Pipes & Wires

Though leadership of critical energy & infrastructure matters

Issue 173 – March 2018


From the editor’s desk…


Welcome to Pipes & Wires #173, which starts with a look at compensating battery storage for grid support. We then look at 2 electricity distribution revenue decisions and 1 rail revenue decision, and then we look at 3 larger mergers in the US.


This issue concludes with a look at the proposed end of wind power subsidies in the US state of Oklahoma, and the key features of the next gas and electricity price control in the UK. So … until next month, happy reading…


Recent client projects


Recent client projects include…


·     Developing a strategy for complying with the related party transaction provisions.


·     Advising on the regulatory implications of an aging timber transmission pole fleet.


·     Facilitating a series of client workshops to better understand asset information criticality and in-service failure risk.


·     Assessing the strength of asset management practices.


·     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.


Electricity training courses

My 2 day Fundamentals Of The NZ Electricity Industry training course will be held as follows…


·     Wellington – 2nd and 3rd May 2018.


·     Auckland - 26th and 27th June 2018.


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Regulating emerging technologies


US – compensating battery storage for grid support




How much and on what basis electricity markets pay emerging technologies for the various electricity products they can provide is a hot topic at the moment. After a quick recap on grid operations and electricity products, this article examines recently introduced rules in California that will inter alia allow revenue stacking.


Grid operations and electricity products


Back in the vertically integrated days, generators just supplied all the electricity products that were necessary to keep the transmission grid working … peak capacity, frequency keeping, voltage support, black start capability, rotational inertia … as well as the most visible products of energy and reactive support. Vertical disaggregation of the electricity industry meant that the grid had to buy these products from generators using market based payment mechanisms. Some might say this has been slow … perhaps too slow … to evolve, and in some cases has met with considerable resistance by policy makers and regulators.


California’s energy stacking rules


In January 2018 the California Public Utilities Commission approved rules that allows the operator of a distributed energy resource (DER) to provide (“stack”) multiple electricity products that can each be paid for on an incremental basis for the value that provide for individual components of the electricity supply chain. The rules were considered necessary to overcome the difficulties wherein DER’s could only be paid once even if they provide multiple electricity products (note that the interim Rule 12 limits payment to electricity products that are distinct, incremental and measurable).


Further reading


·     Pipes & Wires #169 – Ofgem’s work on clarifying the regulatory framework for battery storage.


·     Pipes & Wires #172 – regulating grid-scale battery storage.


Network access decisions


Aus – the Evoenergy revenue determination




The electricity distributor in the Australian Capital Territory (Evoenergy) recently submitted its Regulatory Proposal (rates case) to the Australian Energy Regulator (AER) for the 5 year period commencing on 1st July 2019. This article examines the key features of that Proposal to set some context for examining the Draft and Final Determinations.


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 revenue reset process


Key features of the process to date include…




Draft Determination

Revised Proposal

Final Determination











Opening RAB





Nominal vanilla WACC










Smoothed revenue






Pipes & Wires will revisit this story when the AER releases its Draft Determination.


UK – the PR18 rail access price review




The Office of Rail and Road (ORR) has begun work on the PR18 price review that will apply to Network Rail for the CP6 control period 1st April 2019 to 31st March 2024. This article follows up from Pipes & Wires #166 (which examined the key features of the regulatory framework) with a quick look at Network Rail’s CP6 Strategic Business Plans.


A bit about Network Rail


Network Rail is a government-owned corporation that owns and operates 20,000 miles of railway infrastructure throughout England, Wales and Scotland that is managed as 8 routes. That track infrastructure is provided on an open-access basis to independent train operating companies (TOC’s). Network Rail’s regulatory and funding framework includes legislation, statements of expectations from the English and Scottish governments, and grant funding.


Key features of the CP6 Strategic Business Plans


Key features of the CP6 Strategic Business Plans include…


·     Improved passenger and public safety, including reducing the risk of train accidents by 10% and the risk of level crossing incidents by 13%.


·     Reducing the number of delayed trains by 15%.


·     Reducing operating costs per passenger kilometer by 9%.


Next steps


The next key steps for PR18 include…


·     ORR assesses the efficiency of Network Rail’s strategic business plan in early 2018 and consults on its draft determination by June 2018.


·     ORR will publish its final determination by October 2018.


·     Network Rail will publish its delivery plan in March 2019.


Aus - the Northern Territory electricity distribution revenue reset




The electricity distributor in Australia’s Northern Territory, the Power & Water Corporation, recently submitted its Regulatory Proposal to the Australian Energy Regulator for the 5 year period commencing on 1st July 2019. This article examines the key features of that Proposal to set some context for future analysis.


A bit about NT Power & Water


The electricity supply chain in the NT comprises 3 entities owned by the NT Government…


·     Power & Water Corporation provides inter alia electricity network services. Jurisdiction for regulating Power & Water’s electricity networks has recently transferred from the (NT) Utilities Commission to the Australian Energy Regulator.


·     Jacana Energy retails electricity to about 80,000 customers.


·     Territory Generation generates about 2,000GWh per year.


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 revenue reset process


Key features of the process to date include…




Draft Determination

Revised Proposal

Final Determination











Opening RAB





Post-tax nominal WACC










Smoothed revenue






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


Mergers and acquisitions


US – examining the Dominion – SCANA merger




It’s been a while since Pipes & Wires examined any mergers, so let’s re-examine what’s been happening. This article examines the merger between Dominion Energy and SCANA Corp, and then moves to a wider look at the recurring themes and trends.


A bit about Dominion


Dominion Energy is a vertically integrated electricity and gas supplier based in Richmond, Virginia. It is huge even by US standards … 27,000 MW of generation, 14,000 miles of gas transmission pipelines, and 975 BCF of gas storage. Dominion supplies 2,500,000 electric customers in Virginia and North Carolina, along with 2,300,000 gas customers in Idaho, Ohio, Utah, West Virginia and Wyoming.


A bit about SCANA


SCANA is an energy holding company based in Cayce, South Carolina. SCANA supplies about 1,800,000 electric and gas customers throughout South Carolina, North Carolina and Georgia, mainly through its regulated subsidiary SCE&G. SCANA’s history dates back to 1846 when the Charleston Gas Light Company was established.


The merger


Dominion and SCANA announced their all-stock merger in January 2018, in which SCANA shareholders will receive 0.669 Dominion shares for each SCANA share. This would value SCANA at $55.35 per share, with the total deal being worth $14.6b including debt. The merged entity would operate about 31,400 MW of generation and supply about 6,500,000 electric and gas customers. Customer benefits of the merger include a $1.3b rebate and a 5% tariff reduction.


In addition to the merger being subject to the usual approval of state-based regulators, the FERC and the NRC, this merger will also receive close scrutiny from the South Carolina Government due to the inclusion of the abandoned VC Summer nuclear station.


The issue of the VC Summer nuclear station


The Virgil C. Summer nuclear station was a joint venture between SCANA and the state-owned Santee-Cooper electric company. In 2008 plans were announced to construct two AP1000 reactors adjacent to the existing reactor which began operation in 1984. In July 2017 SCANA and Santee-Cooper abandoned the construction after spending $9b when further studies revealed that the likely cost of completion would be about $25b, more than double the originally budgeted $12b.

The whole saga is obviously broad and deep, however the issue directly relevant to this article is the need for SCANA to strengthen its financial position after writing down $1.7b.


Recurring themes in mergers


Over the years Pipes & Wires has observed some concerning themes, with the following two being perhaps the most concerning…


·     Government agencies allowing a wider range of community bodies to object to mergers, ostensibly allowing those bodies to extract special interest concessions and dilute the merger benefits.


·     Requiring increasing customer benefits (eg. rebates and tariff reductions) that again dilute the merger benefits.


It’s possible that beneath the more visible shadow of the VC Summer issue, these issues are also impacting the Dominion – SCANA merger. Pipes & Wires will comment further as the various regulatory approvals progress and legislative scrutiny of the VC Summer abandonment continues.


US – NextEra Energy searches for regulated earnings




As a follow on from the companion article that discussed the troubled Virgil C. Summer nuclear station and its 45% owner Santee-Cooper, this article examines NextEra Energy’s possible bid for Santee-Cooper as part of its strategy to reduce the risk exposure from its merchant generation business.


NextEra’s strategy


NextEra Energy operates 45,900 MW of generation in Canada and in 27 of the US states, but is perhaps more visibly known through its subsidiaries Florida Power & Light and Lone Star Transmission. Annual revenues are about $16b, and it is the largest electric company in the US by market capitalisation.


A large part of NextEra’s strategy has been investment in low emission generation (wind, solar, gas and nuclear complemented by transmission lines to deliver renewable energy) balanced against regulated earnings from FPL&L which itself is driven by Florida’s growing population. Although NextEra’s dividend yields are below the utilities industry average, the growth of those dividends over the last 5 years has exceeded the industry average growth.


However NextEra has identified the need to reduce the risk exposure from its merchant generation businesses by investing in regulated electric businesses, which is where Santee-Cooper comes in.


A bit about Santee-Cooper


Santee-Cooper had its origins in the 1930’s as both a rural electrification project and a public works program, and now supplies about 165,000 residential customers as well as bulk supply to a further 1,500,000 customers of South Carolina’s electric cooperatives. Santee-Cooper’s directors are appointed by the Governor and ratified by the South Carolina Senate.


The decision to abandon construction of the two AP1000 reactors at the Virgil C. Summer nuclear station (of which Santee Cooper was a 45% owner) has left Santee-Cooper with an extra $4b of debt. A key outstanding issue is how much of the sunk costs can be recovered by SCANA’s subsidiary South Carolina Electric & Gas through its regulated tariffs.


Further news emerged in mid-March 2018 that the Central Electric Power Cooperative is suing Santee Cooper on behalf of 20 of South Carolina’s electric coops to prevent it recovering more of the $9b VC Summer nuclear expansion costs from the coops, and to receive 70% of Santee-Cooper’s settlement with Westinghouse. 


Possible bid for Santee-Cooper


It is understood that Duke Energy, Southern Co and Dominion Energy have shown interest in Santee-Cooper, but the most serious offer appears to be from NextEra which is offering a deal estimated to be worth $15.9b over 30 years. This deal would freeze tariffs for 5 years and pay down part of Santee-Cooper’s debt. Not surprisingly the deal process is intensely political, with an obvious concern being Santee-Cooper’s transition from a cooperative model to an investor-owned model with the associated increase in cost of capital.


Pipes & Wires will examine this issue further as NextEra’s offer unfolds, and also as the South Carolina Public Service Commission determines how much of the sunk costs of the two additional reactors can be recovered from customers.


US – progress on the Westar – Great Plains merger




After Great Plains Energy’s acquisition of Westar Energy was rejected by the Kansas Corporation Commission around September 2017, the two companies worked on a merger deal. This article catches up with progress on that merger.


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, and believe that the merger addresses all the concerns that led to the KCC rejected the previous acquisition proposal.


Progress on the merger


The following progress on the merger has occurred…


·     In November 2017 over 90% of shareholders voted to approve the merger.


·     A public hearing in mid-January 2018 in Topeka, Kansas was rather quiet, with 3 people speaking against the merger and 3 speaking for it.


·     The KCC released a staff report in late January 2018 recommended approving the merger subject to allocating more of the merger benefits to customer through bill credits, a 5 year freeze on prices, and submitting an annual earnings review to the KCC.


Pipes & Wires will comment further when the KCC releases its final decision in June 2018.



Energy mix & emissions reduction


US – further pressure on wind subsidies in Oklahoma




Pipes & Wires #163 examined the curtailing of Oklahoma’s zero emission tax credit on 1st July 2017. This article revisits that issue to examine further moves.


Oklahoma’s wind subsidy framework


Key features of Oklahoma’s wind subsidy framework include…


·     The Zero Emission Facilities Production Tax Credit, which provided a tax credit for zero emission generation of greater than 1MW capacity that entered service after 4th June 2001 and sold its electricity to an unrelated party.


·     The Zero Emission Tax Credit Amendment Act 2017 which repealed the Tax Credit.


Recent moves


Further moves around the Oklahoma Capitol include…


·     Pushing for a new production tax on wind.


·     Possible caps on previously promised incentives.


Not surprisingly, the push to phase out wind subsidies is being driven largely by pressure on the State budget, which saw the cost of the wind subsidy grow to $113m in 2014.


The various viewpoints


The various viewpoints include…


·     Supporters claim that the State is reneging on previous commitments, and question why oil and gas subsidies continue.


·     Opponents of the wind subsidies claim that subsidies are no longer necessary because the wind sector has successfully attracted about $12b of private investment since 2004.


The editor comments


Notwithstanding that most if not all special interest groups protest if their funding comes under threat, wind energy and its subsidies (like solar) seem to be an ideological issue in which the 2 main interest groups are miles apart with no obvious middle ground. Perhaps the best we can hope for is an unhealthy imposition of the ruling party’s wishes…


Network access policy


UK – preparing for RIIO -2




The UK energy regulatory Ofgem recently released a framework consultation paper for the second RIIO price control. This article recaps the RIIO framework and examines what Ofgem are proposing for RIIO – 2.


The RIIO framework


The RIIO (Revenue = Incentives + Innovation + Outputs) regulatory model is the output focused approach to regulating the UK’s electricity and gas networks that replaced the prescriptive RPI – X model back in 2013. The current RIIO – 1 controls are in place for the gas distribution networks, the electricity transmission networks and the gas transmission networks for the period 1st April 2013 to 31st March 2021 (the RIIO – 1 control for the electricity networks covers the period 1st April 2015 to 31st March 2023).


Key features of RIIO -2


Key features of RIIO – 2 include…


·     Giving customers a stronger voice in the revenue setting process though a test and challenge process.


·     Incentives for electric companies to respond to strategic changes, but with controls to limit customers risk exposure should the future turn out differently.


·     Clarifying and simplifying the way that outputs, incentives and cost allowances are specified.


·     Encouraging electric companies to think smarter, with a big emphasis on competitive provision of emerging services by third parties.


·     The view that electric companies face a low risk because of the stable and predictable regulatory regime.


·     Additional rewards for electric companies that deliver great service at low cost.


·     Further downward pressure on returns, including greater protection for customers from companies than earn higher than expected returns.


On the whole, RIIO – 2 doesn’t seem to hold much good news for electric companies or their shareholders.


Next steps


Ofgem will receive submissions on the RIIO – 2 framework consultation until 2nd May 2018.


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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