From the
editor’s desk…
Welcome
back to Pipes & Wires after the summer break. Whilst many in the northern
hemisphere have endured endless blizzards, we’ve had a fantastic summer in most
parts of NZ.
This
issue includes a very mixed bag of articles … a network sale in Scandinavia, a whole
bunch of regulatory determinations in New Zealand and Australia, progress on a
major HVDC link in Africa, and to close this issue, some significant regulatory
shifts in California.
Matters for attention
Amendments to NZS 7901 (Safety
Management Systems)
A
draft document for Amendment #1 to NZS 7901 is open for public comment until 21st
February 2014. For help with this issue, pick here or call Phil on (07) 854-6541.
Initial observations on EDB’s disclosed
forecasts
The
Commerce Commission recently released its initial observations on EDB’s disclosed forecasts.
Distribution pricing methodologies
The
Electricity Authority has released the results of its distribution pricing review. For help with this report or
developing your initial thoughts, pick here or call Phil on (07) 854-6541.
Recent client projects
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 from Utility
Consultants....
· Examining the economic efficiencies of
an EDB’s pricing methodologies.
· Advised on the wider philosophical and
potential tax issues of the way consumer discounts are paid.
· Prepared an independent engineer’s
report to justify proposed alternative asset lives.
· 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.
UK
and Europe
Finland – Fortum sells Finnish network
business
Introduction
Pipes & Wires #123 examined the proposed sale of Fortum’s electricity network business. This article notes the final
sale (subject to regulatory approval) of the Finnish component of that business
to a consortium of investors.
The buyer
The
buyer is a consortium of institutional investors led by First State Investments and Borealis
Infrastructure. This follows the now established pattern of electric
companies divesting grids and networks to institutional funds focused on
predictable regulated cash flows, whilst the electric companies themselves
focus on unregulated energy activities and reducing debt.
The sale price
The
sale price for the Finnish network was €2.55b. This was much greater than the
expected sale price of €1.8b, and implies an EBITDA multiple of about 16.6
which is much greater than the multiples of about 10 seen in previous grid and
network sales.
Likely sale of the Swedish and
Norwegian grids
Fortum
is now preparing its Swedish and Norwegian networks for sale. The higher than
expected sale price of the Finnish network has prompted analysts to predict a
higher price for the Swedish and Norwegian networks also, with a possible sale
price for all the networks of €9b which is obviously a substantial step up from
the previously estimated €5b.
Pipes
& Wires will comment further as the Swedish and Norwegian networks are
offered for sale.
New Zealand
NZ – determining the cost of capital
for the Maui pipeline
Introduction
The Commerce
Commission recently released its weighted average cost of capital (WACC) determination that will apply to the Maui gas
transmission pipeline for the year ending 31st December 2014. This
article examines the key features of that decision. Interested parties should
refer to the complete decision document.
Legal framework
The
WACC is compiled pursuant to clauses 2.4.1 to 2.4.7 of the Commerce Act (Gas Distribution Services Input Methodologies)
Determination 2012, which is itself made pursuant to Part 4 of the Commerce Act 1986.
Key features of the determination
The
Commission has determined the following WACC parameters…
|
Parameter |
Value |
|
Risk-free
rate (5 years) |
4.29% |
|
Debt
premium (5 years) |
1.80% |
|
Equity
beta |
0.79 |
|
Debt
issuance costs (5 years) |
0.35% |
|
Leverage |
44% |
|
Cost
of debt (5 year) |
6.39% |
|
Cost
of equity (5 years) |
8.62% |
|
Midpoint
vanilla WACC |
7.64% |
|
Mid-point post-tax WACC |
6.85% |
NZ – determining the cost of capital
for gas pipeline CPP’s
Introduction
The Commerce
Commission recently released its weighted average cost of capital (WACC) determination that will apply to any CPP application
by Vector (gas transmission or distribution) and
GasNet (gas distribution) prior to the next WACC determination in
December 2014. This article examines the key features of that decision.
Interested parties should refer to the complete decision document.
Legal framework
Theses
WACC’s are compiled pursuant to…
· Clauses 5.3.22 to 5.3.29 of the Commerce Act (Gas Distribution Services Input Methodologies)
Determination 2012, and
· Clauses 5.3.18 to 5.3.25 of the Commerce Act (Gas Transmission Services Input Methodologies)
Determination 2012.
Key features of the determination
The
Commission has determined the following WACC parameters…
|
Parameter |
Value |
|
Risk-free
rate (5 years) |
4.22% |
|
Debt
premium (5 years) |
1.70% |
|
Equity
beta |
0.79 |
|
Debt
issuance costs (5 years) |
0.35% |
|
Leverage |
44% |
|
Pre-tax
cost of debt (5 year) |
6.27% |
|
Cost
of equity (5 years) |
8.57% |
|
Midpoint vanilla WACC (5 years) |
7.56% |
NZ - summary of recent WACC determinations
Some
of the Commissions’ previous WACC decisions are as
follows.
|
WACC
decision applies to |
Approx
date |
Mid-point
WACC |
Other
WACC’s |
|
January
2014 |
Vanilla
7.64% |
Post-tax
from 6.06% to 7.68% |
|
|
December
2013 |
Vanilla
7.56% |
|
|
|
All
CPP applications before 30/9/14 |
September
2013 |
Vanilla
from 6.26% to 6.69% |
Vanilla
from 6.97% to 7.41% |
|
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% |
|
Pipes
& Wires will update this table as further determinations are made.
Africa
Ethiopia & Kenya – update on the
Eastern Electricity Highway
Introduction
Pipes & Wires #124 examined the EEH, an HVDC link between Ethiopia and Kenya for which construction was expected to
commence in September 2013. This article provides a quick update on progress.
Technical details of the EEH
Key
technical features of the EEH include....
·
1,066km
of 500kV overhead line (the precise line length differs between reports, but no
matter what, it is a very long line). Of the total length, about 437km will be
within Ethiopia and 631km within Kenya.
·
A
convertor station at Wolayta-Sodo in Ethiopia to interconnect with
EEPCO’s 400kV grid.
·
A
convertor station at Suswa in Kenya to interconnect with
KETRACO’s 400kV grid.
·
A
200MVAr synchronous condenser at KETRACO’s new Longonot 400kV substation in
Kenya.
Progress on the EEH
The
following significant steps appear to have occurred…
· Partial funding has been achieved.
· Tenders for substation construction
have been issued.
Pipes
& Wires will re-examine progress on the EEH as news emerges.
Australia
NSW,
ACT – setting the electricity distribution revenues
Introduction
The electricity
distribution network service providers (DNSP’s) in New South Wales and the
Australian Capital Territory recently submitted their Transitional Regulatory
Proposals for the period 1st July 2014 to 30th June 2015
to the Australian
Energy Regulator. This article
examines those proposals to provide some context for future analysis.
Legal
framework
The legal framework
covering the Transitional Regulatory Proposals is Division 2, Part ZW of Chapter
11 of the National Electricity Rules.
Summarising
the transitional proposals
· Key
parameters of ActewAGL’s
transitional proposal include…
|
Parameter |
Proposal |
Decision |
|
Estimated OpEx
(dist) |
$63.3m |
|
|
Estimated CapEx
(dist) |
$76.5m |
|
|
Opening RAB (dist) |
$700.7m |
|
|
Regulatory
depreciation (dist) |
$27.6m |
|
|
Smoothed revenue
(dist) |
$155.9 |
|
|
Estimated Opex
(trans) |
$12.5m |
|
|
Estimated CapEx
(trans) |
$9.9m |
|
|
Opening RAB
(trans) |
$154.0m |
|
|
Regulatory
depreciation (trans) |
$4.3m |
|
|
Smoothed revenue
(trans) |
$30.2m |
|
|
Indicative rate of
return |
8.79%
to 9.49% |
|
· Key
parameters of the AusGrid
transitional proposal include…
|
Parameter |
Proposal |
Decision |
|
Estimated OpEx (both) |
$571m |
|
|
Estimated CapEx (both) |
$1,020m |
|
|
Opening RAB (both) |
$14,390m |
|
|
Smoothed revenue
(dist) |
$2,004m |
|
|
Smoothed revenue
(trans) |
$270m |
|
|
Indicative rate of
return |
8.52% |
|
· Key
parameters of the Endeavour Energy
transitional proposal include…
|
Parameter |
Proposal |
Decision |
|
Estimated OpEx |
$291.8m |
|
|
Estimated CapEx |
$430.7m |
|
|
Regulatory
depreciation |
$62.6m |
|
|
Opening RAB |
$5,593m |
|
|
Smoothed revenue |
$987.7m |
|
|
Indicative rate of
return |
8.52% |
|
· Key
parameters of the Essential Energy
transitional proposal include…
|
Parameter |
Proposal |
Decision |
|
Estimated OpEx |
$469m |
|
|
Estimated CapEx |
$552m |
|
|
Regulatory
depreciation |
$99m |
|
|
Opening RAB |
$6,790m |
|
|
Smoothed revenue |
$1,293m |
|
|
Indicative rate of
return |
8.52% |
|
Pipes & Wires
will make further comment as the AER’s decisions emerge.
Vic - setting the electricity
transmission revenue
Introduction
The Australian
Energy Regulator (AER) recently delivered its Final Decision for SP AusNet’s electricity transmission business for
the 3 year period commencing on 1st April 2014. This article
examines that Final Decision.
Legal framework
The
prevailing legal framework is Chapter 6A of the National Electricity Rules. The Rules are made pursuant to the National Electricity Law.
Key features of the determination to
date
Key
features of the determination to date include...
|
Parameter |
Proposal |
Revised
Proposal |
Final
Decision |
|
CapEx |
$575m |
$541.7m |
$513.1m |
|
OpEx |
$657.6m |
$599.6m |
$560.0m |
|
Opening
RAB |
$2,721.3m |
$2,869m |
$2,876.9m |
|
Depreciation |
$239.1m |
$239.8m |
$242.7m |
|
Nominal
Vanilla WACC |
7.19% |
7.43% |
7.87% |
|
Max
Allowable Revenue |
$1,597.8m |
$1,594.2m |
$1,600.0m |
This
concludes Pipes & Wires analysis of the SP AusNet transmission
determination.
Tas – setting the electricity transmission
revenue
Introduction
The electricity
transmission grid in Tasmania, Transend,
recently submitted its Transitional Revenue Proposal to the Australian Energy Regulator for the
1 year transitional period commencing on 1st July 2014. This article
examines the key features of that Proposal and sets a framework for future
analysis.
Legal
framework
The usual legal
framework for transmission determinations is set out in Chapter 6A of the National
Electricity Rules. Recent changes to
Chapter 6A have required Transend to submit a Transitional Revenue Proposal as
a 1 year placeholder for the period 1st July 2014 to 30th
June 2015.
Key features of the determination to
date
Key
features of the determination to date include...
|
Parameter |
Proposal |
Decision |
|
CapEx |
$52.0m |
|
|
OpEx |
$45.7m |
|
|
Opening
RAB |
$1,416.8m |
|
|
Depreciation |
$21.8m |
|
|
Nominal
Vanilla WACC |
8.43% |
|
|
Smoothed
Revenue Requirement |
$215.5m |
|
Pipes & wires
will comment further as the AER’s decision emerges.
North America
US – California approves AB 327
Introduction
Pipes & Wires #126 examined California’s Assembly Bill 327 under the heading “unwinding the
subsidies in California”. This article notes that several amendments to AB 327
occurred as it successfully worked its way through to the Governor’s office.
Unwinding the subsidies
The
context of the analysis in Pipes & Wires #126 was the dismantling of the
subsidies inherent in the low block tariffs for customers who me specified
income criteria. AB 327 proposed to remove the low block tariff caps so that
electric companies could develop tariffs that reflect the true economic cost of
supply.
Amendments to the Bill
Various
amendments to the wider Bill were made as it progressed through the legislature,
which included…
· Removal of the curtailing of nett
metering that would’ve taken effect at the end of 2013. This effectively means
that an electric company’s connected customers can continue to pay on a nett
basis, effectively reducing their contribution to the true economic cost of
operating the network.
· Eliminating the uncertainty of how the
existing nett metering cap is to be calculated.
· Removing the 33% ceiling on the
Renewable Portfolio Standard, and instead making that 33% a floor.
The
passage of the Bill is undoubtedly a big win for the solar panel industry, but
apparently a big loss for the intended removal of subsidies.
Approval of the Bill
Governor Jerry
Brown signed AB 327 into law in October 2013.
General stuff
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...
· Kazakhstan Oil & Gas Summit – Almaty, 27th
– 28th February 2014.
· Third annual Downstream Energy Sector conference – Auckland, 5th
– 6th March 2014.
· Indonesia Oil & Energy Summit – Bali, 11th
– 12th March 2014.
· East Africa Oil & Gas Summit – Dar Es Salaam, 27th – 28th March 2014.
· Fundamentals of the NZ
electricity industry – Wellington, 1st – 2nd
April 2014.
· Electric Utility
Transmission Ratemaking – Pasadena, 23rd – 24th
April 2014.
· Fundamentals of the NZ
electricity industry – Auckland, 6th – 7th
May 2014.
· Libya Oil &
Gas – London, 29th – 30th May 2014.
· European Wholesale Energy
Markets – London, 11th – 12th
June 2014.
· Africa Oil & Gas Expo –
Johannesburg, 9th – 10th October, 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
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,
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