From the
editor’s desk…
Welcome
to Pipes & Wires #127. First up we examine several regulatory decisions in
New Zealand, before examining some policy disconnects in the United States and
Germany. This issue then closes with a look at two energy business sales, one
that seems to be going full steam ahead and one that has come to a shuddering
halt.
Matters for attention (NZ)
Default Price Path reset
The
Commerce Commission recently released its timetable for compiling the default
price paths (DPP) that will apply to non-exempt EDB’s from the 1st
April 2015. Refer to the full article below.
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
In
September 2013 the Commerce Commission released 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 was held on 2nd October 2013 at the
Commission’s offices in Wellington.
New Zealand
NZ – setting the next electricity DPP
Introduction
The
Commerce Commission recently announced its timetable for compiling the default price paths (DPP) that non-exempt EDB’s will be
subject to from 1st April 2015. This short article examines that
timetable and notes the key outcomes of the process.
Legal framework
The
legal framework for regulating non-exempt EDB’s is set out in Subpart 6 of Part 4 of the Commerce Act 1986. The precise criteria that an EDB must
fulfil to be exempt are set out in s54D of the Act.
Commission’s timetable
Key
aspects of the Commission’s timetable include…
· Compiling and finalising the financial
model – November to December 2013.
· Gathering data – February 2014.
· Publication and consultation on Issues
Paper – February to March 2014.
· Publication, consultation and
submissions on Draft Determination – June to July 2014.
· Publication and submissions on updated
version of Determination – September to October 2014.
· Publication of Final Decision and
Reasons Paper – November 2014.
Interested
parties should consult the Commission’s official timetable.
NZ – submissions on the Orion CPP draft
decision
Introduction
In
August 2013 the Commerce Commission recently released its draft decision on
Orion’s customized price path (CPP) application, and sought submissions from interested parties. This article summaries the key themes
of those submissions.
Legal framework for the CPP
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 themes from the submissions
The
key themes from the submissions include…
· The draft decision does not provide
certainty on how the risks of a catastrophic event will be allocated to a regulated
infrastructure business.
· Concern over the possible ability of
regulated infrastructure businesses to claw back disaster related costs, when a
competitive business would broadly be unable to.
· Concern that the Draft Decision will
result in less network resilience than Orion proposed.
· Technical concerns over how the CPP
WACC incorporated the risk of a disaster.
· Concern over how the CPP Input
Methodologies will be interpreted and applied.
Next steps
The
Commission expects to release its Final Decision by late November 2014.
NZ – setting the WACC for CPP
applications
Introduction
The
Commerce Commission recently released its weighted average cost of capital (WACC) decision that will apply to all customised
price path (CPP) applications submitted during the 12 month period ending on 30th
September 2014. This article examines the key features of that decision, and
compares the decision to previous WACC decisions. Interested parties should
refer to the complete decision document.
Legal framework
The
WACC is compiled pursuant to clause 5.3.28 of the Commerce Act (Electricity Distribution Services
Input Methodologies) Determination 2010 (known to most of us Decision #710),
which is itself made pursuant to Part 4 of the Commerce Act 1986.
The recent WACC decision
The
Commission has determined the following WACC parameters…
|
Parameter |
3
year CPP |
4
year CPP |
5
year CPP |
|
Risk-free
rate |
3.42% |
3.71% |
3.95% |
|
Debt
premium |
1.65% |
1.75% |
1.85% |
|
Equity
beta |
0.61 |
||
|
Debt
issuance costs |
0.58% |
0.44% |
0.35% |
|
Leverage |
44% |
||
|
Cost
of debt |
5.65% |
5.90% |
6.15% |
|
Cost
of equity |
6.73% |
6.94% |
7.11% |
|
Midpoint
vanilla WACC |
6.26% |
6.48% |
6.69% |
|
75th percentile vanilla
WACC |
6.97% |
7.20% |
7.41% |
Previous WACC decisions
Some
of the Commissions’ previous WACC decisions are as follows.
|
WACC
decision applies to |
Approx
date |
Mid-point
WACC |
75th
percentile WACC |
|
Transpower |
July
2013 |
|
Vanilla
6.85% , post-tax 6.17% |
|
Vector
gas distribution, GasNet |
July
2013 |
|
Vanilla
7.65%, post-tax 6.97% |
|
Auckland
& Christchurch airports |
July
2013 |
|
Vanilla
8.00%, post-tax 7.75% |
|
All
electricity distribution |
April
2013 |
|
Vanilla
6.83%, post-tax 6.14% |
|
Maui
pipeline (gas transmission) |
February
2013 |
|
Vanilla
7.46%, post-tax 6.80% |
|
All
gas distribution and gas transmission DPP’s |
December
2012 |
|
Vanilla
6.63% |
|
Vector,
GasNet CPP’s |
December
2012 |
Vanilla
6.39% (5 years) |
|
|
Powerco
gas distribution |
October
2012 |
Vanilla
6.83%, post-tax 6.12% |
|
North America
US – reconciling policy disconnects
Introduction
News
emerged a few months ago that FirstEnergy plans to permanently deactivate its Hatfield’s Ferry and
Mitchell coal-fired generation plants in Pennsylvania. This article examines
the Pennsylvania Public Utilities Commission’s curious response to that announcement.
The generation plants
The
two generation plants involved are…
· Hatfield’s Ferry has three 570MW coal-fired steam
turbine generators, and is just over 40 years old. The plant is located near
Masontown on the Monongahela River.
· Mitchell has two 75MW coal-fired steam turbine
generators that are 65 years old and one 300MW steam turbine generator that is
50 years old. The plant is also on the Monongahela River.
FirstEnergy’s plans
FirstEnergy
plans to deactivate these two generation plants for the following reasons…
· The high cost of complying with the Mercury and Air
Toxics Standards (MATS).
· Continued low wholesale electricity
prices.
The
planned deactivations would result in FirstEnergy becoming a cleaner, lower
carbon electric company. The transmission grid operator PJM has indicated that
deactivating the 2,080MW will not affect grid reliability after initially
expressing concerns that it might.
The PUC’s response
The
PUC is expressing concern that the deactivations might affect reliability and
result in job losses, and claims to be proactively searching for options to
keep the plants open. The PUC went on to say that it is not intending to
exercise regulatory authority nor to make managerial decisions, but rather to
support the Pennsylvania electricity market and to ask the hard questions.
The policy disconnects – the editor
comments
Given
that FirstEnergy is simply responding to commercial and (federal) policy
drivers the PUC’s response seems rather odd. Perhaps the PUC should look beyond
FirstEnergy’s response, and look at the policy drivers that FirstEnergy is
responding to….
· Firstly there is the tension between the
PUC recognizing that on the one hand low wholesale prices are good for
customers, but on the other hand prices need to be sustainable for companies
like FirstEnergy.
· Secondly there is the environmental
compliance costs. Perhaps the PUC should direct its attention to Washington DC as
the ultimate source of these costs.
UK
and Europe
Germany – rethinking renewable
electricity
Introduction
It
seems that many countries are increasingly rethinking their renewable
electricity policies as prices escalate and generation fluctuates wildly. This
article examines recent trends in Germany.
Germany’s renewable electricity targets
The Directive on Electricity Production from Renewable
Energy Sources set a target of 12% renewable electricity by 2010. Germany
exceeded this target in 2007 with 14%, and in 2010 went on to announce the
following ambitious renewable electricity targets…
· 35% by 2020.
· 50% by 2030.
· 65% by 2040.
· 80% by 2050.
What about the cost of it all ?
After
being absent from the energy policy debate for many years, price has re-entered
the debate as Germany’s industrialists begin to question the cost of renewable
electricity as their heavy industries become increasingly uncompetitive. Media
reports suggest that during the 2013 year Germans will pay about €19b for their
electricity which would have otherwise cost about €3b on the market. Achieving
the renewables targets is estimated to cost about €1,000b over the next 25
years (presumably to only get as far as the 65% renewables by 2040).
What about security of supply ?
After
also being absent from the energy policy debate for many years, security of
supply has re-entered the debate as the increasing penetration of renewables is
leading to volatile generation and grid stability issues. This has become
enough of an issue to prompt a coordinated national study involving the
transmission grid companies who will recommend changes to grid operating
standards to better match supply with demand.
So where might this go ?
So
where might Germany go ? It would seem that the pursuit of renewables without
considering cost and security of supply will undermine what is left of
traditional manufacturing and smoke-stack industries. One way or another,
Germany’s policy makers are going to have to make some very clear decisions on
what balance of low emissions, competitive prices and secure supply they want.
Some additional thought provoking stuff
Pick
these links for a bit of extra thought provoking stuff…
· Energy market reform in Germany: What can we expect
?
· Germany looks to cut electricity costs.
· Green Power: Energy companies to close electricity plants.
· The Czech Republic on the verge of a blackout.
Germany – recommissioning coal-fired
plant to support renewables
Introduction
The
last few issues of Pipes & Wires have examined the seeming impasse around
the need for fossil-fired grid support on the one hand but an unwillingness to
pay for it on the other hand. This article examines the Bundesnetzagentur’s (BNetzA) recent insistence that E.On recommission the 250MW coal-fired
Staudinger #1 unit to ensure security of supply in the Rhine-Main region.
A bit about Staudinger
Staudinger is a 2,000MW coal-fired plant east of
Frankfurt. It has 5 units, of which #1 and #2 were commissioned in 1965.
The BNetzA’s decision
The
BNetzA is insisting that E.On cease dismantling Staudinger #1, and instead
recommission it for the winter of 2014 to ensure grid security in southern
Germany. The BNetzA goes on to express concern about grid security in the face
of an expected 5,600MW of capacity deficit by 2018, and specifically stated
that the new 96MW Darmstadt station was insufficient to provide the expected
grid security.
Even
though a further 1,680MW of coal-fired generation at Karlsruhe and Mannheim
will be commissioned over the next 2 years, most of the capacity will be offset
by the closure of 1,275MW of nuclear capacity at Grafenrheinfeld by December 2015.
The basis for E.On’s decision
There
seem to be several issues driving E.On’s decisions….
· The seeming impasse around paying for
renewable support.
· Expiry of Staudinger #1’s operating
permits.
· The requirement for increasing amounts
of electricity to be obtained firstly from renewable sources is squeezing
fossil-fired generation out of the market.
As a
closing remark, simply refer to closing remark of the previous article.
Ireland – selling Bord Gais Energy
Introduction
Pipes & Wires #121 examined the possible sale of Bord Gais subsidiary Bord Gais Energy (BGE). This article notes progress on
that sale, including the introduction of legislation enabling the sale.
What exactly is Bord Gais Energy ?
BGE operates
as a subsidiary of Bord Gais, which also owns 13,000km of gas pipelines. Bord
Gais itself is predominantly a state-owned company.
BGE
supplies 468,000 gas customers and 407,000 electric customers throughout Eire,
as well as 44,000 gas customers in Northern Ireland through its energy and
distribution subsidiary Firmus Energy. BGE also owns and operates 680MW of
generation capacity.
The planned sale process
The
sale process includes only the BGE customer base, the BGE generation and the
Firmus Energy customer base and distribution network – it will not involve the
Bord Gais networks in Eire. Barclays Capital is advising the Treasury on the
sale process, whilst the Royal Bank of Canada Capital Markets is advising BGE.
The Gas Regulation Bill
Key
features of the Gas Regulation Bill include…
· Part 2 establishes a subsidiary company
to own and operate the gas networks, and specifically prohibits the sale of the
Eire gas networks.
· Part 3 addresses the sale of the BGE
business, and addresses such matters as establishing an appropriate BGE
subsidiary and how the BGE business can be sold.
Key drivers for the BGE sale
Key
drivers for the BGE sale include….
· The full ownership unbundling required
by the EU’s Third Package.
· The need to improve scale of the gas
retailing business.
· The need to reduce Eire’s vulnerability
at the western end of the gas supply chain.
Next steps
The
next steps will include passage of the Gas Regulation Bill through the Dáil,
and then the actual sale of the business.
Australia
Tas – abandoning the retail business
sale
Introduction
Pipes & Wires #121 noted that Tasmania will enter Full
Retail Contestability (FRC) on 1st January 2014, for which a key
mechanism was to have been the sale of Aurora Energy’s existing retail customer base to at
least 2 private sector retailers. News emerged in late September 2013 that this
process has been abandoned on advice from Treasury. This article examines that
news and tries to find some answers amidst the political slagging.
The sale process
The
sale process was in full swing until later September 2013 when the Government
closed the sale on advice from Treasury. This sale process is occurring within
a wider framework of electricity sector reforms that inter alia will amalgamate the transmission grid Transend with
Aurora’s distribution business, and remove Hydro Tasmania’s monopoly.
The reasons for closing the sale
process
Amidst
the political slagging between the front benches, it has emerged that Treasury
believes that the likely sale price would be insufficient. There seems to be
mixed views about how intense competition will be after 1st January
2014, with some claiming it will be so intense that Aurora’s retail business
may not survive and others claiming that it won’t attract serious competition
at all. One possible line of thought is that the big retailers will be
comfortable enough with their current market positions.
An interesting twist
Usually
welfare and poverty groups express concern that privatisation will result in
price increases. In an interesting twist, welfare advocates are now concerned
that abandoning the privatisation will result in prices remaining high.
As
always, time will tell, so Pipes & Wires will comment further in early
2014.
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...
· 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.
· Fundamentals of Renewable
Energy – Singapore, 12th – 14th
November 2013.
· 8th Annual South African Energy Efficiency Convention -
Johannesburg, 13th – 14th November 2013.
· European Wholesale Energy
Markets – London, 3rd
– 4th December 2013.
· Fundamentals of Renewable
Energy – Sydney, 10th – 12th
December 2013.
· Fundamentals of the NZ
electricity industry – Wellington, 1st – 2nd
April 2014.
· Fundamentals of the NZ
electricity industry – Auckland, 6th – 7th
May 2014.
· 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.
Utility
Consultants Ltd accepts no liability for action or inaction based on the
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