Pipes & Wires

Though leadership on critical energy & infrastructure matters

Issue 170 – December 2017


From the editor’s desk…


Welcome to Pipes & Wires #170. This issue starts with a think about how electric distributors and their regulators might respond to competition, and then looks at how secure generation is being squeezed out of the market by low wholesale prices. We then examine moves in the US to strengthen the role that coal and nuclear plays.


We then examine the recent review of energy costs in the UK, and then look at some network access decisions in Australia and New Zealand. This issue ends with a quick look at progress on the Flammanville’s third reactor. To close the year, I’d like to wish you and your families a Merry Christmas and a Happy New Year until Pipes & Wires returns in 2018.


Recent client projects


Recent client projects include…


·      Assessing asset management spend forecasts for prudency and efficiency.


·      Reviewing recent AER decisions to understand the expectations around asset management practices and methods.


·      Reviewing the AER’s recent treatment of network transformation expenditure.


·      Compiling overhead conductor and wooden cross-arm fleet strategies.


·      Identifying the issues around customer-owned lines on private land.


·      Developing a risk-based tree trimming strategy.


·      Developing an EV charging strategy.


·      Analysing transmission charges as a percentage of total electric bills.


·      Compiling a strategy for improving the resilience of a sub-transmission network.


·      Developing a best-practice guideline for smart metering.



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Regulating emerging technologies


US – when electric distribution faces competition




Small-scale embedded generation nibbles away at the traditional regulated electric distribution business model, whilst customer choice aggregation (CCA) is likely to hit it head on. This article examines what CCA is, and how regulators might respond to CCA.


A closer look at CCA


CCA is the process by which an agency (typically a local, not-for-profit) either purchases energy on behalf of individual customers or generates that energy with the most common purpose for CCA’s is to purchase renewable energy. Individual states must legislate to allow CCA, such as California.


How CCA might disrupt the traditional business model


CCA’s will typically rely on existing electric transmission and distribution networks to convey aggregated energy, however the underlying business model will be subject to two competitive pressures…


·      Pushing back against regulated tariffs, which small individual customers are generally unable to do.


·      Bypassing the networks through arranging on-site generation.


A quick look at Porter’s Five Forces Model vividly shows how CCA increases both the bargaining power of buyers and the threat of substitutes.


How might regulators respond to CCA ?


The observation is that regulators in many jurisdictions are struggling to understand how to regulate emerging technologies (refer to Pipes & Wires #139). Perhaps the real question is whether to regulate emerging technologies, and also very importantly whether traditional monopoly businesses that face increasing competition (bargaining power and substitution) should continue to be regulated because after all the raison d’être for regulating wires businesses was because there was no competition.


Thinking about this some more


The traditional regulatory compact has placed a ceiling above either revenue or prices, with the implicit quid pro quo being the floor on revenue (or prices) because customers had to use the wires at a set price.


CCA and embedded generation are eroding that floor, so the question remains why should the ceiling remain ? If regulated wires businesses increase their prices, the incentive to bypass the wires with embedded generation only increases.


Grid operations & security


Global – squeezing secure generation out of the market




News recently emerged that Exelon Generation and Vistra Energy are selling and closing generation in Texas because of historically low power prices. This article examines the concerning wider global trend of declining wholesale prices and the likely financial, market and operational implications. 


Wholesale price trends


The last few years have seen wholesale prices decline in many jurisdictions…


·      UK - from a high of over £90 per MWh in 2008, to about £42 per MWh now.


·      Europe – from a high of 95 per MWh in 2008, to about 35 per MWh now.


·      Texas – from a high of $78 per MWh in 2008, to about $25 per MWh now.


·      South Australia – from a high of $101 per MWh in 2007, to $42 per MWh in 2014 (which has since climbed back to $123 per MWh in 2016).


These declining prices represent a significant hollowing out of revenue for generators that one way or another will need to be matched by structural rather than incremental cost reductions ie. plant closures.


The reasons for declining wholesale prices


Reasons for declining wholesale prices include…


·      Cheap gas squeezed coal-fired generation out of the market (particularly in the United States).


·      Cheap wind squeezed gas out of the market.


The financial implications


The short-term financial implication is the inability to recover fixed costs, so some incremental cost-cutting will need to occur that will probably only chisel the edges off the variable costs. When that extends beyond the short-term, structural changes will be required to reduce fixed costs ie. mothballing or closing plant (which was one of my first jobs when I began working in thermal power station).


The market implications


Withdrawal of thermal capacity from the market may lead to a concentration of (market) power in the hands of the lowest short-run cost generators, with the possibility of price increases.


The operational implications


The key operational implication is that coal-fired and gas-fired generation gets removed from the market, so the percentage of capacity available to meet demand that is secure declines.


Where might it go ?


That the $1b question … where might it go ? Even if wholesale prices recover to sustainable levels, electric companies will need to be convinced that prices will stay at sustainable levels for many years.


US – strengthening the role of coal and nuclear




The emerging global picture is that secure, dispatchable generation plays a critical role in providing security of supply. This article examines recent moves in the United States to strengthen the role that coal and nuclear play in securing power grids.




Pipes & Wires #168 noted the Department of Energy’s filing of a Notice of Proposed Rulemaking (NOPR) directing the Federal Energy Regulatory Commission (FERC) to “accurately price generation resources necessary to maintain reliability and resiliency”. Not surprisingly, that NOPR met some resistance along the way that includes accusations that it is simply returning a favor to coal-fired generators in the PJM that supported President Trump’s campaign.


The wider context


The wider context to the NOPR is the recent DOE study on markets and reliability ordered by Secretary of Energy Rick Perry (refer to Pipes & Wires #163 and #167).


The FERC’s recent plans


In November 2017 the FERC considered directing RTO’s and ISO’s to update their market tariffs to ensure that coal and nuclear generation remained available for grid security whilst the FERC considers the NOPR by way of a show cause order under s206 of the Federal Power Act. The order would require each RTO or ISO to provide interim payment for generators that provide grid security, or to show cause that it is not required to do so.


The FERC’s plan is also similar to the compensation plan advocated by coal-fired generators which would provide a monthly standby payment to all generation deemed resilient by the RTO. Readers might remember from Pipes & Wires #119 that Statkraft in Germany called for a capacity payment of €15 per kW per year that should apply to all gas-fired plants so that their Knapsack gas-fired station would receive about €12m per year.


Tariffs & pricing


UK – reviewing electricity costs




Reviews and inquiries into the cost of electricity and gas seem very popular (refer to Pipes & Wires #169. This article examines the key findings of the recently completed independent review into energy cost in the UK.


Terms of reference


The terms of reference are lengthy, however the specific aim of the review was to report and make recommendations on how Britain can best meet its emission reduction target of 80% by 2050 whilst also ensuring security of electricity supply at minimum cost and without any further cost to the tax-payer.


Key findings and recommendations of the review


Key findings of the review include…


·      That energy costs are than what is necessary to meet the Climate Change Act targets.


·      Customers have not seen lower prices as a result of declining coal and gas costs, declining renewable costs, or from efficiency gains.


·      Legacy costs, policies and regulation along with continued exercise of market power have dampened the flow of benefits to customers.


·      Multiple interventions have added complexity and costs.


·      Recognising that technology is changing too rapidly to reflect in 8 to 10 year price controls.


Key recommendations of the review include…


·      That a universal carbon tax be set on a common basis across the whole country.


·      A unified equivalent firm power capacity auction should be established that places the cost of intermittency on those who cause them.


·      That the assumptions behind the RIIO price caps should be re-visited.


·      That national and regional system operators should be established, and they should be guided by annual statements of required capacity margin.


The energy trilemma


The energy trilemma provides a really useful framework for unpacking the terms of reference for the report. The terms of reference firstly specifies that emission levels must be met (a common theme amongst most if not all of these inquiries), and then secondly that supply must be secure. That leaves cost as the dependent variable, and effectively constrains costs to be on the emissions – security side of the trilemma.


Network access decisions


Aus – the draft SA electricity transmission decision




The Australian Energy Regulator (AER) recently published its Draft Decision in regard to South Australia’s electricity transmission operator, ElectraNet, for the 5 year regulatory period beginning on 1st July 2018. This article examines the key features of that Draft Decision.


A bit about ElectraNet


ElectraNet owns and operates South Australia’s electricity transmission grid, which includes 5,600km of lines and 91 grid substations operating at 275kV, 132kV and 66kV covering 200,000km2. ElectraNet is owned by the State Grid Corporation of China, YTL Power Investments and Hastings Investment Management.


Regulatory framework


The basis of the regulatory framework is Chapter 6a of the National Electricity Rules, which are made pursuant to the National Electricity Law.


Key features of the process


Key features of the process to date include…



Initial Proposal

Draft Determination

Revised Proposal

Final Determination











Opening RAB















Smoothed revenue






Pipes & Wires will report further once ElectraNet submits its Revised Proposal.


NZ – updating Transpower’s individual price-quality path




The Commerce Commission recently released the Transpower Individual Price-Quality Path Amendment Determination 2017 (#1) which updates the following…


·      The forecast Maximum Allowable Revenue (MAR) for the years ending 31st March 2019 and 2020.


·      The approved base CapEx for the years ending 30th June 2018 and 2019.


Regulatory framework


The regulatory framework starts with Part 4 of the Commerce Act 1986 and includes…


·      The Transpower Input Methodologies Determination 2010.


·      The Consolidated Transpower Capital Expenditure Input Methodology Determination.


The #1 Determination amends the Transpower Individual Price-Quality Path Determination 2015.


Key features of the updates


Key features of the updates include…


·          Reducing the MAR for the year ending 31st March 2019 from $949.9m to $932.1m.


·          Reducing the MAR for the year ending 31st March 2020 from $957.3 to $938.7m.


·          Increasing the approved base CapEx for the year ending 30th June 2018 from $242.0m to $243.0m.


·          Increasing the approved base CapEx for the year ending 30th June 2019 from $231.6m to $241.2m.


Aus – reviewing the WACC guidelines




Allowable cost of capital is a critical component of any infrastructure revenue decision. This article examines the Australian Energy Regulator’s Review of the Rate of Return Guidelines.


Purpose of the Review


The purpose of the Review is to ensure that the allowed rates of return have achieved the respective purposes of the…


·      National Electricity Objective.


·      National Gas Objective.


·      Allowed Rate of Return Objective


·      Revenue and Pricing Principles.


The regulatory framework


The regulatory framework for the ROR Guidelines is as follows…







National Electricity Law (South Australia) Act 1996

National Gas (South Australia) Act 2008



National Electricity (South Australia) Regulations

National Gas (South Australia) Regulations



National Electricity Rules v101

National Gas Rules v36



NER 6.5.2(m) to (q).

NGR Part 9, Division 5, (13) to (19).


The review process and its progress to date


The NER and the NGR require the ROR Guideline to be reviewed within 5 years of its first publication, which corresponds to 17th December 2018.


The process began in July 2017 with the publication of a Consultation Paper in July 2017 which was followed by an Issues Paper in October 2017 that the AER has recently consulted on. Experience to date and feedback on the Consultation Paper has led the AER to build on the existing Guideline rather than start afresh.


Specific cost of capital components


Some of the specific issues raised in the Issues Paper include…


·      The AER’s view that a nominal vanilla WACC will continue to achieve the various objectives.


·      The AER’s view that its current adoption of debt-equity ratios is appropriate.


·      The AER’s view that the Australian Government 10 Year Bond rate remains a suitable proxy for the Risk Free Rate (because an efficient network company would issue 10 year debt).


·      The transition to a 10 year historical average for estimating the allowable return on debt.


·      Whether a more prescriptive approach to setting the Equity Risk Premium is required.


·      How should the Equity Beta point estimate be set ?


Next steps


Following the current consultation period, the AER expects to releases its draft Guideline in May 2018.


The editor comments


As (electricity) distribution revenues come under increased threat from emerging technologies, a review of how the Equity Beta is set is definitely appropriate.


Nuclear & emissions reduction


France – progress on Flammanville’s third reactor




Pipes & Wires #151 and #155 discussed the metallurgical difficulties encountered during construction of the third reactor at Flammanville in north-western France. This article examines the Autorité de Sûrete Nucleaire’s (ASN) conclusions.


A summary of the difficulties


Tests performed in 2014 revealed that some zones of the steam generator channel heads included significant concentrations of carbon, which could reduce the resilience of the steel and its ability to resist cracking. Concern spread to a further 18 reactors at 9 stations that could have similar difficulties.


The ASN’s decision


The ASN recently concluded that Flammanville #3 can be started, but the head of the reactor pressure vessel will need to be replaced by the end of 2024.


Progress continues


EDF subsequently announced that construction will continue, fuelling will begin at the end of 2018, and that full commercial load of 1,630MW is expected to be achieved by November 2019.


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.


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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