Pipes & Wires


Issue 137 – September 2014


From the editor’s desk…


Welcome to Pipes & Wires #137. First up we examine an unprecedented swing to the political right in New Zealand, as what that means for energy policy. We then examine 3 regulatory determinations, 2 in New Zealand and 1 in Ireland. We then look at possible policy reform in Germany and the Australian NEM, the changing generation fuel mix in Western Australia, and the on-going saga of muni’ising the electric network in Boulder. This issue ends with a look at a policy shift in California.


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....


·     Advising a major global investment bank on the revenue and capital cost characteristics of the New Zealand generation industry.


·     Assessing the investment characteristics of proposed CapEx increases to an investor-owned electric network.


·     Assessing two EDB’s asset management practices against ISO 55000:2014.


·     Assessing an EDB’s compliance with the lines – generation separation requirements of the Electricity Industry Act 2010.


·     Assessing an EDB’s compliance with the Electricity Industry Participation Code.


·     Compiling safe operating procedures for a wide range of distribution switches.


·     Advising an investor on the investment characteristics and regulatory constraints of small hydro development and grid connection.


·     Reviewing the engineering aspects of an EDB’s lines pricing methodology.


·     Advising a major global consultancy on specific features of emerging electricity transmission and distribution regulatory regimes, including period length, potential for re-opening determinations, caps & collars, total expenditure levels and incentive mechanisms.


·     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.


Matters for attention in NZ


Readers’ attention is drawn to the following matters…


·     Revised standard NZS7901:2014 for Safety Management Systems.


·     Likely increased obligations for worker safety.


·     The Electricity Authority’s intention to “improve distribution efficiency”.


Cool video clips


Symmetrical components made a whole load easier


For those who struggled to understand symmetrical components (and like me, still do), this 1 minute video clip is well worth watching. In particular, observe how the negative sequence voltages increase as the pointer swings the various phases around (which effectively models the effect of swapping 2 phases) and shows why large currents can flow if a connected load has a low negative sequence impedance.


New Zealand


NZ – post-election energy policy




Saturday 20th September saw a National-led government returned for a third term with sufficient numbers to govern alone, and moreover with a very disillusioned and fragmented opposition that appears unable to agree on key policy issues. This article examines where the new government is likely to go with energy. And for those who are (still) puzzled by the Mixed Member Proportional system, watch this cool video clip.


The NZ Power proposal


The Labour – Greens NZ Power proposal to establish a central electricity buying agency that would have presumably bought all electricity at a regulated price is dead in the water. When it seemed that Labour and the Greens had about a 50:50 chance of winning the 2014 Election the markets discounted the price of the listed generators, however those prices seemed to bounce back as Labour and the Green stumbled in the pre-election polls and then rose between 4% and 10% on the first post-election trading day.


Carbon tax


The Greens proposed emissions levy and carbon pricing signals won’t be going ahead, but rather the current policy of encouraging renewables as part of a balanced energy mix will continue.


Freshwater reform


This one seems a bit uncertain, which is concerning for a nation that generates about 65% to 70% of its electricity from inland waterways. The National Policy Statement says that everyone has a right to participate in resource management planning, which does represent a continuation of the last 25 years shift away from the Crown monopoly that our hydro generation is based on (the Electrical Motive-power Act 1896). A possible worst case scenario is that resource consents might only be granted for short periods of time, in which case who would build a long-lived asset like a hydro power station ??


The editor comments


A great result for the energy sector, notwithstanding the uncertainties around the freshwater. For further advice, pick here.


NZ – defining Transpower’s performance measures for RCP2




The Commerce Commission recently released the decision and reasons paper for its’ Final Decision for Transpower’s individual price-quality path (IPP) for 2015-2020 (also known as RCP2). This article follows on from the examination of the Draft Decision that was discussed in Pipes & Wires #134 by examining the decisions and reasons.


Regulatory framework


The regulatory framework is set out in Subpart 7 of Part 4 of the Commerce Act 1986. This provides for the Commission to inter alia set an Individual Price-Quality Path (IPP) for a supplier using any process and in any way it thinks fit as long as the relevant Input Methodologies are used.


The performance measures


The performance measures are as follows…


·     17 grid performance measures for which about $10m of revenue will be at risk each year, including inter alia availability of circuits, number and duration of unplanned interruptions.


·     6 asset health measures for which about $2.9m of revenue will be at risk each year, including inter alia the number of towers painted per year, number of circuit breakers commissioned, and the number of outdoor to indoor conversions commissioned.


·     3 asset health measures for which there is no associated revenue at risk, based around the change in average remaining life of key asset categories.


Determination of costs to date


The determination of costs to date include…




Draft Decision

Final Decision





Base CapEx




HVDC availability




HVAC availability





Next steps


At the time of writing this article, the Commission is working on the revenue component of the RCP2 Final Determination, and expects to publish that Final Determination by 28th November 2014.


NZ – amending the Transpower Input Methodologies (IM’s)




The Commerce Commission recently released the Transpower Input Methodologies Amendments Determination 2014, which amends two previous IM’s. This article notes those amendments.


Regulatory framework


The regulatory framework is Subpart 3 of Part 4 of the Commerce Act 1986. In particular, s52X requires that an amendment to an IM requires a material change, the process set out in s52V applies.


The IM’s that have been amended


The following 2 IM’s have been amended…


·     Transpower Input Methodologies Determination 2012 (NZCC 17).


·     Transpower Capital Expenditure Input Methodology Determination 2012 (NZCC 2).


The detail of the amendments is complex, so those that really need to know should download the whole Determination.


UK & Europe


Ireland – setting the allowed gas transmission revenues




The Commission for Energy Regulation (CER) recently set the allowed revenue that will apply to Bord Gais Networks (BGN) transmission pipelines for the gas 2014/15 year (ending on 30th September 2015). This article examines that decision.


BGN’s gas transmission business


BGN’s gas transmission business comprises 2,467km of high pressure pipelines throughout Eire. These pipelines are supplied with gas by 2 pipelines from Scotland, and also interconnect with Northern Ireland.


Regulatory framework


Key features of the regulatory framework are…


·     The overall regulatory framework is set by Part 14 of the Gas (Interim)(Regulation) Act, 2002 which provides inter alia for the CER to promulgate regulations for the transmission of gas including terms, conditions and price.


·     The context for this article is set by the CER’s decision 12/196 of November 2012 which set BGN’s transmission revenue at €998.5m for the PC3 period from 1st October 2012 to 30th September 2017.


Key features of the allowed revenue decision


Key features of the allowed revenue decision for 2014/15 gas year include…


·     A mix of variations in pass-through costs totaling €750,000, ranging from high council rates in Ireland and higher EU Network Code compliance costs, but lower CO2 costs.


·     An additional €1m for the migration of various systems to Gaslink as the Transmission System Operator.


·     A technical training and competency allowance of €882,000 that was not finalised as part of the original PC3 decision.


·     Return of €2.2m that was over-recovered during previous years (mainly due to higher volume throughput in colder than expected winters).


The overall result will be a 5.5% reduction in the average transmission tariff.


Germany – further energy policy reforms




Pipes & Wires #129 suggested that Germany’s Energiewende” (the politically supervised shift from nuclear and fossil to renewable) would be slowed to a more modest pace as the steeply increasing cost of electricity became more apparent. This article examines some recent amendments that took effect on 1st August 2014.


Legal framework


The legal framework is the Erneuerbare Energien Gesetz (the Renewable Energy Sources Act) which was originally enacted in 2000, but was pre-dated by the Stromeinspeisungsgesetz (the Grid Feed-In Law) of 1991. The Strom in turn was used as a model for the feed-in tariffs developed in many other countries.


Key features of the EEG 2014


Key features of the EEG include…


·     Guaranteed fixed feed-in tariffs (FiT), ostensibly to promote investment in renewables, will continue. The difference between the FiT and the spot price will be funded by a surcharge on domestic and non-exempt industrial customers. The FiT’s for 2014 have declined slightly from the 2012 solar FiT’s, but are similar for wind, hydro and biomass.


·     In order to comply with amended EU guidelines on state aid, support for renewable generation will be tendered from 2017 onwards. Preliminary work is based on 600MW of solar being tendered in 2 or 3 blocks from 2015.


·     Exemptions for energy-intensive industries are likely to reduce, to ensure that those industries are not receiving state aid that would be inconsistent with the EU principles of free movement of trade and capital.


·     Electricity for “own consumption” will have to pay a surcharge, albeit at a reduced level.


So … it will be interesting to see whether the movement to market mechanisms for funding renewables will dampen investor enthusiasm.




Aus – proposed new rules for distribution pricing




Most distribution network pricing methodologies contain anomalous features such as recovery of fixed costs through variable prices, and time-averaging over periods of peak and off-peak demand. This article examines a recent draft rule change proposed by the Australian Energy Markets Commission that will set out significant changes to the way distribution companies can structure their prices.


Regulatory framework for the rule changes


The regulatory framework includes…


·     The National Electricity (South Australia) Act 1996, which is given effect in each participating state in the NEM by application statutes. Part 1 defines the National Electricity Objective, whilst Part 4 provides for the making of regulations and rules.


·     The National Electricity (South Australia) Regulations.


·     The National Electricity Rules.


The most significant feature of the regulatory framework is that that the AEMC can only propose a rule change if it will satisfy the Objective of promoting efficient investment in, and operation of, the electricity services for the long term interests of customers.


The proposed rule changes


The draft National Electricity Amendment (Distribution Network Pricing Arrangements) Rule 2014 will impose a new pricing objective on distribution companies requiring prices to reflect the business’ efficient costs of providing services to each customer. One of the specific features of the draft rule change is that it will require prices to individual customers to more accurately reflect the costs those customers create.


The draft rule change is very clear that it does not alter the overall allowable revenue, only the method by which that revenue is gathered.


Reasons for the rule change


The AEMC is concerned that changes in customer lifestyles and energy use technologies mean that load profiles can be very different from the load profiles assumed by legacy pricing methodologies (and of course, smart metering means that we don’t actually need to assume anymore anyway). The draft rule change quotes a couple of really interesting examples…


·     A customer in Victoria with a 5kW air conditioner creates about $1,000 per year of costs for the distribution company but only pays about $300 per year in additional electricity costs. That customer is therefore subsidised about $700 per year by those customers without air conditioners.


·     A north-facing 2.5kW solar panel in South Australia reduces the distribution network costs by about $80 per year but pays about $200 less per year (due to avoided kWh consumption) and is therefore subsidised about $120 per year by customers without solar. If the same solar panel was faced to the west so it generated during peak periods, the distribution network costs would reduce by about $200 hence the subsidy would reduce to about nil.


Current pricing methodologies do not contain any incentives for using air conditioners more thoughtfully or facing solar panels to the west.


Next steps


The AEMC will receive submissions on the draft until 16th October 2014 and hopes to release its final determination in late November 2014.


The editor comments


Economically efficient tariffs are all fine, and indeed many electricity regulatory bodies strive for that. My observation is that these tariffs are often overtaken by other matters such as the practical requirement to limit the number of tariffs, or political expediencies such as low fixed charge tariffs.


Aus – changing the generation mix in the West




Western Australia has recently signaled a significant shift in generation fuel mix, from coal to gas and diesel, which is also occurring against a shifting degree of vertical integration. This article examines those trends.


Merging Verve and Synergy


Way back in 2005 Pipes & Wires #42 and #45 examined the vertical disaggregation of the old State Electricity Commission of Western Australia. Then in 2009 Pipes & Wires #86 examined the planned re-integration of generation and retail which became a reality in 2013 when Verve and Synergy were amalgamated (Pipes & Wires #121).


The merged entity is known as Synergy, which owned about 3,000 MW of generation and supplied about 10,000 GWh per year (about 55% of WA’s electricity).


The proposed plant closures and openings


The following plant closures and openings are noted…


·     Synergy is closing the remaining coal-fired unit at Kwinana both to reduce costs and also to limit Synergy’s (formerly Verve’s) market share limit which corresponded to 3,000 MW.


·     Horizon Power, in partnership with Contract Power Australia, will build and operate 1 gas-fired and 5 diesel-powered generators.


Changing the mix


In a world focused on reducing CO2 emissions and separating lines and energy, the substitution of diesel generation operated by a lines business for coal-fired generation owned by a generator seems odd. It would appear that there a couple of issues at work there…


·     Synergy needed to reduce its share of the market.


·     Embedded (diesel) generation may avoid transmission losses and network constraints.


·     Diesel generation may provide more start and load-following flexibility than coal.


North America


US – the continuing saga of muni’ising Boulder




Pipes & Wires #126 and #128 examined the City Of Boulder’s (Colorado) plans to purchase Xcel Energy’s distribution assets and run those assets as a Muni. This article examines recent events.


Key events to date


Key events to date include…


·     In 2004 Boulder commissioned a report which concluded that the City could feasibly purchase Xcel’s distribution assets and keep tariffs comparable to Xcel’s.


·     These plans were shelved in 2008 when Xcel selected Boulder for its SmartGridCity program


·     The shelved plans were dusted off in 2011 when negotiations to develop a wind farm broke down.


·     The City planned a vote on the issue in April 2012, with the expectation that the vote would be in favor of purchasing Xcel’s distribution business and running it as a Muni.


·     Boulder then planned a vote for April 2013 which would authorise the City to form a Muni and issue bonds to fund the purchase of Xcel’s distribution assets providing that the Muni’s tariffs would be no greater than Xcel’s at the time the Muni starts.


·     In August 2013 the City voted 6 to 3 in favor of forming a Muni, and additionally gave voters the opportunity to set an upper limit on key costs of $214m and gave the City the power to file a condemnation lawsuit if negotiations breakdown.


·     In late October 2013 voters were asked to consider the following 2 ballot questions (the “Yes on 310” question, backed by Xcel Energy which aimed to limit the debt that the City could take on to form the Muni, and the “2E” question, backed by the City). The final election results revealed 66.5% support for “2E” but only 31.1 support for “Yes on 310”, which supporters of the Muni claim as a double victory and evidence of increased support since 2011.


Recent events


Not surprisingly the issues being raised by both Boulder and Xcel are regulatory rather than technical, and include…


·     Various philosophical views on the interests of democracy versus the rights of private corporations.


·     What exactly the “fair price” for the sale of the Xcel assets to Boulder might be, and whether it is agreed or imposed.


·     The previously approved limit of $214m that Boulder can spend.


·     Disputes over jurisdiction amidst claims that the Colorado Public Utilities Commission (PUC) has primary jurisdiction, and unless the issues become legal rather than factual the Colorado Supreme Court does not have any obvious jurisdiction.


·     Because assets within the Boulder municipal area also supply electric customers outside of Boulder, the impact of muni’ising on those customers must also be considered. The PUC has asserted its power as the jurisdictional authority over who may provide electric supply to those non-Boulder customers.


·     The proposal approved by voters requires the muni to be fully operational by the end of 2016 otherwise Boulder must seek further approval form voters. Advocates of muni’ising claim that Xcel is trying to delay the process knowing that only a finite time period is available.


So … there are obviously some very complex legal issues to be worked through before a muni can even be established. Pipes & Wires will comment further as progress emerges.


US – assessing the value of embedded generation




Inclusion of embedded generation into distribution planning models can be a thorny issue. This article examines recent moves by the California Public Utilities Commission that requires the use of marginal costs to assess the likely effectiveness of embedded generation.


Legal framework of s769


The legal framework for the PUC’s requirements is s769 of the Public Utilities Code. This s769 was added to the Code by Assembly Bill 327.


Key requirements of s769


The requirements of s769 are inter alia


·     Each electric company must submit a Distribution Resource Plan (DRP) to the PUC by 1st July 2015 that identifies the optimal location for embedded generation.


·     The DRP must evaluate localised costs and benefits, including cost avoidance, safety and reliability.


·     The DRP must set out tariff or contract mechanisms by which embedded generation can be deployed.


·     The DRP must include methods and approaches that minimise the incremental costs of embedded generation.


·     The PUC shall review the DRP’s, and may amend a DRP to minimise overall distribution system costs and maximize customer benefits. Recovery of spending necessary to implement the DRP is not a given, but rather must be considered as part of the next price reset (rate case).


So, all in all, electric companies will have to assess embedded generation on the basis of marginal costs and benefits (which is probably what they are doing anyway). What remains to be seen is whether the practical implementation of s769 will allow recovery of full economic costs.


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...


·     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…


·     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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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.