From the
editor’s desk…
Welcome
to Pipes & Wires #153. This month we start with a look at a big merger in
the United States to set some context for future analysis, and then it’s pretty
much all regulatory decisions and policy. That includes two gas decisions and
one electricity determination from Australia, along with appeals to electricity
and gas decisions in Sweden (one of which led to further regulation to better
prescribe the regulatory framework).
We
also discuss an examination of the electricity market competitiveness in the UK
and end this issue with a discussion of a proposed new water regulatory model
in the Australian state of Victoria.
So …
until next month, happy reading…
Recent client projects
Utility
Consultants has been involved in the following client projects…
Strategic advice to an electricity trust
· Client - electricity trust.
· Location – New Zealand.
· Project – a ½ day workshop was held with this client to
advise them on specific issues facing the electricity distribution sector
including regional consolidation of distribution businesses, the separation of
lines and energy, the likely impact of solar and battery technologies and some
political trends heading into the 2017 general election.
Expert witness to defend insurance claim
· Client - electricity distribution.
· Location – Australia.
· Project – this project involved challenging the allegations
that an electricity distributors’ inadequate maintenance practices resulted in
a fire which destroyed a commercial premise. The scope of advice provided
included an analysis of two regulatory determinations which revealed that the
distributor had clearly proposed an increased spend to address declining asset
condition which was rejected by the regulator, and a rejection of the plaintiff’s
interpretation of reliability centered maintenance.
Peer
review of asset valuation methodology
· Client - electricity distribution.
· Location – New Zealand.
· Project – this project involved providing a report to the
client’s auditor confirming that the client’s depreciated replacement cost
valuation methodology complied with the applicable accounting and valuation
standards. This included consideration of impairment due to declining energy
throughput.
Pick
to here to download a profile of recent projects, or here to contact Phil.
Mergers & acquisitions
US – Great Plains launches bid for Westar
Introduction
News
recently emerged that Great Plains
Energy has launched a bid for Westar Energy that, if successful, will give Great Plains an enlarged
business of 1,500,000 customers in Kansas and Missouri. This article examines
the early stages of the bid.
A bit about the companies
The
two companies are…
· Great Plains Energy is the parent company of Kansas City Power
& Light, with revenues of about $2.6b.
· Westar Energy supplies about 700,000 customers in central and eastern Kansas, operates 7,000 MW of generation, and has annual revenues
of about $2.5b.
The
merged entity would have about 1,500,000 customers, 13,000 MW of generation and
annual revenues of about $5.1b, and is expected to be completed in early 2017
subject to all required approvals.
Details of Great Plains bid
Key
features of Great Plains bid include…
· An offer of $51 cash for each Westar share.
· An offer of between 0.27 and 0.31 Great Plains shares for
each Westar share (tentatively valued at $9).
· Assumption of $3.6b of Westar debt by Great Plains.
The
total transaction is valued at $12.2b. The tentative cash-plus-stock offer of
$60 for each Westar share represents a 13% premium over Westar’s closing price
of $53.
The strategy behind the deal
Key
strategies behind the deal include…
· Attempts to shake off increased compliance costs and
sluggish kWh growth by improving efficiencies and scale.
· Maintaining a similar size and scale to the emerging giants.
Regulatory approvals
The
following regulatory approvals will be required…
· Kansas Corporation
Commission.
· Federal Energy
Regulatory Commission (FERC).
· Nuclear Regulatory
Commission.
Pipes
& Wires will comment further as this deal progresses
Regulatory decisions
Aus – gas under pressure in South Australia
Introduction
The Australian Energy
Regulator (AER) recently released its Final Decision for Australian Gas
Networks (AGN) South Australian gas distribution networks for the 5
year control period starting on 1st July 2016. This article examines
that Final Decision.
A bit about AGN
AGN
operates gas networks nationally that supply about 1,185,000 customers through
23,000km of distribution pipelines and 1,124km of transmission pipelines. The
subject of this article is AGN’s South Australian network which is mainly in
the Adelaide metro area.
Regulatory framework
The
basis of the regulatory framework is the National Gas (South Australia) Act 2008, which sets out the National Gas Law as a Schedule to the
Act. Section 26 of the Act provides for the National Gas Rules to have legal effect, and it is those Rules that set the
detailed regulatory framework.
Key features of the process to date
Key
features of the process to date include…
|
Parameter |
Access
Arrangement |
Draft
Decision |
Revised
AA |
Final
Decision |
|
OpEx |
$353m |
$342m |
$359m |
$364m |
|
CapEx |
$699m |
$393m |
$637m |
$551m |
|
Opening
RAB |
$1,429m |
$1,414m |
$1,401m |
$1,386m |
|
Return
on equity |
9.91% |
7.3% |
9.76% |
7.1% |
|
Return
on debt |
5.44% |
5.16% |
7.14% |
5.51% |
|
Revenue |
$1,149m |
$940m |
$1,123m |
$986m |
This
concludes Pipes & Wires coverage of this decision.
Sweden – appealing the electricity distribution
determinations
Introduction
Each
of Sweden’s 180 electric distribution companies were regulated by the Energimarknadsinspektionen (Ei) on an ex-ante basis for the 1st January
2012 – 31st December 2015 supervisory period. This article follows
up the article in Pipes & Wires #132 which examined the appeal of the revenue caps for 87 of
those electric companies.
Legal framework
The
legal framework is the Electricity Act (1997:857), and in particular Chapter 5 which inter alia requires…
· The establishment of a revenue frame before each supervisory
period begins, which shall be 4 years unless special reasons for an alternative
period have been identified.
· Each electric company shall submit a revenue proposal.
· The regulator shall issue a decision on each revenue frame
at least 2 months before the start of the supervisory period.
Sequence of decisions and rulings
The
following sequence of decisions and rulings has occurred…
· In 2009 the Riksdagen (Parliament) decreed that an incentive regulation model
would be adopted.
· In October 2011 the Ei determined the revenue caps that
would apply to all electric distribution companies for the 2012-2015
supervisory period in accordance with Chapter 5 of the Electricity Act 1997.
· Eighty-seven of those electric companies appealed the Ei’s
2011 determination to the Administrative Court of Linköping on the grounds that
the Ei had no legal mandate to include an interim mechanism to limit tariff
shocks as part of the transition to incentive regulation.
· In December 2013 the Administrative Court upheld the
appeals, ruling that the Ei did not have a legal basis for including a
transitional mechanism, and should’ve adopted a pre-tax real WACC of 6.5%. The Administrative
Court’s ruling would’ve allowed some of the revenue caps to increase by 30% to
40%, which amounted to about €3.3b nationally.
· In November 2014 the Ei then appealed the Administrative Court’s
ruling in the Administrative Court of Appeals, which upheld the Administrative
Court’s original decision.
· The Ei then further appealed the Administrative Court of
Appeals decision to the Supreme Administrative Court in December 2014.
· In March 2015 the Supreme Administrative Court ruled the Ei
did not have leave to appeal, that the appeals process had been exhausted, and
that the original ruling of the Administrative Court of Linköping stands.
So a
rather lengthy appeals process came to an end, however it did result in the Ei
proposing further regulations to clarify the setting of revenue caps.
Aus – the
Victorian electricity distribution Final Determinations
Introduction
The
five electricity distribution businesses in the Australian state of Victoria have
recently been through the process of having their revenues reset by the Australian Energy
Regulator (AER) for the 5 year regulatory period starting on 1st
January 2016. This article examines the 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 (AusNet Services)
Key
features of the process to date include…
|
Parameter |
Initial
Proposal ($
nominal) |
Preliminary
Determination |
Revised
Proposal |
Final
Determination |
|
Total
OpEx |
$1,356m |
$1,191m |
$1,019m |
$1,169m |
|
Total
CapEx |
$1,690m |
$1,471m |
$1,749m |
$1,600m |
|
Opening
RAB |
$3,547m |
$3,423m |
$3,445m |
$3,442m |
|
Regulatory
depreciation |
$478m |
$369m |
$519m |
$475m |
|
Unsmoothed
revenue |
$3,567m |
$2,878m |
$3,812m |
$3,132m |
Key features of the process to date (CitiPower)
Key
features of the process to date include…
|
Parameter |
Initial
Proposal ($
nominal) |
Preliminary
Determination |
Revised
Proposal |
Final
Determination |
|
Total
OpEx |
$502m |
$445.8m |
$462.4m |
$432m |
|
Total
CapEx |
$848m |
$659m |
$825.8m |
$775m |
|
Opening
RAB |
$1,804m |
$1,795.1m |
$1,802.6m |
$1,763m |
|
Regulatory
depreciation |
$297m |
$304.6m |
$318.5m |
$335m |
|
Unsmoothed
revenue |
$1,718m |
$1,413.7m |
$1,572.2m |
$1,503m |
Key features of the process to date (Jemena)
Key
features of the process to date include…
|
Parameter |
Initial
Proposal ($
nominal) |
Preliminary
Determination |
Revised
Proposal |
Final
Determination |
|
Total
OpEx |
$499m |
$390m |
$471m |
$452m |
|
Total
CapEx |
$841m |
$774m |
$709m |
$709m |
|
Opening
RAB |
$1,191m |
$1,187m |
$1,187m |
$1,186m |
|
Regulatory
depreciation |
$243m |
$238m |
$265m |
$263m |
|
Unsmoothed
revenue |
$1,308m |
$1,082m |
$1,430m |
$1,302m |
Key features of the process to date (Powercor)
Key
features of the process to date include…
|
Parameter |
Initial
Proposal ($
nominal) |
Preliminary
Determination |
Revised
Proposal |
Final
Determination |
|
Total
OpEx |
$1,334m |
$1,256m |
$1,252.3m |
$1,277m |
|
Total
CapEx |
$2,006m |
$1,610m |
$1,783m |
$1,623m |
|
Opening
RAB |
$3,363m |
$3,344m |
$3,358m |
$3,307m |
|
Regulatory
depreciation |
$504m |
$503m |
$526m |
$559m |
|
Unsmoothed
revenue |
$3,662m |
$3,086m |
$3,303m |
$3,186m |
Key features of the process to date (United Energy)
Key
features of the process to date include…
|
Parameter |
Initial
Proposal ($
nominal) |
Preliminary
Determination |
Revised
Proposal |
Final
Determination |
|
Total
OpEx |
$800m |
$711m |
$781m |
$726m |
|
Total
CapEx |
$1,104m |
$815m |
$1,189m |
$918m |
|
Opening
RAB |
$2,189m |
$2,052m |
$2,190m |
$2,083m |
|
Regulatory
depreciation |
$640m |
$315m |
$660m |
$422m |
|
Unsmoothed
revenue |
$2,150m |
$1,841m |
$2,367m |
$2,101m |
This
article concludes Pipes & Wires examination of the Victorian electricity
distribution deteminations.
Sweden – appealing the gas distribution revenue decisions
Introduction
Sweden’s
9 gas distribution companies submitted their proposed revenue caps (rate cases) to the Energimarknadsinspektionen (Ei) in June 2014 for the 4 year regulatory control period
beginning on 1st January 2015. The 9 companies sought a total
revenue of about €787m. This article examines the appeal by 3 of the 9
companies against the Ei’s revenue cap of about €647m.
Regulatory framework
The
regulatory framework is set out in Chapter 6 of the Natural Gas Act (2005:403). Key features include…
· A requirement for tariffs shall be reasonable, objective and
non-discriminatory.
· A requirement for tariffs to reflect the costs of the
assets, and the volume of gas transmitted.
· A requirement for tariffs to reflect the use of all assets
used by that connection.
· Provision for the Ei to make more detailed regulations.
The appealing companies
The 3
gas companies that appealed the Ei’s decision are…
· Swedegas.
Basis of the appeal
The
principal basis of the appeal was that the Ei’s proposed cost of capital of
6.26% was too low. The Administrative Court ruled that the risk-free rate for
the 2015 – 2018 control period should be 3.83% instead of 3.33%, leading to a
cost of capital of 6.82%.
The decision process
Key
steps in the revenue decision process have been…
· June 2014 – submission of proposed revenue caps by
distributors.
· October 2014 – Ei publishes its revenue decisions.
· February 2016 – the Administrative Court rules in favor of
the appealing gas companies.
Pipes
& Wires will comment further on this if the Ei decides to appeal the
Administrative Court’s ruling.
Aus – gas under pressure in the Capital
Introduction
The Australian Energy Regulator (AER) recently released its Final Decision for the gas distribution networks owned by ActewAGL for the 5 year control period starting on 1st
July 2016. This article examines that Final Decision.
A bit about ActewAGL’s gas networks
ActewAGL
supplies about 138,000 customers in the Canberra, Queanbeyan and Palerang areas
from 4,500km of distribution pipelines. The distribution network is supplied
from the following two transmission pipelines…
· From the Dalton – Watson spur of the Moomba – Sydney Pipeline.
· From the Hoskintown receiving station on the Eastern Gas Pipeline (Longford).
Regulatory framework
The
basis of the regulatory framework is the National Gas (South Australia) Act 2008, which sets out the National Gas Law as a Schedule to the
Act. Section 26 of the Act provides for the National Gas Rules to have legal effect, and it is those Rules that set the
detailed regulatory framework.
Key features of the process to date
Key
features of the process to date include…
|
Parameter |
Access
Arrangement |
Draft
Decision |
Revised
AA |
Final
Decision |
|
OpEx |
$144m |
$133m |
$163m |
$169m |
|
CapEx |
$116m |
$77m |
$93m |
$81m |
|
Opening
RAB |
$368m |
$339m |
$366m |
$338m |
|
Nominal
vanilla WACC |
7.15% |
6.09% |
8.59% |
6.03% |
|
Revenue |
$358m |
$279m |
$453m |
$301m |
This
concludes Pipes & Wires examination of this decision.
Regulatory policy
UK – investigating the competitiveness of energy supply
Introduction
In
March 2014 Ofgem concluded that competition in the UK’s retail energy
markets wasn’t working as well as it should, and referred the matter to the Competition & Markets Authority to investigate. This article examines that investigation.
Scope of the investigation
The
investigation focused on the following possible causes of adverse effects on
competition (AEC’s)…
· Opaque prices or low levels of liquidity in wholesale
markets creating entry barriers.
· Vertically integrated energy companies harming the
competitive position of non-integrated energy companies.
· Market power leading to higher prices.
· Weak incentives for energy companies to compete on either
price or non-price factors.
Provisional findings of the investigation
Provisional findings of the investigation include…
· Generation plant appears to be dispatched in accordance with
the merit order.
· Based on an analysis of profitability, the Big Six energy
firms did not appear to have made excessive profits from their generation
businesses.
· Based on an analysis of profitability, the wholesale market
price does not appear to be above competitive levels.
· An absence of strong transmission location loss charges.
Pipes
& Wires will comment further when the final report emerges.
Sweden - clarifying the electricity distribution regulatory
framework
Introduction
In
March 2014 the Energimarknadsinspektionen (Ei) released a proposed amendment to the electricity distribution regulatory framework in
preparation for the 4 year supervisory period starting on 1st
January 2016. This article examines the proposed amendment.
Background
The
first supervisory period (1st January 2012 to 31st
December 2015) was based on a revenue control framework pursuant to Chapter 5
of the Electricity Act (1997:857). The Ei’s resulting revenue decisions were appealed by 87
of the 180 distribution companies, and were upheld by a succession of court
decisions.
In
April 2013 the Ei proposed a number of legislative changes to Chapter 5 to
clarify the revenue setting framework in preparation for the 2016 – 2019
supervisory period. The government allowed the Ei to continue with that work,
and in February 2014 the government submitted Bill 2013/14:85 to parliament for
approval.
Key features of the amended regulatory framework
Key
features of the amended regulatory framework include…
· An increased emphasis on including asset age in the revenue
determination process to ensure that depreciation is correctly calculated.
· A recognition that a higher cost of capital will be required
to incentivise new investment.
· A recognition that the distribution companies are not
sufficiently similar to allow highly standardised models to be used.
· Moving away from the real annuity method which has
under-stated capital costs vis-à-vis actual accounting capital costs.
· A recognition that local government legislation required
municipally owned distributors to use accounting methods that were different to
the Ei’s approach.
Some might observe that these shortcomings were not unique
to Sweden.
Aus – a new regulatory model for water price control
Introduction
Twenty
five years on from the start of CPI-X regulation, economic regulators are
seeking new regulatory models that better emulate competitive market outcomes
and return a focus on outcomes rather than detailed inputs. This article
examines the Essential Services Commission recently released Position Paper proposing a new water pricing model for the state of
Victoria.
The ESC’s concerns about the existing model
The
ESC has expressed the following concerns about Victoria’s current regulatory
model…
· It is a “one size fits all” approach.
· Based on the assumption that a technical model can produce
outcomes that are in the long-term interests of customers.
· Based on the assumption that water companies will
out-perform regulatory targets if correctly incentivised.
Readers
might observe that these concerns are unique to neither water nor to Victoria.
The proposed regulatory model
The
ESC noted that the 2013 Water Price Review included improved customer engagement by the water
companies to determine exactly what service levels customers and prices
customers wanted, but it was felt that more could be done. Two of the key
messages confronting the industry is the need for simpler regulatory processes
and for stronger incentives to deliver efficient outcomes.
Key
features of the proposed regulatory model include…
· A requirement for the water companies to explain how they
have engaged with their customers, and how the results of that engagement
translates into water business outcomes.
· Focusing the water companies on outcomes that matter to
customers, and not what matters to engineers, accountants or regulators.
· Linking financial outcomes to service delivery.
· Adopting a simple incentive framework.
· Simplifying the calculations for the cost of equity and
debt.
· Providing the strong incentive of a simpler regulatory
process for those companies that submit high quality proposals (rate cases).
· Providing an opportunity for water companies to
realistically assess their own proposals before submitting to the ESC.
Readers
might recognise that many of these features are similar to those adopted by Ofgem and Ofwat in the UK, including the RIIO and IQI mechanisms.
Next steps
The
ESC will receive written submissions on its proposal until 29th July
2016. Pipes & Wires will examine this issue further as the ESC publishes
updates.
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.
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.
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Disclaimer
These articles are
of a general nature and are not intended as specific legal, consulting or
investment advice, and are correct at the time of writing. In particular Pipes
& Wires may make forward looking or speculative statements, projections or
estimates of such matters as industry structural changes, merger outcomes or
regulatory determinations. These articles also summarise lengthy documents, and it is important that readers refer to those
documents in forming opinions or taking action.
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Consultants Ltd accepts no liability for action or inaction based on the
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