Pipes & Wires


Issue 164 – June 2017


From the editor’s desk…


Welcome to Pipes & Wires #164. This issue starts with a summary of the long-term lease of Endeavour Energy by the NSW government, and then continues the theme of who pays to integrate distributed generation in the context of a California rate case.


We then consider a couple of electricity wires and gas pipes regulatory decisions in Australia and New Zealand, and then examine some security of supply and energy mix issues in Australia and the United States. This issue then closes with a quick look at some nuclear issues in Lithuania and South Africa.


So … until next month, happy reading…


What’s trending ??


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


·      Establishment of committees and task forces to inquire into security of electricity supply.


·      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 have been “market-led”.


·      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.


·      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.


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Mergers & asset sales


Aus – the long-term lease of Endeavour Energy




The winning bidder for the long-term lease of a 50.4% stake in Endeavour Energy was announced in mid-May. This article examines that bid and makes some brief comparisons with the other two long-term leases (Transgrid and Ausgrid).


A bit about Endeavour Energy


Endeavour Energy is the poles & wires business that supplies 934,000 customers across 24,800 km2 of Illawarra, the South Coast, the Southern Highlands, the Blue Mountains and Sydney’s south-west and western suburbs. Key financials are approximately…


·      Annual revenue is about $1.6b


·      EBITDA of $795m.


·      NOPAT of $244m.


·      ROR of 13.7%.


The winning bid for Endeavour Energy


The winning bid of $7.624b was from the Advance Energy consortium led by Macquarie Bank and including AMP Capital, the British Columbia Investment Management Corporation and the Qatar Investment Authority. This is above the $7.2b forecast lease price based on the 9.1x EBITDA multiple achieved by the Ausgrid lease.


The nett proceeds of the lease after costs and debt repayment were $2.9b.


Comparisons with the Transgrid and Ausgrid leases


Key features of the three leases are as follows…





Endeavour Energy


Hastings Funds Management et al.

IFM Investors et al.

Macquarie Bank et al.






Proceeds of the overall lease process


The three leases have raised $23b (nett), which is over $2b more than the $20b target. Sales proceeds will be applied to a range of projects, including the WestConnex motorway and Metro rail line project.


Tariffs, subsidies & tax credits


US – who pays to integrate DER’s ?




Who pays to integrate distributed energy resources (DER’s) into the distribution network seems to be one of those prickly questions for which the discussion seems ideological even though the answer is analytical. This article unpicks that issue using Southern California Edison’s (SoCalEd) recent Rate Case as a starting point.


The SoCalEd Rate Case


SoCalEd recently submitted its Rate Case to the Public Utilities Commission which seeks approval to spend inter alia $2.1b to ready its distribution network for a further 1,500,000 DER’s by 2025. This $2.1b is proposed to improve the following 4 features of the network (and is not simply to replace aging assets)…


·      Structural upgrading, including replacement of the inadequate 4kV circuits.


·      Automation for real-time monitoring and control. This includes accommodating two-way power flows as required by the PUC’s Distribution Resources Plan.


·      New communications capabilities including optical fiber and Wi-Fi.


·      New system management software.


The ideological angles


The crunchy issue doesn’t seem to be so much about whether SoCalEd should spend the $2.1b, but rather whether it should be allowed to recover that $2.1b spend through its regulated rates (tariffs). There are obviously a range of ideological angles on this proposed spend…


·      SoCalEd (and presumably other electric companies) simply want to prepare their networks for an expected increase in DER’s. Arguably, they should be perfectly entitled to recover the efficient cost of implementing a regulatory obligation.


·      The DER industry (of which the roof-top solar lobby seems to be the most visible and vocal) claim that SoCalEd is not properly valuing DER’s in its planning and that SoCalEd is further claiming that DER’s impose costs rather than benefits (refer to Pipes & Wires #137 and #157). A further strand of their argument is that at least some of network improvements (like communications and automation) could be provided by third parties including DER’s through competitive tenders.


·      To add a third angle to this, customer advocacy group The Utility Reform Network (TURN) claim that neither SoCalEd nor the DER’s arguments are supported by facts and instead claim that SoCalEd is simply using DER’s to justify gold-plating its network. A particular aspect of TURN’s concern is the claim that third-party DER will reduce the need for network improvements (and a little thought would support this concern).


Pipes & Wires will continue its analysis of who pays for DER integration as this progresses.


Network access decisions


NZ – gas under pressure




The Commerce Commission recently released its cost of capital decision that will apply to all gas distribution and transmission default price paths (DPP’s) for the period starting on 1st October 2017. This article examines the key features of that determination.


Regulatory frameworks


The regulatory frameworks for setting the WACC are set out in clauses 4.4.1 to 4.4.10 of the Gas Distribution Services Input Methodologies Determination 2012 and the Gas Transmission Services Input Methodologies 2012 respectively. Those determinations are made pursuant to Part 4 of the Commerce Act 1986.


Key features of the WACC’s


Key features of the WACC’s include…




67th percentile

Vanilla WACC



Post-tax WACC

Not stated



Aus – the final Tasmanian electricity distribution determination




The Australian Energy Regulator (AER) recently released its’ Final Decision for TasNetworks distribution business for the two year period from 1st July 2017 to 30th June 2019. This article examines the key features of that Decision.


The reason for a two year Decision


The Tasmanian government amalgamated its transmission grid Transend with the distribution business of 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. TasNetworks distribution will be subject to a 5 year Decision commencing on 1st July 2019.


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…




Draft determination

Revised proposal

Final determination











Opening RAB










Regulatory depreciation





Total smoothed revenue






This concludes Pipes & Wires of the Tasmanian electricity distribution.


NZ – Powerco applies for a Customised Price Path (CPP)




Powerco recently applied for a Customised Price-Quality Path (CPP) for its electricity distribution business. This article examines what a CPP is, why a company might apply for a CPP, and the key features of Powerco’s CPP application.


Background to the CPP


Powerco is one of 17 electricity distribution businesses that is subject to Default Price-Quality Path regulation under Part 4 of the Commerce Act 1986. Readers should be broadly familiar with the DPP’s concepts and processes from Pipes & Wires articles, and understand that New Zealand doesn’t use the “propose - respond” model common in other jurisdictions.


Subpart 6 of Part 4 provides the opportunity for individual regulated businesses to seek an alternative price-quality path that better meets its particular circumstances. That alternative is the CPP which is the equivalent of the Rate Case or Regulatory Proposal and effectively uses a “propose – respond” model.


So in broad terms, a CPP would seek approval for 1 or both of the following…


·      To operate at a different point on the same existing price-reliability curve. This might be in response to customer preferences for paying less to have less reliability (ie. more or longer outages).


·      To adopt a different price-reliability curve. This might be because the required reliability cannot be sustainably achieved at the allowable price (revenue).


Key features of Powerco’s CPP proposal


Key features of Powerco’s CPP proposal include…


·      CapEx of $873m, which represents a 50% increase viz-a-viz the previous 5 years, including $286m in growth and security of supply projects.


·      OpEx of $455m, which represents a 28% increase viz-a-viz the previous 5 years, including $289m on network OpEx (which represents a 38% increase viz-a-viz the previous 5 years) and $165m of non-network OpEx.


·      SAIDI of 195.9 and a SAIFI of 2.31.


·      Return on investment of $788.5m.


·      Depreciation of $296.6m


·      Pre-smoothed (building block) revenue of $1,241.3m


Next steps


The Commerce Commission will now assess Powerco’s application. Pipes & Wires will provide further analysis once their decisions are released.


Aus – the Court judgement on electricity revenue determinations




Australia’s Full Federal Court recently released its judgement on the Australian Energy Regulator’s (AER) appeal of the Australian Competition Tribunal’s findings in regard to several electricity revenue determinations. This brief article examines the sequence of events, the Court’s decision around the OpEx and Gamma aspects of the determinations, and the likely implications.


Sequence of events


The sequence of events is as follows…


·      In April 2015 the AER determined the allowed revenues for the electricity distributors in NSW and the ACT (Ausgrid, Endeavour Energy, Essential Energy and ActewAGL).


·      In June 2015 the 4 electricity distributors applied to the Tribunal for a review of the AER’s determinations on the basis that the AER had made material errors in its determinations. The legal framework for appealing that determination is set out in s71B of the National Electricity Law.


·       In February 2016 the Tribunal ruled in favor of the 4 electricity distributors in regard to inter alia OpEx, but also rules in favor of the AER on several aspects. The Tribunal instructed the AER to inter alia re-determine various aspects of the original determinations.


·      The AER appealed the Tribunal’s ruling to the Federal Court on the basis that the Tribunal had made a legally incorrect decision.


·      The Court judgement upheld some of the Tribunal’s findings (in favor of the electric companies) whilst also finding errors and shortcomings in some aspects of the Tribunal’s ruling (in favor of the AER).


The Court’s ruling


The Court ruled inter alia…


·      That the AER has not established any of the grounds of judicial review in relation to the OpEx forecasts (Para 386). This means that the Tribunal’s decision to set aside the AER’s original OpEx allowances is upheld.


·      That the Tribunal misunderstood the function of imputation credits (Para 751). This means that the AER’s approach to Gamma was not a reviewable error (Para 756).    


It is important to also broadly note the following…


·      Neither the Court nor the Tribunal are “making” or “re-making” any part of the revenue determination. That task remains with the AER.


·      The Court judgement and the Tribunal ruling do not require the AER to allow higher revenues per se. They simply require the AER to adhere to the revenue setting process set out in the National Electricity Rules.


The likely implications


The likely implications of the Court’s judgement are inter alia…


·      A re-thinking of how OpEx benchmarking and various efficiency principles are practically applied.


·      Higher electricity distribution charges in NSW and the ACT as a result of the AER amending the original determinations.


·      Flow-on implications for the revenue determinations in other states.


·      Renewed efforts to abolish the limited merits review process.


NZ – gas under more pressure




Pipes & Wires #161 and #163 examined the Draft Default Price-Quality Paths (DPP’s) compiled by the Commerce Commission that will apply to…


·      the gas distribution businesses owned by GasNet, Powerco, Vector and First Gas.


·      all gas transmission businesses.


This article examines the Final DPP’s that were released by the Commission last month, and which will apply from 1st October 2017.


Regulatory framework


The regulatory frameworks are drawn from Part 4 of the Commerce Act 1986. Subpart 10 addresses gas pipeline services, and in particular subjects all gas pipeline services to price-quality regulation (s55D).


Key features of the Distribution Final DPP


Key features of the Distribution Final DPP (compared to the Draft) include…





Provision for submitting a CPP application.

Provision for submitting a customised price path (CPP) application any time before 1st October 2021 (ie the start of Year 5).


Provision for submitting a customised price path (CPP) application any time before 1st October 2021 (ie the start of Year 5).


Starting prices

Starting prices are specified as maximum allowable revenue (MAR), and will be specified in the final decision.


·   GasNet $4.15m

·   Powerco $47.31m

·   Vector $43.92m

·   First Gas $22.14m


Rate of change


The annual rate of change is 0%.


Emergency response time

No more than 20% of response to emergencies (RTE’s) can take more than 60 minutes, with the added requirement that the RTE to any 1 emergency cannot exceed 180 minutes.


No more than 20% of response to emergencies (RTE’s) can take more than 60 minutes, with the added requirement that the RTE to any 1 emergency cannot exceed 180 minutes.



Key features of the Transmission DPP


Key features of the Transmission Final DPP (compared to the Draft) include…





Provision for submitting a CPP application.

Provision for submitting a customised price path (CPP) application any time before 1st October 2021 (ie the start of Year 5).


Provision for submitting a customised price path (CPP) application any time before 1st October 2021 (ie the start of Year 5).


Starting price (MAR)


Specified as an MAR of $121.6m.


Rate of change

Allowable rate of change will be 0%.


Allowable rate of change will be 0%.


Revenue forecasts


Year ending 30th September 2018 $121.6m.

Year ending 30th September 2019 $123.9m.

Year ending 30th September 2020 $126.4m.

Year ending 30th September 2021 $129.0m.

Year ending 30th September 2022 $131.6m.

Emergency response time

No RTE may exceed 180 minutes, neither can there be a major interruption.


No RTE may exceed 180 minutes, neither can there be a major interruption.



WACC of 5.67%

Mid-point vanilla WACC of 5.95%.


This article concludes Pipes & Wires coverage of the gas pipeline DPP re-set.


System security & energy mix


Aus – the future of coal-fired generation




In amongst a wider article on the closure of Hazelwood Power Station, Pipes & Wires #159 noted the key recommendations of the Senate Standing Committees on Environment and Communications interim report on the retirement of coal-fired power stations. This article notes the recommendations of the final report that was presented back in late March.


Key recommendations of the final report


The final report recommends the following…


·      Development of a comprehensive energy transition plan, including reform of the National Electricity Market rules.


·      Develop a mechanism for the orderly retirement of coal-fired stations for consideration by the COAG Energy Council.


·      Insertion of a pollution reduction objective into the National Electricity Objectives.


·      Establishment of an energy transition authority.


·      That a comprehensive and independent assessment of the health effects of coal-fired power stations be commissioned.


·      That a load-based licensing arrangement based on the NSW Scheme be developed, with fees reflecting externalities including health impacts.


·      That additional measures be taken to ensure compliance with the standards in the National Environmental Protection (Air Quality) Measure.


·      That a more rigorous assessment of emissions be provided.


·      A national audit of likely mine and station rehabilitation costs be undertaken.


·      That a common national approach to setting rehabilitation bonds be developed.


·      That grid level battery storage be supported at a government level, to promote decentralized generation whilst also enhancing grid stability.


·      That a commitment to not funding, subsidising or supporting construction of new coal-fired generation be made.


Alignment with the interim report


These recommendations are consistent with the interim report, with the first 4 recommendations being pretty much identical.


Editors’ note


The interim report noted that energy security is a number one priority, however Pipes & Wires #159 concluded that it was not clear how that priority was reflected in the interim recommendations. The final report also mentions security, including a comment from the dissenting senators that energy security must be the Governments’ number one priority. Again, it is not clear how making security of supply a priority is reflected in those recommendations.


US – reviewing the Clean Power Plan




Back in late March President Trump instructed the Environmental Protection Agency (EPA) to review inter alia the Clean Power Plan (CPP). This article takes a quick look at the CPP and the Executive Order ordering the review.


Key features of the CPP


The CPP was one of President Obama’s flagship policies, and embodied multiple objectives of reducing CO2 emissions, lowering energy costs and improving air quality.


The regulatory framework for the CPP is based on s111 of the Clean Air Act (Title 42 of the United States Code, Section 7411) which authorises the EPA to issue nationally applicable New Source Performance Standards which limit air pollution. Section 7411 has long been used to limit emissions of SOx, NOx and particulates from coal-fired generation but in 2015 the EPA used this Section to also set CO2 emission limits.


The Executive Order


The Executive Order instructing inter alia the EPA to review the Clean Power Plan includes the following features…


·      A policy statement that it is in the national interest to develop the US’s energy resources whilst reducing regulatory burdens and promoting energy independence.


·      Specific recognition of both fossil fuels and renewables as an essential part of that energy mix.


·      All agencies that potentially burden the safe and efficient production of domestic energy are to review their actions and report to the Office of Management and Budget (OMB) within 45 days on how they will comply with the Order. The head of any agency who doesn’t believe that their agency burdens that efficient production of domestic energy must report to the OMB on why they believe that to be the case.


Consistency with Trump’s policy positions


How does this review of the CPP (which ostensibly amounts to a restoration of a wider and more balanced energy mix) stack up against President Trump’s policy positions. Pipes & Wires #161 provides a handy list of those policy positions…


·      An expected use of coal and shale gas to benefit American families and to support American jobs.


·      Strong support for the coal industry.


·      Support for natural gas.


·      A rejection of the principles of green energy, including the view that man-made CO2 emissions are causing global warming.


·      To strengthen America’s energy independence as a key strategic and foreign policy goal.


What will this mean for coal-fired generation ?


It would appear that coal-fired generation may now continue into the future, presumably allowing end-of-life asset issues and market costs to determine closures rather than CO2 emission limits.


Nuclear strategy & operations


Lithuania – decommissioning the RBMK reactors




The Ignalina Power Station in Lithuania is currently decommissioning its 2 RBMK reactors. This article briefly examines that decommissioning and then considers the forecast spike in decommissioning over the next 10 to 15 years.


A bit about Ignalina


Ignalina is a 2 x 1,500 MW nuclear station situated in eastern Lithuania near the Belarus border. After 4 years of preparatory work construction began in 1978. Unit 1 was commissioned in December 1983 followed by Unit 2 in August 1987 (the Chernobyl explosion delayed Unit 2’s commissioning by 1 year). Construction of a third unit began in 1985, but this was suspended in 1988 and subsequently demolished. The originally planned fourth unit was never started. Each 1,500 MW unit had two 750 MW turbines, with total annual generation being about 19,000 GWh.


Key features of the Ignalina reactors are the graphite moderated tips on the control rods and the absence of containment shields. Readers might recall that both of these features were among the numerous causes of the Chernobyl explosion, however it is important to note that the Ignalina reactors also included some safety features that Chernobyl did not have.


A bit about RBMK reactors


The 2 Ignalina reactors were RBMK-1500’s, which are water-cooled, graphite-moderated channel-type power reactors rated at 4,800 MWt or 1,500 MWe (after the Chernobyl accident, the RBMK-1500 reactors were de-rated to 4,200 MWt or about 1,350 MWe).


So while the RBMK is largely equivalent to western boiling water reactors (BWR), a key difference is that each fuel assembly is housed in a separately cooled channel that requires an even distribution of coolant.


Decommissioning the Ignalina reactors


In 1999 Lithuania agreed to close both Ignalina reactors as a condition of entering the EU, for which the EU agreed to contribute €820m towards the decommissioning & decontamination costs. Decommissioning was as follows…


·      Unit 1 was shut down on 31st December 2004 after 21 years of commercial operation.


·      Unit 2 was shut down on 31st December 2009 after 22 years of commercial operation. Removal of spent fuel began in February 2011.


The wider picture of decommissioning


Ignalina is obviously only 1 of many nuclear stations that are approaching the end of their technical, economic or political lives A few comments…


·      The political life of a nuclear station is obviously very fickle as we’ve seen with the abrupt changes of direction in Germany and Sweden to name just a few.


·      Languishing wholesale prices in many markets are essentially squeezing nuclear out.


The number of nuclear stations planned for closure is steadily climbing as these issues bite…


·      Europe - an expected increase from 76 closures in 2015 to about 110 by 2020.


·      United States – about 12 planned closures by 2025.


·      Japan – about 5 planned closures.


·      Britain – about 15 planned closures between 2023 and 2035.


Given that it seems to take about as long to decommission and dismantle a nuclear station as it takes to build one, there will be a lot of work to be done.


South Africa – proposed new nuclear station hits a big bump




South Africa has been quietly planning its next nuclear power station, but that process recently hit a big bump in the road when a High Court ruled that the Government’s actions were unconstitutional and illegal. This article examines those rulings.


The process to date


Key aspects of the process to date include…


·      September 2011 - Energy Minister Dipuo Peters signed off a proposal for 9,600MW of nuclear capacity that was to go to Cabinet for a decision by the end of 2011.


·      November 2011 - Cabinet’s approval to establish the National Nuclear Energy Executive Coordination Committee (NNEECC) at its meeting. There was media comment that the NNEECC would be authorised to approve construction contracts without further reference to cabinet.


·      April 2016 – two site license applications are submitted to the National Nuclear Regulator for approval, one for Thyspunt, in the Eastern Cape and the other for Duynefontein, in the Western Cape just north of Koeburg.


The big bump


Understandably various lobby groups were upset with the process (ostensibly around the lack of debate, consultation and transparency) and took inter alia the Minister, the President, the Regulator and Eskom to the High Court in the Western Cape. Key features of the case include whether various documents and agreements were tabled in accordance with legislation. The ruling declared inter alia that…


·      Agreements with Russia, the United States and with South Korea were both unconstitutional and unlawful, and were to be set aside.


·      Various decisions around procuring new nuclear generation capacity made pursuant to the Electricity Regulation Act were unlawful and unconstitutional, and were to be set aside.


The decision not to appeal the High Court ruling


Energy Minister Mmamoloko Kubayi has decided not to appeal the High Court’s ruling. Pipes & Wires will comment further as the Government makes its next move.


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…


·      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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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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