Pipes & Wires

THE JOURNAL OF COOL ENERGY & UTILITIES STUFF

Issue 126 – September 2013

 

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.

 

House-keeping stuff

 

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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.