Pipes & Wires


Issue 148 – December 2015


From the editor’s desk…


Welcome to Pipes & Wires #148. This issue begins with the successful conclusion of a couple of significant asset sales, and then looks at the defeat of some embedded generation legislation in New Zealand. We then look at 2 regulatory determinations in Australia, and conclude this issue with a look at a wide range of energy policy and market issues in New Zealand, the UK and the United States.


I’d also like to wish you and yours a Merry Christmas and a Happy New Year. Pipes & Wires will hopefully return in February 2016.


Mergers & acquisitions


NZ – Vector sells its gas pipeline businesses




Auckland-based pipes & wires company Vector recently announced the sale of parts of its gas pipeline business to First State Funds. This article examines that asset sale.


The assets involved


There were two key assets involved…


·      The gas transmission business, comprising 3,400km of high-pressure pipelines.


·      The non-Auckland gas distribution business, comprising 7,000km of distribution pipelines supplying 163,000 connected customers in over 30 North Island towns.


These have been packaged up as Vector Gas Ltd.


The final deal


The final deal will see all the shares in Vector Gas Ltd sold to First State Funds for $952.5m, which will result in a gain of $167m. Vector expects to complete the deal by 31st March 2016 subject to approval by both shareholders and the Overseas Investment Office.


Vector’s strategy


What do we make of Vector’s strategy ?? This is the second major transaction (the first being the sale of the Wellington electricity distribution business in 2008) from which we might imply their strategy. Key features of that strategy include…


·      Migrating capital towards less regulated businesses.


·      Concentrating on the high-growth Auckland electricity and gas markets.


·      Exiting businesses with high capital expenditure forecasts.


·      Obtaining access to further energy investment and operation opportunities.


Aus – a winner for TransGrid emerges




Pipes & Wires #144 examined the NSW Government’s process of leasing its electricity transmission business, TransGrid, for 99 years. This article notes the winning bid for the lease by a consortium led by Hastings Funds Management.


A bit about TransGrid


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


The successful bidder


The successful bidder for the 99 year lease was a consortium led by Hastings Funds Management in association with Spark Infrastructure, the Abu Dhabi Investment Authority, Canada’s Caisse de Depot et Placement Quebec, and Wren House Infrastructure with a bid of $10.258b.


The other short-listed bidders included…


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


·      The Australian Super Fund in association with the Canadian Pension Plan Investment Board.


The bidding process


Pipes & Wires #144 noted that bidders were expected to offer between 1.2x and 1.5x TransGrid’s regulatory asset base (RAB) of $6b ie. between about $7.2b and $9b. The bidding appears to have been intense, with other parties thought to have bid around $9.5b to $10b.


Pipes & Wires will comment further as the NSW electricity distribution business lease process progresses.


NZ – Maui owners look to sell Maui Pipeline




Following intense interest in Vector’s gas transmission and non-Auckland gas distribution businesses, it was really not surprising that the owners of the Maui Pipeline have also considered selling. This article examines a possible sale.


The pipeline asset


The Maui Pipeline runs 307km from Oaonui (near New Plymouth) to the Huntly Power Station, and is of welded steel construction between 850mm and 750mm diameter. About 55% of the gas transported goes to 3 major industrial users (the 2 Methanex plants, and Huntly Power Station).


The pipeline owners


The Maui Pipeline is jointly owned by Shell, OMV New Zealand Ltd and Todd Petroleum Mining Ltd which operates through the joint venture company Maui Development Ltd. Maui Development contracts out the three key functions of Commercial Operator (performed by Transact), System Operator (Vector Gas) and Technical Operator (also Vector Gas).


First State Funds as a possible buyer


Following on from First State Funds successful purchase of Vector Gas, it would seem likely that they would also be interested in the Maui Pipeline to extract vertical and horizontal integration synergies. It would seem unlikely that the other rumored bidders would be able to extract similar synergies, hence they may simply be seeking a more favorable investment destination.


Regulatory implications of a common owner of both transmission pipelines


Given that both the Maui Pipeline and the (soon to be) First State Funds gas transmission pipeline are both revenue regulated common ownership may not be quite the issue it appears to be. What may be an issue is the possibility of anti-competitive behavior around access to other connected users.


Blast from the past…


This time-lapse video of the Hoover Dam being built is worth a look at, which appears to cover the period from June 1933 to May 1935. To give some perspective of the size of the dam, each 18 ton bucket of concrete raised the height only 1 inch.


Emerging technologies


NZ – solar energy bill defeated at the First Reading




Pipes & Wires #145 examined the introduction of the Electricity Industry (Small-Scale Renewable Distributed Generation) Amendment Bill. This article notes the Bill’s voting down in Parliament on 11th November 2015.


Purpose of the Bill


The Bill was designed to overcome perceived entry barriers to small-scale distributed generation by amending various clauses of the Electricity Industry Act 2010 and in particular regulate the price paid by a retailer for exported electricity.


Progress on the Bill


As noted in Pipes & Wires #147, the Bill got its First Reading in October 2015. That First Reading was concluded on 11th November 2015 and resulted in the Bill being voted down by 61 to 60.


Although the close vote would suggest a high level of support for the Bill, it is understood that at least some Member’s only voted for the Bill in order for it to proceed to the Committee stage where expert advice could be called for. Issues raised as part of the Bill’s progress include…


·      That the Bill would provide subsidies for small-scale renewables (Dunne – United Future).


·      A concession that rooftop solar will not be economic for many customers (Nash – Labour).


·      The steady increase in rooftop solar suggests that entry barriers are not as high as claimed (Hudson – National).


Regulatory decisions


Victoria – progress on the 2016-2020 revenue determinations




Pipes & Wires #145 examined the electricity distribution Regulatory Proposals (rate cases) submitted to the Australian Energy Regulator (AER) for the 5 year regulatory period starting on 1st January 2016, and noted the Initial Proposals. This article examines AER’s Preliminary Decisions.


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 (AusNet Services)


Key features of the process to date include…



Initial Proposal

($ nominal)

Preliminary Determination

Revised Proposal

Final Determination

Total OpEx





Total CapEx





Opening RAB





Regulatory depreciation





Unsmoothed revenue
















Key features of the process to date (CitiPower)


Key features of the process to date include…



Initial Proposal

($ nominal)

Preliminary Determination

Revised Proposal

Final Determination

Total OpEx





Total CapEx





Opening RAB





Regulatory depreciation





Unsmoothed revenue












6.75%, -0.45%




Key features of the process to date (Jemena)


Key features of the process to date include…



Initial Proposal

($ nominal)

Preliminary Determination

Revised Proposal

Final Determination

Total OpEx





Total CapEx





Opening RAB





Regulatory depreciation





Unsmoothed revenue











About -1%





Key features of the process to date (Powercor)


Key features of the process to date include…



Initial Proposal

($ nominal)

Preliminary Determination

Revised Proposal

Final Determination

Total OpEx





Total CapEx





Opening RAB





Regulatory depreciation





Unsmoothed revenue












7.96%, -0.75%




Key features of the process to date (United Energy)


Key features of the process to date include…



Initial Proposal

($ nominal)

Preliminary Determination

Revised Proposal

Final Determination

Total OpEx





Total CapEx





Opening RAB





Regulatory depreciation





Unsmoothed revenue












8.72%, 0%




Pipes & Wires will comment further as the Revised Proposals are submitted.


Aus – SA Power Networks challenges revenue determination




This article examining SA Power Networks challenge to the recent AER electricity distribution revenue determination follows on from Pipes & Wires #146’s coverage of the challenges to the NSW and ACT revenue determinations.


The revenue determinations


The revenue determination resulted in a significant revenue reduction from that proposed…



Proposed revenue

Final determination

Final as a percentage of proposal

SA Power Networks





The appeals to the Tribunal


On 19th November 2015 SA Power Networks applied to the Tribunal for a review of the AER’s determination. The basis of the appeal is that the AER made material errors in determining the following key components of the determination….


·      The value of imputation credits.


·      The allowable rate of return.


·      Forecasts of inflation.


·      Forecasts of the capital expenditure required for bushfire safety.


·      Forecasts of the operating expenditure required for increasing asset inspections in bushfire risk areas.


·      Forecasts of operating expenditure for no access pole inspections.


·      Forecasts of labor cost escalations.


Legal framework for the appeals


The legal framework for the appeals is set out in s71B of the National Electricity Law.


Next steps


Pipes & Wires will comment further once the Tribunal publishes its decision.


Energy policy, markets & tariffs


NZ – maybe Huntly will remain in service




Back in August 2015 Genesis Energy announced that it would close two of the 250MW coal and gas-fired units at Huntly by the end of 2018, which resulted in some wide-spread concern around the industry. This article picks up that story again in light of the possibility that Genesis is expected to reverse the 2018 closure decision.


Re-capping the closure decisions


The following thermal plant closure decisions were noted…


Effective date


MW withdrawn

Cumulative MW withdrawn

October 2014

Huntly #3.



June 2015

Huntly #4.



September 2015

Otahuhu B.



Late 2015




Late 2018

Huntly #1 and #2.




The possibility of reversing the closure decision


A recent analyst’s report forecasts a shortfall of about 350MW of mid-winter North Island generation capacity after 2018, based on demand growth and other thermal plant closures.


Genesis had previously indicated that it doesn’t make commercial sense to keep the two units available, but that it would reconsider the closure decision if the market was prepared to pay a suitable price (presumably the standing costs of keeping those two units available). The analysts’ report goes on to note that keeping the two Huntly units available for coal-firing would be a much cheaper and less riskier option than quickly building replacement gas-fired peaking plant only to find it stranded if the Tiwai smelter does close.


So as we edge towards the critical date of mid-2018 it will be interesting to see whether Genesis does reverse the closure decisions.


Global – update on the WEC trilemma ratings




The World Energy Council recently released its 2015 Energy Trilemma Index. This article examines the underlying principle of the Trilemma and notes the top performers.


The trilemma rating


The trilemma is basically a triangle model that depicts how well a country is balancing the trade-offs between the three important dimensions of…


·      Security of energy supply.


·      Accessibility and affordability of energy.


·      Environmental sustainability, including both supply and demand side efficiencies and uptake of renewables.


Key features of the Index report


The WEC’s website has a cool interactive graphic which is worth having a muck about with to see which countries are ranked best in each of the indices. Picking the country names jumps to a screen detailing that country’s energy supply arrangements and also (perhaps equally important) that country’s political, societal and economic performance. Not surprisingly the top performers have a long history of stable and consistent energy policy that has encouraged investment in security of supply, and perhaps also has historically priced energy at a sustainable level that doesn’t require steep price increases to recover the full cost of energy and energy supply.


The top performers


The top performers for 2015 are…


Index rank



Rank - security

Rank - equity

Rank - sustainability




















United Kingdom












What are the top performers of each dimension doing ??


Let’s consider what the Trilemma report has to say about the top performer in each dimension…





What that country is doing well




·      Nett energy exporter (mainly fossil fuels).

·      Diverse electricity generation portfolio.

·      Low economic dependency on fuel exports.


United States


·      Offers some of the most affordable energy in the world.




·      Generating only about 1% of its electricity from fossil fuels, which as noted weakens its security of electricity supply.


It is noted that “environmental sustainability” concerns are not confined to the Sustainability dimension but spill over into the Security dimension in that Canada’s Security rating includes consideration of diversifying away from fossil fuels (which many of us would think might weaken its security of electricity supply).


US – falling prices undermine the unregulated sector




Falling electricity prices are generally welcomed as good news, especially by policy makers and regulators seeking validation of their actions. The downside is that it makes capitally-intensive assets less bankable. This article considers that very issue as wholesale electricity prices take a bit of a dive in the United States.


The dividing line between sectors


Electric company owners generally divide assets between regulated and unregulated assets, viz…


·      Regulated assets such as poles, wires, pipes and substations. Revenue tends to be strongly influenced by the prevailing regulatory regime, which typically provides a reasonably certain revenue stream once the regulatory decision is finalised, albeit one in which the upside gains are limited (in theory … but not always in practice … in return for also limiting the downside losses).


·      Unregulated assets, typically generation plant. Revenue tends to be strongly influenced by the ability to understand and capture high-margin opportunities in various market segments. The underlying philosophy is that because generation is typically always competitive, there is no need for regulation.


The last few years have seen very conscious decisions by some electric companies to migrate their capital away from grids and into generation and retail.


What’s happening in the unregulated sectors ??


Falling gas prices are in turn forcing down wholesale electricity prices, which is especially tough for coal and nuclear plants whose costs are largely fixed and who are finding themselves squeezed out of the market by lower cost gas-fired plants whose operating costs are dominated by fuel. Declining sales volumes due to increasing energy efficiency and sluggish industrial demand limits their ability to “make it up on volume”.


It is noted that the PJM will introduce capacity payments next year (2016) however those capacity payments are not expected to fully offset the revenue losses for the coal and nuclear plants.


The implications for funding capital assets


Squeezing the earning of key segments of the electricity supply chain is not going to be helpful, with one rating agency (Moody’s) already altering its outlook for the unregulated sector for 2016 to Negative. This declining confidence in the segment could lead to higher interest costs and higher internal hurdle rates for allocating funds to coal and nuclear plants, which in turn may starve the segment of capital.


Interestingly enough, Moody’s have retained their Stable outlook for the regulated segment of the electricity supply chain, suggesting that the apparently simple decision to migrate capital from regulated to unregulated assets is not without its risks.


UK – concerns about the reserve capacity margin




Concerns about the UK’s declining reserve capacity margin has featured in previous editions of Pipes & Wires. This article examines some recent “grid incidents” in the UK that have required unusual and rather inefficient interventions.


The downward trend in reserve capacity margin


The following concerns have been noted about the UK’s declining reserve capacity margin…


·      PW #116 (November 2012) examined a report by Ofgem that forecast a base case of 4% reserve capacity margin by 2015/16 (that’s this coming winter !!!).


·      PW #143 (May 2015) noted that 2,400 MW of combined-cycle gas turbine (CCGT) plants were marked for closure, whilst the 3 CCGT’s that were expected to remain in the market were running to increasingly high capacity factors. That article poignantly noted that there was not much wriggle room for contingencies like prolonged cloud cover, no wind, plant breakdowns, gas outages or import curtailments.


·      Recent articles in the UK media have indicated that the reserve capacity margin would’ve fallen to a piddling 1.2% had the new demand curtailment program not been invoked to keep the reserve capacity margin at a breathtakingly low 5.1%.


Recent events in the UK


In early November 2015 National Grid (in its role as System Operator) invoked a new scheme of paying large industrial and commercial customers to be willing to curtail demand between 4pm and 8pm … the official term is a Notification of Insufficient System Margin (NISM). The NISM arose because of extended maintenance shutdowns at some coal-fired plants, and a significant reduction in wind power to about 400 MW during the peak.


The rise of back-up diesel generators


Earlier in 2015 National Grid began a scheme of subsidising grid-controlled diesel generators to help maintain the reserve capacity margin. Not surprisingly many entrepreneurial sorts are installing diesel generators (in some cases, the very same entrepreneurial sorts who also installed wind farms), which are expected to amount to about 1,500 MW.


The editor comments


Well … what can be said ?? It is ironic that the UK’s low carbon electricity policies are more than likely going to create more CO2 emissions than ever whilst also diminishing industrial production.


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....


·      Facilitating an executive workshop on the future trends and issues for the distribution industry.


·      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...


·      No events scheduled.


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.


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”.


House-keeping stuff


Opt out from Pipes & Wires


Pick this link to opt out from Pipes & Wires. Please ensure that you send from the email address we send Pipes & Wires to.




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.