Pipes & Wires

INSIGHT AND ANALYSIS OF TOPICAL ENERGY & INFRASTRUCTURE ISSUES

Issue 132 – April 2014

 

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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I’m thinking about using the “Pipes & Wires” group on Linked In as a distribution means rather than email, so it would be really helpful if you’d pick this link and then hit the yellow Join button.

 

Correct email address

 

Please note that my correct email address is phil.caffyn@utilityconsultants.co.nz. Please don’t use phil.caffyn@clear.net.nz as this does not get through.

 

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 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 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.

 

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.

 

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.