From the
editor’s desk…
Welcome
to Pipes & Wires #176. This month we start with some revenue decisions from
the Australian state of NSW and an airport cost of capital decision from New
Zealand. We then look at some contrasting views on regulating EV chargers,
followed by a look at 3 mergers that are significantly altering America’s
electricity sector. We conclude with a look at security of supply standards in
Australia, and the hollowing out of the daily load profile in Europe. So …
until next month, happy reading…
What we’re seeing…
· Increasingly mixed messages about
closing down coal-fired station to reduce emissions on the one hand, and
keeping them open to improve grid security on the other hand.
· Regulators defining multiple classes of
services and payment categories for battery storage.
· Diversified electric companies reducing
their exposure to volatile energy revenues and increasing their exposure to predictable
lines revenue (the opposite of what was fashionable a few years ago).
· Legacy thermal generation facing
steeper evening ramping rates as solar hollows out the daily demand profile.
· Heightened appreciation of coal-firing capability
during gas supply interruptions.
· A shortage of skilled project managers
and electricity network designers.
· Gas
turbine stations being recognised as important for providing grid security.
· A mixed bag of revenue determinations …
some tougher than expected, some easier.
Recent client projects
Recent
client projects include…
· Compiling some introductory thoughts on
digital transformation and blockchain.
· 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…
· Auckland - 26th and 27th
June 2018.
If
your organization has sufficient people, an in-house course can be arranged.
Subscribe to Pipes & Wires
If
you’re receiving this second-hand, pick this link to subscribe.
Network access policy & decisions
Aus – the TransGrid revenue determination
Introduction
The Australian Energy Regulator
recently released its Final
Decision for
the electricity transmission grid owner in the Australian state of NSW, TransGrid, for the five year period beginning on 1st July. This
article examines the key features of that Final 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…
|
Parameter |
Initial Proposal |
Draft Decision |
Revised Proposal |
Final Decision |
|
CapEx |
$1,612m |
$992m |
$1,534m |
$1,258m |
|
OpEx |
$908m |
$857m |
$878m |
$907m |
|
Opening RAB |
$6,406m |
$6,373m |
$6,377m |
$6,371m |
|
WACC |
6.6% |
6.5% |
6.5% |
6.5% |
|
Regulatory depreciation |
$678m |
$631m |
$635m |
$631m |
|
Smoothed revenue |
$3,973m |
$3,910m |
$3,781m |
$4,015m |
This concludes Pipes &
Wires coverage of this Decision.
NZ – downward pressure on airport profits
Introduction
Auckland International Airport Ltd is currently almost 1 year into its third Price Setting Event
(regulatory control period) which runs from 1st July 2017 to 30th
June 2022. This report examines the Commerce Commission’s recent Draft Report of Auckland Airport’s pricing and expected performance for PSE3.
Regulatory framework
Along with Wellington and
Christchurch, Auckland Airport’s airfield revenue is regulated under Part 4
of the Commerce Act 1986 which inter alia subjects those airports to an
information disclosure regime. In particular, s53B(2)(b) requires the Commission to publish an analysis and summary of
that information disclosure after it is published.
Key features of the Draft Report
Key features of the Draft Report
include….
· Auckland Airport has disclosed a target post-tax nominal WACC of
7.06%. This comprises a WACC of 6.99% for the aeronautical pricing services,
along with the Commissions’ estimated WACC of 7.90% for other regulated
services.
· This is above the Commissions’ mid-point WACC estimate of 6.41%.
The Commission states this in plain language as an extra $47m of post-tax
profit for PSE3, which equates to about $0.61 per passenger per flight.
· The Commission clearly states that not all of this $47m may
represent excessive profit, but that the evidence provided by Auckland Airport
is insufficient to demonstrate that its target WACC is in the long-term
interest of customers (as required by the Purpose Statement in s52A(1) of the
Act).
· The Commission does not have any significant concerns about the
forecasts underpinning Auckland Airport’s revenues and returns.
· Auckland Airport has adopted
a higher cost of equity due to the expected increase in operating leverage
(ratio of fixed costs to total costs) over PSE3, mainly due to the large
forecast CapEx program. The Commission is not satisfied that the forecast
increase in operating leverage has been sufficiently demonstrated.
As always, interested readers
should read the entire draft report, which talks of such marvelous features as
the asset beta and systematic risk.
Next steps
Following a period of receiving
submissions and cross-submissions, the commission expects to release its Final
Report in mid-September 2018.
Aus – the NSW electricity distribution revenue resets
Introduction
The electricity distributors in
NSW (Ausgrid, Endeavour
Energy and Essential Energy) recently submitted their Regulatory
Proposals (rates
cases) to the Australian Energy Regulator (AER) for the 5 year period
commencing on 1st July 2019. This article examines the key features
of those Proposals 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.
Ausgrid - key features of the revenue reset process
Key features of the process to
date include…
|
Parameter |
Proposal |
Draft Determination |
Revised Proposal |
Final Determination |
|
CapEx |
$3,084m |
|
|
|
|
OpEx |
$2,402m |
|
|
|
|
Opening RAB |
$15,716m |
|
|
|
|
WACC |
6.33% |
|
|
|
|
Depreciation |
$713m |
|
|
|
|
Smoothed revenue |
$8,918m |
|
|
|
Endeavour Energy - key features of the revenue reset process
Key features of the process to
date include…
|
Parameter |
Proposal |
Draft Determination |
Revised Proposal |
Final Determination |
|
CapEx |
$2,166m |
|
|
|
|
OpEx |
$1,486m |
|
|
|
|
Opening RAB |
$6,512m |
|
|
|
|
WACC |
6.11% |
|
|
|
|
Depreciation |
$504m |
|
|
|
|
Smoothed revenue |
$3,892m |
|
|
|
Essential Energy - key features of the revenue reset process
Key features of the process to
date include…
|
Parameter |
Proposal |
Draft Determination |
Revised Proposal |
Final Determination |
|
CapEx |
$2,100m |
|
|
|
|
OpEx |
$1,698m |
|
|
|
|
Opening RAB |
$8,215m |
|
|
|
|
WACC |
6.34% |
|
|
|
|
Depreciation |
$632m |
|
|
|
|
Smoothed revenue |
$5,142m |
|
|
|
Pipes & Wires will revisit
this story when the AER releases its Draft Determinations.
Regulating emerging technologies
Global – regulation of EV charging stations
Introduction
Attempts to regulate EV
rechargers seems to be providing a wide range of answers between jurisdictions,
including the null answer of declining to regulate battery charging services.
This article examines two recent regulatory views, one from the United States
and the other from New Zealand.
Recent decision from the US state of Nevada
Against a policy and legal
backdrop that includes the Nevada
Electric Highway and Senate
Bill 145, the Nevada
Public Utilities Commission recently ruled that NV Energy may own and operate EV rechargers and
include those chargers in its regulatory asset base. A few details of that ruling
include…
· Provision for reviewing the prudence of that ruling in a future
rate filing (tariff application), which is particularly noted as a safeguard
against NV Energy simply padding its asset base with rechargers in remote
locations.
· Agreement from NV Energy that the NPUC would regulate the
recharging tariffs at any rechargers owned by NV Energy, but not by
third-parties.
An understandable concern of
the rulings’ opponents is that electric customers at large will be funding
recharging stations (hence the safeguards in the ruling).
Recent guidance from New Zealand
The Commerce Commission
recently wrote an open letter to all electricity distribution businesses (EDB’s) that included
a lengthy attachment setting out guidance on how EDB’s are to apply Part 4
of the Commerce Act 1986, the
Input Methodologies, and the Information Disclosure requirements. Key features
of that attachment include…
· The Commission’s view that the main purpose of EV rechargers is not
to provide regulated electricity line services, therefore the associated
revenues and costs should not be regulated unless (i) the recharger can be
actively controlled to manage demand (and thereby defer network CapEx), or (ii)
the EDB is recharging its own EV’s which are part of providing regulated
electricity line services.
· If any active control module can be separated from the recharger,
then the cost of the control module should be included in the RAB but not the
cost of the recharger.
· If the recharger is only ever used to recharge EV’s owned by the
EDB (to provided regulated electricity line services), then all of the rechargers
capital cost can be included in the allocated RAB.
· Any OpEx associated with actively controlling a recharger (ie.
managing network demand) can be considered to be regulated OpEx.
· Any revenue from recharging EV’s is (by definition) not based on
providing electricity line services, and is therefore outside the scope of Part
4.
Comparing these views
These two views embody some quite different
conclusions….
|
Characteristic |
Nevada |
New Zealand |
|
Regulatory coverage |
More, to ensure customers at large are not
subsidising rechargers. |
Less, as main purpose falls outside of definition of
regulated lines services |
|
Inclusion in RAB |
Subject to PUC approval to ensure RAB-padding
doesn’t occur. |
Only the cost of components that can provide active
demand management. |
|
Treatment of OpEx |
Not clear, presumably over to NV Energy to manage
OpEx within regulated revenue. |
Only OpEx associated with active demand management
can be treated as regulated OpEx. |
|
Revenue derived from recharging EV’s |
Tariffs for rechargers owned by NV Energy to be
regulated. |
Outside scope of regulation. |
Pipes & Wires recognises that correct regulatory
treatment of battery charging revenues and costs is a critical frontier for the
industry, and will continue to follow these decisions.
Mergers & acquisitions
US – CenterPoint Energy seeks to acquire Vectren
Introduction
News emerged recently that CenterPoint Energy is seeking to acquire Vectren. This article examines the two entities and the
proposed deal to set some context for examining the deal’s progression.
A bit about CenterPoint Energy
CenterPoint Energy supplies regulated
natural gas services to 3,400,000 customers across Arkansas, Louisiana,
Mississippi, Oklahoma, Texas and Minnesota, unregulated gas services to a
further 100,000 customers across a further 33 states, and regulated electric
distribution services to 2,400,000 customers in the Houston metro area.
Annual revenues are about $8.1b.
A bit about Vectren
Vectren was formed from the merger of the
Indiana Gas Company and the Southern Indiana Gas & Electric Company, and now supplies 1,000,000 gas customers in
Indiana and Ohio along with 145,000 regulated electric customers in Indiana.
Annual revenues are about $2.7b.
The proposed deal structure
CenterPoint Energy will pay $72 cash for
each Vectren share, as well as assuming all Vectren’s nett debt. The merged
entity would supply 4,400,000 regulated gas customers and 100,000 unregulated
gas customers across 41 states, along with 2,545,000 regulated electric
customers in Texas and Indiana. Combined annual revenues would be about $10.8b
The strategy behind the deal
Key strategic features of the proposed
acquisition include geographical diversification, consolidating operational
efficiencies and an equivalent size to its major competitors.
Pipes & Wires will comment further as
the deal progresses, including the various regulatory approvals that will be
required (including 8 stated based approvals).
US – final approvals for the Westar – Great Plains
merger
Introduction
Previous issues of Pipes & Wires (#163, #167 and #173) have
noted this particularly difficult merger that met with refusals along the way.
This article notes the final regulatory approvals.
Recapping the original merger terms
The
original merger terms included…
· 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.
Final approvals
Following the FERC’s approval in February
2018, the following state approvals were given in late May…
· Kansas Corporation Commission.
· Missouri Public Service Commission.
Next steps
Westar and Great Plains expect the merger
to be completed in early June. The merged entity will be known as Evergy, and
will continue to supply its combined 1,600,000 electric customers under the
familiar Westar and KCP&L brands for the immediate future.
US – NextEra Energy buys Southern Co assets
Introduction
Pipes & Wires has recently examined NextEra Energy’s (owner of Florida Power & Light) search for regulated earnings and its sale of
renewable assets. This article examines NextEra’s purchase of several Southern Co businesses.
NextEra’s strategy and recent moves
Pipes & Wires #173 noted NextEra’s strategy of reducing its risk
exposure to merchant generation (which faces declining wholesale prices) by
migrating its capital to regulated businesses. This strategy was embodied in
the following transactions…
· The agreement to sell its Canadian renewables business to the Canada Pension Plan Investment Board (CPPIB) for a total consideration of $1.27b.
· Bidding for Santee-Cooper, a regulated electric company in South Carolina.
Businesses being acquired
NextEra has agreed to acquire the
following businesses from Southern Co…
· Gulf Power, which supplies 450,000 electric customers in
north-western Florida.
· Florida City Gas, which supplies 110,000 customers in south-eastern
Florida.
· A 100% stake in the 791MW Oleander gas turbine generation plant.
· A 65% stake in the 660MW Stanton combined-cycle generation plant.
This will add 450,000 electric and 110,000
gas customers to FPL’s existing 4,900,000 customers.
Terms of the deal
The acquisitions will be financed in cash
(by NextEra raising $5.1b in debt), and by assuming $1.4b of Gulf Power’s debt.
NextEra expects the deal to increase its earnings by $0.15 per share in 2020
and by $0.20 per share in 2021.
Pipes & Wires will check back on these
deals later in 2018 after the Florida City Gas deal is expected to be
completed.
Energy mix & grid security
Aus – setting the grid reliability
standards
Introduction
Pipes & Wires #171 noted that the Australian
Energy Markets Commission (AEMC) and the Australian
Energy Market Operator (AEMO) were reviewing the grid reliability standards in the
context of securing the NEM for the 2017/18 summer. This article examines the
key features of the AEMC Reliability Panel’s final report which will set the NEM’s grid
reliability standards for the 4 year period starting on 1st July
2020.
Key features of the AEMC’s final report
Key
features of the final report include…
· A grid reliability standard of 0.002%
of annual total energy demand being unserved will continue (meaning that no
less than 99.998% of the forecast annual energy demand will be supplied). To
provide some context, the South Australian blackout in 2016 resulted in
0.00036% of forecast annual energy not being supplied.
· A price cap of $14,200 per MWh (indexed
for CPI from 2017).
· A cumulative price threshold of
$212,800 (again, indexed for CPI from 2017).
· An administered price cap of $300 per
MWh (which applies when the cumulative price threshold is exceeded).
· A market floor price of -$1,000 per
MWh.
The wider thoughts behind the numbers
Some
might query the need for the various price caps, arguing that “we either have a
market or we don’t … we can’t claim to have a market, and then intervene when
prices rise or fall”.
The
AEMC has recognised exactly this issue in regard to both having various price
caps, and in setting their values. They have recognised the need to set price
caps that strike an appropriate balance between sending strong investment
signals for new generation or transmission capacity on the one hand, and
mitigating unnecessarily high wholesale prices on the other hand. Those who
have attended my 2 day electricity training course should be familiar with this issue.
Europe – hollowing out the daily load
profile
Introduction
Most
of us have a pretty good idea of how rooftop solar is reducing the load
supplied by the grid during hot, sunny afternoons … the duck curve that most of us probably associate
with California. This article examines the effect that increasing solar
penetration is having on Europe’s load profile.
The daily load profile
The
legacy daily grid load profile has a trough between the morning and evening
peaks. Increasing penetration of rooftop solar that is behind the meter is altering
two characteristics of that daily load profile...
· It is deepening the trough.
· It is making the climb down from the
morning peak and the climb up again to the evening peak steeper.
These
characteristics are having troubling impacts on the grid…
Declining wholesale prices
Wholesale
spot prices have generally always eased back as the morning peak declined,
however increasing solar generation from around midday into the afternoon is further
depressing prices. Data from the EPEX shows an April morning peak of €42 per
MWh declining to about €32 per MWh by midday, but then
declining further to around €26 per MWh by mid-afternoon before
climbing steeply to an evening peak of €44
per MWh. The deepening solar trough represents a hollowing out of about €6
per MWh during the afternoon. This obviously bites into the payment for
grid-connected generation.
Ramping rates of legacy thermal
generation
That
deepened trough that has bitten into thermal generators payments then presents
a steeper climb back to the evening peak as both demand increases and solar
generation declines, a climb that challenges the ramping rate of thermal
generation. This is creating major issues for thermal generators…
· Rapid ramping of thermal generation
increases the life consumption of high temperature components such as boiler
super heater tubes and HP turbine blades.
· Ramping thermal generation up and down
also consumes coal or gas, fuel that has a real and finite cost that is under
upward pressure. So operators are in the dilemma of do they shutdown to save
fuel (but consume life) and take a bet on not needing to ramp up again, or stay
generating to conserve life but get paid a reduced revenue that may not cover
the fuel cost.
Where to for the future
Battery
storage (and discharge) and throttling EV rechargers to manage demand may
reduce the need for thermal generation to buffer the intermittent nature of
solar and wind, but until that becomes prevalent it appears that coal and
gas-fired generation will be left to provide the important grid balancing role.
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
republishing by a third-party whether authorised or not, nor from any comments posted on Linked In,
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