From the editor’s
desk…
Welcome to Pipes & Wires #126,
which starts with a quick analysis of an acquisition deal in New Zealand and
some guesses about possible policy shifts if the Liberal-National Coalition win
the Australian election. We then turn to the United States to examine a
municipal buy-out of an investor-owned electric company and how subsidies might
be unwound in California. From there we go to Europe to examine regulatory
policy, investment trends and allegations of anti-competitive behavior. This
issue closes with an update on Nigeria’s privatisation program.
Matters for attention (NZ)
Safety Management Systems (NZS 7901)
Changes are being proposed for the
Safety Management Systems (NZS 7901) that all electric companies have to have
implemented. These changes include...
·
Better aligning the risk aspects of NZS
7901 to ISO 31000 and NZS 4801.
·
An increased emphasis on leading KPI’s.
For assistance in interpreting or
implementing these changes, pick here or
call Phil on (07) 854-6541.
Potential amendments to Input Methodologies
Anytime now the Commerce Commission will release a Process & Issues Paper regarding
amendment to the Input Methodologies that affect an electric or gas company’s
incentives to reduce expenditure under a Part 4 price-quality path,
specifically the incremental rolling incentive schemes described in decisions NZCC #17, #26, #27 and #28.
A workshop is planned for the afternoon
of 2nd October 2013 at the Commission’s offices in Wellington.
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.
Cool video clips
Electric cables the way they used to be (1944)
This 15 minute video
clip
provides an interesting, if somewhat patronising, view of the way electric
cables were made in the UK in the 1940’s. It’s probably worth remembering that
cables of this vintage are still in use around the world.
Steam turbines made simple (1946)
This 8 minute video
clip
explains how a steam turbine works, especially how the fixed blades re-direct
the steam on to each subsequent set of rotating blades.
New Zealand
NZ – Brookfield Infrastructure sells Powerco stake
Introduction
The sale of Brookfield Infrastructure Partner’s 42% stake in Powerco to a group led by AMP Capital comes amidst exciting times for the NZ energy sector. Now
that the deal is pretty much concluded, this article examines the deal and some
related issues.
Details of the deal
The deal was comprised of the sale of
the 42% of Powerco’s equity shares owned by Brookfield Infrastructure, and was
expected to sell for between $350m to $510m. Short-listed bidders included...
·
China State Grid Corporation, advised by Macquarie Capital.
·
A group led by AMP Capital, advised by
AMP Capital.
·
Canadian Pension Plan Investment Board, advised by Goldman Sachs.
The owner of the other 58% stake in
Powerco, QIC, did
not bid. The successful bidder was AMP Capital, with a bid of $525m which is still
subject to approval by the Overseas
Investment Office.
Reshuffles in Powerco’s ownership
Powerco’s ownership has reshuffled over
the last few years....
·
Sale of 100% of Powerco to Prime
Infrastructure in November 2004 (refer to Pipes & Wires #32, #34 and
#35).
·
Prime Infrastructure’s successor
company Babcock & Brown Infrastructure sold 58% of Powerco to QIC (refer to
Pipes & Wires #77 and #80).
·
Babcock & Brown’s successor company
Brookfield Infrastructure sold its 42% stake to AMP Capital.
Australia
Aus – possible shifts in energy & infrastructure policy
Introduction
Australia goes to the polls this coming
Saturday to elect a Prime Minister, with many media polls suggesting that a Liberal-National Coalition will oust the Labor Party from Canberra. This article examines the likely shifts in
energy & infrastructure policy if a change of government does occur.
Examining the likely policy shifts
If the Coalition does win the election,
we could expect to see the following policy shifts...
·
A prompt repeal of the carbon tax,
although the Coalition will retain a commitment to a 5% reduction in CO2
emissions by 2020. However funds used to purchase overseas carbon credits will
instead be used to reduce emissions within Australia.
·
Suspending and then shutting down the Clean Energy
Finance Corporation.
·
Development of a rolling 15 year
infrastructure plan that specifically allocates $10b to highway projects.
·
Possible development of coal seam
methane in NSW.
·
Tax incentives for smaller gas
exploration and development companies.
·
More “certainty” through the
publication of a new energy white paper.
The Coalition has said that repealing
the carbon tax will a job for Day 1 in office, so Pipes & Wires might be
able to comment sometime over the next few months.
North America
US – turning Boulder into a Muni
Introduction
News emerged last month that the City
of Boulder, Colorado is proceeding with its plans to purchase Xcel Energy’s distribution assets and run those assets as a Muni. This
article summarises the background and examines recent events.
Background
Boulder’s plans to Muni-ise appear to
go back to at least 2004 when it commissioned a report which concluded that the
City could feasibly purchase Xcel’s distribution assets and keep tariffs comparable to Xcel’s. These plans were shelved in 2008 when Xcel selected
Boulder for its SmartGridCity
program, but were dusted off in 2011 when negotiations to develop a wind farm
broke down.
Plans to turn Boulder into a Muni
The City of Boulder planned the Ballot
2C vote for April 2013. Ballot 2C would authorise the City to form a Muni and
issue bonds to fund the purchase of Xcel’s distribution assets providing that
the Muni’s tariffs would be no greater than Xcel’s at the time the Muni starts.
In August 2013 the City voted 6 to 3 in
favor of forming a Muni, and additionally gave voters the opportunity to set an
upper limit on key costs of $214m and gave the City the power to file a
condemnation lawsuit if negotiations breakdown. The process would center around
appraising Xcel’s distribution system and then negotiating to buy it, which
several commentators claim is likely to result in the condemnation lawsuit
being triggered.
So what do we make of all this ?
Pipes & Wires #119 set out some of the complex cost and performance issues
that forming a Muni would supposedly need to address, but I guess the headline
measure in Boulder’s voters and electric customers minds will be the tariffs.
Sure there has been much talk about such noble things as increasing renewable
energy, but I’m picking that if tariffs do increase more than what they
would’ve done under continued Xcel ownership hard questions are going to put to
the City.
That then begs the question of whether
the City might try to keep electric tariffs artificially low in order to be
seen to be making Muni-ising work, and then perhaps quietly fund any shortfall
from property taxes. One way or another it would seem that the loss of scale
and planned level of renewables is unlikely to reduce costs.
US – unwinding the subsidies in California
Introduction
Low electric tariffs that result in
subsidies for specific classes of customers are a legal requirement in many
jurisdictions. This article looks at Assembly Bill 327
that is currently working its way through the California legislature.
Background
During the California energy crisis
around 2000 and 2001, the Public Utilities Code was amended to include inter
alia a number of clauses that have required electric companies to establish
low block tariffs for customers who met specified income criteria to ensure
that those customers can access a reasonable monthly kWh consumption at an
affordable price. The lost revenue resulting from these low block tariffs has
required increasing numbers of higher tariffs for higher levels of kWh consumption
to be introduced to adequately recover increasing costs.
The purpose of AB327
The core purpose of AB327 is to remove
the tariff caps that were established during the energy crisis so that electric
companies can propose tariffs that better reflect the true cost of supply,
which should ease the subsidy from those who use more kWh per month to those
who use only the lowest block of kWh. The existing mechanisms that provide a
safety net for those who genuinely meet federally mandated income criteria or
who are medically dependent will be expanded.
Progress of AB327
AB327 was introduced to the Assembly in February 2013. By May 2013 the Bill had passed through
the various committees and 3 readings, and was ordered to the Senate by a vote of 66 to 4. At the time of writing this article
the Bill had been read twice in the Senate and was waiting in committee.
Pipes & Wires will examine the
final outcome of AB327 as it move from the Senate to the Governor’s office.
UK and
Europe
UK – compiling the 2015 - 2020 water price control
Introduction
The UK water and sewage regulator OFWAT recently announced the final methodology and expectations that will apply for the 2015 – 2020 control period. This article
follows on from OFWAT’s analysis of some very significant issues (Pipes & Wires #110 and #119),
and examines the key features of the final methodology and expectations.
Targeting controls
OFWAT has determined that it will
target controls as follows....
·
Separate controls will be implemented
for Wholesale and for Retail.
·
Wholesale water and sewage prices will
be subject to total revenue control.
·
Retail household prices will be subject
to total revenue control with an annual revenue adjustment factor
·
Retail non-household prices will be
subject to average revenue control with a gross margin mechanism, with the view
that this will provide a degree of backstop protection as competition emerges.
·
Demand side initiatives and customer
leak repairs will be based in the Retail parts of the businesses.
·
Housing development services will be
allocated to the Retail parts of the businesses.
Proportionate regulation
OFWAT has signaled a move away from
highly prescriptive price controls, and instead intends to adopt a risk-based
review of the water companies business plans that will examine 4 key areas...
·
What each companies proposed customer
outcomes are, and what incentives are in place to ensure delivery.
·
The costs of both Wholesale and Retail
activities.
·
How each company’s business plan
balances risks and rewards amongst current customers, future customers, the
environment and investors.
·
The impact of each company’s proposals
on customer prices, and the ability to finance its operations.
Next steps
The next steps in this approach are for
OFWAT to publish its financial model, for companies to submit their business
plans, and then for OFWAT to publish its risk-based review results and then its
final determinations.
Europe – following the money
Introduction
A couple of recent Pipes & Wires
articles have indicated an emerging trend of investment capital fleeing firstly
grids and networks in preference to energy supply, and now secondly fleeing the
European Union (EU). This article examines some of the issues behind that
worrying trend.
The emerging trend
The EU’s third package of energy reforms that required separation of lines and energy was expected
by the politicians to encourage investment in lines, whilst those in the
industry concluded the opposite. Firstly we saw the large European electric and
gas companies like E.On, RWE and EDF
migrate their capital from their electricity networks and gas pipelines into
generation plant with the flip side that some state-owned transmission grids
like TenneT
increased their reach. Secondly we’ve seen what appears to be the start of
capital flight from the EU into emerging markets that provide greater
investment certainty.
The underlying issue
The underlying issue is undoubtedly investment
certainty. Over the last few years we’ve seen the EU’s expectations that political
intervention will encourage investment, when in fact it appears to have done
the exact opposite. The most recent impasse around needing quick-start gas
turbine plant to buffer wind and solar on the one hand, but expecting that gas
turbine plant to be funded by a MWh mechanism on the other hand is already
prompting the large European electric companies to migrate their capital to
emerging markets that provide greater investment certainty.
The possible outcomes
Unless a political awakening occurs, it
would appear that there will only be 1 outcome .... a decline in investment in
lines and very likely also in generation, which means declining reliability and
security of supply. That spells bad news for customers, those very same
customers that regulators and regulation purport to help.
Bulgaria – allegations of anti-competitive behavior
Introduction
Obstructing or denying third party
access to pipes & wires is a whole body of law in itself, and a fascinating
one at that. This article examines allegations that Bulgarian Energy Holdings and its subsidiary gas transmission and storage company Bulgartransgaz EAD has prevented potential competitors from accessing its
pipelines.
Wider competition issues
One of the key issues of competition
law is whether an incumbent pipes & wires owner must allow third parties
including potential competitors to access its assets, and on what terms that
access must be provided. This in turn gives rise to several issues...
·
Whether or not the incumbent pipes
& wires business is owned by the government. Most of us wouldn’t have a
problem with a government using its own businesses to facilitate reform (and
possibly accepting a lower return), but it gets a bit murky when a privately
owned business gets used as an instrument of policy with no obvious
compensation.
·
Whether the incumbent pipes & wires
business also owns other segments of the value chain, and what incentives that
might provide to prevent competitor access eg. if an electric transmission grid
company also owns generation plant that competes with third party generation (refer
to the article on Czech electric company CEZ in Pipes & Wires #105).
·
The profit that can be recovered from a
third party access agreement. This can range from less than short-run costs to
a full risk-adjusted return, but given the heavy regulation of such agreements
the observation is that profits tend toward the lower end of that range.
The allegations against Bulgartransgaz
The allegations against Bulgartransgaz
are based on breaches of Article 102 of the Treaty on the Functioning of the European Union, and include...
·
Explicitly and tacitly refusing or
delaying third party access to its assets.
·
Suspicions that capacity that
Bulgartransgaz claimed to be reserve capacity was not in fact genuinely
required, and was withheld from the market.
Where might this end up ?
It is early days, and the EU has a lot
of work ahead to determine if the allegations against Bulgartransgaz are
correct. If the allegations are substantiated, however, the implications could
be significant as we note from the following 2 anti-trust cases in the EU,
viz....
·
Pipes & Wires #105 examined allegations that Czech electric company CEZ was favoring its sister company CEPS when allocating
transmission grid capacity access. CEZ offered to divest about 800MW to 1,000MW of generation capacity, which the EU
accepted and made legally binding.
·
Pipes & Wires #88 noted E.On’s commitment to divest its transmission grid
subsidiary E.On Netz and
4,800 MW of generation capacity in return for the Commission dropping a
possibly damaging anti-trust investigation
Pipes & Wires will comment further
as the EU’s investigation proceeds.
Spain – approving the energy sector reforms
Introduction
The Spanish energy sector has an
accumulated deficit of about €26b. The government recently announced a reform
package aimed at fixing what has been called “structural revenue imbalances”,
or what I guess could be called “not charging enough”. This article examines
the likely cause of the deficit, and what the proposed reforms embody.
Likely causes of the deficit
It would appear that loans made to
solar energy companies ... of the order of €30b ... are much of the cause of
the deficit, which is increasing at about €4.5b per year. The cost of these
loans has not been fully reflected in electric tariffs, hence the deficit.
The proposed reforms
The proposed reforms appear to be 3
pronged....
·
Establishing new tariff structures for
renewables, and for transmission and distribution aimed at ensuring returns are
about 2% to 3% above the 10 year government bond rate.
·
Amending payment for peak MW, network
access and tariffs of last resort.
·
Establishing new market mechanisms for
interruptibility and allowing combined cycle gas turbine plants to be
hibernated.
Energy Minister Jose Manuel Soria has
indicated that the burden of fixing the deficit will lie as follows...
·
Regulated electric companies are likely
to face a reduction in allowable costs of €2.7b per year.
·
Customers will pay an extra €900m per
year.
·
The government will provide a €900m
subsidy per year.
What should we make of all this ?
From the details that have emerged so
far, it would appear that....
·
The renewables sector has been sent a
clear message that their day in the sun (and probably in the wind also) has
come to an end. It’s no secret that Germany and the UK are also wrestling with
higher electricity prices attributed to high levels of renewables.
·
It remains to be seen whether the 10
year government bond rate plus 3% will be an acceptable long-term return for
wires businesses. Some careful thought about such rates will be necessary given
the emerging pattern of Europe’s largest electric companies migrating their
capital from wires to energy (and potentially from Western Europe to emerging
markets).
·
Recognition of the high fixed costs of
peaking plant is a good start, but it’s the final €/kW/year that will encourage
investment, not the fancy rhetoric about needing quick-start plant to support
renewables.
·
It’s
not clear how reducing the industry’s allowable costs will work. The industry’s
true costs are what they actually are, not what a government agency decrees.
Electric companies can respond in 1 of 2 ways ... either reduce investment
levels to match (reduced) revenue, or just invest anyway without recovering the
costs.
My guess is that the investment trends
that will define the future state of the industry will be defined fairly
quickly, so the success or otherwise of the reforms will become readily
apparent.
Africa
Nigeria – update on the generation privatisation
Introduction
Nigeria is currently privatising 80%
stakes of its 10 generation companies (refer Pipes & Wires #121). This article examines an astounding 378 short-listed
bidders.
Background
The generation companies are wholly
owned by the Niger Delta
Power Holding Company
(NDPHC), which is in turn owned by 3 tiers of government. The NDPHC’s key
objective is to implement the National Integrated
Power Plan (NIPP).
The short-lists
The number of short-listed bidders for
each generation plant is as follows...
Generation
plant |
Capacity |
Type |
No. of bidders |
Bariam |
|
|
46 |
Benin (Ihovbor) |
508MW |
Open-cycle gas turbine, built to
accommodate conversion to CCGT |
44 |
Omotosho |
513MW |
Open-cycle gas turbine |
42 |
Egbema |
381MW |
Open-cycle gas turbine, built to
accommodate conversion to CCGT |
41 |
Omoku |
265MW |
Open-cycle gas turbine, built to
accommodate conversion to CCGT |
41 |
Geregu |
506MW |
Open-cycle gas turbine, built to
accommodate conversion to CCGT |
39 |
Calabar |
634MW |
Open-cycle gas turbine, built to
accommodate conversion to CCGT |
37 |
Ogwurode |
|
|
36 |
Olaoje |
|
|
30 |
Olorunsogo |
754MW |
Combined-cycle gas turbine |
30 |
The next steps will include site
inspections, finalising bids and announcing the winning bids.
Fitting the context of the NIPP
One of the objectives of the NIPP is to
attract private sector funding so that modernisation of Nigeria’s electricity
system is not funded from tax revenues, and in particular to increase
generation capacity. On the face of it, the huge number of bidders would
suggest strong investor interest presumably with an eye to converting the many
open-cycle GT’s to combined-cycle plants.
Pipes & Wires will closely watch
this one, as I’m interested to see whether investor interest remains strong and
what the actual sale prices are.
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. It
looks really cool printed in color as an A2 or A1 size.
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 – 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.
· Energy Risk Asia
conference – Singapore,
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.
· Demand Side
Response & Dynamic Pricing –
Singapore, 23rd – 24th October 2013.
· Regulation of
Electricity Networks – Cape Town,
28th – 29th October 2013.
· Regulation of
Electricity Networks – Singapore, 4th
– 5th November 2013.
· European
Wholesale Energy Markets –
London, 3rd – 4th December 2013.
· European Wholesale
Energy Markets – London, 11th
– 12th June 2014.
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)
·
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.
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