Pipes & Wires


Issue 155 – August 2016


From the editor’s desk…


Welcome to Pipes & Wires #155. This issue has a strong focus on several regulatory determinations and appeals in Australia.


In amongst that we examine the role of marginal thermal generation, and what that role might be in South Australia. We also look at the termination of a merger plan in the United States, and conclude with a look at some nuclear issues in South Africa and France.  So … until next month, happy reading…


Recent client projects


Facilitate strategy workshop


·      Client – electricity distribution.


·      Location – New Zealand.


·      Project – this project involved preparing a set of PowerPoint slides and facilitating a strategy workshop for an electricity distributor. Content included analysis of the distributor’s wider economic and demographic context, specific strengths and weaknesses, and the impact of emerging technologies.


Critique asset management plan as part of regulatory reset


·      Client – electricity distribution.


·      Location – Pacific Islands.


·      Project – this project involved critiquing an asset management plan as part of an electricity distributors’ regulatory reset. This involved highlighting aspects of the plan that the regulator might consider deficient, and recommending improvements.


Review engineering aspects of a distribution pricing methodology


·      Client – electricity distributor.


·      Location – New Zealand.


·      Project – this project involved confirming that an electricity distributors’ load group prices accurately reflected the underlying costs and the underlying attributes of electricity lines services. This included considerations of peak demand, time of use, seasonal variations and power factor.


Pick to here to download a profile of recent projects, or here to contact Phil.


System operations & security


Global - re-thinking the role of marginal thermal generation




Increased gas-fired generation seems to be featuring in the news a lot lately … headlines have come from New Zealand, Tasmania and South Australia in particular. This article examines why we are seeing this increase, and tries to unpack the issue a bit more.


Key features of the news articles


Below the immediate headline of “increased gas-fired generation”, a few common themes emerge…


·      Low hydro storage, often compounded by low hydro inflows or snow melt.


·      Low wind speeds.


·      Days on end without any sunshine.


·      Limited interconnection capacity.


In many places, all four of these themes are converging and in a roundabout way the life-saving role of marginal thermal generation gets emphasised.


The role of thermal generation


The emerging picture is that marginal thermal generation is still important, and in a world that is increasingly dominated by insecure renewable generation it is arguably more important than ever. A key premise is that a secure electricity supply requires a secure supply of primary energy (or a really huge battery), and it is becoming clear that renewables are not providing that security of supply. After all this is why hydro firming generation such as Meremere and dry year generation such as Marsden A and Bell Bay were built over 50 years ago.


The marginalization of thermal generation


There are a number of reasons why so much thermal generation has become marginalized…


·      Electricity markets generally pay for generated MWh, not for standby MW.


·      Policy and legislation has allowed renewables to squeeze thermal out of the market. We’ve seen this with the Renewable Energy Sources Act in Germany (refer to Pipes & Wires #137).


·      Regulators and policy makers are baulking at the idea of paying standby fees to marginal thermal generation. We’ve seen this in Germany (refer to Pipes & Wires #119).


·      Climate change initiatives are encouraging (or even demanding) the closure of thermal generation. We’ve seen this in the UK as many of the legacy coal-fired stations like Ferrybridge C have been closed to comply with the EU Directive 2001/80/EC on Large Combustion Plant.


Some reflections on the wider matter


Some reflections on this whole increase in thermal generation…


·      Much of the marginal thermal generation that has been running lately has only very recently been ear marked for closure (and in many cases we are fortunate that it hasn’t been dismantled). In a few cases clear thinking has prevailed and that generation has been retained to provide dry year generation.


·      Intermittent operation of thermal generation to buffer renewables tends to increase the CO2 emissions, offsetting any reduction from the renewables.


·      Closing black coal-fired generation has required either diesel-fired or brown coal-fired generation to step into the gap, which produces even more CO2 emissions.


Pipes & Wires will continue to discuss this theme as it inevitably unfolds over time.


Solar, wind, batteries & micro grids


Aus – supporting renewable generation




Further evidence is mounting that the intermittent nature of solar and wind generation is requiring back-up plant, which in most cases is either coal-fired or gas-fired. This article considers recent events in South Australia and considers what policy options might be available to achieve a reliable electricity supply.


Recent events in South Australia


Over the last 9 months or so, electricity prices in South Australia have risen sharply above the prices in NSW, Victoria and Queensland, often reaching $1,000 per MWh and on 1 occasion reaching $14,000 per MWh. One possible reason for this is the high penetration of wind power. This has squeezed legacy thermal generation out of the South Australian market so that it now relies on imported electricity from the eastern states.


Whilst it’s great that South Australia is able to export clean, renewable energy when the wind is blowing the reality is that the wind also stops blowing, so that during the 2013/14 year South Australia imported 2010 GWh but exported only 338 GWh. It’s those periods when the wind stops blowing that back-up plant is required. In South Australia that would’ve been thermal stations like Port Augusta and Pelican Point that have been mothballed for reasons that include high gas prices and “lack of market opportunities” ie. being squeezed out.


Parallel events in Germany


Readers might remember that thermal generation has been squeezed out of the market in Germany by renewables, and that thermal generation owners suggested they be paid a standby fee of €1,500 per kW per year (refer to Pipes & Wires #119 and #123).


Applying the trilemma model


Applying the trilemma model to South Australia’s current market indicates that the pursuit of lower CO2 emissions has raised prices and reduced security of supply. What is perhaps not quite so obvious is that the electricity coming through the interconnectors from Victoria is almost certain to have been generated from brown coal, which is pretty high on emissions.  


Possible policy options


On the assumption that South Australia wants a secure and reasonably priced electricity supply, a few policy settings emerge…


·      Firstly, consideration should be given to capping the penetration of wind generation in South Australia (and it is acknowledged that this will not sit easily with some).


·      Secondly, consider paying a realistic standby fee to South Australia’s gas-fired generators so they stay available. This would have the advantage of displacing brown coal-fired generation from Victoria.


·      Thirdly, consider long-term options for securing supply. Pumped storage and grid-scale batteries are 2 options, but it needs to be remembered that these technologies still require the electricity to be generated in the first place. If the 2013/14 import and export GWh represent the trend going forward, South Australia will still require additional generation.


Mergers & acquisitions


US – NextEra Energy and Hawaiian Electric terminate merger plans




NextEra Energy and Hawaiian Electric recently terminated their merger plans after the Hawaii Public Utilities Commission rejected the plan. This article looks briefly at the planned merger, but then looks more deeply into the PUC’s apparent reasons for rejected the merger.


Some wider context to Hawaiian Electric


Historically about 75% of Hawaii’s electricity has been generated by oil-fired plant, with a further 15% generated by coal-fired plant and the remaining 10% from renewables. Those oil and coal imports have understandably resulted in high electricity prices, in fact Hawaii has the highest average electricity price in the United States at about 45% higher than the next most expensive (Alaska).


The governor of Hawaii recently signed House Bill 623 into law which requires a ramping up of the renewable energy sold by each electric company (refer to Pipes & Wires #151).


A bit about the planned merger


NextEra Energy announced its plans to acquire Hawaiian Electric Industries back in December 2014. Key features of the deal included…


·      Plans for Hawaiian Electric to divest its banking subsidiary, leaving an enterprise value of about $4.3b.


·      An offer of 0.2413 NextEra shares for each Hawaiian Electric share.


·      Assumption of $1.7b of debt by NextEra.


This valued Hawaiian Electric at about $33.50 per share, or about an 18% premium to recent prices. The market’s response to the merger termination announcement was as follows…


·      NextEra’s stock rose slightly less than 1% following the announcement, suggesting that NextEra investors were somewhat neutral about the merger.


·      Hawaiian Electric’s stock closed almost 7% down, suggesting that its investors saw the merger as good idea.


The PUC’s decision


The PUC voted 2 – 0 to reject the merger. A quick read of Order # 33795 reveals the following…


·      The PUC saw the merger proposal as being important to the State of Hawaii, and not just to Hawaiian Electric’s customers.


·      The PUC recognises that emerging technologies have made managing an electric company more complicated.


·      The PUC notes that it is not sufficient to decide a merger application on the basis of commonly understood statutory standards of financial strength and management capability.


·      That several other state agencies opposed the merger proposal.


·      The PUC’s view that the proposed merger conditions do not provide sufficient benefits, nor do they adequately address legitimate concerns.


·      In particular, the PUC broadly concluded that NextEra would not be able to contribute to Hawaii’s renewable energy goals.


The central issue of renewable energy and possible approaches to mergers in a renewable-centric world


A bit of reflection on some recent mergers reveals that regulators seem to be giving additional weight to an acquirer’s ability to implement renewable energy targets. This suggests a couple of merger tactics (nothing as fancy as Pac-Man or Poison Pill defenses)…


·      Electric companies wishing to repel unwanted merger proposals could set ambitious renewable energy targets that an acquiror would be unlikely to be able to keep, or at least be perceived as being unlikely to keep.


·      An acquiror might strengthen its proposal for delivering on renewable energy targets.


Regulatory decisions


Aus – resetting the Queensland electricity transmission revenue




Queensland’s electricity transmission operator, Powerlink, has submitted its regulatory proposal (rate case) to the Australian Energy Regulator (AER) for the 5 year regulatory period beginning on 1st July 2017. This article examines the key features of that proposal to provide some context for future analysis of the AER’s decisions.


A bit about Powerlink


Powerlink is a limited company owned by the Queensland State Government. It operates 14,310km of lines at 110kV, 132kV, 275kv and 330kV between Cairns and the NSW border. Annual revenue is about $1b.


Regulatory framework


The basis of the regulatory framework is Chapter 6a of the National Electricity Rules, which are made pursuant to the National Electricity Law.


Key features of the process


Key features of the process to date include…



Initial Proposal

Draft Decision

Revised Proposal

Final Decision











Opening RAB















Smoothed revenue






Next steps


The next step is for the AER to release its Draft Decision, which is expected in September 2016.


NZ – setting the WACC




The Commerce Commission recently released its cost of capital decision that will apply to the following regulated infrastructure for the disclosure year ending 30th June 2017…


·      Transpower.


·      Gas pipeline businesses with a 30th June year end (Vector and GasNet).


·      Airports with a 30th June year end (Auckland and Christchurch).


This article examines the key features of that determination.


Regulatory frameworks


The applicable regulatory frameworks are…


·      Clauses 2.4.1 to 2.4.7 of the Transpower Input Methodologies Determination 2012.


·      Clauses 2.4.1 to 2.4.7 of the Gas Distribution Services Input Methodologies Determination 2012.


·      Clauses 2.4.1 to 2.4.7 of the Gas Transmission Services Input Methodologies Determination 2012.


·      Clauses 5.1 to 5.7 of the Commerce Act (Specified Airport Services Input Methodologies) Determination 2010.


Each of the determinations is made pursuant to Part 4 of the Commerce Act 1986.


Key features of the WACC’s


Key features of the Vanilla WACC’s include…



25th percentile


67th percentile

75th percentile






Gas pipelines











Key features of the Post-tax WACC’s include…



25th percentile


67th percentile

75th percentile






Gas pipelines











Aus – appealing the electricity revenue determinations




The Australian Energy Regulator recently released its revenue determinations for the 5 electricity distributors in the Australian state of Victoria for the 5 year regulatory period starting on 1st January 2016 (Pipes & Wires #153). This article examines the appeal of those determinations to the Australian Competition Tribunal.


Re-capping the recent revenue determinations


The unsmoothed revenue for each of the 5 distributors is as follows…



Initial Proposal

Preliminary Determination

Revised Proposal

Final Determination

Final Determination as a percent of Initial Proposal







United Energy






AusNet Services



















The applications to the Tribunal


The 5 distributors applied for leave and for review of the Final Determinations on 16th June pursuant to s71B of the National Electricity Law. Key aspects of the Final Determination that the distributors are appealing include…


·      Value of γ (gamma) adopted for calculating income tax.


·      Value of forecast inflation.


·      Estimated return on debt.


·      Cost of self-insuring.


·      Growth in labor costs.


Media estimates of the additional revenue being sought through the appeals process are about $355m.


Other recent appeals


Revenue determinations have been appealed on the following previous occasions…


·      December 2005, in which 4 of the 5 Victorian distributors appealed the Essential Services Commission’s determinations (Pipes & Wires #47).


·      October 2010, in which all 5 of the Victorian distributors appealed the Australian Energy Regulator’s determinations (Pipes & Wires #110).


·      June 2015, in which the 3 NSW distributors along with ActewAGL appealed the Australian Energy Regulator’s determinations (Pipes & Wires #146).


·      June 2015, in which Jemena Gas Networks appealed the Australian Energy Regulator’s decisions (Pipes & Wires #150).


·      November 2015, in which SA Power Networks appealed the Australian Energy Regulator’s determinations (Pipes & Wires #148).


Next steps


Pipes & Wires will comment further as the Tribunal’s decisions emerge.


Aus – resetting the Victorian electricity transmission revenue




The Australian Energy Regulator has recently released its Draft Decision for the electricity transmission revenue for Victoria’s electricity transmission operator, AusNet Services for the 5 year regulatory period beginning on 1st April 2017. This article examines the key features of that Draft Decision to provide some context for future analysis of the AER’s determinations.


A bit about AusNet Services electricity transmission business


AusNet Services is a limited company that is part publically owned and also part owned by a consortium including State Grid Corporation and Singapore Power. Its electricity transmission business operates 6,570km of lines at 132kV, 220kV and 500kV. Annual revenue is about $620m.


Regulatory framework


The basis of the regulatory framework is Chapter 6a of the National Electricity Rules, which are made pursuant to the National Electricity Law.


Key features of the process


Key features of the process to date include…



Initial Proposal

Draft Determination

Revised Proposal

Final Determination











Opening RAB















Smoothed revenue






Next steps


The next step is for AusNet Services to submit its Revised Proposal.


Aus – appealing the gas distribution determination




Pipes & Wires #153 examined the Australian Energy Regulator’s Final Decision for the gas distribution networks owned by ActewAGL for the 5 year control period starting on 1st July 2016. This article notes the appeal of that Final Decision to the Australian Competition Tribunal.


Re-capping the revenue decision


The revenue component of the decision was as follows…


Access Arrangement

Draft Decision

Revised AA

Final Decision

Final Decision as a percent of Access Arrangement







The appeal to the Tribunal


ActewAGL applied for leave and for a review of the Final Decision on 16th June pursuant to s245 of the National Gas Law. The basis for the review includes…


·      Value of γ (gamma) adopted for calculating income tax.


·      Value of forecast inflation.


·      Estimated return on debt.


Next steps


Pipes & Wires will comment further as the Tribunal’s decisions emerge.




South Africa – the need for additional nuclear




Nuclear seems to be the uneasy bedfellow at the moment … some countries such as the US and Germany are closing their nuclear stations, whilst others like Britain and France are trying to build more. This article examines a recent statement from South Africa that it needs more nuclear stations.


Recent statements from Eskom


A key statement from Eskom is that solar and wind cannot be guaranteed to contribute to the 35,000MW needed for the winter evening peak, hence an increase in nuclear (and coal-fired) baseload generation is required. The wider context to this is that Eskom recently decided not to accept any additional power purchase agreements.


The wider picture of nuclear energy


Nuclear energy seems to have had a troubled time over the last few decades since its boom days of the 1970’s that seemed to turn south with Three Mile Island in 1979 and then Chernobyl in 1986. The full economic costs of new nuclear generation seem to have increased exponentially, and now a green divide seems to have emerged with some claiming that nuclear is environmentally devastating and others claiming that nuclear provides a useful low-carbon transition away from coal (but only until we can get to 100% renewables mind you).


Where might South Africa go with nuclear ?


Pipes & Wires has examined South Africa’s increasing interest in new nuclear over the past few years (Pipes & Wires #107, #110, #146 and #151). A couple of months ago the National Nuclear Regulator received 2 site license applications from Eskom for sites at Thyspunt and at Duynefontein. Eskom expressed confidence that it could fund, build and operate a new nuclear station whilst other agencies were more cautious in their outlook.


France – the Flamanville difficulty spreads




As part of Pipes & Wires #151 examination of the construction difficulties being experienced at Flamanville #3, it was noted that certain components of the reactor contained high carbon concentrations that could lead to lower than expected mechanical strength. This article notes that difficulty in a bit more detail, and also notes that the difficulty might be more widely spread than just Flamanville #3.


The difficulties at Flamanville


As noted in Pipes & Wires #151, tests performed in 2014 revealed that some zones of the steam generator channel heads included significant concentrations of carbon. Those concentrations of carbon reduce the resilience of the steel and reduce its ability to resist crack propagation.


The supplier of the reactor, AREVA, proposed a test method that the French Nuclear Regulator (ASN) broadly accepted and called for submissions on. Following that, the ASN approved an AREVA laboratory in Germany to test the components. A final decision from the ASN is expected in late 2016.


The difficulty may be more widely spread


Back in 2015 the ASN asked EDF to identify any in-service reactors that may have similar high concentrations of carbon to Flamanville #3. Analysis carried out by EDF revealed that 18 reactors at 9 stations could have similar difficulties, and furthermore that the high carbon concentrations may not be limited to the channel heads.


This has resulted in the ASN suspending the test certificate issued for the #2 reactor at Fessenheim, requiring that reactor to be shut down. It is noted that there has been intense pressure from the German government to close Fessenheim anyway because of its proximity to the German border and also because of its age, hence it is not clear whether the ASN’s concerns will result in other reactor shut downs.


The ASN’s final report


Pipes & Wires will comment further once the ASN releases its final report on the Flamanville #3 component tests.


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.


House-keeping stuff


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These articles are of a general nature and are not intended as specific legal, consulting or investment advice, and are correct at the time of writing. In particular Pipes & Wires may make forward looking or speculative statements, projections or estimates of such matters as industry structural changes, merger outcomes or regulatory determinations. These articles also summarise lengthy documents, and it is important that readers refer to those documents in forming opinions or taking action.


Utility Consultants Ltd accepts no liability for action or inaction based on the contents of Pipes & Wires including any loss, damage or exposure to offensive material from linking to any websites contained herein, or from any republishing by a third-party whether authorised or not, nor from any comments posted on Linked In, Face Book or similar by other parties.