Pipes & Wires

INSIGHT AND ANALYSIS OF COOL ENERGY & INFRASTRUCTURE STUFF

Issue 144 – August 2015

From the editor’s desk…

Welcome to Pipes & Wires #144 after a few months break. This issue starts by examining 2 large mergers in the US and the privatisation of TransGrid in Australia. We then look at 2 cost of capital determinations in NZ, and then look at a wide range of energy policy and market issues including the UK’s declining security of supply, the recently released Tasmanian energy strategy and the likely future of hydro in the US. So … happy reading.

Matters for attention in NZ

Readers’ attention is drawn to the following matters…

· The Select Committee on the Health & Safety Reform Bill has reported back.

· Changes to the requirements for connecting embedded generation to distribution.

· Increasing interest in ISO 55000:2014 in regard to asset management practices and systems, and the associated withdrawal of BSI PAS 55:2008.

· Revised standard NZS 7901:2014 for Safety Management Systems.

Interesting fact…

Most of us are aware that increasing penetration of air conditioners is requiring summer peaking plant. Readers might be surprised to learn that the world’s first summer peaking generation plant was built as far back as 1942 (back in the day when installing air conditioning literally cost a fortune).

Mergers & acquisitions

US – progress on the We Energies – Integrys merger

Introduction

Pipes & Wires #141 and #143 examined of We Energies $9.1b bid for Integrys Energy Group and noted a number of regulatory approvals that were required. This article notes the conclusion of the regulatory approvals process.

The proposed merger

The proposed merger is a combined stock, cash and assumption of debt deal totaling $9.1b which values Integrys at $71.47 per share. The merged company would supply 1,490,000 electric customers and 2,445,000 gas customers and would be headquartered in Milwaukee.

Progress on the required approvals

Progress on the required approvals is as follows…

Regulator	Progress on approval
Federal Energy Regulatory Commission.	Approved in mid-April 2015, stating that there would be no cross-subsidy of a non-utility associate company.
Wisconsin Public Service Commission.	Approved in late April 2015, with the major conditions being that any profit over and above the authorised return on equity would need to be returned to We Energies customers, and a gas-fired generation plant proposed by We Energies subsidiary Wisconsin Public Service is to be abandoned.
Illinois Commerce Commission.	Approved in June 2015, with a major condition being a 2 year tariff freeze.
Michigan Public Service Commission.	Approved in mid-April 2015.
Minnesota Public Utilities Commission.	Approved in June 2015.

The completion of the regulatory approvals process concludes Pipes & Wires analysis of this merger.

US - the Exelon-Pepco merger nears final approval

Introduction

Previous issues of Pipes & Wires have examined Exelon’s proposed acquisition of Pepco. This issue notes two further regulatory approvals by the Delaware and Maryland Public Service Commissions.

Key features of Exelon’s offer

Exelon has made a $6.8b all-cash offer of $27.25 per Pepco share, which represented a 24.7% premium to Pepco’s closing price on the announcement day.

Status of the required approvals

The status of the regulatory approvals is…

Regulator	Current status of approval
Federal Energy Regulatory Commission.	Approved 20^th November 2014.
District of Columbia Public Service Commission.	Application filed on 18^th June 2014.
Delaware Public Service Commission.	Approved in May 2015, but with conditions including a package of benefits worth $42m to Delaware and Delmarva Power customers.
Maryland Public Service Commission.	Approved in May 2015, including 46 conditions that included a $100 credit to all Maryland and Delmarva Power customers, improved fault response and establishment of a $43m energy efficiency fund.
New Jersey Board of Public Utilities.	Approved on 11^th February 2015, with the 2 conditions that include a settlement being reached between Exelon, Pepco, the Board and the Independent Energy Producers of New Jersey that included provisions for $15m of efficiency gains for customers of Atlantic City Electric, and establishing a fund of $62m to provide rebates to Atlantic City Electric customers.
Virginia State Corporation Commission.	Approved 8^th October 2014.

Pipes & Wires will comment further as the (Washington) DC Public Service Commission decided whether or not to approve the deal.

Industry restructurings

Aus – the race is on for TransGrid

Introduction

The (estimated) $30b sale of poles and wires in the Australian state of New South Wales (NSW) recently commenced with a formal invitation for expressions of interest in the long-term lease of the state’s electricity transmission business TransGrid. This article examines the likely bidders and the next steps in the process.

A bit about TransGrid

TransGrid owns and operates the electricity transmission grid throughout the state of NSW, and is 100% owned by the NSW government. TransGrid operates 12,900km of lines and 99 substations and switching stations at 132kV, 220kV, 330kV and 500kV.

What is actually on offer ??

What is being offered is a 99 year lease of the TransGrid assets, presumably similar to the 200 year lease of ElectraNet in South Australia.

The likely bidders

Initial likely bidders were thought to include…

· Hastings Funds Management in association with Spark Infrastructure, the Abu Dhabi Investment Authority, the Canadian Pension Fund and Wren House Infrastructure.

· The Australian Super Fund.

· Cheung Kong Infrastructure.

· State Grid Corporation of China in association with Macquarie Bank.

· Singapore Power through AusNet Services.

Expected bids

Short-listed bidders are expected to offer between 1.2x and 1.5x TransGrid’s regulatory asset base (RAB) of $6b, with interest in the fiber assets as a source of revenue growth.

Next steps

Expressions of interest closed on 14^th July, and binding bids are due in mid-September. Final bids are due in November, so Pipes & Wires will make further comment then.

People in power

This series of historical interest articles follows on from a similar series a few years ago, and examines the lives and achievements of electrical pioneers that were born in the last few decades of the 1800’s.

Thomas W. Martin builds an electric empire

Birth, early years and education

Thomas Wesley Martin was born in Scottsboro, Alabama in 1881. After attending prep school until the age of 17, Thomas attended the University Of Alabama where he completed a law degree in 1901. His pursuit of law was not surprising as his father William Logan Martin was a prominent lawyer who was appointed Alabama’s attorney general in 1889. Thus began a life in which young Thomas was in the company of several prominent and influential lawyers.

The law practice in Montgomery

In 1901 Thomas began practicing law in Montgomery, Alabama in his fathers’ law practice of Tyson, Wilson & Martin in which young Thomas was introduced to Massey Wilson who got Thomas working on the legal issues of hydro-electric dam construction. Again, this seems to have been a very fortuitous start for Thomas as his fathers’ partners were amazingly well politically connected ... John Tyson had been a City Councillor, an Alabama Supreme Court judge, and an Alabama Congressman, whilst Massey Wilson was a former Alabama Attorney General. It appears that Thomas then left his father’s practice around about 1903 to become Alabama’s Assistant Attorney General until about 1911.

The introduction to things electric

Around 1912 James Marshall from Massachusetts bought the rights to develop a hydro dam on the Coosa River from Alabama Power, having retained Thomas the previous year as legal counsel. The dam became operational in 1914 and was the starting point for Alabama’s electric supply industry.

Thomas’ career continues as Alabama Power expands

Thomas served as legal counsel for the emerging Alabama Traction, Light & Power until James Mitchell’s death in 1920 whereupon Thomas became president. Many initiatives began during Thomas’ presidency…

· The beginning of a rural electrification program.

· The establishment of a hydrology laboratory in Birmingham to assist hydro dam design.

· The completion of the Mitchell Dam on the Coosa River in 1921.

· Establishment of an economic development unit to attract new industry to the state.

· Funding a program at Auburn University to determine how electricity could improve farm yields.

On a wider scale, Thomas also encouraged electrical inter-connection between Alabama and Georgia that resulted in the formation of the Southeastern Power & Light holding company that eventually included Mississippi Power, Georgia Power, South Carolina Power and Gulf Power. Around the time of the Wall Street crash, SP&L became investor owned and amalgamated with Midwestern Utilities and the Tennessee Electric Power Company to form Commonwealth & Southern.

The formation of Southern Company

Readers with long memories (or a bent for history) might remember from Pipes & Wires #55, #97, and #98 that C&S played a significant role in shaping the investor-owned electricity sector before being broken up as a result of the Public Utility Holding Company Act 1935. After being busted up because of their non-contiguous networks, Thomas took a lead to form the Southern Company which in 1949 became the holding company for the 4 big electric companies Alabama Power, Georgia Power, Mississippi Power and Gulf Power.

Later years

Thomas retired as president of Southern Company and Alabama Power in 1949, but remained influential with both electrical matters and civic affairs until his death in 1964.

Regulatory decisions

NZ – gas under pressure

Introduction

The Commerce Commission recently released its cost of capital determination for any customised price-quality path that Maui Developments may make for its gas transmission service until June 2016. This article examines the key features of that determination.

Regulatory framework

The regulatory framework is set out s5.3 of the Gas Transmission Services Input Methodology Determination 2012, whilst the wider framework for setting WACC’s is s52T of the Commerce Act 1986 which sets out the matters covered by the Input Methodologies.

Key features of the gas transmission WACC

Key features of the gas transmission Vanilla WACC include…

Vanilla WACC period	Mid-point	67^th percentile
3 years	6.63%	7.16%
4 years	6.62%	7.15%
5 years	6.71%	7.23%

NZ – determining the WACC for electricity transmission

Introduction

The Commerce Commission recently released its WACC determination that will apply to electricity transmission grid operator Transpower for the year ending 30^th June 2016. This article examines the key features of that determination.

Regulatory framework

The regulatory framework is set out in clauses 2.4.1 to 2.4.7 of the Transpower Input Methodologies Determinations 2012 (ref. NZCC 17). This is pursuant to Subpart 3 of Part of the Commerce Act 1986.

Key features of the WACC determination

Key features of the Transpower WACC determination include…

	25^th percentile	Mid-point	67^th percentile	75^th percentile
Vanilla WACC	5.23%	5.95%	6.41%	6.66%
Post-tax WACC	4.60%	5.32%	5.78%	6.03%

NZ - previous WACC decisions

Some of the Commissions’ previous WACC decisions are as follows.

WACC decision applies to	Approx date	Mid-point WACC	75^th (or 67^th) percentile WACC
Vector and Powerco gas pipelines for year ending 30^th June 2016.	July 2015	Vanilla 6.65%.	Vanilla 75^th percentile 7.46%.
Transpower for year ending 30^th June 2016	July 2015	Vanilla 5.95%.	Vanilla 67^th percentile 6.41%.
Maui CPP application before June 2016	June 2015	Vanilla 6.63% to 6.71%.	Vanilla 67^th percentile 7.16% to 7.23%.
All electricity distribution for year starting on 1^st April 2015.	April 2015	Vanilla 6.02%, post-tax 5.37%.	Vanilla 6.49%, post-tax 5.84%.
Wellington Airport for year starting on 1^st April 2015.	April 2015	Vanilla 6.93%, post-tax 6.71%.	Vanilla 7.91%, post-tax 7.69%.
Powerco gas CPP application before April 2016.	March 2015	Vanilla 6.70% to 6.72%.	Vanilla 7.23% to 7.25%.
Maui Developments for 2016 disclosure year	January 2015	Vanilla 7.08%.	Vanilla 7.89%.
Vector, GasNet CPP application before December 2015.	December 2014	Vanilla 7.11%, 7.14%, 7.22%.
All electricity CPP applications after 30^th September 2014.	September 2014	Vanilla 6.58%, 6.64%, 6.72%.
Auckland, Christchurch Airports for 2015 disclosure year.	July 2014	Vanilla 7.64%.	Vanilla 8.63%.
Vector, GasNet for 2015 disclosure year.	July 2014	Vanilla 7.54%.	Vanilla 8.35%.
Transpower for 2015 disclosure year.	July 2014	Vanilla 6.83%.	Vanilla 7.55%.
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 March 2015.	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 December 2014.	December 2013	Vanilla 7.56%.
All CPP applications before 30^th September 2014	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%.

Energy policy & markets

UK – avoiding wide-spread blackouts

Introduction

Back in May Pipes & Wires #143 examined the UK’s declining reserve capacity margin. Since then National Grid has recently announced that the risk of blackouts for the coming (northern) winter has increased since last winter. This article examines this fundamentally important matter.

The decline in reserve capacity margin

The reserve capacity margin for the 2011-12 winter was about 17%, a level recognised as providing a prudent trade-off between black-out risk and acceptable utilisation of capital. That margin fell to a whisker under 5% last winter (2014-15) and was expected to fall to about 2% for the coming 2015-16 winter (in the absence of any prompt intervention) as 2,000MW of capacity at Barking, Ferrybridge C and Littlebrook close.

The interventions

Two key interventions are planned…

· National Grid will pay for generation plant to be kept on standby. This will cost about £36m per year, and add about 50p to a monthly domestic electric bill.

· Large users such as steel mills will be asked to curtail demand during grid peaks.

The wider picture of why the reserve capacity margin is falling

The principal reason for the declining reserve capacity margin is that generation capacity closures are not being matched by new capacity. Key reasons include…

· Closure of legacy coal-fired stations under the EU’s large combustion plant directive.

· Languishing wholesale prices that are making new capacity uneconomic.

· The difficulty in obtaining certainty of forward prices for the proposed new nuclear fleet (remember what a struggle it was to get 1 station across the line).

Restoring the reserve capacity margin will therefore require price certainty for new investors. Additional market mechanisms such as the capacity market will be useful, but one way or another someone will have to build some serious generation capacity.

Aus – the release of the Tasmanian Energy Strategy

Introduction

Following the release of the Commonwealth Government’s Energy White Paper, the Tasmanian Government has recently released its own Energy Strategy entitled Restoring Tasmania’s Energy Advantage.

Vision and themes of the Tasmanian Energy Strategy

The vision of the Strategy is “restore energy as a competitive advantage for Tasmania”, along with 5 key themes…

· Delivering affordable energy at competitive and predictable prices that are among the lowest in Australia.

· Empowering consumer choice.

· Ensuring an efficient energy sector that is customer-focused.

· Utilising energy to facilitate State growth.

· Maximising Tasmania’s renewable energy opportunities.

Key outcomes include planning a second Bass Straight cable and increasing Tasmania’s hydro generation output by 10%.

The editor comments

The above 5 themes are certainly very noble and worthwhile, but how might those themes end up as tangible outcomes, principally lower and more predictable electricity prices ? A few comments…

· One of the stated directions is to use renewable energy to attract energy-intensive industries. That could prove very valuable for industries like smelting and refining that need predictably priced electricity (as long as the electricity supply is secure).

· It is expected that demand increases will prompt the private sector to build new generation capacity. That will require predictable long-term prices.

· The need to integrate a wide range of energies into a single strategy, including gas and bio-mass.

· Managing forward prices will be critical. Languishing wholesale prices dampen investment enthusiasm, but unless those low prices carry through to retail prices, consumers don’t benefit.

So it will be interesting to see how the implementation of this strategy actually works out.

US – will hydro make a comeback ?

Introduction

There is no doubt that hydro has been sidelined in the renewables debate, principally because of the way it significantly alters natural waterways. This article examines a recent Department of Energy report which suggests that hydro could make a comeback.

The key issues

The principal issue with hydro tends to be opposition from environmental groups (and that is certainly not unique to the United States). However, in amongst the non-emitting generation, hydro has the key advantage that it can be stored in bulk and its weather dependency is typically month-by-month (or even year-by-year) rather than minute-by-minute.

The current state of hydro in the US

The US has about 80,000 MW of hydro generation (excluding pumped storage), which represents about 7% of installed capacity. This generation is heavily concentrated, with 21,300 MW in Washington, 10,300 MW in California and 8,300 MW in Oregon … pretty much 50% of US hydro is concentrated on the west coast.

Additions to the national hydro generation fleet appear to be large numbers of smaller plants or improvements to existing plants, with only about 1,500 MW of additional capacity being added between 2005 and 2013.

The expected trends

New hydro (and pumped storage) capacity is expected to increase with about 5,000 MW at various stages from concept to construction. So it would appear that hydro has at least some future.

Asset strategy & management

UK – revising electricity security of supply standards

Introduction

Most of us are familiar with the Engineering Recommendation (ER) P2 planning standards for transmission and distribution network security. This article examines the current review of P2 initiated by the Distribution Code Review Panel.

The P2/5 and P2/6 standards

The P2/5 standard was introduced in October 1978 to set out the percentage of demand that should be restored within a specified time for certain levels of demand. P2/5 is fundamentally a probabilistic approach but the application of it is generally required to be done deterministically.

P2/6 was essentially a revision of P2/5 in July 2006 to recognise the increasing role that distributed generation could play in securing supply as  historic smaller (eg. 120 MW unit) coal stations were retired.  The requirements for demand security were unchanged in P2/6.  P2/6 overlaps the National Electricity Transmission System Security & Quality of Supply Standards (NETS SQSS) which is the equivalent planning and operation standards used by transmission licensees.

Philosophical difficulties with the current P2/6 and SQSS

The following philosophical difficulties have been identified…

· How useful is it to still be using an engineering standard such as P2/6 that reflects 1970’s practices and technologies.

· Although P2/6 and SQSS have a common origin, differences in specific terminology and interpretation have led to difficulties in confirming transmission license compliance and Grid Supply Points.

Specific shortcomings of P2/6

A few specific shortcomings of P2/6 include…

· The underlying value of kWh not supplied reflects 1970’s levels, and also does not reflect other factors such as how different classes of customers value a kWh not supplied, and how the value of a kWh not supplied varies with outage duration.

· Failure rates, restoration times and repair times have varied a lot since the 1970’s.

· An increase in the amount of data on the security of supply provided by distributed generation since P2/6 was written.

· It doesn’t recognise how the various incentive mechanisms or the RIIO framework incentivise network design.

All these issues are getting folded into the review process, and Pipes & Wires will comment further as that review progresses. Thanks to Mike Kay of P2 Analysis Ltd for contributing to this article.

Global - withdrawal of asset management standard PAS 55:2008

Readers should note that the asset management standard PAS 55:2008 was withdrawn on 1^st February 2015, and effectively superseded by ISO 55000. That doesn’t mean that all the hard work of achieving PAS 55 certification is now worthless, but rather that the internationally consistent ISO 55000 is now the preferred standard. To discuss how your company can move towards ISO 55000 certification, pick here.

Cool stuff

Newly published book – “Keeping The Lights On”

Well-known electricity historian and author Helen Reilly has recently published her latest book “Keeping The Lights On – The History Of System Operations In New Zealand 1939 – 2013”. Pick here to order your copy for only $46.50 from Grid Heritage. It’s a thoroughly good read, and complements Helen’s previous book “Connecting The Country”.

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, 7^th – 8^th September 2015, Wellington.

· Fundamentals of the NZ electricity industry, 19^th – 20^th October 2015, Auckland.

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…

· Economic Operation Of Power Systems (Kirchmayer).

· 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.