Pipes & Wires

INSIGHT AND ANALYSIS OF TOPICAL ENERGY & INFRASTRUCTURE ISSUES

Issue 139 – December 2014

 

From the editor’s desk…

 

Welcome to Pipes & Wires #139. This issue discusses the following matters…

 

·       The impact of disruptive technologies and how regulatory frameworks might need to be altered to accommodate the increasing customer choice that comes with such technologies.

 

·       A couple of regulatory decisions, in New Zealand, Australia and the US.

 

·       Storage of peak-time electricity.

 

So … until February 2014, happy reading and enjoy the Christmas holidays…

 

Matters for attention in NZ

 

Readers’ attention is drawn to the following matters…

 

·     Revised standard NZS7901:2014 for Safety Management Systems.

 

·     Increasing interest in ISO 55000 in regard to asset management practices and systems.

 

·     Increased obligations for worker safety.

 

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

 

·     Increasing interest in ISO 37120:2014 in regard to sustainable community development.

 

Cool video clip

 

This really interesting video clip describes how the increasing scale of electric plants in the 1890’s and the early 1900’s led to decreasing prices and eventual consolidation of electric companies in large cities like New York and Chicago. That consolidation reduced the competition that was keeping downward pressure on prices, and led to agreements with regulators that prices would be regulated in return for an exclusive franchise.

 

Cool magazine article

 

This really cool article describing Britain’s electric power supplies appeared in Part 3 of Wonders Of World Engineering which was published on 16th March 1937. The article describes the development of the 132kV grid back in the days when the objective was to keep the lights on at least cost. Themes such as economic efficiency, incentive regulation, global warming and de-carbonisation don’t even get a mention (although acid rain gets a vague mention in Solving the smoke problem in Part 32 which was published on 5th October 1937).

 

New Zealand

 

NZ – setting the electricity default price path

 

Introduction

 

Electricity distribution businesses (EDB’s) that do not meet the consumer ownership criteria set out in s54D of the Commerce Act 1986 are subject to a Default Price-Quality Path (DPP) for the five year period 1st April 2010 to 31st March 2015. The Commerce Commission recently released its Final Determination of the Default Price Path (DPP) that will apply to the 16 non-exempt electricity distribution businesses (EDB’s) for the 5 year period commencing on 1st April 2015 (and to Orion when its Customised Price Path expires). This article examines the key features of the Final Determination and compares it to the Draft Determination.

 

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 3 of Part 4 specifies the purpose of the Input Methodologies, and the processes to be used for compiling the IM’s.

 

·     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.

 

·     Subpart 9 of Part 4 specifically addresses electricity line services.

 

·     s54D(1) defines the criteria that an EDB must meet to be exempt from the DPP.

 

The Commission’s previous work

 

The Commission’s previous work has included extensive deliberation on information forecasts, on quality and performance incentives, treatment of risk, and how claw back should be applied. Pipes & Wires #127, #129, #132, #135 and #138 discuss these issues.

 

Key features of the Final Determination

 

Key features of the Final Determination include…

 

·     The following starting prices (MAR) and annual rates of change shall apply…

 

Company

Draft Determination

Final Determination

Maximum Allowable Revenue ($m)

Annual rate of change

Maximum Allowable Revenue ($m)

Annual rate of change

Alpine Energy

$30.913

10.0%

$30.458

11.0%

Aurora Energy

$56.590

0.0%

$56.512

0.0%

Centralines

$10.084

6.0%

$9.983

7.0%

Eastland Networks

$22.681

3.5%

$22.732

3.0%

Electricity Ashburton

$32.846

2.0%

$33.047

0.0%

Electricity Invercargill

$14.556

0.5%

$13.565

0.0%

Horizon Energy

$22.047

0.5%

$22.027

0.0%

Nelson Electricity

$6.093

0.0%

$6.824

0.0%

Network Tasman

$28.729

0.0%

$28.092

0.0%

OtagoNet

$23.742

0.0%

$24.780

0.0%

Powerco

$256.527

0.0%

$250.424

0.0%

The Lines Company

$35.816

0.0%

$34.705

0.0%

Top Energy

$35.020

7.0%

$34.231

7.0%

Unison

$100.102

0.0%

$100.102

0.0%

Vector

$396.831

0.0%

$395.245

0.0%

Wellington Electricity

$100.482

0.0%

$98.788

0.0%

 

·     The following SAIDI targets, collars and caps shall apply (revenue at risk from the collar & cap approach is 1%)…

 

Company

Draft Determination

Final Determination

SAIDI collar

SAIDI target

SAIDI cap

SAIDI collar

SAIDI target

SAIDI cap

Alpine Energy

78.77

147.60

216.44

111.4627

132.8088

154.1549

Aurora Energy

61.41

86.80

112.20

65.5614

74.4633

83.3652

Centralines

100.94

137.19

173.44

98.7960

119.0718

139.3477

Eastland Networks

206.03

246.60

287.16

210.2241

242.1494

274.0746

Electricity Ashburton

109.27

139.55

169.83

114.6501

132.8466

151.0431

Electricity Invercargill

17.51

29.16

40.80

17.0250

24.0759

31.1267

Horizon Energy

124.54

170.64

216.73

124.4211

150.1240

175.8269

Nelson Electricity

5.55

15.13

24.7

10.1810

16.2056

22.2302

Network Tasman

102.54

126.03

149.52

95.1376

112.4781

129.8185

OtagoNet

171.51

233.61

295.70

194.2394

224.5773

254.9153

Powerco

166.19

222.32

278.44

167.0966

188.8628

210.6290

The Lines Company

201.33

238.81

276.30

183.3679

208.7747

234.1815

Top Energy

364.24

445.99

527.75

340.0581

405.4091

470.7602

Unison

87.5

111.4

135.3

88.1075

99.1371

110.1668

Vector

81.52

106.64

131.77

87.8999

96.0364

104.1728

Wellington Electricity

24.92

37.12

49.31

30.2414

35.4358

40.6302

 

NZ – determining the electricity and gas WACC

 

Introduction

 

The Commerce Commission has been revising the WACC that will apply to electricity lines and gas pipes businesses following the High Court’s opinion that the 75th percentile might be too high. This article examines the Commission’s recently released Electricity Lines Services and Gas Pipeline Services Input Methodologies Determination Amendment (WACC Percentile For Price-Quality Regulation) 2014, also known as Decision [2014] NZCC 27. Interested parties should read the full determination as this article is by necessity brief.

 

Regulatory framework

 

The broad regulatory framework is Subpart 3 of Part 4 of the Commerce Act 1986, in particular…

 

·     s52V(2), which sets out the requirement for the Commission to publish a draft, provide a reasonable opportunity for comment, possibly hold a conference, and have regard to submitted views.

 

·     s52X, which requires a material change to be treated as a new IM.

 

Applicability of the determination

 

The following determinations are amended by NZCC 27…

 

·     Electricity Distribution Services Input Methodologies Determination 2012 ([2012] NZCC 26).

 

·     Transpower Input Methodologies Determination 2012 ([2012] NZCC 17).

 

·     Gas Distribution Services Input Methodologies Determination 2012 ([2012] NZCC 27).

 

·     Gas Transmission Services Input Methodologies Determination 2012 ([2012] NZCC 28).

 

Key features of the determination

 

The two key features of NZCC 27 are…

 

·     Replaces references to “75th percentile” with “67th percentile”.

 

·     References to “0.674” for calculating the mid-point WACC estimate are to be amended to “0.440”.

 

Timeframe for implementing NZCC 27

 

NZCC 27 will apply from the following dates…

 

·     Electricity distribution DPP – from 1st April 2015.

 

·     Transpower IPP – from 1st April 2015.

 

·     Gas pipelines DPP – from 1st October 2017.

 

NZ - LED street lighting reducing kWh throughput

 

Introduction

 

Many councils are looking to replace their traditional Sodium vapor street lights with LED lights, with a key driver appearing to be energy efficiency with the obvious consequences of reduced kWh consumption. This article, however, picks up on the well-worn theme of how that declining kWh consumption might impact on electric distribution businesses that recover their high fixed costs on a kWh basis.

 

The legal and regulatory angles

 

A couple of pieces of NZ’s legal and regulatory framework encourage or indeed even require certain classes of bodies to “have regard to energy efficiency” in varying degrees, viz…

 

·     s54Q of the Commerce Act 1986 requires the Commerce Commission to promote incentives for investment in energy efficiency, which continued the requirement set out in the now repealed s172N(2)(d) of the Electricity Act 1992.

 

·     s128(3)(c) of the Electricity Industry Act 2010.

 

·     The former Government Policy Statements that required energy efficiency to be considered.

 

The effect on electric distribution businesses

 

Many, if not most, electric distribution businesses (EDB’s) recover at least part of their costs on a kWh basis, which involves some legacy assumptions about kWh consumption per customer connection.

 

The transition to LED street lighting is likely to reduce electricity consumption by about 50% to 60%, which will undoubtedly reduce kWh consumption. Precisely how that effects EDB’s will depend on how their street light tariff is structured (noting that some are very sensibly structured as a fixed annual charge per light), but none-the-less any reduction in kWh throughput is unwelcome and may well result in higher per-kWh charges to all customers.

 

That in turn could lead to subsidies from those who can’t afford the up-front cost of investing in energy efficiency to those who can.

 

NZ – preparing for disruptive electrical technologies

 

Introduction

 

The Commerce Commission has signaled that it is open to considering the impact of disruptive technologies such as rooftop solar when it compiles the regulatory model that will start on 1st April 2020. This article examines those technologies and then looks at what issues and features a regulatory model might need to address.

 

Possible technologies

 

Some of the technologies that are emerging include…

 

·     Solar panels that generate electricity.

 

·     Solar hot water (that displaces incoming electricity).

 

·     Electric cars feeding back into the grid at peak times.

 

·     Gas-fired fuel cells (either bottled natural gas, or bio-gas).

 

·     Micro wind turbines.

 

·     On-site energy sources that displace incoming electricity (cogeneration, solid fuels etc).

 

These technologies are obviously very broad and in some ways each technology is scientifically unique, but they all have the common features that they will…

 

·     Increasingly reduce consumed kWh, requiring electric tariffs to have a greater proportion of fixed charges if the true economic cost of network connection is to be fully recovered.

 

·     Provide customers with increasing choices of alternative energy supplies, reducing the need for regulation. 

 

The resulting issues

 

That reduction of consumed kWh could have 2 major head-line implications (and as a starting point I’m going to make the bold assumption that policy and tariff mechanisms are put in place to restrict electric car re-charging to off-peak periods)…

 

·     Traditional electricity generators are likely to face significant changes to their legacy generation profiles, which may include significant reductions in kWh or possibly generation at different times. This has the potential to strand marginal generation, but also has the possible upside of better utilization of base-load and shoulder generation.

 

·     Grid and network companies are likely to see increasingly bi-directional electricity flows that will start with a reduction in incoming kWh which may then extend to increasing outgoing kWh. As Pipes & Wires has reiterated, the costs of the network will stay pretty much constant (or possibly even increase) but will need to be recovered from fewer kWh. One option is to increase the per-kWh price, however that will simply encourage further reductions in kWh consumption.

 

If we then relax my initial assumption of restricting car re-charging to off-peak so that cars can be re-charged any time, the following further issues may emerge…

 

·     Traditional electricity generators may see increased generation during peak times, leading to increased fossil-fuelled generation in many jurisdictions.

 

·     Grid and network companies are likely to see increased kW demand which will almost certainly require a lot of growth CapEx which in turn must be recovered from customers. As Pipes & Wires has previously noted, under conventional kWh-based tariffs peaky loads (in which the peak kW tend to be large compared to the kWh consumed such as air conditioners) tend to draw a subsidy from customers with non-peaky loads.

 

Issues that the post 31st March 2020 regulatory model will need to address

 

The regulatory model that takes over when the next DPP expires on 31st March 2020 will need to address the following issues…

 

·     Rather than being universally applicable to all customer connections owned by a non-exempt EDB, regulation will need to operate solely as a back-stop for those customers who genuinely cannot (and not simply don’t or won’t) adopt alternative energy sources and lapse for those customers who install alternative energy sources. This might also include relaxing the information disclosure requirements.

 

·     An ability to include increasingly fixed tariffs to ensure that the true economic cost of network connection is recovered. Customers’ ability to install alternative energy sources will provide counter-veiling economic power because if fixed charges increase too much those customers have the choice of going off-grid.

 

·     Equating feed-in tariffs to consumed energy tariffs (like Contact Energy and Meridian Energy have recently done). The declining cost of alternative energy sources means there is no need for subsidies.

 

·     Increased information on customers’ electric bills. Industry opinion seems divided on this … some are saying nobody will bother to read all the extra information, others claiming that exported energy and subsidies to achieve public policy objectives need to be clearly stated, and presumably others who will want the subsidies disguised or buried.

 

The current regulatory framework, and how it might need to be amended

 

The current regulatory framework includes the following features that might need to be amended (and this is certainly not an exhaustive list)…

 

Ref.

Requirement

What might need amending

s52G of the Commerce Act 1986

Regulation of goods or services only if there is … little or no competition.

Increased recognition of this requirement, such that blanket regulation of non-exempt EDB customers does not occur.

s52R of the Commerce Act 1986

Sets out purpose of the Input Methodologies (IM’s).

Recognition that IM’s only apply to customer connections that don’t or can’t install alternative energy.

s53A of the Commerce Act 1986

Sets out the purpose of information disclosure.

Recognition that disclosure need not include assets that could be subject to competition (ie. customer connections that have installed alternative energy sources).

s54(1)(a) of the Commerce Act 1986

Provides for all EDB’s to disclose information.

Relaxing so that only assets or customer connections not able to be supplied by alternative energy sources are subject to disclosure.

s54(1)(b) of the Commerce Act 1986

Provides for all non-exempt EDB’s to be subject to price-quality regulation.

Relaxing so that only assets or customer connections not able to be supplied by alternative energy sources are subject to price-quality regulation.

s54E of the Commerce Act 1986

Declares electricity line services to be regulation.

Relaxing so that only electricity line services that are not subject to completion from alternative energy sources be subject to regulation.

s54G of the Commerce Act 1986

Subjects certain electricity line services to default or customised price-quality regulation.

Relaxing so that only electricity line services that are not subject to completion from alternative energy sources be subject to price-quality regulation.

ss14-17 of the Electricity (Low Fixed Charge Tariff Option For Domestic Customers) Regulations 2004

Sets out the minimum requirements for EDB tariffs with particular regard to the fixed component.

Removal of the requirement to offer low fixed charges to any primary residence that has installed alternative energy sources.

 

So … let’s sharpen the pencils and get thinking…

 

Global

 

Global - has price regulation of electric wires had its’ day ??

 

Introduction

 

Price regulation of electric wires has been around since the early 1900’s, but the principles of regulating monopoly infrastructure appear to go back even further to the beginning of piped coal gas around the 1850’s. This article considers 2 major trends that make it prudent to consider whether price regulation of electric wires has maybe had its day.

 

The original reasons for regulation of electric wires

 

The original reason for regulating electric wires (electricity distribution services) was an agreement that apparently involved J.P Morgan that an incumbent electric wires company would be an exclusive franchise in return for that incumbent being price regulated. Morgan quickly recognised that competition would be economically inefficient, and agreed to price regulation of the incumbent by the state authorities in return for an exclusive supply (distribution) area.

 

Trends that are diminishing the need for price regulation

 

A bit over a century on from the original price regulation we now face 2 significant issues that are making price regulation less necessary and increasingly harder to accurately apply…

 

·     Technology is providing alternative energy choices for customers, particularly rooftop solar supported by batteries (which are making network connection less and less critical). The increasing choice of alternative energy sources is shifting the balance of power towards customers, diminishing the need for regulation (this issue was raised during question time at the Commerce Commission’s recent conference on the WACC revision).

 

·     These technologies are eroding the legacy per-customer kWh consumption assumptions that many regulatory regimes are based on, leading to over-stated kWh forecasts. When actual kWh consumption is less than the regulators forecast, revenue may be less which can lead to under-funding.

 

So it appears that 2 things are occurring … there is less need for regulation, and regulation is increasingly struggling to accurately forecast future circumstances.

 

Global – storing peak-time electricity

 

Introduction

 

One of the first questions people used to ask me about electricity was “can it be stored” in the context of the daily load cycle. Of course the answer used to be “no … not as electricity, but as other forms of energy”. This article examines the trends in battery storage technologies that are rapidly turning that answer into a “yes”.

 

How we used to store peak-time electricity

 

We used to store peak-time energy as primary energy rather than directly as electricity … water at the top of a dam, diesel in a tank, gas in a pipeline etc. This of course often required generation plant that had 2 characteristics…

 

·     It has to be able to start or at least ramp up fairly quickly, which often requires hydro or gas turbines. Of course the trade-off with the rapid starting capability of open-cycle gas turbines is that they have a lower thermal efficiency.

 

·     It usually runs at a low annual load factor. This has created cost recovery difficulties in markets that pay for MWh rather than kW.

 

Battery storage technologies

 

Batteries have been steadily improving over the years, ostensibly on a couple of dimensions…

 

·     The volume of electricity that can be stored per unit weight.

 

·     The time required to re-charge.

 

·     The number of times that the battery can be usefully re-charged.

 

·     Specific technologies that can be escalated in scale.

 

Each of these dimensions has been driven by different applications such as mobile phones and electric cars.

 

Likely uses for battery storage

 

Battery storage is likely to have 3 main uses…

 

·     Buffering intermittent renewables (wind and solar).

 

·     Releasing stored (off-peak) electricity during peak times.

 

·     Providing an alternative to building additional lines (refer to Pipes & Wires #86 “US – big batteries for the Lone Star State”).

 

Those who have had the pleasure of my 2 day electricity training course will hopefully remember that 1 of the future scenarios discussed in Chapter 10.2 is the “battery charger” scenario in which conventional electric grids essentially become a giant battery charger. So … a very exciting future out there.

 

UK & Europe

 

Germany – the district of Feldheim goes self sufficient

 

Introduction

 

Going off-grid is a topical issue, so this article examines the efforts by the district of Feldheim near Berlin to go completely energy self-sufficient. 

 

A bit about Feldheim

 

Feldheim is a district of the city of Treuenbrietzen, about 60km south-west of Berlin. It has about 130 residents living in about 40 houses, and covers about 6.3km2 … so it is pretty small. In electrical terms that’s about 1 GWh of electricity per year (noting that they did have oil heating).

 

The technologies adopted

 

Some of the technologies that supply Feldheim include…

 

·     Wind, from 43 turbines owned by Energiequelle Gmbh. These have an installed capacity of about 81MW, and generate about 160 GWh per year so not surprisingly over 99% of the generated electricity is exported.

 

·     Thermal generation fuelled by gas from pig manure and cow manure generating about 4 GWh per year.

 

·     Thermal generation burning forestry (timber) waste.

 

·     Solar panels generating about 2.7 GWh per year.

 

·     A second planned stage including a battery bank to smooth the fluctuations in wind generation.

 

What might the issues and concerns be ??

 

Let’s identify the issues and concerns using the “Energy Trilemma Model”…

 

·     Security of supply - given the presumably secure supply of manure and timber waste to fuel the generators, security of electricity supply shouldn’t be much of a problem.

 

·     Price – apparently the locals are paying about 30% less for their electricity than they used to. However there are 2 issues buried slightly below the surface that need examining …

 

 

 

So maybe those subsidies are why the locals get cheap electricity (and heat).

 

·     Emissions – presumably the emissions are pretty close to zero. However we need to factor in the emissions from any quick-start gas turbine plants used to buffer wind and solar variations, remembering that if renewable generation didn’t have priority access to the grid secure, non-emitting generation such as nuclear could be used.

 

The wider picture

 

So it appears that Feldheim has not gone “off grid” as many claim, but is in fact very much “on grid” and receiving various subsidies (so maybe they’re the clever ones !!).

 

North America

 

US – reforming tariffs to recover costs from low-use consumers

 

Introduction

 

Recovery of the full economic cost of operating a network in the face of declining kWh consumption continues to be a challenge … I’d go as far as saying that correctly managing this regulatory disconnect is probably 1 of the 3 or 4 big issues facing electric distribution companies (EDC’s) globally. This article examines San Diego Gas & Electric’s (SDG&E) proposed tariff reform which opponents claim will include a $10 per month fixed charge.

 

The key issues around tariff reform

 

The key issues are…

 

·     The cost of operating a network is pretty much fixed, regardless of kWh consumption. In economic-speak, we would say it has a high ratio of fixed to variable costs.

 

·     Many jurisdictions either prefer or require (by regulation) that those fixed costs be recovered on a kWh basis rather than paying a fixed daily charge (which would be more economically efficient). Hence an annual kWh consumption was assumed (about 8,000kWh per domestic customer in New Zealand), from which a c/kWh tariff was derived.

 

·     Any reduction in kWh consumption (including as a result of roof-top solar) leads to under-recovery of the high fixed costs.

 

In addition to these key issues there are a range of legacy tariff issues stemming from the enacting of California Assembly Bill 1X in February 2001 which inter alia created 4 tiers of tariffs, capped tariffs for the 2 lowest tiers and left the 2 highest tiers paying about 50% more than the true cost of supply.

 

SDG&E’s proposed tariff reform

 

Key features of SDG&E’s reformed tariff proposal includes…

 

·     A strong emphasis that customer choice must be complemented with a transparent unbundling of all tariff components.

 

·     Tariffs should more accurately signal underlying costs.

 

·     Tariffs must not allow unreasonable shifting of costs to other classes of customers.

 

·     A recognition that a smooth transition from legacy tariffs is required.

 

·     An emphasis that full cost recovery is necessary to maintain a safe, reliable electric supply.

 

·     Recognition that incentives or subsidies required to achieve public policy goals must be separately identified on the bill, so that customers can see how much those subsidies cost.

 

·     The principles of fairness and equity.

 

The opponents’ response

 

One of SDG&E’s opponents is The Utility Reform Network (TURN). TURN’s objections include…

 

·     The proposed $10 per month fixed charge, which it argues discourages energy conservation and disadvantages low-income customers.

 

·     Any introduction of time-of-use (TOU) metering which could increase electric bills in hot locations (because air conditioner use tends to coincide with grid congestion).

 

Another opponent, the Alliance For Solar Choice, points out that the value proposition for roof-top solar declines as fixed charges are introduced (which it undeniably does, but if that is the case then the value proposition must rely on an implicit subsidy).

 

The editor comments

 

The real question underlying these issues is whether people believe that low users should have their cost of distribution network connection subsidised by other classes of customers. If someone does believe that (as it appears that TURN and AFSC do) a sensible way forward will never be achieved, and it will rely on regulators taking a balanced view of how the long-term objectives of reliable electricity supply will be achieved.

 

US – reducing the ROE on electric transmission assets

 

Introduction

 

We’re all familiar with the inventive that a correct ROE provides to asset investors, and how an ROE that is too low can discourage investment and threaten long-term supply reliability. This article examines a recent Federal Energy Regulatory Commission (FERC) ruling that will reduce the ROE on electric transmission assets in the New England states from 11.14% to 10.57%.

 

Regulatory framework

 

The regulatory framework includes inter alia s206 of the Federal Power Act which authorises the FERC to investigate and if necessary determine a “just and reasonable rate” for electric transmission if a complaint is received.

 

The FERC’s decision

 

Based on a complaint back in 2011 that electric transmission tariffs were too high, the FERC investigated and in mid-October 2014 released its Opinion No. 531-A. Key features of that decision include…

 

·     Adoption of a 2 step discounted cash flow methodology (in its previous Opinion 531).

 

·     Concluding that gross domestic product (GDP) is an appropriate long-term growth rate to use.

 

·     Concluding that the existing 11.14% base ROE is unjust and unreasonable, and that a just and reasonable base rate is 10.57%.

 

·     A requirement to refund customers with interest.

 

Key issues

 

Any ROE or WACC decision has the potential to change investment patterns, with a reduction in allowable ROE leading to the following possible outcomes…

 

·     A reduction in renewal investment levels, leading to a long-term decline in asset condition and hence supply reliability.

 

·     A migration of capital to other activities. Pipes & Wires #98 noted that 1 of the underlying drivers of the flurry of mergers was migration of capital from individual state jurisdictions to the FERC jurisdiction which typically allowed a higher ROE.

 

So, like all things, time will tell what investment incentives Opinion 531-A will prompt.

 

 

Australia

 

SA – the 2015-2020 revenue determination

 

Introduction

 

SA Power Networks recently submitted its Regulatory Proposal (rate case) to the Australian Energy Regulator for the 5 year regulatory period beginning on 1st July 2015. This article summarises the key features of the Proposal to set some context for analyzing the Draft and Final Determinations.

 

The regulatory framework

 

The regulatory framework has its basis in s7 of the National Electricity Law, which states the National Electricity Objective which is inter alia to promote efficient investment in electricity services for the long-term benefit of consumers. Chapter 6 of the National Electricity Rules sets out the details for economic regulation of distribution services.

 

Key features of the process to date

 

Key features of the process to date include…

 

Parameter

Initial Proposal

($ nominal)

Draft Determination

Revised Proposal

Final Determination

Total OpEx

$1,554m

 

 

 

Total CapEx

$2,485m

 

 

 

Opening RAB

$3,829m

 

 

 

Regulatory depreciation

$936m

 

 

 

Unsmoothed revenue

$4,782m

 

 

 

P0

4.3%

 

 

 

X

0%

 

 

 

 

Pipes & Wires will comment further when the AER releases its Draft Determination.

 

Queensland – the 2015-2020 revenue determinations

 

Introduction

 

Energex and Ergon Energy recently submitted their Regulatory Proposals (rate cases) to the Australian Energy Regulator for the 5 year regulatory period beginning on 1st July 2015. This article summarises the key features of those Proposals to set some context for analyzing the Draft and Final Determinations.

 

The regulatory framework

 

The regulatory framework has its basis in s7 of the National Electricity Law, which states the National Electricity Objective which is inter alia to promote efficient investment in electricity services for the long-term benefit of consumers. Chapter 6 of the National Electricity Rules sets out the details for economic regulation of distribution services.

 

Key features of the process to date (Energex)

 

Key features of the process to date include…

 

Parameter

Initial Proposal

($ nominal)

Draft Determination

Revised Proposal

Final Determination

Total OpEx

$1,738m

 

 

 

Total CapEx

$3,240m

 

 

 

Opening RAB

$11,313m

 

 

 

Regulatory depreciation

$502m

 

 

 

Smoothed DUOS revenue

$9,832m

 

 

 

P0

0%

 

 

 

X

2%

 

 

 

 

Key features of the process to date (Ergon)

 

Key features of the process to date include…

 

Parameter

Initial Proposal

Draft Determination

Revised Proposal

Final Determination

Total OpEx (nominal)

$2,035m

 

 

 

Total CapEx (real)

$3,555m

 

 

 

Opening RAB

$10,041m

 

 

 

Regulatory depreciation

$904m

 

 

 

Unsmoothed revenue

$8,229m

 

 

 

P0

15.85%

 

 

 

X

Varies

 

 

 

 

Pipes & Wires will comment further when the AER releases its Draft Determination.

 

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 three 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.

 

General stuff

 

Guide to NZ electricity laws

 

I’ve compiled a “wall chart” setting out the relationship between various past and present electricity Acts, Regulations, Codes etc in sort of a chronological progression. To request your free copy, pick here. It looks really cool printed in color as an A2 or A1 size.

 

A bit of light-hearted humor

 

What if price control had been around in the 1920’s and 1930’s ? A collection of photo’s with humorous captions looks at some of the salient features of price control. Pick here to download.

 

Conferences & training courses

 

The following conferences and training courses are planned...

 

·     Fundamentals of the NZ electricity industry, Wellington, 16th – 17th March 2015.

 

·     Fundamentals of the NZ electricity industry, Auckland, 20th – 21st April 2015.

 

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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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.