From the
editor’s desk…
Welcome
to Pipes & Wires #125. This month we focus on happenings in New Zealand,
mainly regulatory policy and regulatory decisions. We also note that the global
asset management standard ISO 55000 is nearing completion. We also consider
some policy disconnects and new technologies in Europe, and conclude this issue
with regulatory decisions in Africa and 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 late 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.
Topical issues for thought...
Civic
authorities are increasingly expecting electric companies to demonstrate
leadership in responding to and recovering from natural disasters. This
requires well thought out plans that understand the level of risk exposure and
the resources required to respond and recover. Over the years Utility
Consultants has helped several electric companies compile plans for recovering
from natural disasters, key asset failures and interruptions to key business
processes. To discuss this in more detail, pick here
or call Phil on (07) 854-6541.
Cool video clips
500kV isolator opening
This
10 second video clip
shows a 500kV substation isolator being opened. My guess is that it is load current, not just charging current, but it’s still pretty
cool.
Tesla Coils singing Dueling Banjo’s
I
guess most of us have read about Tesla Coils, or even mucked about with one.
This 2˝ minute video clip
shows 2 Coils singing Dueling Banjo’s.
Monowai Power Station (built in 1925)
This
5˝ minute video shows
Monowai Power Station in Western Southland. I spent a couple of weeks
rebuilding the 66kV switchyard during the summer of 1985/86, and another few
weeks investigating ferro-resonance of the local service transformer during the
summer of 1987/88.
Global
ISO asset management standard
Introduction
Most
of us are familiar with the UK asset management standard PAS 55, and how that
is being superseded by the ISO 55000 series of standards. This article examines
ISO 55000 in a bit more detail.
Structure of ISO 55000
ISO
55000 is based around 3 modules....
·
ISO 55000 – overview, principles and
terminology of asset management.
·
ISO 55001 – define the requirements for
a management system.
·
ISO 55002 – interpretation and
implementation guidelines for a management system.
Status of ISO 55000
Under
the development of ISO Project committee 251, ISO 55000 is expected to be
published in either late 2013 or early 2014. At the time of writing this
article, ISO 55000 has been approved to move to Final Draft status.
Pipes
& wires will comment further as ISO 55000 progresses toward publication. In
the meantime, pick here
to discuss ISO 55000.
New Zealand
NZ – draft decision on Orion’s CPP
application
Introduction
The
Commerce Commission recently released its draft decision on
Orion’s Customised Price Path (CPP) application. This article examines the key
features of that decision.
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.
Key features of the draft decision
Key
features of the CPP application and draft decision include...
|
Parameter |
Application |
Draft decision |
Final decision |
|
CapEx |
$397m |
$269m |
|
|
Price
increase on 1st April 2014 |
CPI + 15% |
CPI + 9.2% |
|
|
Price
increases on 1st April 2015, 2016, 2017 and 2018 |
CPI + 1.2% |
CPI |
|
|
Typical
domestic bill increase |
$8.50 per month. |
$5.20 per month. |
|
|
Total
revenue |
$896.4m |
$826.8m |
|
Next steps
The
Commission will receive submissions on the draft decision until 5pm on 20th
September 2013, followed by an opportunity for cross-examining until 5pm on 11th
October 2013. The final decision is expected by 29th November 2013.
NZ – progress on the Part 10 review
Introduction
The
former Electricity
Governance Rules 2003 provided the basis for many of the former Electricity
Commission’s work streams (much of which is being continued by the Electricity
Authority under the Electricity
Industry Participation Code). This article examines the review of the Metering
Code originally set out in Part D of the Rules which is being continued
under Part 10 of the Code.
Purpose of Part 10
The
purpose of Part 10 is to
define key terms, define the responsibilities for metering electricity and
various points on the grid, provide for recording of electricity movements, and
describing how those recorded movements are to be reconciled.
Key aspects of the Part 10 review
The
key aspects of the Part 10 review are to address problems that stem largely
from the original MARIA arrangement almost 20 years ago, viz...
·
Changes in structure and ownership of
the electricity value chain.
·
References to obsolete technical standards.
·
Inconsistencies and a lack of clarity
revealed by almost 20 years of practical use.
·
Difficulties in providing the
information necessary for customer switching.
·
The original MARIA code did not
identify many issues associated with smart meter technologies and data privacy.
Progress on the review
After
several consultations stretching back 3 years, and much work by both the
Authority and industry working groups, the 2 week transition phase of the Part
10 implementation is scheduled for the 2 week period from 16th August
to 28th August 2013.
NZ – assessing the effectiveness of
information disclosure
Introduction
The Commerce Commission has recently been
assessing how effectively information disclosure has promoted the purpose of Part
4 of the Commerce Act 1986 for Auckland
Airport. This article examines the Commission’s recent report to the
Minister of Commerce and the Minister of Transport.
Regulatory framework
Part
4 of the Commerce Act 1986 establishes the regulatory framework for regulated
goods and services as follows...
·
S52A(1) defines the purpose of Part 4.
·
Subpart 4 provides for information
disclosure regulation
·
Subpart 11 specifically covers airport
services.
The
Commission has carried its assessment of the information disclosure
effectiveness under s56G
of the Act.
Findings in regard to Auckland Airport
The
Commission’s findings include...
·
Information disclosure has been
effective in limiting Auckland Airport’s ability to earn excessive profits.
·
Information disclosure has been
effective in promoting innovation, service quality and pricing efficiency.
·
The Commission has been unable to
conclude whether information disclosure has been effective in promoting
operational efficiency, efficient investment and sharing of efficiency gains
(principally because of the time-frame over which these parameters must be
measured).
The
Commission also notes that the Input Methodologies used to estimate expected
profits are under review by the High Court, and it is possible that the Court’s
judgment may require the Commission’s conclusions to be altered.
Translating those findings to the
electricity lines and gas pipes sectors
It
is obviously early days to form a view, which the Commission has specifically
noted in regard to assessing whether information disclosure has been effective
in promoting operational and investment efficiencies. However the following
issues are worth considering....
·
Airlines appear to have significant
counter-veiling power in negotiating prices and service levels. In a similar
vein, we’ve seen how shipping companies have moved their business around
various ports which suggests both a high degree of counter-veiling market power
and competitive choices. Arguably, airlines (and shipping companies) seeking
the best deal would be able to obtain price and quality information through
commercial negotiation rather than relying on information disclosure.
·
One of the interesting observations to
emerge from the relaxing of regulation around competitive services (such as
connections and metering) in the UK electricity distribution sector is the
increase in innovation as the industry moves from a regulated model to a
competitive model. This strongly suggests that higher levels of innovation will
be driven by competitive arrangements rather than by regulation.
·
I’d be surprised if there were any
long-run operational inefficiencies in the electricity
lines sector. My observation is that most people work long and hard, and there
is certainly no clear evidence of poor productivity or goofing off.
·
I’d also be surprised if there were any
long-run investment inefficiencies. From what I’ve seen, investment has been
targeted at what customers want, and it seems to be done at least cost. If anything,
we probably need more investment after long periods of low investment following
the reforms of the early 1990’s.
NZ – setting the WACC
Introduction
The
Commerce Commission has recently published the weighted average costs of
capital (WACC) that will apply to Transpower, Vector and GasNet’s pipes
businesses, and to Auckland and Christchurch Airports for the information
disclosure year 2014 (year ending 30th June 2014).
Legal framework
The respective
WACC’s are compiled pursuant to...
·
Clauses 2.4.1 to 2.4.7 of the Commerce Act (Transpower
Input Methodologies) Determination 2012.
·
Clauses 2.4.1 to 2.4.7 of the Commerce Act (Gas
Distribution Services Input Methodologies) Determination 2012.
·
Clauses 2.4.1 to 2.4.7 of the Commerce Act (Gas
Transmission Services Input Methodologies) Determination 2012.
·
Clauses 5.1 to 5.7 of the Commerce Act
(Specified Airport Services Input Methodologies) Determination 2010.
The latest WACC decisions
The
WACC decisions are...
·
Transpower
|
Parameter |
Mid-point
estimate |
25th
percentile estimate |
75th
percentile estimate |
|
Vanilla
WACC |
6.13% |
5.42% |
6.85% |
|
Post-tax
WACC |
5.46% |
4.74% |
6.17% |
·
Vector and GasNet
|
Parameter |
Mid-point
estimate |
25th
percentile estimate |
75th
percentile estimate |
|
Vanilla
WACC |
6.84% |
6.03% |
7.65% |
|
Post-tax
WACC |
6.16% |
5.35% |
6.97% |
·
Auckland and Christchurch Airports
|
Parameter |
Mid-point
estimate |
25th
percentile estimate |
75th
percentile estimate |
|
Vanilla
WACC |
7.01% |
6.03% |
8.00% |
|
Post-tax
WACC |
6.77% |
5.79% |
7.75% |
These
WACC’s have been estimated as of 1st July 2013.
Previous WACC decisions
To
avoid confusion with other recently released WACC decisions, a summary is
presented in the table below...
|
PW issue |
Sector |
Applicable period |
|
Electricity
distribution |
Disclosure
year starting 1st April 2013 |
|
|
All
gas distribution and transmission DPP’s, any gas CPP’s proposed within 12
months of the decision. |
DPP’s
proposed to start on 1st July 2013, any CPP proposed to start
within 12 months of decision. |
|
|
Powerco
gas distribution |
Disclosure
year 2013. |
|
|
Gas
distribution and transmission |
From
1st July 2012. |
|
|
Electricity
distribution CPP’s |
12
month period from 30th September 2011 |
NZ – revamping the HSE laws
Introduction
The
government recently announced its Working Safer package of reforms in response
to the Independent Taskforce on Workplace
Health & Safety. This article examines some of the likely changes that
will occur.
Expectation of business leadership
The
Minister, the Hon. Simon Bridges,
clearly stated that achieving the target will “require leadership and action
from business and workers, working with government...”.
The emphasis of the popular media has certainly been on directors and managers,
so it remains to be seen just how much will be expected of front-line workers
and their immediate supervisors. I think we all accept that even the most
rigorous health & safety policies and strategies can be undone by a simple
thoughtless or careless action on the job.
Likely specific initiatives
Specific
initiatives that are likely to emerge include...
·
A new health & safety at work Act.
·
A large increase in funding for the
planned WorkSafe New Zealand.
·
A focus on high-risk areas.
·
A stronger focus on occupational harm
and on hazardous substances.
·
Stronger penalties, enforcement tools
and court powers.
It
will be important for electric and gas companies to ensure that the industry’s
excellent safety record is acknowledged by authorities, and that in particular
the industry doesn’t become unnecessarily encumbered with additional safety
requirements because it has the perception of being dangerous.
UK and
Europe
Central Europe – selling, closing or moving
generation plant
Introduction
A
few recent issues of Pipes & Wires have examined the seeming policy
disconnect between needing quick-start generation, and paying for it. This
article examines the plans by some of central Europe’s largest electric
companies to close generation, sell generation or physically move some generation
plant to emerging markets such as Turkey.
The policy disconnect
Pipes
& Wires #119 and #123
examined the view that stand-by plants such Knapsack #1 and Irsching should
be paid a standing annual charge. This seems at odds with conventional energy
policy that requires recovery of high fixed costs through MWh-based charges.
The shifting markets
Central
Europe’s demand for electricity seems to softening as their economy languishes,
while conversely the demand for electricity (and presumably also the policy
mechanisms to pay for it) in the emerging markets of Western Asia is
growing.
Plans to reshuffle central European
generation portfolios
A
couple of planned reshufflings that have been announced include...
·
E.On
is considering dismantling and moving a quick start plant from central Europe
to Turkey.
·
Vattenfall
is considering selling its central European generation assets.
·
RWE
is considering closing about 10,000MW of coal-fired plants that have declining
profitability.
The likely outcomes
Like
most things that are driven by supply and demand, it looks like central
Europe’s electricity supply curve will move to the left. Prices will, of
course, be determined by how much the supply curve also moves to the left, so
there will be a bit of wait and see. Putting aside the specific details of the
outcome, the declining willingness to invest in generation in central Europe is
definitely a worrying trend.
UK – grid storage takes a leap forward
Introduction
The
old adage that electricity can’t be stored is steadily giving way as large
battery technologies emerge and mature. This article examines a planned 6MW
battery installation at Leighton
Buzzard in the English county of Bedfordshire that goes under the broad
heading of Smarter Network Storage (SNS).
The SNS installation
The
SNS will be a 6MW / 10MWh device installed at the Leighton Buzzard 33kV primary
substation, and will be based on Lithium-Manganese battery technology. The
project is being partly funded by OFGEM’s Low Carbon Network (LCN) fund.
The business drivers
The
business drivers of the SNS include....
·
Providing peak MW from stored off-peak
energy.
·
Re-selling low cost off-peak MWh during
high cost periods (arbitrage).
·
Avoiding additional network capacity in
constrained areas, in this case about Ł6m.
·
Buffering renewable generation.
Comparison with other storage
arrangements
Pipes
& Wires has examined 2 other large battery installations....
·
Electric Transmission Texas’
4MW battery at Presidio,
Texas, where the primary purpose is to avoid a second 60 mile, 69kV line to
provide (n-1) security to a small town (Pipes
& Wires #86).
·
The 36MW battery bank at Duke Energy’s Notrees wind farm in Texas, where the primary purpose is to buffer the
intermittent nature of wind generation (Pipes
& Wires #101).
Africa
South Africa – rethinking Eskom’s mode
of business
Introduction
The National Electricity Regulator of South Africa
(NERSA) recently pruned Eskom’s
multi-year price determination #3 (MYPD3) from
R1,087b to R906b for the 5 year period starting on 1st April 2013.
This article examines some of the key features of that decision,
and also considers Eskom’s possible responses.
The regulatory model Eskom works within
A
key feature of Eskom’s regulatory model is that uncontrollable coal, oil and
gas costs cannot be passed through to the final tariffs, but instead have to be
absorbed. Those costs represent well over 50% of Eskom’s costs.
It
should be noted that MYPD1 and MYPD2 also approved significantly lower price
increases than Eskom sought.
Key features of the MYPD3
Key
features of the MYPD3 compared to what Eskom sought are...
|
Parameter |
Sought by
Eskom |
Approved by
NERSA |
|
Average
annual price increase |
16% |
8% |
|
Operating
costs |
R310b |
R265b |
|
Depreciation |
R185b |
R140b |
|
Capital
costs |
R337b |
R230b |
Likely responses
Eskom
has indicated that it cannot simply absorb something like R180b of disallowed
revenue over 5 years, and may well need to move beyond cost-cutting and trying
to improve efficiencies. Likely responses include...
·
Re-considering its security of supply
mandate.
·
Accepting that its’ credit rating may
be effected, and therefore both its access to debt funding and the cost of
debt.
·
Re-structuring individual business
units.
·
Re-considering its role in large
development projects once Kusile is
completed.
·
Advocating a pact that limits coal
price increases to 10%.
Pipes
& Wires will comment further as Eskom sets out it various responses.
Australia
Vic – the final water & sewage
decisions
Introduction
Pipes
& Wires #118 and #122
examined the initial steps and the Draft Decisions for 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 Final
Decision.
Comparing the Final and Draft Decisions
to the Water Plans
The Final
and Draft Decisions are compared to the Water Plans for each business below. In
particular, compare the 2 “Combined” columns which shows
that some sizeable pruning of allowable revenues has occurred.
|
Company |
Water Plan |
Draft Decision |
Final Decision |
|||
|
P0 |
X1-5 |
Combined |
P0 |
X1-5 |
Combined |
|
|
|
60.4% |
0.5% |
|
77% water 39% sewage |
0.5% |
|
|
33.9% |
0.0% |
31.7% |
20.6% |
0.0% |
19.2% |
|
|
33.6% |
0.0% |
34.9% |
24.8% |
0.0% |
22.8% |
|
|
33.7% |
0.0% |
35.8% |
25.8% |
0.0% |
24.6% |
|
|
6.1% |
-6.2% |
35.6% |
5.9% |
1.1 to 1.3% |
12.3% |
|
The
ESC shortened Melbourne Water’s regulatory period from 5 years to 3 because of
concerns about the quality of data used to capitalise the security payments for
the Victorian Desalination Plant. Accordingly the revenues and costs have been
truncated so that comparison is difficult.
This
concludes Pipes & Wires coverage of the Victorian water & sewage price
controls.
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...
· 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.
· Nuclear
Long Term Ops & Aging Management – Brussels, 24th – 25th
September 2013.
· Energy
& Utilities: Strategic Planning For Market Entry – Singapore, 25th
– 26th September 2013
· Africa and Middle East Oil and
Gas Summit – Abu Dhabi, 30th September – 1st October
2013.
· 5th
Annual Nuclear Construction Summit – Charlotte, 22nd –
23rd October 2013.
· Regulation
of Electricity Networks – London, 23rd – 24th October
2013.
· Regulation
of Electricity Networks – Cape Town, 28th – 29th
October 2013.
· Regulation
of Electricity Networks – Singapore, 4th – 5th
November 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
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