Pipes & Wires

Though leadership of critical energy & infrastructure matters

Issue 171 – January 2018


From the editor’s desk…


Welcome to Pipes & Wires #171. We start this issue with a look at summer preparedness in the Australian NEM and in Texas, and then take a quick look at progress on the Hinkley Point C nuclear station in Britain. We then examine some network access decisions in Australia and New Zealand, followed by a comparison of how regulatory stability effects solar investment. This issue ends with an examination of solar metering and fixed tariffs in the United States. 


So … until next month, happy reading…


Recent client projects


Recent client projects include…


·     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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Grid operations & security


Aus – securing the NEM for summer




The closure of the coal-fired Hazelwood Power Station removed 1,600MW of firm capacity from Australia’s National Electricity Market (NEM) earlier in 2017, which caused concern over how peak summer demand would be supplied. This article examines the Australian Energy Market Operators’ security of supply plans for the 2017/18 summer.


The NEM reliability standard


The reliability standard for the NEM is set by the Australian Energy Market Operator’s (AEMO) Reliability Panel, and is 0.002% of Unserved Energy, meaning that in any given (financial) year the maximum amount of forecast energy demand that should be at risk of not being supplied is 0.002%, or alternatively that 99.998% of forecast energy demand should be met. As an example, NSW’s annual consumption is about 69,500 GWh, so the requirement is for no more than 1,390 MWh to be at risk (eg. 1,390 MW for 1 hour at a transmission grid level).


The AEMO and the AEMC are reviewing this reliability standard, and expect to publish a revised standard in April 2018.


Capacity closures in the NEM


Pipes & Wires #166 noted that 5,900 MW of firm capacity (including Hazelwood during 2017) had closed since 2010, along with a further 5,000 MW (Yallourn W, Liddell and Gladstone) expected to close by 2026. There were also some anxious moments during September 2017 when the possibility that the Springvale Coal Mine supplying Mt Piper (1,400 MW) might be closed due to environmental activism.


The AEMO’s plans


The AEMO released its Summer Operations 2017-18 plan in November 2017. Key features of that plan include…


·     A reiteration of the heightened risk of supply interruptions (specifically noting the Hazelwood closure) noted in the June 2017 Energy Supply Outlook.


·     A recognition that declining firm capacity, longer and hotter summers and the introduction of intermittent generation requires an additional emphasis on summer preparedness.


·      An explanation that the primary focus of the plan is on the medium-to-long term balancing of energy supply and demand rather than the immediate-term balancing of MW.


·     Refined modelling that includes inter alia a lower peak period contribution from rooftop solar than previously thought, and higher demands for South Australia than previously forecast.


·     The view that customers are less likely to reduce energy consumption than the AEMO previously thought.


·     Recognising that the number of Lack Of Reserve notices issued to the market has increased over the last 3 years.


·     Recognition that the risk of unserved energy (USE) in Victoria and South Australia would exceed the reliability standard during the 2017/18 summer.


Specific measures to meet the reliability standard


Specific measures set out in the Summer Operations 2017-18 plan include…


·     Returning 833 MW of previously mothballed gas-fired capacity to the NEM (including Pelican Point, Swanbank E and Tamar Valley).


·     Obtaining commitments to 884 MW of interruptible load under the Reliability & Emergency Reserve Trader (RERT) arrangement.


·     Obtaining commitments for 266 MW of non-market generation and 170 MW of emergency diesel generation in South Australia (both through the RERT), along with a further 96 MW of emergency diesel generation in Victoria).


All going well, that represents about 2,000 MW of previously unavailable capacity.


US – tightening reserve in the Lone Star State




Pipes & Wires #170 noted that generation is being closed or sold in Texas because of historically low wholesale prices (currently about $25 per MWh, down from $78 per MWh in 2008). This article examines the Electric Reliability Council of Texas’ (ERCOT) recently signaled decline in reserve capacity margin for the 2018 summer.


ERCOT’s recent forecasts


Key feature of ERCOT’s recent reports include…


·     A December 2017 forecast of a reserve capacity margin of 9.3% for the 2018 summer (much less than ERCOT’s preferred minimum of 13.75%), in contrast to the May 2017 forecast of 18.9%. This sharp decline is due to recently announced capacity retirements and construction delays totaling 7,200 MW offset by 3,800 MW of new capacity during 2017.


·     A December 2017 forecast that reserve capacity margin would decline to 9.6% by 2027 primarily due to a forecast 1.7% annual peak demand growth.


·     An expected 10,000 MW of new capacity expected to be added during 2018, of which 5,500 MW is expected to be summer-capable.


The difference between the May and December 2017 Reports highlights how quickly available capacity can change, although ERCOT notes that reserve margins are expected to fluctuate in the current market design.


The wider trends


Some likely wider trends and issues include…


·     Some increase in forward wholesale prices for the 2018 summer has occurred since ERCOT’s latest report was released.


·     Cheap gas and wind have eroded the wholesale prices (and not just in Texas, as noted in Pipes & Wires #170), which will increasingly couple wholesale electricity prices to wholesale gas prices.


·     A headline view from the Texas Coalition For Affordable Power that retiring old, expensive coal-fired capacity should improve overall market efficiency and should not be seen as bad for customers (Editor’s note – that would depend on what cost recovery commitments have been agreed to).


·     A view from the Texas Association Of Manufacturers’ that the energy market is encouraging the replacement of older capacity with new, efficient, reliable capacity.


Nuclear & emissions reduction


UK – progress on Hinkley Point C




Last time Pipes & Wires examined Hinkley Point C was just after the UK Government’s review of security and ownership that resulted in increased control over any on-sale. This brief article revisits progress and notes the expected dilution of returns.


Latest progress on the works


Although work is proceeding, recent construction updates suggest that Unit #1 will be commissioned in 2027 instead of the originally planned late 2025, and the likely cost of completion will creep up from £18b to about £20.2b. It might be worth considering that although the cost and time over-runs (at least at this stage anyway) seem a lot they are of the order of 10% which maybe isn’t so bad for a complex construction project.


The investment characteristics


EDF’s expected rate of return for Hinkley Point C is 9%, which is expected to retreat to about 8.2% if the cost over-runs do amount to £2.2b. That suggests that every £1b over-run will dilute the return by about 0.36%. Keep this figure in mind for future analyses…


Network access decisions


Aus – the Murraylink revenue determination




The Murraylink recently submitted its Revised Proposal for the five year period beginning on 1st July 2018 to the Australian Energy Regulator (AER). This article examines the key features of the Revised Proposal.


A bit about the Murraylink


The Murraylink is a 180km long HVDC cable link between Berri (South Australia) and Red Cliffs (Victoria) which operates at 150kV and has a rating of 220MW. It was built by TransEnergie Australia and commissioned in 2002, and is now owned by Energy Infrastructure Investments Pty Ltd.


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…



Initial Proposal

Draft Decision

Revised Proposal

Final Decision











Opening RAB





Nominal vanilla WACC





Regulatory depreciation





Smoothed revenue






Next steps


Pipes & Wires will comment further when the AER releases its Final Decision.


NZ – gas under pressure




The Commerce Commission recently released its Final Decision on the detailed requirements for customised price-quality paths (CPP’s), which are set out in the Input Methodologies. This article summarises the key features of that decision.


Regulatory framework


The regulatory framework for regulated suppliers is set out in Part 4 of the Commerce Act 1986.  Subpart 6 of Part 4 sets out the requirements for default price-quality paths (DPP) and for customised price-quality paths (CPP). A regulated supplier that is subject to a DPP and believes it cannot adequately fund its business has the option of applying for a CPP pursuant to s53Q.


Key features of the decision


Key features of the Final Decision include…


·     The view that single-issue CPP’s are problematic, and that CPP’s should therefore be full scope with perhaps a lesser level of scrutiny.


·     Widening the range of circumstances under which a DPP can be reopened, including allowing a reopener for varying quality standards (which replaces the option of applying for a quality-only CPP).


·      Allowing the recovery of the prudent costs of urgent work performed after a CPP is applied for but before the CPP takes effect.


·     Allowing a gas distribution or electricity distribution CPP to be reopened for contingent and unforeseen projects.


·     Aligning the WACC requirements between DPP’s and CPP’s so the decision to apply for a CPP is independent of the WACC.


·     A preference for top-down assessment of spend forecasts with limited bottom-up assessment of selected projects and programs.


·     CPP applications will need to include a works deliverability risk assessment to demonstrate that the forecast work can be physically delivered.


Aus – the Victorian gas transmission Final Decision




The Australian Energy Regulator (AER) recently released its Final 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 Final 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 include…




Draft Decision

Revised Proposal

Final Decision

Gross CapEx










Opening RAB










Regulatory depreciation





Smoothed revenue requirement






This concludes Pipes & Wires coverage of this access decision.


NZ – regulating related party transactions




The Commerce Commission recently released its Final Decision on how it intends to regulate related party transactions as part of its review of the Input Methodologies review. This article examines related party transactions and summarises the key features of the Final Decision.


Thinking a bit more about related party transactions


Put simply a related party transaction is a transaction that occurs between an entity that is related to the entity preparing its financial statements. The context of this discussion is regulated pipes & wires businesses where the “do” (field services) activity may be related to the “think” (asset management) activity as either an internal business unit, as a subsidiary of the “think” activity, or as a subsidiary of the parent company.


Some of the issues around related party transactions


Some of the issues around related party transactions include…


·     The possibility that an “own” activity (owner of regulated assets) might be able to pass on inefficient costs derived from a related party “do” activity.


·     The additional possibility that a related party “do” activity might set its prices to the “think” and “own” activities higher than what a market-based transaction would allow, depressing the prima facie ROI for the “own” function whilst attributing those funds back to the “own” function as profit from the “do” function.


·     The fact that many regional areas simply don’t have a robust market for major line and substation construction and maintenance activities that asset owners can readily access, so there are often no comparable arms-length transactions for comparison.


·     At least some “think” activities are regularly tendering out “do” work where external contractors exist and have sufficient internal tension and separation to obtain competitive prices.


Key features of the Final Decision


Key features of the Final Decision include…


·     The Commission’s view that it doesn’t want to prohibit the use of related party services, but rather require regulated suppliers to demonstrate that the price paid for related party services are consistent with the prices that are (or would be) paid for arms-length services.


·     Removing the original prescriptive valuation options for disclosing related party transactions.


·     The introduction of a principles-based approach requiring demonstration that inter alia the price of related party purchases is no more than an equivalent arms-length purchase.


·     A requirement to disclose how competitive markets have been tested.


Readers should note that the Final Decision amends the Input Methodologies and the Information Disclosure Determinations for electricity distribution services, gas distribution services and gas transmission services.


Aus – the TransGrid revenue determination




The electricity transmission grid owner in the Australian state of NSW, TransGrid, recently submitted its Revised Proposal for the five year period beginning on 1st July 2018 to the Australian Energy Regulator (AER). This article examines the key features of that Draft Decision.


A bit about TransGrid


TransGrid owns and operates 13,000km of lines at 500kV, 330kV, 220kV and 132kV that supply 99 bulk supply substations (GXP’s). Following the completion of the 99 year lease process in 2015, TransGrid is owned by a consortium led by Hastings Funds Management.


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…



Initial Proposal

Draft Decision

Revised Proposal

Final Decision











Opening RAB










Regulatory depreciation





Smoothed revenue






Next steps


Pipes & Wires will comment further once the AER releases its Final Decision.


Regulating emerging technologies


US – different lessons from different states




We all know that long-term stability of cost recovery is a major investment driver for large capital projects. This article examines the differing regulatory frameworks in California and Massachusetts that are leading to counter-intuitive outcomes for community solar investment.


The investment in question


The investment in question is privately developed community solar, which refers to a solar installation that…


·     Provides electricity to more than 1 property.


·     Is owned by a “community” or possibly by a third party such as an electric company.


Comparing the two states


A quick comparison of California and Massachusetts reveals…





Average annual number of sunny days

284 (Los Angeles)

200 (Boston)

Land area

424,000 km2

27,300 km2

Installed private-sector led community solar

0 MW

130 MW

Regulatory stability



Regulatory complexity



Solar tariffs



Complexity of tariffs



Stability of tariffs




The apparent lessons


So the apparent lesson here (like in many other areas of life) is that it is not necessarily the abundance of the natural resources that creates the opportunity but rather the stability of the regulatory framework.


Tariffs & pricing



US – striking the right balance for solar metering in Nevada




Opposition to increasing the fixed component of electric tariffs is nothing new … promoters of rooftop solar have claimed that increasing the fixed tariff component whilst also reducing the variable component undermines the benefits of solar (which electric companies have never disputed). This article follows on from Pipes & Wires #168 and examines the Nevada Public Utility Commission’s response to NV Energy’s proposed implementation of the nett metering law.


Nevada’s nett metering law


Assembly Bill 405 was introduced to the Nevada Legislature in March 2017 with the aim of…


·     Protecting customers who use renewable energy.


·     Revising provisions for nett metering.


A key feature of the Bill was that it restored nett metering rates to 95% of the retail rate. The Bill was signed into law in June 2017 by Governor Brian Sandoval.


NV Energy’s proposed tariff rebalancing


Key features of NV Energy’s proposed tariff rebalancing include…


·     Increasing the fixed monthly tariff from $12.75 to $16.76, but noting that customer bills should remain about the same because of a corresponding reduction in the kWh tariff.


·     Paying rooftop solar customers 95% of the prevailing import rate for their exported energy. This will decline by 7% for every 80MW of rooftop solar installed until a floor of 75% is reached.


The Nevada PUC’s response


Key features of the PUC’s response include…


·     A strong commitment to implement the recently passed Assembly Bill 405, providing for the immediate reestablishment of the rooftop solar market in Nevada.


·     A directive that solar and non-solar customers be treated equally.


·     Approval to establish regulatory assets to protect NV Energy against any under recovery of costs.


·     A return to (traditional) monthly nett kWh metering.


·     A requirement that public purpose levies must continue to be paid by all applicable classes of customers, whether solar or non-solar.


The editor comments


On the face of it, the PUC’s conclusions seem reasonable, especially the approval to establish regulatory assets to protect against under recovery of costs. Only time will tell how successful this works out in practice.


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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