From the
editor’s desk…
Welcome
to Pipes & Wires #132. This month we examine some regulatory decisions in
New Zealand, some policy shifts in Australia and some deals and a regulatory
decision in Europe.
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· Examining the economic efficiencies of
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· Advised on the wider philosophical and
potential tax issues of the way consumer discounts are paid by EDB’s.
· 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
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· Performed various substation growth and
reinforcement assessments.
· Performed network physical and business
risk studies.
· Compiled disaster recovery and business
continuity plans.
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New Zealand
NZ – issues for the 2015 DPP reset
Introduction
The
Commerce Commission is starting to compile the Default Price-Quality Path (DPP)
that will apply to the 17 non-exempt electricity distribution businesses
(EDB’s) from 1st April 2015. This article examines the Process & Issues Paper that was released in late March.
Legal framework
The
legal framework for the DPP is as follows…
· Part 4 of the Commerce Act 1986 provides the broad framework for
regulated goods or services.
· Subpart 6 of Part 4 specifically addresses the
Default and Customised Price-Quality Regulation, with ss 52O and 52P setting out the specific features that
a DPP must include.
· s54D(1) defines the criteria that an EDB must
meet to be exempt from the DPP.
Issues raised in the paper
The
recently released Paper seeks feedback from industry participants on the
following issues, and notes the Commission’s proposed approach and identified
issues…
· Forecast OpEx. The Commission expects
to retain the approach used for the November 2012 reset in which the initial
OpEx was updated as the key OpEx drivers changed.
· Forecast CapEx. The Commission is
seeking alternatives to relying solely on EDB’s own CapEx forecasts.
· Forecast revenue growth. The Commission
proposes to retain its’ existing approach, but updated for more recent
information.
· Rates of change in price. The
Commission proposes to use its’ previously applied approach to determining the
long-run productivity improvement rate.
· Quality of service incentives. The
Commission is proposing to include an incentive scheme that links revenue
rewards and penalties to supply reliability targets.
· Performance incentives. The Commission
is considering including mechanisms to incentivise expenditure control, energy
efficiency, demand management and loss reduction.
· Treatment of uncertainty and risk. The
commission expects to adopt an approach similar to that of the 2012 reset,
subject to resolving concerns with recovering pass-through costs and treatment
of catastrophic risk.
· Outstanding claw-back. The Commission
proposes to spread any outstanding claw-back amounts equally across all 5 years
of the regulatory period.
Next steps
The
Commission will accept submissions until 5pm on Wednesday 30th
April, and will accept cross-submissions until 5pm on Thursday 15th
May. The Commission then expects to release its Draft Determination on 30th
June and its Final Determination on 28th November.
NZ – gas under pressure
Introduction
The
Commerce Commission recently determined the cost of capital (Vanilla WACC) that will apply to any
customised price path (CPP) proposed by Powerco for its gas distribution
business before March 2015. This article examines the key features of that
determination.
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) |
4.12% |
Debt
premium (5 years) |
1.85% |
Equity
beta |
0.79 |
Debt
issuance costs (5 years) |
0.35% |
Leverage |
44% |
Pre-tax
cost of debt (5 year) |
6.32% |
Cost
of equity (5 years) |
8.50% |
Midpoint
vanilla WACC (5 years) |
7.54% |
75th percentile vanilla
WACC (5 years) |
8.35% |
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 |
Powerco
gas CPP applications before 3/15 |
March
2014 |
Vanilla
5-year 7.54% |
Vanilla
5-year 8.35% |
Maui
pipeline (gas transmission) |
January
2014 |
Vanilla
7.64%, post-tax 6.85% |
|
Vector,
GasNet CPP applications before 12/14 |
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% |
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% |
|
NZ – declining security of electricity
supply
Introduction
The Institute for 21st
Century Energy recently released the 2013 edition of its International Index Of
Energy Security Risk. This article examines the key global features and summaries
how New Zealand has performed over time.
Overview of the Index
The
2013 edition is the Institute’s 2nd Index that aims to provide a
comprehensive comparison of the energy security risks facing 25 large energy
consuming nations since 1980. A particularly noteworthy conclusion is the
decoupling of natural gas prices from crude oil prices in the United States as
a result of moving to market price setting, which has led to a sharp drop in
gas prices and may result in the US becoming a nett gas exporter.
Global summary
A
quick summary of global Risk Scores are as follows…
· Norway has the most secure national
energy supply with a Risk Score of 909.
· Mexico is ranked 2nd with a
Risk Score of 928.
· New Zealand is ranked 3rd
with a Risk Score of 955.
· The OECD average Risk Score is 1,047.
· The Ukraine is ranked least secure at
25th with a Risk Score of 2,250.
NZ’s energy security position
A
few salient points include…
· NZ has consistently been within the top
4 most secure national energy supplies since 1980. Interestingly enough, Norway
has jumped from 8th position in 2000 to 1st in 2005
whilst Mexico held 1st place from 1980 until 2000 when it dropped to
2nd.
· NZ’s Risk Score was 955 is in contrast
to a Risk Score of 1,025 in the previous year, however this is still a worsening
in absolute terms since 1980 when the Risk Score was 835.
· NZ’s Risk Scores over time have been
consistently lower than the OECD average, although the Index does note that
NZ’s energy security is now worsening more rapidly than for the OECD as a
whole.
NZ’s energy productivity
A
few salient points include…
· NZ uses slightly more energy than other
OECD nations to create $1 of GDP.
· The trend in CO2 emissions
is worse than the OECD average, but emissions intensity is broadly in line with
OECD trends.
NZ’s energy prices
A
few salient points include…
· Historically NZ has had low electricity
prices.
· Since 2004, however, prices have been
in line with the OECD average and in some years slightly above.
Concluding remarks
While
it is easy to get swept up with NZ’s comparatively secure energy supply
(particularly against our major trading partners), the underlying trends of
declining energy security and increasing prices over time need to be of concern
to a nation that still has a lot of energy-intensive primary industries.
Australia
NSW – ACCC blocks AGL’s proposed MacGen
acquisition
Introduction
Pipes & Wires #131 examined AGL’s proposed acquisition of
Macquarie Generation (MacGen), and noted that the proposed
deal was subject to regulatory approval. This article notes the ACCC’s decision to block the deal, ironically within a
day or so of Pipes & Wires #131 going to print.
Re-capping the proposed deal
AGL Energy
proposed to pay the NSW government $1.7b for assets that include …
· Bayswater, a 4 x 660 MW hard-coal fired station.
· Liddell, a 4 x 500 MW hard-coal fired station.
· The 50 MW Hunter Valley gas turbines.
· The Liddell solar farm.
The ACCC’s decision
On
the 4th March 2014 the ACCC announced that it opposed the proposed
acquisition on the basis that it would be likely to substantially lessen
competition in the NSW retail electricity supply market. The proposed
acquisition would result in the state’s largest generators being owned by 1 of
the 3 largest retails, which the ACCC claims would both raise barriers to entry
and expansion for other retailers and reduce hedge liquidity
The NSW Government’s response
The
NSW Government had previously indicated that of the offers received for MacGen,
only 1 of those offers (AGL’s) exceeded the retention value, and that the NSW
Government would retain MacGen if the ACCC refused to approve the deal.
Likely next steps
Several
options were available to AGL…
· Simply accept the ACCC’s decision, and
for MacGen to remain owned by the NSW Government.
· For AGL to appeal the ACCC’s decision
to the Australian Competition Tribunal.
· For the NSW Government to restructure
MacGen into entities that would not result in a substantial lessening of
competition.
In
late March 2014 AGL applied to the Competition Tribunal seeking an
authorization that the deal be allowed to proceed on public benefit grounds.
Pipes & Wires will provide further examination once the Tribunal releases
its decision.
Queensland – deregulating solar tariffs
Introduction
It
has been observed that the lifting of retail price caps in various Australian
states has led to lower prices. This article notes the Queensland Government’s
decision to deregulate solar tariffs, and ponders whether that deregulation
will result in a better deal for connected solar users.
Background
The
current arrangement of feed-in tariffs (and this is not particularly unique to
Queensland) embodies the following features…
· A rate that is set by the government or
a government agency, rather than market participants.
· An implicit subsidy from non-generators
to generators, often by way of the distribution business.
· Little control or influence over where
embedded generation could be useful deployed to avoid costs or constraints.
The Queensland Government’s proposal
The Queensland Solar Bonus Scheme (SBS) will change on 30th
June 2014, primarily to ensure that feed-in tariffs do not result in increased
electricity costs. The Government plans to curtain the 8c / kWh solar feed-in
tariff, and instead require those connected solar generators to negotiate a
feed-in tariff directly with their retailers. Interestingly enough, the 284,000
solar generators currently receiving the 44c / kWh feed-in tariff will continue
to receive that tariff until the earlier of 2028 or when they sell their house.
The cost of the SBS
A
quick analysis of figures indicates that the SBS added about $32 to the average
Energex distribution customer during the
2012/13 year. This figure is expected to increase to about $67 for the 2014/15
year and possibly to $276 for the 2015/16 year.
The economics of running a distribution
business with solar feed-in tariffs
Solar
feed-in tariffs impact on a distribution network in a couple of ways…
· They can substantially reduce the nett
kWh distributed, leaving fewer kWh to recover the fixed costs from.
· If the distribution company is required
to recover its costs using a consumption (kWh) based tariff, revenue will be
reduced unless the kWh unit tariff can be correspondingly increased.
· The feed-in tariff payable to
generators also has to be recovered from someone.
This creates a difficult
situation for the distribution company.
The deregulation program
The
moving of solar feed-in tariffs from a regulated to a market basis is only the
first step of Queensland’s electricity deregulation, and will apply to all of
Energex’ connected customers 12 months ahead of retail price cap removal. A new
regulated rate will apply to the former 8c / kWh customers in the Ergon network area.
In
amongst the political slagging that inevitably accompanies such a move, Pipes
& Wires will revisit this issue.
Aus – scraping the carbon tax
Introduction
Most
of us down under can remember Tony Abbot’s bold pledge to inter alia scrap the Carbon Tax if he was elected as Prime Minister of
Australia. This article examines the recent defeat of his attempt to do that.
Abbot’s election pledge
Abbot
campaigned for the 2013 general election with a pledge to scrap Australia’s Carbon Tax, a stance that he received shadow
cabinet approval for way back in early 2011.
The legislative package
Abbott’s
legislative package includes the Clean Energy Legislation (Carbon Tax Repeal) Bill
2013 and comprises 7 Bills to inter alia repeal the 6 Acts that established the carbon pricing
mechanism.
Defeat of the legislation in the Senate
Senators
from the Labor and Green parties blocked Abbot’s repeal package
by 33 votes to 29. The Government must now wait 3 months before it can bring
the legislation back to Parliament, but it is expected that it will wait until
after any newly elected senators take their seats on 1st July 2014
before attempting another vote. This defeat comes against a backdrop of 2 other
climate change repeal Bills also being defeated.
The wider constitutional issue
This
apparent deadlock between House Of Representatives (the lower house) and the Senate (the upper house) could possibly trigger a double
dissolution, wherein the Government can request the Governor-General to
dissolve both houses of parliament and call a full election.
So
an apparently simple repeal of legislation could result in a full election.
Pipes & Wires will comment further as and when the Bill is re-introduced to
Parliament.
UK
and Europe
Sweden – appealing the electricity
distribution revenue caps
Introduction
Each
of Sweden’s 170 electric distribution companies are regulated by the Energimarknadsinspektionen (Ei) on an ex-ante basis for the 1st
January 2012 – 31st December 2015 supervisory period. This article
examines the dispute over the revenue caps for 87 of those electric companies.
Legal framework
The
legal framework is the Electricity Act (1997:857), and in particular Chapter 5 which inter alia requires…
· The establishment of a revenue frame
before each supervisory period begins, which shall be 4 years unless special
reasons for an alternative period have been identified.
· Each electric company to submit a
revenue proposal.
· The regulator to issue a decision on
each revenue frame at least 2 months before the start of the supervisory
period.
Sequence of decisions and rulings
The
following sequence of decisions and rulings has occurred…
· In 2009 the Riksdagen (Parliament) decreed that an incentive
regulation model would be adopted.
· In October 2011 the Ei determined the
revenue caps that would apply to all electric distribution companies for the
2012-2015 supervisory period in accordance with Chapter 5 of the Electricity
Act 1997.
· Eighty-seven of those electric
companies appealed the Ei’s 2011 determination to the Administrative Court of
Linköping on the grounds that the Ei had no legal mandate to include an interim
mechanism to limit tariff shocks as part of the transition to incentive
regulation.
· In December 2013 the Court overruled
the Ei. The Court’s ruling would’ve allowed some of the revenue caps to
increase by 30% to 40%, which amounts to about €3.3b nationally.
· The Ei appealed the Court’s ruling.
This
will no doubt be an interesting case to follow, so Pipes & Wires will make
further comment as the Ei’s appeal progresses.
Germany – Stuttgart buys back the
electricity distribution network
Introduction
The
“muni-ising” of investor-owned electric companies appears very fashionable
these days, ostensibly because those investor owners are not embracing
renewables and smart grids. Hot on the heels of the muni-ising of Hamburg’s
electric company, this article notes the formation of yet another Stadtwerke as
the City of Stuttgart moves to muni-ise its’ electricity networks.
The deal
In
February, Stuttgart moved to buy back 75% of the shares in the city’s
electricity network leaving the current owner, Energie Baden-Württemburg
AB (EnBW), owning 25% of the shares and a 5 year operating
concession. It appears that this deal was preferable to the original 20 year
concession that Stuttgart proposed.
The motivation
It
appears that Stuttgart’s motivation for buying back the network includes…
· “Making more intelligent use of the
grid for PV and wind energy” (a quote from the Mayor).
· “Hoping for lower prices by separating
them from EnBW’s other grids”.
In
amongst these noble initiatives it appears that muni-isation is also seen as a
means to more democratic control of electricity, securing jobs and workers’
rights, and … capturing the profits. From the side of the big electric
companies like E.On, RWE, Vattenfall and EnBW … well, they’re under regulatory
pressure to divest their networks and it seems that municipalities are the
logical and willing buyers.
Re-iterating the issues
Pipes & Wires #131 set out some philosophical and
commercial issues that are worth re-iterating in this context…
· A growing dislike that profits are
leaving the district. This of course overlooks the fact that the respective
cities were paid for their networks at the time of sale … they weren’t just given
away.
· A growing dislike of rising electricity
prices. This ignores the real cause of electricity price rises in Germany which
is the cost of the very same wind and solar that the buy-back advocates want
more of.
· A view that “there isn’t enough renewables”
and that network owners are using network ownership to create captive markets
for their own coal-fired generation businesses. Again, more wind and solar is
only likely to increase costs and diminish reliability.
· A growing dislike of capitalism in general
and particularly the big electric companies which seem to be the visible face
of that capitalism.
· A smaller network would prima facie mean reduced operating
scale.
· The energy sold to a muni-ised network
may come at a less favorable price.
· The cost of capital for the network
business may increase, especially if the network business gets rolled into a
debt-laden municipal balance sheet.
· Rating agencies may look less favorably
upon smaller municipally-owned networks, especially if investment capital becomes
subject to political decision-making.
· The municipalities themselves may
resort to the same profit stripping that the big electric companies are being
accused of. On the other hand, property taxes might be used to subsidise the
electric networks if the need to make muni-isation work becomes apparent.
· One way or another, increased wind and
solar are likely to increase customer bills.
So
it might be a case of “be careful what you wish for”. I guess it will be many
years hence before enough performance data has emerged to form a clear view on
the success or otherwise of muni-isation.
Ireland – concluding the Bord Gais
Energy sale
Introduction
Pipes & Wires #121 and #127 examined the possible sale of Bord Gais subsidiary Bord Gais Energy (BGE). This article examines the
recently announced sale of BGE to a consortium led by Centrica.
Re-capping BGE
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.
Re-capping the 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. In parallel, the Dáil was enacting the Gas
Regulation Bill that inter alia specifically
prohibited the sale of the Eire gas networks.
The final deal
A
consortium comprising Centrica, Brookfield
Renewable Energy Partners and Icon
Infrastructure will buy BGE for €1.1b in a deal that is expected to
conclude by June 2014.
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.
Recently released book “Small
Hydroelectric Engineering Practice”
Well-known
hydroelectric engineer Bryan Leyland has recently published a book entitled
“Small Hydroelectric Engineering Practice”. This is a comprehensive reference
book covering all aspects of identifying, building and operating hydroelectric
schemes between 500kW and 50MW. Pick here for more details.
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...
· Electric Utility
Transmission Ratemaking – Pasadena, 23rd – 24th
April 2014.
· Fundamentals of the NZ
electricity industry – Auckland, 6th – 7th
May 2014.
· Network Performance &
Optimisation In Infrastructure Assets – Auckland, 20th
– 21st May 2014
· Libya Oil &
Gas – London, 29th – 30th May 2014.
· European Wholesale Energy
Markets – London, 11th – 12th
June 2014.
· Myanmar Oil & Gas Summit – Yangon, 23rd
– 24th 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.
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Consultants Ltd accepts no liability for action or inaction based on the
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