From the
editor’s desk…
Welcome
to Pipes & Wires #133. This month we look at some regulatory determinations
in NZ, Australia and the UK. In amongst all that we examine a wide range of
other matters such as the evolving health & safety framework in NZ,
increasing opposition to smart metering in the US, who should pay for network
hardening, and how Germany’s relaxing regulatory framework might drive battery
technologies.
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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 – setting the WACC for Electricity
and for Wellington Airport
Introduction
The
Commerce Commission has recently determined the cost of capital (Vanilla WACC) that will apply to the
following infrastructure businesses for the 2015 information disclosure year...
· Electricity distribution businesses
(EDB’s).
· Wellington
Airport’s specified airport services.
This
article examines the key features of that determination.
Legal frameworks
These
WACC’s have been compiled pursuant to…
· Clauses 2.4.1 to 2.4.7 of the Commerce Act (Electricity Distribution Services Input Methodologies)
Determination 2012.
· Clauses 5.1 to 5.7 of the Commerce Act (Specified Airport Services Input Methodologies)
Determination 2010.
These
determinations themselves are made pursuant to Part 4 of the Commerce Act 1986.
Key features of the determination
The
Commission has determined the following WACC parameters…
|
Parameter |
EDB’s |
Wellington
Airport |
|
Risk-free
rate (5 years) |
4.21% |
4.21% |
|
Debt
premium (5 years) |
1.80% |
1.31% |
|
Equity
beta |
0.61 |
0.72 |
|
Debt
issuance costs (5 years) |
0.35% |
0.35% |
|
Leverage |
44% |
17% |
|
Pre-tax
cost of debt (5 year) |
6.36% |
5.87% |
|
Cost
of equity (5 years) |
7.30% |
8.07% |
|
Midpoint
vanilla WACC |
6.89% |
7.70% |
|
Midpoint
post-tax WACC |
6.10% |
7.42% |
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 |
|
Wellington
Airport for 2015 disclosure year |
April
2014 |
Vanilla
7.70% |
|
|
EDB’s
for 2015 disclosure year |
April
2014 |
Vanilla
6.89% |
|
|
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 – amending the electricity
distribution Input Methodologies
Introduction
In
late April 2014 the Commerce Commission published its’ intentions to amend
several components of the Electricity Distribution Services Input Methodologies Determination
[2012] NZCC 26. This article examines the proposed amendments and their
timeframe.
Legal framework
The
legal framework for the Input Methodologies is set out in Subpart 3 of Part 4 of the Commerce Act 1986, with two specific requirements as
follows…
· Section 52V(1) requires the commission to publish a
notice of intention when it begins work on an input methodology which outlines
the process and the proposed timeframe.
· Section 52X requires that if the proposed
amendment is a material change, s52V shall apply as if the amendment were a new
input methodology.
Proposed amendments
The
Commission is proposing two amendments…
· Amendments focusing on changes that
would affect the model used to set starting prices based on the current and
projected profitability.
· Amendments focusing on changes that
would affect other aspects of the default price path (DPP) such as definitions
of recoverable costs
Timeframe
The
commission expects to publish its draft reasons paper and draft amendments by
16th May 2014, and after a period of consultation, release its final
decision by 30th September 2014.
NZ – improving workplace safety
Introduction
Improving
workplace safety is an over-arching theme of NZ industry at the moment. This
article examines the emerging legal framework and considers how electric companies
might respond.
Emerging legal framework
The
Government’s “Working Safer” blueprint for health and safety has
led to the Health & Safety Reform Bill which was introduced into Parliament
in March 2014, and is expected to come into force on 1st April 2015.
At the time of writing this article the Bill is with the Transport & Industrial Relations Committee which is receiving submissions.
The
Working Safer package appears to be a three-pronged approach, viz…
· Working smarter, including providing
clarity through legislation, regulation and guidance.
· Targeting risk, including more focused
accident prevention in higher risk industries.
· Working together, including improved
worker participation.
Specific responsibilities
The
Bill introduces some specific responsibilities, viz…
· The concept of a Person Conducting a
Business or Undertaking (PCBU) is introduced as the primary duty-holder under
the Act. The definition of the PCBU is broad, but also includes specific
exclusions such as volunteers and home owners.
· The Bill imposes a personal obligation
of due diligence on the PCBU’s officers to ensure that the PCBU complies with
all its required duties and obligation so far as is reasonably practicable.
· Officers must take reasonable steps to
ensure that various processes are in place to identify, understand and
eliminate or minimise hazards and risks.
The editor comments
Most
of you will appreciate that I see the inner workings of a lot of electric
companies in my travels and work, probably about 40 companies from memory. So
I’ve got a few observations and comments to make…
· The new health & safety regime
provides the electric power industry with a fantastic opportunity to showcase
its history of strong pro-active leadership in workplace safety, and my observation
is that the industry is doing pretty much all of the Working Safer chapter
introduction bullet points. It appears, however, that the electric power
industry is going to be lumped in with industries such as mining and forestry.
· The electric power industry has always
had a very strong safety culture, at least for the almost 30 years I’ve been
part of it. Even as an engineering cadet safety was drummed into anyone who
went close to live structures … my second day as a cadet at the tender age of
18˝ involved being trained as a safety observer for 110kV overhead.
· The electric power industry doesn’t
have many inherently dangerous tasks. Granted, there are elements of danger in
some tasks like heavy lifting, live line work, heights and using hot tools or
materials but these tasks have been made about as safe as they possibly can.
· The electric power industry faces time
pressure … many electric companies have a maximum number of lost system minutes
per year (SAIDI), hence the pressure is on to restore supply. Sure the industry
might be able to improve its work practices, but that could lead to breaching
the SAIDI threshold which carries stiff penalties.
· Similarly with the use of live-line
work to avoid planned lost minutes … again, we could possibly improve safety by
de-energising the circuits but at the risk of exceeding the SAIDI threshold. It
appears that WorkSafe are going to strongly advocate for all work to be
de-energised.
· I’m really struggling to see what more
most electric companies could practically do to improve safety in a workplace
that already has comprehensive safety polices and plans, removal of unsafe
materials and equipment, detailed hazard and risk assessments, public safety
management plans, regular safety meetings, training courses on just about
everything imaginable, job-specific briefings, defect reporting, random job
site inspections, drug and alcohol testing, circulation of incident reports and
protective clothing.
· My guess … and I recognise that this
comment won’t sit easily with some … is that at least some accidents are caused
by an individual making an unwise decision in the moment, not because of any
failure at a strategy, policy or planning level.
Pipes
& Wires will comment further as the Bill progresses through Parliament.
North America
US – opposition to smart meters increases
Introduction
Opposition
to smart meters has been an on-going hassle for many electric companies in the
United States. This article examines the latest twists and turns in the debate.
The various faces that opposition has
taken
Opposition
to smart meters has taken the following faces…
· Concerns about the health effects of
the mobile phone radiation that some classes of smart meters use to transmit
data.
· Privacy of electric customers’ lifestyles,
habits, absence from home and even their dependence on medical devices as
revealed from time-of-use consumption data. There was concern that the early
generation of smart meters adopted in Germany that had low levels of data
encryption were being hacked by thieves on the lookout for people away on
vacation.
· The issue of customer choice,
particularly around why customers should have to pay for the removal of a smart
meter that they never asked for in the first place and then pay an on-going
analog meter reading fee.
The current opposition
The
face that the opposition seems to be taking at the moment is the data privacy
issue. Not surprisingly, points of view range widely on this one, with the Department Of
Energy acknowledging on one hand that smart meters could reveal
detailed lifestyle habits and patterns to the Cato Institute claiming on the other hand that
“privacy zealots are obsessing over something that wouldn’t concern a rational
person”. As a personal aside, it seems crazy that people are so concerned about
their personal habits being revealed to a completely uninterested billing clerk
at their electric company, and yet they publish their every move and thought on
Face Book.
Where might this lead
I
guess there are three broad scenarios that might emerge…
· A continuation of the steady onslaught
that will result in every customer having a smart meter.
· A back-down in which smart meters will
be optional ... a dilution of the ubiquitous metering plan.
· A complete reversion to manually read
analog meters.
The
third scenario seems very unlikely simply because we appear to have crossed a
technological divide. The second scenario could be possible, however my guess
is that the first scenario will prevail as there seems to be a political
determination like no other to roll out smart meters. An interesting adjunct to
that is that government agencies usually side with consumer and lobby groups on
populist issues, but on the specific issue of smart meters there seems to be a
strong underlying government support.
US – obtaining approval for network
hardening
Introduction
Network
hardening to reduce storm damage is a very topical theme. Obtaining regulatory
approval for network hardening is also a very topical and closely related theme.
This article examines the apparent disconnect between these two issues using Public Service
Enterprise Group’s (PSEG) planned $3.9b grid hardening program as a starting
point.
PSEG’s specific plans
PSEG’s
Energy Strong program proposes to spend $2.6b over
the next 5 years with a possible $1.3b over the following 5 years. Specifics of
the Energy Strong program include protecting electric substations from
flooding, increasing redundancy in the electric network, undergrounding of
overhead lines, implementing smart grid technologies, replacing cast iron gas
mains in flood prone areas, and protecting gas metering stations from flooding.
PSEG
filed its Energy Strong program with the New Jersey Board
of Public Utilities (BPU) in February 2013, and is still awaiting a firm
response from the BPU.
Wider stakeholder responses
In
addition to providing more resilient energy supply networks and creating almost
6,000 jobs, Energy Strong will not require customers to pay more (Energy Strong
will be funded from a set of customer charges that are due to expire soon).
It’s hard to imagine what any stakeholder could find wrong with that. Well …
apparently some stakeholders have been able to find the following things wrong
…
· It costs too much.
· It will drive up customer prices, with
some opponents claiming as much as 20%.
· Why should PSEG get funding in advance
?
· Not all of the previous outages would have
been prevented by Energy Strong.
In
response, PSEG has aired its frustration and challenged the BPU to come up with
a better plan.
The apparent disconnect
From
a political position it is hard to imagine anything better … more reliable gas
and electric supply and job creation without customers having to pay anymore. It
appears that the disconnect is around whether customers will actually pay more,
and it seems that Energy Strong’s opponents are determined to believe that
prices will rise.
Australia
Tasmania – setting the electricity
transmission revenue
Introduction
The Australian
Energy Regulator (AER) recently released its Transitional Determination for the electricity transmission grid
in Tasmania, Transend, for the 1 year transitional period
commencing on 1st July 2014. This article examines the key features
of that Determination.
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
The
AER did not approve Transend’s Transitional Revenue Proposal because they were inter alia not satisfied that the
proposed revenue would minimise price variations between the current period (1st
July 2009 to 30th June 2014) and the subsequent period (1st
July 2015 to 30th June 2019). Key features of the Determination
include...
|
Parameter |
Proposal |
Decision |
|
OpEx |
$45.7m |
$48m |
|
Depreciation |
$21.8m |
$22m |
|
Nominal
Vanilla WACC |
8.43% |
8.1% |
|
Smoothed
Revenue Requirement |
$215.5m |
$205.1m |
This
concludes Pipes & Wires coverage of the Tasmanian electricity transmission
revenue reset.
NSW, ACT – setting the electricity
distribution revenues
Introduction
The Australian
Energy Regulator (AER) recently released its Transitional Determinations for the electricity distribution
network service providers (DNSP’s) in New South Wales and the Australian
Capital Territory for the period 1st July 2014 to 30th
June 2015. This article examines those Determinations.
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 Determinations
· Key parameters of ActewAGL’s Transitional Determination include…
|
Parameter |
Proposal |
Decision |
|
Estimated
OpEx (dist) |
$63.3m |
$65m |
|
Regulatory
depreciation (dist) |
$27.6m |
$27m |
|
Smoothed
revenue (dist) |
$155.9 |
$145m |
|
Estimated
Opex (trans) |
$12.5m |
$13m |
|
Regulatory
depreciation (trans) |
$4.3m |
$4m |
|
Smoothed
revenue (trans) |
$30.2m |
$28m |
· Key parameters of the AusGrid Transitional Determination include …
|
Parameter |
Proposal |
Decision |
|
Estimated
OpEx (both) |
$571m |
$551m |
|
Smoothed
revenue (dist) |
$2,004m |
$1,958m |
|
Smoothed
revenue (trans) |
$270m |
$252m |
|
Indicative
rate of return |
8.52% |
8.1% |
· Key parameters of the Endeavour
Energy Transitional Determination include …
|
Parameter |
Proposal |
Decision |
|
Estimated
OpEx |
$291.8m |
$292m |
|
Regulatory
depreciation |
$62.6m |
$63m |
|
Smoothed
revenue |
$987.7m |
$949m |
|
Indicative
rate of return |
8.52% |
8.1% |
· Key parameters of the Essential
Energy Transitional Determination include …
|
Parameter |
Proposal |
Decision |
|
Estimated
OpEx |
$469m |
$481m |
|
Regulatory
depreciation |
$99m |
$99m |
|
Smoothed
revenue |
$1,363m |
$1,292m |
|
Indicative
rate of return |
8.52% |
8.1% |
This
concludes Pipes & Wires coverage of the NSW and ACT electricity
distribution revenue determinations.
UK
and Europe
Germany – encouraging electricity
storage
Introduction
Electricity
storage is becoming a hot topic in Germany as both feed-in tariffs and the
obligation to provide grid access for renewables are ramped down. This article
examines some key threads of the debate.
Legal framework
The
legal framework is the Erneuerbare-Energien-Gesetz (the Renewable Energy Sources Act), of
which 2 features are relevant to this debate…
· Part 2, Chapter 1, Section 5 broadly
requires grid operators to give priority access to renewable generation.
· Part 3, Chapter 1, Section 20 specifies
the rates at which feed-in tariffs shall ramp down from specified dates.
The proposed changes to the EEG
Over
the last few months EU Energy Commissioner Gunther Oettinger has called for Germany to review the
EEG, with specific emphasis on reducing the priority access provision. A little
thought would suggest that priority access is strongly linked to feed-in
tariffs, hence Oettinger’s calls have caused concern amongst the renewable
energy community.
What to do with renewable energy
What
Oettinger is calling for would effectively strand a lot of non-dispatchable
generation like solar and wind, hence those solar and wind generators will need
to store their electricity and then release it into the grid during peak
periods (and presumably at a commercially negotiated tariff rather than a
regulated tariff). This is understandably driving the electricity storage
industry (technology choices) but not surprisingly is also giving rise to calls
for a regulatory framework for electricity storage (political choices). Hence a
possible scenario is an amendment to the EEG that would regulate the feed-in of
stored electricity.
UK – deregulating the market for
connection services
Introduction
Most
of us appreciate that while the “own” function of an electricity distribution
network is monopolistic, the “do” function is often very contestable. This
article examines some recent determinations from OFGEM in regard to allowing unregulated
margins to be charged for network connection services from UK Power
Networks, SSE Power Distribution and Electricity
North West.
Legal framework
Broadly
speaking, each electric company’s Electricity Distribution License requires
that company to set its prices for “do” activities such as network extensions,
reinforcements or connections to reflect an appropriate proportion of costs
along with a regulated margin of 4%. The regulatory framework also provides for
an electric company to request OFGEM to allow that company to charge an
unregulated margin on contestable activities in specified Relevant Market
Segments.
The tests OFGEM must apply in making
its determinations
OFGEM
has to consider inter alia two tests
in making its determinations…
· Legal Requirements Test, which includes
compliance with various license conditions
· Competition Test, which considers a
range of economic features such as market share, prices and pricing
transparency, service quality, degree of promotion of competitive alternatives
and entry barriers.
The electric companies requests to
OFGEM, and OFGEM’s determinations
In
late December 2013 the following applications were made to OFGEM, who responded
as shown…
|
Company |
License |
Relevant
Market Segments |
OFGEM’s
Determinations |
|
Eastern |
Unmetered
other work. |
Did
not meet Competition Test. |
|
|
London |
Unmetered
local authority work. |
Did
not meet Competition Test. |
|
|
Unmetered
other work. |
Did
not meet Competition Test. |
||
|
South
Eastern |
Unmetered
other work. |
Did
not meet Competition Test. |
|
|
Scottish
Hydro |
Metered
demand HV work. |
Did
not meet Competition Test. |
|
|
Metered
demand EHV work. |
Did
not meet Competition Test. |
||
|
Metered
demand EHV work and above. |
Did
not meet Competition Test. |
||
|
Metered
distributed generation HV and EHV work. |
Did
not meet Competition Test. |
||
|
Southern |
Metered
demand HV work. |
Did
not meet Competition Test. |
|
|
Metered
demand EHV work. |
Did
not meet Competition Test. |
||
|
Metered
demand EHV work and above. |
Did
not meet Competition Test. |
||
|
Metered
distributed generation HV and EHV work. |
Meets
both Legal Requirements Test and Competition Test. |
||
|
Unmetered
local authority work. |
Did
not meet Competition Test. |
||
|
Unmetered
private finance initiative work. |
Meets
both Legal Requirements Test and Competition Test. |
||
|
Unmetered
connections other work. |
Did
not meet Competition Test. |
||
|
North
West |
Metered
demand LV work. |
Meets
both Legal Requirements Test and Competition Test. |
|
|
Metered
distributed generation LV work. |
Did
not meet Competition Test. |
||
|
Unmetered
connections other work. |
Did
not meet Competition Test. |
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...
· 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.
· Fundamentals of the NZ
Electricity Industry – Wellington, 23rd – 24th
September 2014.
· Fundamentals of the NZ
Electricity Industry – Auckland, 7th – 8th
October 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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