Pipes & Wires

Though leadership of critical energy & infrastructure matters

Issue 177 – July 2018

From the editor’s desk…

Welcome to Pipes & Wires #177. This issue starts with 3 network access decisions in NZ and the UK, and is followed by an examination of smart meter cost recovery being rejected. We then look at two grid security issues in the US (but which could happen anywhere), and conclude with an examination of a huge merger in Australia and a summary of recent merger activity in the US. So … until next month, happy reading…

What we’re seeing…

· Some regulators warming to the idea of allowing a “sand pit” for electric companies to play with emerging technology ideas in, and allowing recovery of the reasonable costs of that playing.

· 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.

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Network access policy & decisions

NZ – setting the 2020 – 2025 default price path

Introduction

Non-exempt electricity distribution businesses (EDB’s) are currently regulated by a default price path (DPP) running from 1^st April 2015 to 31^st March 2020. This article examines the Commerce Commission’s proposed process for setting the next DPP which will start on 1^st April 2020.

Regulatory framework

The regulatory framework for the DPP is set out in Subpart 6 of Part 4 of the Commerce Act 1986. This framework requires the Commission to reset the DPP 4 months prior to the end of the existing DPP ie. by 30^th November 2019.

Key features

The Commission has signaled that it will focus on the following features as part of its consultation process…

· Starting prices and rates of change.

· Quality standards.

· Performance and efficiency incentives.

· Rules around demonstrating and assessing compliance.

· Implementing the changes from the 2016 Input Methodologies review.

· The CapEx and OpEx forecasts that the financial model is based on.

As always, interested parties should obtain and read the entire document.

Next steps

The Commission expects to publish the DPP Issues paper in November 2018, its Draft Decision around May 2019, and its Final Decision in late November 2019.

UK – the RIIO - 2 regulatory framework

Introduction

The UK’s electricity networks and gas pipelines are currently regulated under the RIIO – 1 framework, which focuses more on incentives and innovation rather than prescriptive cost categories (the former RPI – X framework). This article examines the likely features of the impending RIIO – 2 framework.

The current RIIO – 1 framework

The electricity and gas regulator Ofgem introduced the RIIO – 1 framework in 2013. In contrast to the former 5 year RPI – X framework, RIIO – 1 adopted an 8 year control period. The current RIIO – 1 controls include…

· RIIO – T1 covering the high-pressure gas transmission business and the 3 high-voltage electricity transmission businesses for the period 1^st April 2013 to 31^st March 2021.

· RIIO – ED1 covering the 12 electricity distribution businesses for the period 1^st April 2015 to 31^st March 2023.

· RIIO – GD1 covering the 8 gas distribution businesses for the period 1^st April 2013 to 31^st March 2021.

Likely features of the RIIO – 2 framework

The likely features of the RIIO -2 framework include…

· A move from 8 year control periods back to 5 years. Ofgem acknowledges that an 8 year control period could provide more planning certainty for electric and gas companies, but also argues that a 5 year period provides an opportunity to reset customer prices as the industry rapidly changes.

· An expectation that electric and gas companies will work with closely with the respective system operators to invest for the lowest overall supply chain cost.

· An expectation that the nation-wide electric and gas bill will reduce by about £1b per year for each of the 5 years, of which part will come from reduced investor returns.

· Requiring electric and gas companies to justify their investment plans more robustly.

· An expectation of increased active demand management focused on customers recognising when they can use electricity more cheaply.

Next steps

Ofgem has recently consulted on its draft RIIO – 2 framework, and will publish its final framework in mid-2018.

UK – the PR18 rail access draft decision

Introduction

Pipes & Wires #173 examined the key features of Network Rail’s CP6 Strategic Business Plans for the CP6 control period from 1^st April 2019 to 31^st March 2024. This article examines the Office of Rail and Road’s draft decision.

Key features of the draft decision

Key features of the draft decision include…

· A requirement for further engagement with the train operating companies on performance trajectories.

· An expectation that costs will be reduced by about £1b.

· Whilst stakeholder engagement was good, it could be improved. In particular some stakeholders felt that the engagement process was more like communicating a pre-determined outcome.

· An expectation of more explicit trade-offs around competing priorities.

· Concerns about the tracks’ ability to accept specific types of freight rolling stock, including speed, availability and electrification.

Next steps

The ORR expects to publish its final decision in October 2018.

Regulating emerging technologies

US – rejecting advanced meters

Introduction

Rejecting the recovery of costs from previously ordered initiatives is nothing new. This article examines the Massachusetts Department of Public Utilities recent rejection of advanced metering proposals.

Massachusetts’ grid modernisation plan

The Massachusetts’ Department of Public Utilities issued Order 12-76-B in June 2014, which required all electric companies in the state to file Grid Modernisation Plans outlining how they intended to achieve the following outcomes over the next 10 years…

· Reducing the effects of outages.

· Optimising demand.

· Integrating distributed resources.

· Improving workforce and asset management

The principal feature of the Order was that electric companies were to prioritise advanced metering functionality (which the Order states forms the basic technology platform for grid modernisation), and such advanced metering functionality would receive preferential regulatory treatment.

The DPU’s decision

The DPU recently rejected the advanced metering components of several grid modernisation plans, claiming that the evidence provided revealed weaknesses in the business cases presented, and now plans to work with electric companies on more targeted roll-outs of advanced meters that will yield benefits in line with the costs. The DPU went on to state that grid-facing technologies (eg. Advanced DMS, voltage optimisation etc) lay the foundational framework for grid modernisation (which seems to differ from the previous claim that advanced metering was the foundation).

Previous disconnects

Pipes & Wires #93 and #94 noted a similar disconnect in the US state of Maryland, in which noted Baltimore Gas & Electric’s plan to install smart meters under the encouragement of the state government was rejected by the Maryland Public Service Commission (PSC) on the basis that the benefits to customers were “largely indirect, highly contingent and a long way off”.

Energy mix & grid security

US – keeping the lights on in the Lone Star State

Introduction

Keeping the lights on as summer air conditioning loads reach ever-increasing peaks seems to be a topical issue (indeed it was the keynote theme at the recent Energy Networks 2018 conference in Australia). This article examines how the Electric Reliability Council of Texas is coping with this summers’ peaks.

Recent demand peaks in Texas

Demand in the ERCOT region recently reached 61,500 MW (which is 2,200 MW higher than the previous peak demand in May 2017), whilst prices peaked to $1,500 per MWh.

Texas’ supply and demand situation

ERCOT’s forecasts are as follows (derived from ERCOT forecasts which show demand exceeding installed capacity)...

Year	2019	2020	2021	2022	2023
Installed MW	76,000	76,000	76,000	76,000	76,000
Planned MW	3,585	6,385	8,100	8,815	8,815
Forecast capacity	79,585	82,385	84,100	84,815	84,815
Forecast demand	74,200	75,880	77,595	79,030	80,430
Reserve margin including planned	7%	8%	8%	7%	5%
Reserve Margin excluding planned	2%	0%	-2%	-4%	-6%

This table shows that simply meeting forecast demand in the 2023 summer depends on over 4,400 MW of new (secure) generation being commissioned within 5 years.

Likely responses to meet demand

Likely responses to meeting demand include….

· Commissioning of gas-fired generation earlier than expected.

· Returning moth-balled generation to service.

· Re-scheduling generation shutdowns.

· Possibly intervention by ERCOT to deploy contracted emergency generation.

· Voluntary load reductions.

· Injection from industrial customers with their own generation.

US – replacing gas turbines with batteries

Introduction

Pacific Gas & Electric recently requested approval from the California Public Utilities Commission (CPUC) to install 4 energy storage projects. This article considers the issue of large-scale battery storage on several dimensions.

The context

The California Independent System Operator (ISO) identified the following gas-fired generation plant as critical to the security of PG&E’s South Bay and Moss Landing transmission regions…

· Metcalf – a 605 MW combined-cycle plant in the Coyote Valley are of South San Jose.

· Feather River – a 47 MW simple-cycle gas turbine plant in Yuba City.

· Yuba City – a 47 MW simple-cycle gas turbine plant also in Yuba City.

These plants are owned by Calpine and operated by agreement with PG&E. Various views on assigned reliability-must-run (RMR) status to those generators was as follows…

· Calpine supported using RMR contracts.

· The California ISO also supported using RMR contracts, but opposed some of the terms.

· The FERC recommended that the CPUC approve the agreement.

· The CPUC opposed using RMR contracts.

· PG&E opposed using RMR contracts.

Key reasons for opposing the use of RMR contracts was possible market distortions, higher costs (many analysts claim that batteries are now cheaper than gas turbines), and CO2 emissions, but in the end it was determined that the 3 plants were essential to grid security.

Tendering for support

In keeping with the trend of seeking third-party provision of constraint relief, the CPUC authorized PG&E to hold competitive solicitations for energy storage and / or preferred resources to meet specific local area needs in 3 specified sub-areas. New Zealand readers might want to think about seeking third-party relief of constraints (eg. batteries, diesel generators, interruptible tariffs etc) in the context of the Related Party Transactions (pg 73 of the Related Party Transactions Input Methodologies Review Final Decision and Determinations Guidance 21 December 2017).

The proposed batteries

The proposed 4 LiOn batteries are as follows…

Counterparty	Connection point	Rating	Duration
Dynergy	Transmission	300 MW	4 hours
Hummingbird Energy Storage	Transmission	75 MW	4 hours
Micronoc	Behind the meter	10 MW	4 hours
Tesla	Transmission	182.5 MW	4 hours

Key issues to think about

A couple of key issues to think about include…

· The levelised cost of batteries is now considered to be less than the cost of gas turbine generation, and that presumably depends on the price of delivered gas.

· Regulatory treatment of batteries still seems a bit immature, with many energy companies claiming that lines companies should not be able to simply add the cost of batteries to their RAB.

· Will batteries really provide a similar level of grid security as gas turbine generation ? The evidence from the Australian NEM is that the Hornsdale battery in South Australia has performed very well during recent grid excursions that lasted for seconds, but how well might batteries perform if those excursions extend from seconds to hours or even days ? Another angle of thought might be that batteries should be considered as a complement for gas turbines rather than a substitute.

Mergers & acquisitions

Aus – CK Infrastructure bids for APA Group

Introduction

Last month CK Infrastructure launched an unsolicited bid for the APA Group, Australia’s largest gas pipeline operator. This article examines the initial bid to set some context for further analysis.

A bit about CK Infrastructure

CK Infrastructure owns and operates a wide range of electricity, gas, water, rail, airport and roading assets in Australia, New Zealand, Europe, Canada and Asia. Australian assets include…

· SA Power Networks in South Australia.

· CitiPower and Powercor in Victoria.

· DUET, which owns MultiNet Gas and 66% of United Energy in Victoria.

· Australian Gas Infrastructure Group in NSW, Victoria, the Northern Territory, South Australia, Queensland and Western Australia.

A bit about APA Group

APA Group owns 15,000 km of gas transmission pipelines, along with gas distribution networks in south-east Queensland (Allgas) and Tamworth, NSW.

Details of the bid

CK Infrastructure’s bid of A$13b represents a 33% premium to APA’s closing stock price. Such a premium suggests that CKI has identified tranches of value that are not recognised by APA’s stock price, most likely…

· Amalgamation synergies.

· Expectations of favorable regulatory decisions.

· Expectations of increased gas transmission volumes.

What might an enlarged CK Infrastructure look like ?

Huge is probably the best word. And vertically integrated. An enlarged CK Infrastructure will have electricity distribution, gas distribution or gas transmission assets in all jurisdictions except Tasmania.

Pipes & Wires will comment further as the bid progresses.

US – summary of recent merger activity

The following table provides a quick summary of Pipes & wires recent merger and acquisition coverage…

Entities	Nature of merger	Merged entity dimensions	Status as of early July 2018
Dominion Energy, SCANA	All stock, 0.669 Dominion shares for each SCANA share.	Revenue - $17.5b Customer – 6,500,000 Generation – 31,400 MW.	In doubt due to legislative reduction of SCG&E tariffs.
Great Plains Energy, Westar Energy	Offer of $51 cash per Westar share, between 0.27 and 0.31 GPE share per Westar share, GPE assumes Westar debt.	Annual revenue - $5.1b. Customers – 1,500,000 Generation – 13,000 MW.	Approved by both Kansas Corporation Commission and Missouri PSC in late May 2018.
Exelon, Pepco	All cash offer of $27.25 per share by Exelon.	Annual revenue - $29b. Customers – 9,800,000. Generation – 35,000 MW.	Concluded in March 2016
CenterPoint Energy, Vectren	All cash offer of $72 per share by CenterPoint Energy.	Annual revenue - $10.8b. Gas customers – 4,500,000. Electric customers – 2,545,000.	Early stages, no regulatory approvals yet
Hydro One, Avista	All cash deal valuing Avista at $5.3b.	Annual revenue – C$7.9b. Electric customers – 1,679,000. Gas customers – 342,000.	Regulatory approvals being granted.
NextEra Energy, various Southern Co assets	Cash and debt assumption valuing Southern Co assets at $6.1b.	Electric customers – 5,350,000. Gas customers – 110,000.	Agreements reached.

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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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, Face Book or similar by other parties.