Pipes & Wires

INSIGHT AND ANALYSIS OF COOL ENERGY & INFRASTRUCTURE STUFF

Issue 160 – February 2017

 

From the editor’s desk…

 

Welcome to Pipes & Wires #160 and to 2017. After a rather damp and cool summer in New Zealand we begin our look at the world of energy and infrastructure with the suspension of a nett metering program in the US, and follow that with a look at the closure of coal-fired power stations in Australia.

 

We then look at a couple of regulatory decisions in Australia and New Zealand, and then examine some mergers and ownership reshufflings. So … until next month, happy reading…

 

Emerging themes & trends

 

Some of the industry themes and trends that are emerging include…

 

·      Regulators using merger approval processes to force electric companies to implement wider objectives such as public policy goals.

 

·      Development of national strategies for various things (like closing thermal power stations) that a few years ago would’ve been “market-led”.

 

·      Government officials seem a bit nervous about regulated electric companies diversifying into other sources of revenue, and more so when natural disasters interrupt electricity supply. Those officials anxiously seek assurance that supply interruptions weren’t because electric companies had taken their focus of the core electricity business (the Auditor General in New Zealand recently commented that “investments in core business should not be compromised”). Personally I’m not seeing core asset management being compromised by diversification to the extent of wide spread supply interruptions.

 

·      Canadian electric companies are migrating their capital to the United States. Key reasons include expected localised demand growth and sustainable regulatory determinations in some states. This could be the next wave of capital migration, and appears to be a continuation of the off-shore infrastructure investments being made by some of Canada’s pension funds.

 

·      What appears to be some confusion amongst regulators about to how to regulate emerging technologies such as batteries and solar. Given that these technologies seem to be giving customers increased choice about where they obtain their electricity from, perhaps the question should be whether to regulate.

 

·      Concern over foreign ownership of critical infrastructure. This issue seems to have escalated from one of energy security to one of national security.

 

·      Diverging views of the green lobby on nuclear energy. Some environmental groups remain steadfastly opposed to nuclear energy, whilst other groups are now supporting nuclear as a useful transition from coal to renewables.

 

·      An increasing recognition that improved asset condition information is the next frontier for improved asset management decisions, and from there to strengthened regulatory proposals (rates cases).

 

·      A rapidly increasing awareness of the importance of thermal generation for renewable buffering, both in the context of moment-by-moment fluctuations in wind and solar, but also in the traditionally understood sense of dry hydro years.

 

·      A sense that some governments may be losing patience with the slow pace of the transition to renewables, and the heightened possibility that those governments may move from encouraging through incentives to mandating through sanctions.

 

 

Solar, batteries & nett metering

 

US – Rocky Mountain suspends nett metering proposal

 

Introduction

 

Pipes & Wires #159 examined the solar tariffs that Rocky Mountain Power was proposing to introduce. This article notes the suspension of those proposed tariffs by the Utah Public Service Commission (PSC).

 

The PSC’s suspension of the proposed tariffs

 

The PSC suspended the introduction of the proposed tariffs at the request of Rocky Mountain’s parent company (PacifiCorp) “while interested stakeholders continue to seek mutually acceptable resolutions”.

 

Not surprisingly, the basis of the suspension was the similar argument to what Pipes & Wires has examined in other states…

 

·      Electric companies claiming that solar customers are under-paying the true cost of their connection (the whole reduced kWh argument). In Rocky Mountain’s case this is about $400 per year.

 

·      Solar promoters claiming that electric companies consistently under value the contribution that solar makes to the distribution grid.

 

The timing of the suspension

 

The proposed rates were to have taken effect on 9th December 2016, which effectively set the last day for applying to connect solar at the previous tariffs. This was the day that the PSC suspended the proposed tariffs at Rocky Mountain’s request.

 

Likely next steps

 

Rocky Mountain has said that it will continue to try to seek a rate that’s fair to Utah solar customers without harming other non-solar customers. It’s really not clear what middle ground there might be … non-solar customers either subsidise solar or they don’t. Pipes & Wires will follow this argument as it progresses, particular around quantifying the contribution of solar that electric companies are accused of under valuing.

 

Further reading…

 

·      US – how much is solar really worth to a distribution network

 

System security & energy mix

 

Aus – closing coal-fired generation

 

Introduction

 

Closing coal-fired generation has been a topical theme for Pipes & Wires for a few years. This article continues a closer examination of the closing of Victoria’s brown coal stations that started in Pipes & Wires #157.

 

Recapping the closure of Hazelwood

 

ENGIE’s confirmed closure of Hazelwood at the end of March 2017 was expected to push up wholesale electricity prices by anywhere from 8% in 2018 to 25% in 2017. Since the announcement in September the following wholesale price increases have occurred…

 

·      Spot prices have risen 12% in NSW and 20% in Victoria

 

·      Forward contract prices have risen 24% out to 2019.

 

These increases would seem to validate the initial expectations that prices would rise, and indeed at the high end of the predictions. However there is about 7,000 MW of surplus generation in the NEM so it is not clear that closing Hazelwood’s 1,600 MW will erode dry year security.

 

The possible closure of Yallourn W

 

Comment about how Yallourn W power station will now be the dirtiest power station in Australia has made it into the media, along with the view that wholesale electricity prices would be pushed up even further if it were to close. Further comment suggests that like it or not, the closure of Hazelwood will be followed by other closures and will be the new norm.

 

Consistency with the interim report on retiring coal-fired power stations

 

The article in Pipes & Wires #159 on the Hazelwood closure also examined the interim conclusions of the Senate Environment and Communications References Committee inquiry into the retirement of coal-fired stations. Given that 1 of the specific interim recommendations was the establishment of a mechanism for orderly retirement, and the interim report’s noting of security of supply as a number priority it would be concerning to see an ad-hoc closure of Yallourn W.

 

Further reading…

 

·      Global – is thermal generation retirement reaching a crisis point?

 

·      Aus – closing Hazelwood and the future of coal-fired generation

 

·      Canada – phasing out traditional coal-fired generation

 

·      Global – rethinking the role of marginal thermal generation

 

·      UK – accelerating the closure of coal-fired generation

 

Regulatory decisions

 

Aus – the Tasmanian electricity distribution determination

 

Introduction

 

TasNetworks recently submitted its revised regulatory proposal (rate case) for its distribution network for the two year period from 1st July 2017 to 30th June 2019 to the Australian Energy Regulator.

 

Readers may recall that the Tasmanian government amalgamated its transmission grid Transend with its distribution business Aurora Energy on 1st July 2014 (refer to Pipes & Wires #113). This two year regulatory period is to align the regulatory periods for TasNetworks transmission and distribution businesses.

 

A bit about the assets

 

TasNetworks distribution network comprises 22,400km of lines and cables, 18 large distribution stations and 33,000 small distribution substations. These assets supply about 284,000 customers.

 

One of the features of TasNetworks is that because it was originally vertically integrated as the Hydro Electric Commission there are more transmission substations and fewer distribution zone substations (the opposite of what generally occurs).

 

Regulatory framework

 

The regulatory framework is based on the National Electricity (South Australia) Act 1996, which provides for the making of the National Electricity Rules (version 79 at the time of writing). Electricity distribution determinations are principally made pursuant to Chapter 6 of the Rules.

 

The determination process to date

 

The determination process to date includes the following…

 

Parameter

Proposal

Draft determination

Revised proposal

Final determination

CapEx

$213.4m

$213.4m

$223.2m

 

OpEx

$123.1m

$127.6m

$129.7m

 

Opening RAB

$1,646.7m

$1,629.4m

$1,621.2m

 

WACC

6.04%

5.48%

5.48%

 

Regulatory depreciation

$107.2m

$98.6m

$96.2m

 

Total smoothed revenue

$493.3m

$446.6m

$458.2m

 

 

Pipes & Wires will comment further once the AER releases its final determination.

 

NZ – finalising the Input Methodologies (IM’s)

 

Introduction

 

The Commerce Commission recently released their Input Methodologies Review Decisions. This article tries to present a brief summary of that 1,128 page document.

 

Regulatory framework

 

The regulatory framework for the IM’s is set out in Subpart 3 of Part 4 of the Commerce Act 1986. A key aspect is s52Y which requires the Commission to review each IM no later than 7 years after its date of publication (and at intervals of no more than 7 years following that). 

 

The original IM’s (except the IM for Transpower’s CapEx proposals) were determined on 22nd December 2010, and have been amended on previous occasions including as a result of judicial review proceedings in 2012.

 

Key features of the IM’s

 

Key features of the finalised IM Decisions applicable to electricity and gas include…

 

·      Removal of the avoidable cost allocation methodology (ACAM) as a stand-alone option for electricity lines and gas pipes.

 

·      Adoption of an asset beta of 0.35 for electricity lines (including Transpower), and 0.4 for gas pipes.

 

·      Adoption of an historic averaging process for debt premiums.

 

·      Moving electricity lines from a weighted average price cap to a pure revenue cap.

 

·      Moving gas transmission pipelines from a lagged revenue cap to a pure revenue cap.

 

·      Allowing non-exempt electricity lines to shorten average remaining asset lives by up to 15%.

 

·      Removing the separate WACC for customised price paths (CPP’s) and instead applying the WACC from the prevailing default price path (DPP).

 

·      Introducing greater flexibility for customised price path information and verifier requirements.

 

·      Replacing the (supply) quality-only customised price path alternative with a default price path reopener.

 

Effected parties should read the Decisions paper in full.

 

Aus – the Queensland electricity transmission revenue reset

 

Introduction

 

Powerlink has recently submitted its Revised Revenue Proposal 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 Revised Proposal to provide some context for analysis of the AER’s final Determination.

 

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 is made pursuant to the National Electricity Law.

 

Key features of the process

 

Key features of the process to date include…

 

Parameter

Initial Proposal

Draft Decision

Revised Proposal

Final Decision

CapEx

$957m

$775m

$886m

 

OpEx

$977m

$1,051m

$1,049m

 

Opening RAB

$7,238m

$7,165m

$7,082m

 

WACC

7.3%

6.5%

5.5%

 

Depreciation

$623m

$606m

$643m

 

Smoothed revenue

$4,017m

$3,721m

$3,742m

 

 

Next steps

 

The next step is for the AER to release its Final Decision, which should be around April or May 2017.

 

Mergers & restructuring

 

UK – selling the gas networks

 

Introduction

 

Long-time readers might remember the sale of 4 of National Grid’s 8 regional gas networks back in 2004 (Pipes & Wires #33). This article examines the following further sales of gas networks…

 

·      The sale of a 61% stake in National Grid’s remaining 4 gas networks.

 

·      The sale of a 16.7% stake in Scotia Gas Networks by Scottish & Southern Energy (SSE).

 

The National Grid stake sale

 

National Grid has sold a 61% stake in its 4 remaining gas networks to a consortium led by Macquarie Infrastructure, and may sell a further 14% stake. The sale price included £3.6b cash and the assumption of £1.8b (which values the 4 gas networks at about £13.8b), and is subject approval at the time of writing.

 

There appear to be mixed views on this transaction…

 

·      One of the consortium has indicated that the stake offers low operational risk and relative certainty of earnings.

 

·      An industry analyst has commented on the likely cost of maintaining an aging asset and the long-term withdrawal of gas as a domestic fuel to reduce CO2 emissions (like the Dutch are planning for 2050).

 

·      Ofgem cautioned bidders against overpaying, clearly stating in an open letter that future price controls will not compensate for any premium paid nor consider any particular financing arrangements.

 

The Scotia Gas Network stake sale

 

SSE had owned 50% of Scotia Gas Networks, and was looking to sell down 33% of that 50% stake. That 16.7% stake was sold to subsidiaries of the Abu Dhabi Investment Authority for £621m. That suggests SSE’s 50% stake was worth about £1.8b at the time of sale, which is a significant uplift from the £505m SSE paid for the network in 2005.

 

US – regulator recommends rejecting Great Plains – Westar merger

 

Introduction

 

Pipes & Wires #156 examined the proposed merger of Great Plains Energy and Westar Energy and noted that the Kansas Corporation Commission (KCC) has decided to allow a wide range of intervenors in addition to their own consideration of the merger. This article notes the recommendation of the KCC staff that the merger be rejected.

 

Brief recap of the merger

 

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 represented a 13% premium over Westar’s closing price of $53.

 

The Missouri Public Service Commission’s acceptance of the merger

 

In October 2016, Great Plains reached an agreement with the Missouri Public Service Commission (PSC) to keep the financial structure and credit rating of the Missouri business separate from the Kansas business. The agreement embodied two criteria…

 

·      Missouri customers’ electric bills won’t increase if the merged company’s credit rating or financial health declines.

·      If the Missouri business’ credit rating falls below BBB-, Great Plains must further separate the Missouri and Kansas businesses.

 

The KCC’s recommendation to reject the merger

 

In late December 2016 the KCC staff recommended to its Commissioners that they reject the merger proposal, claiming that the merger…

 

·      Doesn’t promote the public interest when evaluated against the KCC’s merger standards (including taking on $4.4b of debt, and possible job losses in Kansas).

 

·      Creates an unacceptably high financial risk for both current and future customers and shareholders.

 

Whilst the KCC acknowledged that merger efficiency gains of about $2b over 10 years that would be passed to Kansas customers through lower bills would be welcome, it was insufficient to offset the KCC’s estimates of job losses. Great Plains initial comments were…

 

·      It was unusual for the KCC staff’s recommendation to not include any ways forward.

 

·      Bond rating agencies have stated that an enlarged Great Plains could retain its investment-grade rating.

 

·      Wall Street investors have welcomed the deal.

 

·      There were no plans for forced redundancy of staff from the merged company.

 

Next steps

 

Pipes & Wires will examine Great Plains response to the KCC’s decision in future issues.

 

UK – sale of Thames Water

 

Introduction

 

Pipes & Wires first looked at Thames Water back in 2006 (Pipes & Wires #48 and #55) when German utility RWE sold its 100% stake to a consortium led by Macquarie Bank for £8b. Macquarie has since sold down parts of this 100% stake, and this article examines the sale of the remaining 26.3% stake in Thames Water.

 

A bit about Thames Water

 

Thames Water supplies 15,000,000 customers in London and the Thames Valley region with about 2,600,000,000 liters of water every day, and treats about 4,400,000,000 liters of sewage every day. Its regulatory value is about £12b.

 

The sale process

 

Macquarie started the sale process in May 2016 by offering its stake to existing co-shareholders, hoping to raise between £1b and £1.5b from the sale. A lack of interest prompted an approach to the wider market, and it is expected that the stake will be sold to more than one buyer.

 

Pipes & Wires will comment further as the sale process proceeds.

 

Aus – update on the Western Power sale

 

Introduction

 

Pipes & Wires #150 noted the possible privatisation of Western Power, and that it was likely to be a key issue for the 2017 state election. This article examines recent comment suggesting that the merger will have a hard road through 2017.

 

What the privatisation might look like

 

On the face of it, the original plans seemed to be that 100% of Western Power would be sold. It now appears that 51% will be sold if the 2017 election returns Colin Barnett’s Liberal Government for a third term.

 

It is possible that that 51% stake may have further restrictions attached to it, like 20% needing to be owned by an Australian based investor or 30% being offered for public sale. That would reiterate the political tightrope that Barnett’s government is walking.

 

Next steps

 

Pipes & Wires will comment further on this issue after the election.

 

Regulatory policy & models

 

NZ – amending the Code

 

Introduction

 

This short article notes an amendment to Part 6 and Part 17 of the Electricity Industry Participation Code that came into effect on 9th January 2017.

 

The amendments

 

A summary of the amendments to the Code are as follows…

 

·      Amending existing clauses and inserting additional clauses in Schedule 6.4.

 

·      Inserting an additional clause after Clause 17.23A.

 

Basis for the amendments

 

The basis for the amendments is to limit the connection charge for embedded generation to the incremental cost of connecting that embedded generator. Those incremental costs are defined as…

 

·      The transmission costs that an efficient distributor could avoid if the embedded generation is included in the Electricity Authority’s published list.

 

·      The distribution costs that an efficient distributor could avoid.

 

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.

 

·      Live Lines (the old ESAA journal).

 

·      The Engineering History Of Electric Supply In New Zealand.

 

House-keeping stuff

 

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Disclaimer

 

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

 

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