From the
editor’s desk…
Welcome
to Pipes & Wires #167, which has a heap of Australian content. We start
with a look at the proposed expansion of Australia’s Snowy Hydro scheme, and
then consider 5 gas pipeline revenue decisions from Australia’s eastern states.
We then look at the final report on security of supply in Tasmania and check
progress on the legislation to abolish the Limited Merits Review.
In between
these articles we examine the report on markets & reliability from the
United States, and also the attempt to merge Westar and Great Plains Energy. We
also examine the Input Methodologies (rules) governing transmission grid CapEx
in New Zealand. So … until next month,
happy reading.
PS –
several readers have commented about the data tables not reproducing as tables
in their email. To view the tables correctly pick here to see the on-line version.
What’s trending ??
Some of
the industry themes and trends that are emerging include…
· A shift towards government financial support for secure
generation.
· Reducing the options for appealing regulatory decisions.
· 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”.
· 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.
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Asset strategy
Aus – extending the Snowy Hydro power scheme
Introduction
News
of a proposed extension of the Snowy Hydro power scheme in Australia emerged earlier this year. This brief article
takes a look at the engineering aspects of Snowy (which are stunning to say the
least), and also examines the strategy behind the proposed extension.
A bit about Snowy Hydro
Snowy
consists of 9 hydro stations, 16 large dams, 145km of
tunnels and 80km of aqueducts in the Kosciuszko National Park area south-west
of Canberra. Construction began in 1949 and was completed in 1974. Snowy has a
total generation capacity of 4,100 MW, an annual generation of about 4,500 GWh
and about 7,000,000,000 m3 of hydro storage. Snowy’s current
operating modes include providing peak MW’s into the NEM, and also vital
irrigation.
Snowy
Hydro Ltd also owns 1,285 MW of gas-fired generation across Victoria and NSW
and the Red Energy and Lumo Energy brands.
The planned extensions
The
headline is that the proposed extension could add 2,000 MW of generation
capacity to the NEM, noting a primary role of buffering intermittent
renewables. This is expected to be in the form of a single 2,000 MW underground
station that would require a new 26km tunnel between Tantangara and Talbingo.
The expected cost is about $2b.
The planned changes in ownership
Snowy
Hydro Ltd is 58% owned by the NSW Government, 29% owned by the Victorian
Government and 13% owned by the Commonwealth Government. Most of the proposed
$2b expansion cost would fall to the NSW and Victorian Governments which
already have heavily committed budgets, hence one option is for the
Commonwealth Government to buy out the States’ shareholdings
The strategy behind the planned extensions
The
strategy is ostensibly to increase the available peak MW’s available to the NEM
(which of itself presumes a policy of increasing wind and solar in the NEM),
however it is not without its critics. Those criticisms range from a preference
for more wind and solar through to concerns over the viability of pumped
storage in an era of declining battery costs (Editors’ note – those who raise
the issue of declining battery costs have assumed that batteries and generation
are easily interchangeable. Re-reading the article on batteries in Pipes & Wires #166 is recommended).
Network access decisions
Aus – the Victorian gas distribution Draft Decisions
Introduction
The Australian Energy
Regulator (AER) recently published its Draft Decisions for the 3 gas
distributors in the Australian state of Victoria (MultiNet Gas, AusNet Services and Australian Gas
Networks) for the 5 year regulatory period commencing on 1st
January 2018. This article examines the key features of those Draft Decisions.
A bit about the gas distributors
· MultiNet owns and operates 165km of transmission pipelines
and a further 9,900km of distribution mains that supply about 700,000 customers
throughout the eastern suburbs of Melbourne, the Yarra Ranges and South
Gippsland. MultiNet is wholly owned by a consortium led by Cheung Kong
Infrastructure.
· AusNet Services owns and operates 9,400km of distribution pipelines that supply 665,000 customers throughout central and
western Victoria. AusNet is majority owned by State Grid Corporation of China.
· AGN owns and operates inter
alia 10,500km of distribution pipelines that supply 614,000 customers
through the Melbourne area, rural areas to the immediate north and east and
across the NSW border into Albury. AGN is owned by Cheung Kong
Infrastructure.
Regulatory framework
The
regulatory framework for gas distribution includes the following…
· National Gas (South Australia) Act 2008 which has also been enacted in the other participating
states through application statutes.
· National Gas (South Australia) Regulations.
· National Gas Rules, for which Part 8 addresses Access Arrangements.
Key features of the Access Arrangement to date
· Key features of the MultiNet Access Draft Decision include…
|
Parameter |
Proposal |
Draft
Decision |
Revised
Proposal |
Final
Decision |
|
Gross
CapEx |
$517m |
$357m |
|
|
|
OpEx |
$385m |
$385m |
|
|
|
Opening
RAB |
$1,211m |
$1,192m |
|
|
|
WACC |
6.12% |
5.75% |
|
|
|
Regulatory
depreciation |
$342m |
$182m |
|
|
|
Revenue
requirement |
$1,101m |
$1,017m |
|
|
|
P0 |
-9.12% |
5.56% |
|
|
|
X |
-2.00% |
-1.70% |
|
|
· Key features of the AusNet Services Draft Decision to date include…
|
Parameter |
Proposal |
Draft
Decision |
Revised
Proposal |
Final
Decision |
|
Gross
CapEx |
$514m |
$460m |
|
|
|
OpEx |
$305m |
$269m |
|
|
|
Opening
RAB |
$1,575m |
$1,575m |
|
|
|
WACC |
5.63% |
5.94% |
|
|
|
Regulatory
depreciation |
$259m |
$195m |
|
|
|
Revenue
requirement |
$1,086m |
$1,045m |
|
|
|
P0 |
5.00% |
9.68% |
|
|
|
X |
-2.00% |
0.90% |
|
|
· Key features of the AGN Draft Decision include…
|
Parameter |
Proposal |
Draft
Decision |
Revised
Proposal |
Final
Decision |
|
Gross
CapEx |
$555m |
$554m |
|
|
|
OpEx |
$344m |
$370m |
|
|
|
Opening
RAB |
$1,616m |
$1,603m |
|
|
|
WACC |
5.28% |
5.75% |
|
|
|
Regulatory
depreciation |
$235m |
$239m |
|
|
|
Revenue
requirement |
$1,158m |
$1,200m |
|
|
|
P0 |
11.5% |
6.44% |
|
|
|
X |
2.45% |
-1.25% |
|
|
Pipes
& Wires will re-examine this as the AER makes its Final Decisions.
Aus – the Roma to Brisbane Pipeline Draft Decision
Introduction
The Australian Energy
Regulator (AER) recently released it Draft Decision for the Roma – Brisbane Pipeline (RBP) for the 5 year regulatory period commencing on 1st
July 2017. This article examines the key features of that Draft Decision.
A bit about APA Group and the RBP
The APA Group owns and operates inter
alia 15,000km of gas pipelines across Australia, which includes 7,500km of
interconnected pipelines in the eastern states. The RBP comprises 438km of
pipeline which forms an integral part of the eastern states interconnected
network.
Regulatory framework
The
regulatory framework for gas transmission includes the…
· National Gas (South Australia) Act 2008 which has also been enacted in the other participating
states through application statutes.
· National Gas (South Australia) Regulations.
· National Gas Rules, for which Part 8 addresses Access Arrangements.
Key features of the Access Arrangement to date
Key
features of the RBP Access Arrangement to date include…
|
Parameter |
Proposal |
Draft
Decision |
Revised
Proposal |
Final
Decision |
|
Gross
CapEx |
$67m |
$61m |
|
|
|
OpEx |
$71m |
$72m |
|
|
|
Opening
RAB |
$452m |
$444m |
|
|
|
Nominal
vanilla WACC |
7.70% |
5.75% |
|
|
|
Regulatory
depreciation |
$73m |
$20m |
|
|
|
Smoothed
revenue requirement |
$234m |
$237m |
|
|
Pipes
& Wires will re-examine this as APA submits its Revised Proposal and the
AER makes its Final Decision.
Aus – the Victorian gas transmission Draft Decision
Introduction
The Australian Energy
Regulator (AER) recently released its Draft Decision for the 5 year regulatory period commencing on 1st
January 2018 for the Victorian Transmission System (VTS). This article examines
the key features of that Draft Decision.
A bit about APA Group and the VTS
APA Group owns and operates inter
alia 15,000km of gas pipelines across Australia, which includes 7,500km of
interconnected pipelines in the eastern states. The VTS comprises 1,990km of
pipelines which form an integral part of the eastern states interconnected
network.
Regulatory framework
The
regulatory framework for gas transmission includes the…
· National Gas (South Australia) Act 2008 which has also been enacted in the other participating
states through application statutes.
· National Gas (South Australia) Regulations.
· National Gas Rules, for which Part 8 addresses Access Arrangements.
Key features of the Access Arrangement to date
Key
features of the VTS Access Arrangement to date include…
|
Parameter |
Proposal |
Draft
Decision |
Revised
Proposal |
Final
Decision |
|
Gross
CapEx |
$256m |
$215m |
|
|
|
OpEx |
$131m |
$132m |
|
|
|
Opening
RAB |
$1,007m |
$986m |
|
|
|
WACC |
7.88% |
5.75% |
|
|
|
Regulatory
depreciation |
$106m |
$78m |
|
|
|
Smoothed
revenue requirement |
$732m |
$555m |
|
|
|
X |
-23.8% |
0.25% |
|
|
Pipes
& Wires will re-examine this as the AER makes its Final Decision.
System security & energy mix
US – examining markets and
reliability
Introduction
Pipes & Wires #163 examined Secretary of
Energy Rick Perry’s recent order to review inter alia
the impact of regulation and federal subsidies on base-load coal-fired
generation that went under the broad heading of “examining electricity markets
and reliability”. This article examines the key findings of that report.
Terms of reference of Perry’s
review
The terms of reference of Perry’s review require
the Department of Energy to explore and analyse inter alia…
·
The extent to which federal policies and changing
fuel mix are challenging the original assumptions of wholesale markets.
·
Whether markets are correctly paying for attributes
that contribute to security of supply.
·
The extent to which regulations, mandates, taxes
and subsidies are forcing the premature retirement of base-load generation.
Perry notes his commitment to President Trump to
not only analyse problems but to also provide solid solutions and policy
recommendations.
Key conclusions of the report
After a leak and some controversy, the report was released in late August 2017
under Perry’s covering letter.
Probably the most significant conclusion (the one
everyone was waiting for) was whether renewables have squeezed coal and nuclear
out of the market. The headline answer is that cheap gas and efficient
combined-cycle generation have been the biggest factors, however the following
other factors are also noted as having squeezed coal and nuclear out of the
market…
·
Low demand growth combined with 390,000 MW of new
generation capacity since 2002.
·
Low variable costs of renewables.
·
The subsidies and tax credits available to
renewable generators have distorted wholesale markets, lowering wholesale
prices.
·
Costs of meeting increasing air discharge
requirements.
Other conclusions of the report include…
·
Existing market designs may prove inadequate if
increasing penetration of renewables drives wholesale prices down further.
·
More urgent development of market mechanisms is
required for paying generators that provide grid reliability, resilience and
renewable buffering.
·
Security of gas and coal supplies is a mounting
issue, especially as gas transmission pipelines become capacity constrained.
·
A heightened exposure to gas price volatility as
the proportion of gas-fired generation increases.
In summary, an interesting report that concludes
things are working okay for the moment but urgent improvements will be
necessary to avoid disaster.
Aus – final report on Tasmanian
security of supply
Introduction
A key theme of recent Pipes & Wires has been
the various inquiries into security of supply in Australia (refer to Pipes & Wires #162 for more details). This article
examines the Tasmanian Energy Security Taskforce’s final report.
Key findings of the interim
report
The interim
report recommended five priority actions…
· Define energy
security and responsibilities.
· Strengthen
independent energy security monitoring and assessment.
· Establish a
more rigorous and more widely understood framework for the management of water
storages.
· Retain Tamar
Valley as a backup, and to provide clarity to the Tasmanian gas market.
· Support new
generation within Tasmania, and customer innovation.
Key findings of the final report
Probably the key finding of the final report is the
confirmation of the five priority actions recommended in the interim report. Noteworthy
recommendations include…
·
That the agreed definition of energy security
explicitly references low carbon energy.
·
That the identified tasks of monitoring energy
security risk and coordinating low hydro storage responses could be adequately
performed by existing agencies.
·
Defining the level of hydro storage at which Hydro
Tasmania must stop operating for its own commercial interests and instead
operate for the benefit of the State.
·
Adopting more conservative assumptions for rainfall
variability and Basslink availability.
·
That Tamar Valley should remain available as backup
generation, noting that although the convergence of low inflows and a Basslink
outage has a low probability it is nonetheless a credible scenario. It is noted
that Tamar Valley would be less critical if new (presumably secure) generation
is built, demand shrinks, or a second cable to the mainland is built.
·
That future gas transmission capacity into Tasmania
must be confirmed, whether by commercial negotiation or by invoking the
proposed national gas arbitration reforms.
·
Encouraging private sector partnerships to make up
the average deficit of on-island hydro and wind generation of between 700GWh
and 1,000GWh per year ie. in an average year, between
700GWh and 1,000GWh needs to be supplied by either thermal generation or
through the Basslink (which will likely be brown coal fired generation).
This article concludes Pipes & Wires coverage
of the Tasmanian inquiry but no doubt security of supply in Australia will be
an on-going theme.
Mergers & asset sales
US – Great Plains and Westar ask for merger approval
Introduction
Following
the rejection of Great Plains $12.2b acquisition of Westar Energy (Pipes & Wires #163) by the Kansas Corporation
Commission, the two companies began working towards what looked more
like a merger than an acquisition. This article examines the formal merger
request.
The rejected acquisition
Great
Plains Energy launched its $12.2b cash plus stock plus debt acquisition bid for
Wester Energy in mid-2016, with a view to creating an enlarged electric company
with 1,500,000 customers, 13,000MW of generation and $5.1b in annual revenues. The
KCC rejected the acquisition proposal inter
alia on the basis of insufficient customer safeguards (such as maintaining
a separate Westar board), and an acquisition price that customer advocates
considered was too high.
The merger proposal
Great
Plains and Westar filed their merger proposal with the KCC in August 2017. Key features of that proposal
include…
· The formation of a yet-to-be-named corporation that would be
52.5% owned by Westar shareholders and 47.5% owned by Great Plains
shareholders, and which would have an equity value of about $14b.
· A one-off $50m credit spread across all customers.
· The retention of Westar’s Topeka head office and its 500
staff for at least 5 years, including a requirement for no involuntary
lay-offs.
Both
companies reiterate their original justification of improving scale and
avoiding increasing costs per customer as the reason for pursuing the merger.
Next steps
At the
time of writing, the next steps include filing of similar merger proposals with
other regulators (including the Missouri Public
Service Commission). Great Plains and Westar hope to have the merger approved
during the first half of 2018.
Network access frameworks
NZ – the Transpower CapEx Input Methodologies Review
Introduction
The Commerce Commission recently released a Process Update Paper for the
upcoming Review of
the Transpower CapEx Input Methodologies (IM’s).
This brief article describes the IM’s and their context, and notes the
Commission’s expected focus areas.
A bit
about the Transpower CapEx IM’s
Input Methodologies are the “rules” set by
the Commerce Commission to define how various inputs to a regulated
infrastructure business’ building block model will be treated, in this case for
the electricity transmission grid operator Transpower.
Regulatory
framework
The regulatory framework includes …
· Subpart 9
of Part 4 of the Commerce Act 1986 which
sets out the general regulatory framework for all electricity line services
including Transpower.
· Subpart 7
of Part 4 of the Commerce Act 1986 provides
for the Commission to apply an Individual Price-Quality Path (IPP) to a
supplier. In April 2010 the Commission recommended to the Minister Of Commerce that Transpower be subject to an IPP because it
would be more likely to promote the s52A
Purpose Statement than a Default
Price-Quality Path (DPP), principally because Transpower has lumpy CapEx.
Key focus
areas for the CapEx IM Review
The key focus areas for the Review includes…
· Possible
adjustments to the IM’s to ensure that the correct grid investments (including
non-grid investments) are being made.
· Does the
IM support a proportionate approach to scrutiny ?
· Once
expenditure has been approved, does the IM appropriately deal with changing circumstances ?
· Are the
incentive mechanisms in the IM effective ?
· Are
aspects of the IM too complex and prescriptive ?
Next steps
The Commission will be consulting key
stakeholders during September 2017 and expects to release its Draft Decision by
10th November 2017. After a further consultation on the Draft, a
Final Decision is expected in early 2018.
Aus – abolishing
the Limited Merits Review
Introduction
Following the recent appeals of the
Australian Energy Regulator’s revenue decisions for various wires companies (Pipes
& Wires #164), Pipes
& Wires #165 noted the Federal
Government announcement that it would introduce legislation to remove that
right of appeal. This article examines that legislation.
The
Limited Merits Review
The
LMR was introduced in 2008 to provide for the Australian Competition Tribunal
to identify aspects of the AER’s decisions that may be reviewed. The regulatory
framework for the LMR is set out as follows…
· Division 3A of the National Electricity (South Australia) Act 1996. In particular s71c defines the grounds on which an
application to the Tribunal can be made.
· Section 9 of the National Electricity (South Australia) Regulations, which defines the clauses of the National Electricity
Rules for which AER decisions are reviewable.
· Division 2 of the National Gas (South Australia) Act 2008.
In particular s246 defines the grounds for review.
The
LMR was previously reviewed in 2013. A further review was commenced in 2016 for which the conclusions were expected in mid-2017.
The new
legislation
The legislation was introduced as the Competition
and Consumer Amendment (Abolition of Limited Merits Review) Bill 2017, and
amends the Competition and Consumer Act 2010 as follows…
· Including
a new s44AIA to ensure that AER decisions made under the national energy laws
are not subject to merits by any State or Territory body. The right to seek a
judicial review of an AER decision remains unaffected.
· Amending s44AI(1) to make the Commonwealth’s consent to the conferral
of the national energy law functions on the AER subject to the operation of
s44AIA.
· Including
a new s44ZZMAA prevents the (Australian Competition) Tribunal from reviewing national
energy law decisions, other than those decisions relating to the disclosure of
confidential or protected information collected under the NEL or the NGL.
· Amending s44ZZM(1) to make the Commonwealth’s consent to the
conferral of national energy law functions on the AER subject to the operation
of s44ZZMAA.
The
practical effect
Given that the regulatory framework for
revenue regulation of wires businesses has its legal basis in a State law (the National Electricity (South Australia) Act 1996), the
amended s44AI quite clearly curtails access to an LMR.
Next steps
The Bill was introduced and read a first time
on 10th August 2017, and then also read a second time on 10th
August 2017. At the time of writing this article the Bill had been referred to
the Senate Environment and Communications Legislation Committee, with a report
expected by the 16th October.
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 classic historical photo’s with humorous captions looks at some
of the salient features of price control. Pick here to download.
Wanted – old electricity history books
Now
that I seem to have scrounged pretty much every book on the history of
electricity in New Zealand, I’m keen to obtain historical book, journals and
pamphlets from other countries. So if anyone has any unwanted documents, please
email me.
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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
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