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
Ł3.6b cash and the assumption of Ł1.8b (which values the 4 gas networks at
about Ł13.8b), 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 Ł621m. That suggests SSE’s 50% stake was worth about
Ł1.8b at the time of sale, which is a significant uplift from the Ł505m 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 Ł8b. 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 Ł12b.
The sale process
Macquarie
started the sale process in May 2016 by offering its stake to existing
co-shareholders, hoping to raise between Ł1b and Ł1.5b 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.
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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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