Pipes & Wires

Though leadership of critical energy & infrastructure matters

Issue 176 – June 2018


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




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…



Initial Proposal

Draft Decision

Revised Proposal

Final Decision











Opening RAB










Regulatory depreciation





Smoothed revenue






This concludes Pipes & Wires coverage of this Decision.


NZ – downward pressure on airport profits




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




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…




Draft Determination

Revised Proposal

Final Determination











Opening RAB















Smoothed revenue






Endeavour Energy - key features of the revenue reset process


Key features of the process to date include…




Draft Determination

Revised Proposal

Final Determination











Opening RAB















Smoothed revenue






Essential Energy - key features of the revenue reset process


Key features of the process to date include…




Draft Determination

Revised Proposal

Final Determination











Opening RAB















Smoothed revenue






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


Regulating emerging technologies


Global – regulation of EV charging stations




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….




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




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




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




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




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




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.


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.