Pipes & Wires


Issue 156 – September 2016


From the editor’s desk…


Welcome to Pipes & Wires #156. This issues starts with a look at 2 large mergers in the United States, and then looks at the possible reinstatement of coal-fired generation in New Zealand.


We then look at some critical cost of capital and tariff issues, and conclude this issue with an examination of some of the issues that are vexing the proposed Hinkley Point C nuclear station in the UK. So … until next month, happy reading…


Recent client projects


Estimate load group peak demands


·      Client – electricity distributor.


·      Location – New Zealand.


·      Project – this project involved critiquing the assumptions used to estimate an electricity distributors’ load group peak demand, including peaks, diversity, load factor and seasonal variations.


Assess regional variation of retail electricity tariffs


·      Client – electricity trust.


·      Location – New Zealand.


·      Project – this project involved comparing the regional variations of a major electricity retailer’s tariffs on behalf of an electricity trust, including discounts and use of night-day split data from the retailer.


Provide board assurance on key operational matters


·      Client – electricity distributor.


·      Location – New Zealand.


·      Project – this project involved evaluating two key operational aspects of an electricity distributor, and providing the board with assurance that operations were compliant with statutory requirements, aligned to industry practice and were optimising the distributors risk exposure.


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


Mergers & acquisitions


US – the Great Plains – Westar merger attracts wider attention




Pipes & Wires #153 examined the proposed merger of Great Plains Energy and Westar Energy to form an enlarged electric company supplying 1,500,000 customers in Kansas and Missouri. This article examines recent moves to allow scrutiny of the merger over and above the originally identified regulatory bodies.


The original regulatory approvals


The following regulatory approvals will be required…


·      Kansas Corporation Commission.


·      Federal Energy Regulatory Commission (FERC).


·      Nuclear Regulatory Commission.


·      Federal Trade Commission.


·      Department Of Justice.


The KCC decision


The Kansas Corporation Commission has decided to allow a wide range of additional intervenors, including large electric customers, electric companies that buy wholesale power from Great Plains subsidiary Kansas City Power & Light (KCPL), and local chapters of labor unions. This comes on the back of a restatement by the KCC of the criteria that it will use to assess the merger, including the financial stability of the merged companies, local economic impacts, local job market impacts, public safety and the environment.


Missouri’s jurisdiction over the merger


The Missouri Public Service Commission (PSC) has claimed that it too has jurisdiction over the merger, even though Westar supplies only Kansas.


Back in 2008, KCPL acquired Aquila (which had customers in Missouri). That acquisition included an agreement by KCPL that it would not acquire any further electric companies without the Missouri PSC’s approval. Great Plains is disputing Missouri’s jurisdiction on the basis that Great Plains is only a holding company and is not subject to Missouri’s regulation.


Next steps


The KCC expects to rule on the merger by 24th April 2017. Pipes & Wires will comment further on both the specifics of the deal as they occur, and also the emerging trend of adopting ever-widening assessment criteria that seem less and less relevant to an electric company merger.


US – appealing the Exelon – Pepco merger




Pipes & Wires #151 noted that the Exelon – Pepco merger received its final approval from the Washington DC Public Service Commission (PSC) in March 2016. This article notes an appeal to that approval.


The final closing of the deal


The PSC voted 2 -1 to approve the merger, after a long series of approvals in several states and by the FERC. The merger has created America’s largest electric company with about 9,800,000 customers, 35,000MW of generation and annual revenues of about $29b.


The appeal


The appeal has come from the Washington DC Office of People’s Counsel (OPC). The OPC claims a number of procedural weaknesses that appear to stem from the multiple submissions that were required to obtain the PSC’s approval, whilst the PSC claims that it has followed the required legal standards even if the approval process was unconventional.


The OPC believes that the claimed procedural weaknesses must be addressed by the DC Court of Appeals, and it expects to file papers detailing the basis for appeal and the remedies sought. Pipes & Wires will comment further as the OPC’s appeal proceeds.


System operations & security


NZ – improving system security




Closure of thermal generation ostensibly to reduce CO2 emissions has been a major theme of the electricity sectors in the UK, South Australia, Tasmania and New Zealand. This article examines a recent announcement from New Zealand that Genesis Energy might return a third 250MW coal and gas-fired steam turbine generator at Huntly to service, and considers what the implications might be for system security.


The gradual closure of thermal generation


Pipes & Wires #145 noted the following closure of thermal generation…


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.




Subsequent to that article, Genesis announced that Huntly #1 and #2 would remain in service until 2022 under an agreement with other market participants.


Possible plans for Huntly


In August 2016, Genesis announced that it may return one further 250MW coal and gas-fired steam turbine to service if “market conditions allow”, noting that this generator is full coal capable.


Interpreting the plan to possibly reinstate the third generator


Exactly how long Tiwai smelter will continue operating (and therefore what the national demand curve will look like) seems to be the focal point for deciding whether generators such as Huntly should remain open.


Perhaps the more critical issue is that of system security. A review of Transpower’s 2016 Security Of Supply Annual Assessment reveals the following conclusions…


·      The key system security measures would fall below the security standard in the winter of 2019 if the announced closure of the two Huntly generators were to actually occur in late 2018.


·      The measures would continue to be lower than the security standard until beyond 2025 unless there is further generation investment.


·      The winter security measures were lower in the 2016 Assessment than they were in the 2015 assessment due to the Southdown closure and the proposed Huntly closures.


Hopefully the decisions to return 500MW of secure generation to service, along with the possibility of a further 250MW of secure generation being returned to service will lead to a more favorable conclusion in 2017.


Regulatory decisions


NZ – reducing the asset beta for gas pipelines




Most of us have are aware of the importance of the various parameters used to estimate the cost of capital for regulated infrastructure. This article notes the Commerce Commission’s draft decision to reduce the asset beta for gas pipelines from 0.44 to 0.34.


What exactly is the asset beta ?


The asset beta (β) is a measure of whether an investment is more or less volatile than the market in general, as measured by the fluctuation of price around the mean. A key feature of the asset beta is that it represents the undiversifiable risk ie. the risk that is inherent to the asset, and which cannot be avoided by altering the portfolio of investments held.


It is generally accepted that the investment returns from regulated infrastructure are less volatile than the market at large, and should therefore have an asset beta less than 1. How much less than 1 tends to be the sticky point at which infrastructure owners and regulators differ, with regulators generally always claiming that the “risk” associated with infrastructure earnings is less than what owners claim.


Note that the asset beta is different from but related to the equity beta, which depends on capital structure ie. the asset beta is independent of debt and equity.


The draft decision


Paragraph 259.2 of the draft decision states “(we propose to) reduce the asset beta from 0.44 to 0.34, based on updated analysis suggesting that the 0.1 upwards adjustment to the asset beta for GPB’s (that we made in 2010) should no longer be applied”. The draft decision presents an extensive analysis of listed electric and gas company stocks to reach the (draft) conclusion that the upwards adjustment of 0.1 is no longer applicable.


The impact on investment


The asset beta is a component of the capital asset pricing model (CAPM), hence any reduction in the asset beta will also reduce the estimated return or allowable WACC. That in turn reduces both an infrastructure owners’ willingness to invest in new (or replacement) assets, and their ability to attract capital to the business.


On the face of it, some might question how such a reduction in the ability to attract capital is consistent with the incentive to invest in replacement, upgraded and new assets set out in the Part 4 Purpose Statement in s52A of the Commerce Act 1986.


Next steps


As of late August 2016, the Commerce Commission is working through the various submissions and will hold a workshop (on 7th September) on key WACC topics. Pipes & Wires will comment further as the Commission’s final decision emerges.


Aus – framing up the electricity transmission resets




The Australian Energy Regulator (AER) recently released its Final Framework & Approach (F&A) papers for the ElectraNet transmission business in South Australia and for the Murraylink interconnector between Victoria and South Australia for the 5 year regulatory control period starting on 1st July 2018. This article examines the key components of those Final F&A’s to provide some context for analysing the “numbers” as they emerge.


Regulatory framework


The regulatory framework for the F&A is set out in Clause 6A.10.1A of the National Electricity Rules. This inter alia requires the AER to publish its intended approach to various incentive and efficiency schemes.


Key components of the final F&A


The AER requires ElectraNet and Murray Link to include the following information in their revenue proposals (rate cases)…


Scheme component


Murray Link

Service Target Performance Incentive Scheme (STPIS)

Proposed values for service component parameters



Data for its market impact component



Capability incentive parameter action plan.



Efficiency Benefit Sharing Scheme (EBSS)

Formulae for calculating efficiency gains & losses



Adjustments to forecast or actual OpEx when calculating carryovers



Approach to determining carryover period



Capital Expenditure Sharing Scheme

Proposes to apply latest version of CESS



Provision for ex-post review



Expenditure Forecast Assessment Guideline

Intend to apply a range of assessment methods including benchmarking, trend analysis, methodology review, governance and policy review, cost-benefit analysis, and detailed review of individual projects.




Propose to use forecast depreciation approach to establish opening RAB for the 2023 – 2028 regulatory control period.




Next steps


The next steps are for ElectraNet and Murray Link to submit their revenue proposals by 31st January 2017. After a consultation period, the AER will indicatively publish its Draft Determinations in September 2017.


Germany – setting the cost of equity




The German infrastructure regulator (the Bundesnetzagentur) has recently published its draft cost of equity decision that it expects will apply for the gas regulatory period that starts on 1st January 2018 and for the electricity regulatory period that starts on 1st January 2019. This article examines some of the features of that draft decision.


The Bundesnetzargentur’s draft decision


The draft cost of equity is 6.91% after tax, which is a reduction from the 7.39% after tax applicable to the current regulatory period. The Bund says that this reflects a decline in observed equity market returns.


Key features of the draft decision


Key features of the draft decision include…


·      Risk-free rate based on 10 year average – 3.80%.


·      Risk premium – 3.59%.


·      Impact of corporate tax – 1.66%.


·      Pre-tax cost of equity – 9.05%.


·      Post-tax cost of equity – 7.39%.


The decision to apply the same cost of equity to electricity and gas


The same (draft) cost of equity will be applied to both electricity and gas, as the Bund reasons that the risks of both businesses are comparable. A little thought reveals that gas tends to be a more discretionary fuel, but then electricity (networks) face a lot of competition from rooftop solar. So while the maths might result in similar asset betas (and hence cost of equity) for electricity and gas, it would seem to be stretching it to claim that the risks are comparable … it could be argued that a post-tax return of 7.39% from a gas business is less acceptable than a 7.39% post-tax return from an electricity business.


NZ – resetting the gas pipeline default price path (DPP)




The Commerce Commission recently released its policy for setting price paths and quality standards to seek feedback on the default price path (DPP) that will apply to certain gas pipeline businesses for the 5 year period starting on 1st October 2017. This article examines the key features of that policy.


Regulatory framework


The regulatory framework for gas pipelines includes the following components of Part 4 of the Commerce Act 1986


·      The Part 4 purpose statement (s52A).


·      The purpose of default and customised price-quality regulation (s53K).


·      The requirements for resetting a DPP (ss 53M, 53O and 53P).


Gas pipelines businesses that will be subject to the DPP


The following gas pipeline businesses will be subject to the DPP unless that business applies for and is granted a customised price path (CPP)…


·      First Gas (distribution).


·      Powerco.


·      Vector.


·      GasNet.


·      First Gas (transmission).


Key features of the policy paper


Key features of the policy paper include…


·      An initial view to rely more heavily on pipeline businesses’ forecasts (after having capped asset management plan forecasts to historical spend levels), whilst also noting the incentives for businesses’ to pad their forecasts.


·      An expectation of greater scrutiny of pipeline businesses’ forecasts in return for greater reliance on those forecasts as a starting point.


·      An expected reliance on the discretion provided by the Input Methodologies to assess forecasts.


·      An intention to adopt the CPP Expenditure Objective for the assessment criteria.


·      A view that DPP’s could be tailored to the unique circumstances of each pipeline business, whilst also recognising that a DPP is not expected to address every circumstance that a pipeline business may face.


·      A clear recognition by the Commission of the differing cost drivers between transmission and distribution.


·      More extensive modeling of future gas demand as a revenue driver.


·      Proposed changes to how gas supply interruptions are measured.


Next steps


The Commission will receive submissions on the policy paper until 28th September 2016. After a period of consultation that includes consideration of the Input Methodologies review, the Draft DPP Decisions are expected in February 2017.


Greece – gas tariff adjustment threatens gas network sale




The value of any infrastructure asset is strongly related to its allowable tariffs. This article examines recent events in Greece in which a lower-than-expected tariff increase threatens to derail the sale of a gas pipeline business reinforces just how strong that linkage is.


A bit about DESFA


DESFA is the Greek national gas transmission company, which also operates gas distribution networks and the Revithoussa LNG terminal. Annual revenue is about €190m and the asset base is about €1.3b.


The intended sale of DESFA


The sale process began in 2013 when SOCAR from Azerbaijan won the tender to purchase a 66% stake in DESFA for €400m, however completion of the deal was delayed in late 2014 when the European Union raised anti-trust concerns over SOCAR holding a controlling stake. This required SOCAR to on-sell 17% of DESFA to reduce its eventual stake to 49%. That 17% stake was bought by the Italian gas company Snam.


The proposed gas tariff amendment


The Energy Ministry has introduced legislation that would amend the DESFA Tariff Policy without consulting the intending buyers that have the practical effect of a lower-than-expected tariff increase. Not surprisingly, SOCAR has indicated that it may withdraw from the purchase arrangement, whilst the Ministry remains adamant that it will not withdraw the legislation amending the Tariff Policy.




UK – further delays to Hinkley Point C




Pipes & Wires has been following the long and tortuous path to getting Hinkley Point C approved. This article examines the good news, the bad news and some thorny issues.


EDF’s approval


EDF’s board voted 10 – 7 to approve the Hinkley Point C investment in late July 2016. It is understood that 6 of the 7 votes against were from staff representatives on the board who may have been concerned that the required investment and risks could threaten EDF’s survival.


The UK Government’s decision to review the deal


Within hours of EDF’s approval, the UK Government announced a review of the project that it expects to complete by the spring of 2017. That review is expected to examine a range of thorny issues.


The thorny issues


The thorny issues (some of which will be examined by the UK Government) include…


·      Construction delays and cost escalations at other nuclear stations such as Flamanville that are using similar technology (refer to Pipes & Wires #151 and #155).


·      Concern over the 33% stake in the project held by China General Nuclear Power, which comes with permission to build a further nuclear station at Bradwell in Essex.


·      The 35 year commitment to a minimum price of £92.50 per MWh. Further concern has arisen that the wholesale price of £70 per MWh based on gas-fired generation at the time that the £92.50 MWh minimum price was calculated about 3 years ago is now more like £40 per MWh, leading to an even greater subsidy.


·      Exactly what will replace the 23,000 MW of coal and nuclear generation capacity marked for closure over the next 15 or so years ?


·      The rapidly declining cost of solar and batteries makes new nuclear less commercially attractive.


Pipes & Wires will comment further as the UK Government completes its review.


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


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.