2013 the newly elected government indicated that it will not allow the
planned tariff increases to proceed, but that KPLC must instead “sort out its
inefficiencies”. Electricity tariffs have not been reviewed since 2008, despite
industry regulations providing for reviews every 3 years. The reasons given for
suspending the last 3 reviews include...
·
2011 – Claims that high inflation
would’ve been exacerbated if electricity tariffs were allowed to increase.
·
2012 – A general election was pending.
·
2013 – Deeper consideration of
stakeholder views was required.
Likely scenarios
There
are really only 3 scenario’s available to an under-funded electric company...
·
Spend at the proposed level, and fund
from a combination of new equity, debt, retained earnings or shareholder
subsidy.
·
Spend at the proposed level, and rely
on government subsidies or bail-outs.
·
Match spending to the allowable
revenue. This will mean that new generation and grid improvements will be
unlikely to proceed.
It
doesn’t require much thought to see that none of these scenarios are
sustainable.
Wider implications
What
might some of the wider implications be ? Here are a
few possibilities to start with....
·
The ERC is obviously not as independent
and free from political intervention as most of us understand a regulator to
be.
·
Notwithstanding established legal
appeal processes, the industry apparently cannot treat a regulatory
determination as the last word.
·
Investors in the proposed
liberalisation of Kenya’s energy markets will probably be spooked.
·
Listed companies in the wider Kenyan
economy are likely to be spooked.
·
The lights will probably go out, undermining
Kenya’s economy.
So on the face of it,
things look pretty difficult for KPLC and for the wider Kenyan economy.
Asia
Japan – further liberalisation
introduced to Parliament
Introduction
Legislation
was recently submitted to Parliament to further liberalise Japan’s electricity
markets. This article examines the liberalisation to date and the key features
of the legislation.
Liberalisation so far
Key
features of the liberalisation so far include....
·
Phase 1 in 1995 allowed Independent
Power Producer’s (IPP’s) to enter the generation market. Some oversight of
retail tariffs and costs was also introduced.
·
Phase 2 in 1999 introduced competition
for customers taking more than 2MW demand. Associated rules for transmission
access were also established.
·
Phase 3 in 2003 extended competition
for customers taking more than 500kW demand.
It was decided not to liberalise the domestic electricity
market in 2008 (which would’ve represented Phase 4) as the benefits seemed
doubtful.
Key features of the legislation
Key
features of the legislation include....
·
Establishing a nation-wide grid
operator in 2015, with authority over real-time generation dispatch. This will
presumably have to consider the limit of 1,500MW transfer capacity of the 4
back-to-back convertors that interconnect the 50Hz grid in the east and the
60Hz grid in the west.
·
Establish a separate electricity
regulator in 2015. Many policy and regulatory functions are currently performed
by the Ministry of Trade & Industry.
·
Plans to introduce legislation in 2014
to introduce competition into the domestic market in 2016.
·
Plans to introduce legislation in 2015
to require operational and financial separation of lines and energy by about
2018. This would appear to stop short of full ownership separation.
·
Abolition of all price controls by
about 2018 (presumably only retail price controls).
It
appears that the current government-ordered disaggregation of the Tokyo Electric Power Company
(TEPCO) is a model for the legislation.
The editor comments
What
do we make of this ? One aspect of the popular
liberalisation approach that never seems to be discussed is that if a market is
created in the face of a shortfall of supply, prices will rise and may well
offset any benefits from competition (we’ve seen something along these lines
happen in New Zealand and Ontario, and the opposite happen in England and
Victoria when excess supply emerged). So does Japan have a shortage of
electricity supply ? 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. It would appear that as demand recovers and nuclear plants are
closed a shortfall of supply with respect to demand will emerge. So at a rough
guess, I’d say prices will rise.
North America
US – approving the Laredo – Lower Rio
Grande Valley line
Introduction
Pipes
& Wires #107 examined the planned 163 mile 345kV line from Laredo to
the Lower Rio Grande Valley in southern Texas, and noted that the Texas Public Utilities Commission
assessment of the “criticality” of this line would be significant. This article
examines the PUC’s recent approval of the application.
Re-capping the lines details
Key
details of the line include....
·
The
proposed 345kV line will stretch 163 miles from Lobo Substation near Laredo to
substations north of Edinburgh in southern Texas, and is expected to cost
$300m.
·
The
owner of the proposed line is Electric
Transmission Texas LLC, a joint venture between American Electric Power (AEP) and MidAmerican Energy Holdings.
·
The
ERCOT expected to file a Certificate of
Convenience and Necessity (CNN) application with the PUC in 2013 and complete
the line in 2016.
The PUC’s approval
On 9th
May the PUC unanimously approved ETT’s application
for a CNN, including a settlement with about 100 effected landowners along the
proposed line route. Understandably not everyone along the proposed line route
is thrilled about it, with some law firms already offering to challenge the
decision or improve the settlements.
Next steps
Detailed
design and negotiations for land access are expected to start soon, with line
construction beginning in 2014.
US – smart meters get the go-ahead in
Illinois
Introduction
Pipes
& Wires #106 noted Governor Pat Quinn’s
rejection of Senate
Bill 1652 despite both chambers of the General Assembly passing the Bill.
This article examines the passing of the replacement Senate
Bill 0009, which also had a rocky ride through Springfield’s corridors of
power.
Re-capping progress on the Bills
SB
1652 would’ve provided stronger mechanisms for electric companies like Commonwealth Edison to
recover the costs of smart meter roll-out. Quinn’s rejection claimed that the Bill
would result in “excessive financial burden on consumers, sweetheart deals, and
no guarantee of improved service”.
SB 1652 was subsequently replaced by SB
0009 which clarified some wording, and was passed into law as the General
Assembly over-rode a veto.
ComEd’s roll-out begins
ComEd
expects to start rolling out smart meters in late 2013 in a program that it
expects to complete in 2021. The expected benefits include reducing about
700,000 outages per year which are estimated to cost customers about $100m.
UK and
Europe
Germany – paying for renewable support
Introduction
Pipes
& Wires #119 examined the disquiet around who should pay for
Statkraft’s 800MW
Knapsack #1 gas-fired plant near Cologne to provide standby MW. This
article continues that theme by looking at how E.On
is operating its Irsching
units #4 and #5 to provide grid stability.
The Irsching units
Irsching
is a long-established generation site dating back to the late 1960’s, although
units #1 and #2 have already been decommissioned. The units that are providing
grid stability are...
·
Unit #4 – a 570MW gas-fired
combined-cycle.
·
Unit #5 – an 860MW gas-fired combined
cycle.
The issue
The
increasing penetration of renewables has led to increasingly intermittent
generation, which must be supported by quick-start plant. The added extra to
this is that grid operators such as TenneT
are required by the Renewable
Energy Act to give priority to purchasing and transmitting renewable
energy.
As
we saw with Knapsack, the generated MWh doesn’t adequately fund the high fixed
costs of maintaining quick-start generation. Accordingly, E.On had planned to
suspend Irsching’s operation which it said would result in higher costs to
electric consumers.
The agreement to continue operating
E.On
and TenneT recently hammered out an agreement that also has the support of the
Federal Network Agency (BNetzA)
that fixed costs will be paid to quick-start generation that are operated on
demand from grid operators for more than 10% of the time. It was also agreed
that E.On would not close Irsching #4 or #5 for at least 3 years.
The real policy issue
As
Pipes & Wires #119 commented, there seems to be a huge disconnect between
the “must have” security of supply that authorities clearly recognise, and the
need for standby generators to be paid for providing that security of supply.
It is therefore very pleasing to see an energy agency recognising that the high
fixed costs of standby plant actually do need to be paid for.
Finland – selling the grids ?
Introduction
News
recently emerged that state-controlled Fortum
is exploring the sale of its network businesses. This article examines the
proposed sale, and also looks at the wider trend of network sales and where it
might lead
A bit about Fortum
Fortum
is an electricity, gas and heat company that operates in the Nordic countries,
Russia, Poland and the Baltic countries. Annual revenues are about €6.1b, and
annual profit is about €1.8b. Fortum’s network business includes 156,000km of
lines supplying 1,600,000 customers in Finland, Sweden and Norway.
Fortum’s
strategy
has a strong bias towards unregulated energy, similar to many other large
energy companies such as E.On.
The proposed sale of the network
businesses
In
early 2013 Fortum decided to undertake a strategic review of future
alternatives, including possible sale of the electricity networks (which would
be aligned to its strategy). Although the distribution business is returning
about 8% on nett assets, Fortum believes that its
“value potential could be captured to the fullest extent in a different
setting” ie. it might be better for us to cash-out of
the network business and let a player focused on the distribution sector own
the networks.
What would a sale look like ?
Initial
estimates of a likely sale price are about €5b, or about €3,100 per customer
(which seems in line with other distribution network sales). Fortum has
appointed CitiBank and Danske Bank to explore possible sale options, with
industry gossip suggesting a sale is the most likely option.
The wider trends
There
seems to be a couple of trends at work here....
·
The need to reduce debt, generally by
selling assets.
·
The need to separate lines and energy
to comply with the EU
Third Package.
·
A widening gap between traditional
electric and gas companies who are focusing on unregulated energy opportunities
and markets, and investment funds who are increasingly owning
regulated pipes & wires.
Pipes
& Wires will re-visit Fortum as news emerges.
Germany – the battle for WACC
Introduction
Pipes
& Wires #74 noted that the German energy regulator Bundesnetzagentur (BNetzA)
decreed a pre-tax cost of equity of 9.29% for new assets and 7.56% for legacy
assets, ostensibly to incentivise new investment. This article examines a
preliminary court decision to those rates, and also looks at the rates the
BNetzA proposes to apply for the forthcoming regulatory periods.
Basis of the legal appeal
Several
gas and electric companies appealed the BNetzA’s 9.29% pre-tax cost of equity
for the 2008 – 2013 regulatory period, claiming that it was too low to
encourage investment and that about 11% would be more appropriate. Several gas
companies also claimed that gas businesses should be allowed an even higher
pre-tax cost of equity because they face additional investment risks.
The Court’s preliminary ruling
The
Dusseldorf Higher
Regional Court confirmed that firstly the BNetzA’s approach to calculating
the pre-tax cost of equity was appropriate, and secondly that the determined
rates were adequate. These rulings were not binding as the applicants had 1
month to file an appeal.
Proposed rates for the forthcoming
regulatory periods
The
BNetzA is proposing 9.05% for new assets and 7.14% for legacy assets for the
2014 – 2018 electricity price control and for the 2013 – 2017 gas control
period.
Australia
SA – the final water & sewage
tariff determination
Introduction
Pipes
& Wires #118 and #120
discussed the water & sewage determination that will apply in South
Australia from 1st July 2013 to 30th June 2016. This
article concludes that discussion by examining the Essential Services
Commission of South Australia’s (ESCOSA) Final
Determination.
Key features of the Final Decision
Key
features of the Final Determination are set out below.
|
Parameter |
Proposal |
Draft Decision |
Final Decision |
|
CapEx |
$1,100m |
$963m |
$983m |
|
OpEx |
$1,400m |
$1,280m |
$1,268m |
|
Opening
asset base |
$7,700m water $3,580m sewage |
To be stated in Final Decision |
$7,767m water $3,584m sewage |
|
Nominal
vanilla WACC |
7.98% |
Use of NV WACC disallowed |
Use of NV WACC disallowed |
|
Real
vanilla WACC |
5.57% |
4.87% |
4.5% |
This
ends Pipes & Wires coverage of the SA water & sewage tariff
determination.
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...
· PAS 55 training
course – Sydney, 25th – 26th June 2013.
· PAS 55 training
course – Sydney, 16th – 17th July 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
from any comments posted on Linked In, Face Book or similar by other parties.