Pipes & Wires

Though leadership of critical energy & infrastructure matters

Issue 174 – April 2018


From the editor’s desk…


Welcome to Pipes & Wires #174 which starts and ends with some New Zealand policy and regulatory decisions. We then look at the increasingly complex area of regulating emerging technologies, and then look at two related mergers in Europe. We then contrast some roles of gas-fired generation, and then a look at substituting wood for coal. 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.


Subscribe to Pipes & Wires


If you’re receiving this second-hand, pick this link to subscribe.


Energy policy


NZ – reviewing the energy sector




The recently elected government indicated that it would review the energy sector, with a particular emphasis on whether the current electricity market is delivering fair and equitable prices to end consumers. This article examines the recently announced terms of reference to set some context for the conclusions which are expected around April-2019.


Over-arching concerns


An overarching concern of the government is that electricity prices have increased faster than inflation for many years. This includes inter alia the following detailed concerns…


·     Domestic prices in particular have increased by about 50% in real terms since 2000, whilst commercial and industrial prices have remained relatively flat.


·     Those domestic prices have grown from a lower level than other countries scrutinized by the International Energy Agency (IEA), and have grown at a faster rate.


·     Those domestic prices are above the (2014) IEA average, whilst industrial prices are below the IEA average.


·     That changing technologies provide both opportunities and challenges, and it is important that the regulatory framework enables correct adoption of new technologies.


Primary objective of the review


The primary objective is to ensure that the electricity market delivers efficient, fair and equitable prices as technology evolves and we transition to a lower emissions future, taking into consideration environmental sustainability and security of supply. So … a simple matter of figuring out where we are on the energy trilemma, where we want (or can afford to be) to be, and how do we get there.


Key features of the terms of reference


The review will inter alia


·     Examine whether the prices paid by end consumers are efficient, fair and equitable. Various perspectives on equitable are noted, including consideration of the costs being socialised or spread on different bases.


·     Consider the entire electricity supply chain.


·     Evaluate whether the regulatory frameworks for both competitive and monopoly segments of the supply chain are delivering efficiency and fairness.


·     Consider whether the current market and regulatory framework will both enable and deliver benefits from emerging technologies and innovation.


·     Include issues of security, reliability and environmental sustainability when considering whether prices are efficient, fair and equitable.


·     Consider what factors if any may form entry barriers or limit competition along the supply chain, particularly at the boundary of contestable and non-contestable services.


·     Consider the impact of market behavior on various customer segments.


·     Consider cost allocations between market segments, including the impact of the Electricity (Low Fixed Charge Tariff Option for Domestic Consumers) Regulations 2004.


·     Consider how new technologies are likely to effect services, price and different customer groups, and how the current regulatory framework might promote the benefits of emerging technologies.


The TOR specifically excludes matters of technical detail, consideration of the Input Methodologies, and evaluation of regulatory body’s performance against their statutory objectives.


Next steps


Pipes & Wires will examine this review as and when its draft and final conclusions emerge.


Network access decisions


NZ – the final decision for Powerco’s CPP




The Commerce Commission recently released its final decision on Powerco’s customised price path (CPP) application. This article follows on from Pipes & Wires #169 and examines the key features of that final decision.


Powerco’s CPP application


In June 2017 Powerco submitted its CPP application pursuant to Subpart 6 of Part 4 of the Commerce Act 1986 which provides the opportunity for individual regulated businesses to seek an alternative price-quality path that better meets its particular circumstances than the default price path.


Key features of the process to date


Key features of the process to date include…




Draft decision

Final decision

Total CapEx




Growth CapEx




Total OpEx






191.5 down to 176.0

191.4 down to 175.9



2.28 down to 2.19

2.29 down to 2.19






This concludes Pipes & Wires coverage of this matter.


NZ – the final decision for Wellington Electricity’s CPP




The Commerce Commission recently released its final decision on Wellington Electricity’s customised price application (CPP). This article follow on from Pipes & Wires #172 and examines the key features of that decision.


Regulatory framework


The regulatory framework for CPP’s is set out in…

·     Subpart 6 of Part 4 of the Commerce Act 1986.


·     Part 5 of the Electricity Distribution Services Input Methodologies Determination 2012.


Key features of the CPP Application


Key features of Wellington Electricity’s CPP Application include (noting the changes proposed on 16th February 2018)…




Draft Decision

Final Decision

Resilience CapEx and OpEx




Base CapEx for Y3 of CPP




Base OpEx for Y3 of CPP




Revenue for Y1 of CPP





This concludes Pipes & Wires coverage of this matter.


Regulating emerging technologies


US – requiring competitive purchase of DER’s




Regulators seem keen for regulated suppliers to competitively purchase key inputs to their regulated pipes & wires businesses. This article examines current regulatory thinking and then looks at some recent events in California that are requiring electric companies to competitively purchase DER’s (distributed energy resources).


Current regulatory thinking


Regulators are expressing increasing concern that key inputs into regulated pipes & wires businesses could and should be supplied competitively by external suppliers rather than simply by the regulated supplier themselves, with the most obvious example being the requirement for design and construction of new assets to be competitively tendered out. This now seems to be extending to actually tendering out the ownership of new assets or services that will form an integrated part of the regulated pipes & wires business.


Recent events in California


Resolution E-409 by the California Public Utilities Commission in January 2018 requires Pacific Gas & Electric (PG&E) to purchase energy storage, demand response or other preferred resources (eg. solar) rather than having the California ISO allocate “must run” status to 3 of the 4 gas-fired plants operated by Calpine in the northern California area. The CPUC argued that must run contracts for the 3 identified gas-fired plants are likely to be more expensive than DER’s such as solar, batteries and demand response, and in any case the Cal ISO didn’t follow its own rules for purchasing flexible capacity.


The practical effect of Resolution E-409 requires PG&E to hold competitive solicitations for energy storage and preferred resources to meet capacity constraints and voltage sagging in the 3 specified subareas. The CPUC also notes that a similar resolution in May 2016 directing Southern California Edison to purchase resources resulted in more than 100MW’s of grid-level storage being installed.


Further reading


·     The article on Related Party Transactions in Pipes & Wires #173.


·     The article further down this issue of Pipes & Wires #174 on the battle for gas-fired peaking plants.


US – recovering the cost of EV chargers through regulated tariffs




A curious disconnect seems to be emerging between public policy encouraging the uptake of EV’s on one hand, and regulatory policy disallowing the recovery of charging station costs on the other hand. This article examines a recent ruling in the US state of Missouri that follows on from similar recent rulings in the states of Michigan and Kansas (refer to Pipes & Wires #157 and #162) that have made cost recovery uncertain.


Ameren’s proposal to install EV chargers


Ameren proposed to install EV chargers at 6 locations along I-70 between St Louis and Boonville, along with 1 charging station in Jefferson City. It was intended that the capital cost of those chargers would be added to Ameren’s RAB similar to any other regulated asset, and would hence be recovered through Ameren’s regulated tariffs.


The Missouri PSC’s ruling


As part of considering Ameren’s rate case, the Missouri Public Service Commission concluded inter alia that because the product being sold is a charging service, not the electricity itself, the PSC does not have jurisdiction over EV charging stations because they do not fit within the definition of electric plant in state legislation. It is fundamentally important to understand that the PSC did not reject Ameren’s rate case, but rather determined that it had no jurisdiction to determine it. The following excerpts from media sources expand on this critical issue…


·     The board ruled that the installation and operation of EV charging stations is fundamentally different from operating an electric utility. That means that although utilities can enter that business, they cannot do it as regulated monopolies and may not spread the cost among all of their customers. They would have to operate in the free marketplace (quoted from MidWest Energy News, 24th April 2017)


·     Regulators concluded that if they had jurisdiction over electric vehicle charging infrastructure, that ruling "would conceivably assert jurisdiction over other similar battery-charging services, such as smart phone charging stations or kiosks, RV parks that allow vehicles to connect to the park’s electricity supply, or airports that connect planes to a hangar’s electricity supply while parked." (quoted from Utility Dive, 25th April 2017).


What do we make of this ?


The broad conclusion above is that while a regulated electric company can provide EV chargers, it must do so outside of its regulated business meaning that…


·     It is free to set the charging tariff on the basis of a competitive market.


·     It cannot add the cost of the chargers to its regulated asset base and recover the cost through its regulated tariffs.


So while this conclusion may well be legally sound, it probably isn’t going to help the roll-out of EV chargers.


Mergers & acquisitions


Europe – E.On and RWE swap assets to consolidate market positions




It’s been a while since Pipes & Wires examined the German energy sector and its key players, so the opportunity to write about E.On and RWE reshuffling their assets was too good to miss. This article examines the proposed reshuffling and the strategies behind it all.


A bit about E.On


E.On has operating subsidiaries in western Europe, the UK, eastern Europe and Scandinavia, with annual revenues of about €117b. A key component of E.On’s recent strategy was the sale of its high-voltage grid Transpower Stromübertragungs GmbH to Dutch grid operator Tennet.


A bit about RWE


RWE also has operating subsidiaries across western Europe, eastern Europe, and the UK with annual revenues of about €51b. RWE has also separated its high-voltage grid business RWE Trasnportnetz Strom into a subsidiary called Amprion.


The proposed reshuffling


Key features of the reshuffling are…


·     E.On proposes to buy RWE’s entire 77% stake in Innogy.


·     E.On would then sell Innogy’s renewable business back to RWE, along with its own renewable business (representing about 17% of E.On’s equity).


The deal values Innogy’s equity at about €22b, but the final value of the complex asset swap, cash and share issue is expected to be about €43b.


The strategy behind the proposed reshuffling


The deal reflects the following strategies…


·     RWE expanding its renewables portfolio, making its European wind energy business second only to Iberdrola.


·     E.On expanding its retail and distribution businesses as it sells 47% of its fossil generation business Uniper to Fortum.


The deal will also keep Innogy in German ownership amid keen interest from EDF and ENEL seeking to boost their renewable businesses.


Possible regulatory concerns


Regulatory (anti-trust) concerns may emerge in both Germany and Britain…


·     Germany – E.On and RWE are both dominant retail energy suppliers (about 40% in total).


·     Britain – E.On and Innogy are among the Big Six energy retailers (about 23% in total).


Pipes & Wires will comment further as this deal progresses.


UK – merging Npower and SSE’s energy retail businesses




The overall structure of the UK energy sector has been reasonably static for a few years (well … no big distribution mergers anyway), so news of Npower and Scottish & Southern Energy’s proposed retail business merger is exciting. This article examines the early stages of the proposed merger


The merger partners


The proposed merger partners are…


·     Npower is an electricity generator and electricity and gas retailer, and is a subsidiary of RWE’s Innogy. The incumbent retail business were the former Yorkshire Electricity and Northern Electric businesses.


·     SSE emerged from the merger of Southern Energy and Scottish Hydro, and which now includes Scotia Gas Networks. Annual revenues are about £29b.


The proposed merger


The proposed merger is between the following components…


·     Npower’s residential and commercial energy retail businesses.


·     SSE’s residential energy business and its home services business.


The combined entity is expected list on the LSE and be 34% owned by Innogy, with SSE divesting its 66% shareholding to its shareholders. It will have about a 52% share of the UK energy retail market (by customer number) and reduce the Big Six to the Big Five which is of obvious concern to the Competition and Markets Authority (CMA).


The strategy behind the merger


A key component of the strategy is increasing competition driving the need for improved scale and operating efficiencies.


Anti-trust concerns


The key concern is obviously reduced competition, so not surprisingly the CMA intend to take a long, hard look at this proposed merger. Some salient issues include…


·     The most obvious issue being the reduction of the Big Six to the Big Five, with 1 of the Big Five holding 51% of the retail energy market.


·     Various stakeholders have already urged the government to reject the merger (on the basis of reduced competition, of course), even suggesting that the Secretary of State for Business should use his statutory authority to block the merger if the CMA does approve it.


·     Arguments from some sectors that allowing a consolidation of market share would be inconsistent with the Government’s concern over rising energy prices.


·     The recently announced asset swap between E.On and RWE (which would result in E.On owning a stake in Npower) is likely to complicate this merger and attract further scrutiny from the CMA.


Next steps


CMA approval of this merger is not expected until late 2018, although the added complexity of the E.On – RWE asset swap could delay a decision until mid-2019.


Energy mix & emissions reduction


US – gas-fired peaking v’s gas-fired moratorium




Gas-fired generation seems to be in an awkward position … somewhere between BANANA (burn absolutely nothing anywhere near anyone) and “Well it does make less CO2 than coal”. This article examines three different gas-firing decisions stretching from one side of the United States to the other.


The various decisions


The various plans are as follows…


·     The state of Arizona has placed a moratorium on new gas-fired generation of 150MW capacity or greater until 1 January 2019 unless very specific conditions are met (mainly demonstrating that a gas-fired station will have a lower cost than alternative energy storage options).


·     The City of New Orleans recently voted to allow Entergy to build a 128MW piston-engine gas-fired station, which is specifically intended to improve reliability (critically important for draining a city that is built close to sea level) and resilience (by providing black-start capability).


·     South Carolina Gas & Electric has signaled the need for a gas-fired station within the next 5 years to meet cold winter demand.


The reasoning behind the decisions


It’s interesting that three regulators have reached different conclusions for three electric companies, albeit on different sides of the country. Some of the thinking behind the decisions appears to include…


·     The Arizona Corporation Commission’s recent targets for 80% renewable or nuclear electricity by 2050, along with 3,000MW of energy storage by 2030. Both South Carolina and Louisiana appear to have significantly lower renewable energy targets.


·     New Orleans depends critically on electrically driven drainage pumps as about 50% of its land area lies below sea level, and the City’s existing generation plant is aging. It might be concluded that they are not prepared to rely on wind or solar…


·     Low gas prices on the east coast improve the attractiveness of gas-fired stations.


·     Ironically, the ACC has included nuclear in its’ 80% target, whilst SCE&G cites the high cost of nuclear (refer to Pipes & Wires #173) as a key reason for proposing gas-fired plant.


The editor comments


Arizona certainly does have a hot, dry climate (well, at least on the 2 occasions I’ve been there) that could lead to the conclusion that solar plus batteries will suffice. In contrast, Louisiana and South Carolina can have significant variations in weather including heat, cold and storms that increase demand, increase the resilience requirements and reduce the likely availability of stored renewables.


Some might also observe a collision of renewables with pragmatic security of supply considerations.


UK – the future for large steam turbine stations




Opinion on the importance of large, legacy generation plants providing grid security varies widely, from none at all to vitally important. This article examines some recent comment from Drax on how important large, legacy generation actually might be.


A bit about Drax


Drax began life in 1973 as a 6 x 660MW coal-fired station in North Yorkshire, with a design coal consumption of about 36,000 tons per day.


Drax biomass firing


Trials of co-firing with wood around 2004 led to conversion of 3 units to full biomass firing in 2012, funded in part by various emission reduction subsidies.


The ultimate plan is to burn about 7,500,000 tons of wood-based fuel in the 3 units, much of which is expected to be imported from the United States in 50,000 ton shiploads. To provide some perspective, that is like burning 4 entire Kaingaroa forests every year as well as the fuel (presumably fossil) to load, ship and handle it all.


So how important might Drax actually be ?


Increasing penetration of renewables has led to heightened concerns about grid security and the possible role of thermal generation.


The important feature of stations like Drax is not that they are large (or legacy), but rather that they are secure and independent of weather conditions ie. when the Start button is pressed it will start regardless of how much wind, sun, stored rain or last winter’s snow is available. This definite start ability alone makes retaining Drax important enough…


Regulatory policy


NZ – the Draft Transpower CapEx Input Methodologies




Most of us understand the importance of robustly defining the inputs to any regulatory determination, which is done through the Input Methodologies (IM’s) in New Zealand. This article examines the Commerce Commission’s recently released (Draft) Transpower Capital Expenditure Input Methodology Amendments Determination 2018 which amends the Transpower Capital Expenditure Input Methodology Determination 2012.


Regulatory framework


The regulatory framework for the IM’s is set out in Subpart 3 of Part 4 of the Commerce Act 1986. This includes a Purpose Statement at s52R which note the purpose is to promote certainty, what matters can be covered by the IM (s52T) and the process that the Commission must follow in setting an IM (s52V).


Key features of the revised draft decision


The Commission has decided to make a small number of substantive changes to the existing IM which includes the…


·     Incentive regime that applies to Transpower.


·     Approval processes for the Base CapEx and Major CapEx.


·     Information requirements.


Note that the Draft Decision is a lengthy and complex document. Effected parties should read the Draft Decision in its entirety.


Next steps


After a period of consultation the Commission expects to publish it Final Decision at the end of 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


Opt out from Pipes & Wires


Pick this link to opt out from Pipes & Wires. Please ensure that you send from the email address we send Pipes & Wires to.




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 republishing by a third-party whether authorised or not, nor from any comments posted on Linked In, Face Book or similar by other parties.