Pipes & Wires

Though leadership of critical energy & infrastructure matters

Issue 179 – September 2018


From the editor’s desk…


Welcome to Pipes & Wires #179, which starts with 2 regulatory decisions from NZ and then examines 3 regulatory policy changes in NZ and Australia. We then look at 2 mergers in Australia and NZ. This issue concludes with 2 articles from the US … the cancellation of a large wind farm and the proposed replacement of the Clean Power Plan.


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 stations 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).


·     Inquiries and reviews that are prompted by security of supply scares having their official terms of reference subordinate security of supply to reducing CO2 emissions.


·     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.


·     Advising on likely available electrical contractors.


·     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 regulatory decisions


NZ – setting the WACC




The Commerce Commission recently released its cost of capital determination that will apply for the Disclosure Year 2019 for…


·     Electricity transmission (Transpower).


·     Gas distribution (GasNet and Vector).


·     Airports (Auckland and Christchurch).


This article examines the key features of that determination.


Regulatory frameworks


The regulatory framework for setting the WACCs are set out in…


·     Clauses 3.5.1 to 3.5.8 of the Transpower Input Methodologies Determination 2010.


·     Clauses 4.4.1 to 4.4.10 of the Gas Distribution Services Input Methodologies Determination 2012.


·     Clauses 5.1 to 5.7 of the Airport Services Input Methodologies Determination 2010.


These determinations are made pursuant to Part 4 of the Commerce Act 1986.


Key features of the WACC’s


Key features of the WACC’s include…


·     Transpower.



25th percentile


67th percentile

75th percentile

Vanilla WACC





Post-tax WACC






·     GasNet and Vector.



25th percentile


67th percentile

75th percentile

Vanilla WACC





Post-tax WACC










·     Auckland and Christchurch Airports.



25th percentile


67th percentile

75th percentile

Vanilla WACC





Post-tax WACC







NZ – the Transpower draft RCP3 proposal




The NZ electricity transmission grid operator Transpower recently released its draft proposal (rate case) for the impending third 5 year Regulatory Control Period (RCP3) which commences on 1st April 2020. This article examines that draft proposal to set some context for analysing the draft and final determinations.


A bit about Transpower


Transpower owns and operates the NZ national grid, which comprises the AC networks in the North and South Islands, along with the HVDC Interconnection (commonly referred to as the Cook Strait Cable). Key features of the grid include…


·     About 17,400 circuit km of overhead lines at 350kV DC, 220kV AC, 110kV AC and 66kV AC.


·     About 170 grid substations.


·     A maximum demand of about 7,000MW.


·     An annual energy throughput of about 40,000GWh.


Regulatory framework


The regulatory framework for Transpower’s Individual Price-Quality Path (IPP) is set out in Subpart 7 of Part 4 of the Commerce Act 1986.


Key features of the RCP3 draft proposal


Key features of the RCP3 draft proposal include…




RCP3 draft proposal

RCP3 final proposal

RCP3 final decision

















Pipes & Wires will pick up this story again once Transpower publishes its final proposal in late 2018.


Regulatory policy and frameworks


NZ – proposed amendments to the DPP input methodologies




In mid-August 2018 the Commerce Commission published some proposed amendments to the Electricity Distribution Services Input Methodologies Determination 2012 to deal with accelerated depreciation. This article notes those proposed amendments.




As part of the Input Methodology review in 2016 the Commission introduced a provision for adopting shorter asset lives based on the expected economic life rather than the physical life.


The proposed amendment


The draft Electricity Distribution Services Input Methodologies Amendments Determination 2018 and the associated draft Reasons Paper sets out…


·     The proposed revised timing for EDB’s to submit accelerated depreciation applications prior to the draft DPP decision.


·     The proposal to specify that the adjustment factor for the disclosure year immediately following the base year shall be 1 so that any depreciation or asset life adjustment doesn’t occur until the DPP actually starts.


·     How the depreciation and asset life provisions of the Electricity Distribution Services Input Methodologies Determination 2012 will be amended to accommodate accelerated depreciation.


and provides for these (draft) provisions to apply for the DPP starting on 1st April 2020.


Next steps


The Commission will receive submissions on this draft until 5pm on 6th September 2018.


UK – the RIIO - 2 framework decision




Pipes & Wires #173 and #177 examined Ofgem’s compilation of the RIIO - 2 framework that will be used for regulating the UK’s electricity and gas networks. This article examines the key features of the RIIO – 2 framework decision.


Recapping 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…


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


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


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


Key features of the RIIO-2 framework decision


Key features of the RIIO – 2 framework include…


·     The requirement for distribution companies to establish Customer Engagement Groups, and for transmission companies to establish User Groups. Ofgem will also set up an independent RIIO – 2 Challenge Group.


·     Adoption of a default 5 year price control, instead of the 8 year default in RIIO – 1.


·     An intention to protect customers from inefficient network investment.


·     An intention to treat innovation spending as BAU by using an incentive framework.


·     An analysis of possible mechanisms to obtain better information from companies (eg. IQI and Fast Track).


·     Efforts to improve the setting of the costs of debt and equity, including an indicative range of what the cost of equity might be.


·     Consideration of the financeability of companies (long-time readers might remember that Ofwat had similar concerns about the bankability of the water sector).


·     A view to moving away from the RPI as an inflation measure.


Next steps


Ofgem expects the next steps in setting the RIIO – 2 price controls…


·     December 2018 - publication of sector-specific consultation papers.


·     April 2019 – publication of final business plan guidance.


·     September 2019 – companies submit business plans.


·     May 2020 – draft determinations.


·     November 2020 – final determinations.


·     April 2021 – start of RIIO – 2 for electricity and gas transmission and for gas distribution (RIIO – 2 for electricity distribution will start in April 2023).


Pipes & Wires will pick up the RIIO – 2 story as Ofgem publishes further documents.


Aus – consolidating CapEx and OpEx into TotEx




Building block regulation of infrastructure has traditionally treated CapEx and OpEx as very separate items, but the calls for a more consolidated treatment of both spend classes as TotEx have become more frequent. This article examines a recent Australian discussion paper on TotEx.


Separate treatment of CapEx and OpEx


The building block model used to compile the required revenue of an infrastructure business has traditionally treated CapEx and OpEx as very separate, but with the inclusion of a further component to consider the CapEx – OpEx trade-offs. Key concerns arising from the separate treatment of CapEx and OpEx include…


·     Regulatory bias towards either CapEx or OpEx (most latterly considered to have been towards CapEx).


·     The need for better integration of low-CapEx emerging technologies into cost models.


The proposed TotEx approach


Key features of the discussion paper include…


·     Compilation of an economic efficiency framework against which to asses a TotEx approach.


·     Identification of how a TotEx model might differ from the conventional CapEx – OpEx building block model, including the possibility of a transition from CapEx – OpEx to TotEx.


·     The use of TotEx benchmarking to guide the overall TotEx allowance (presumably not much different to the current OpEx and CapEx benchmarking).


·     The introduction of a capitalisation rate to define the percentages of TotEx that are expensed and capitalized (which would seem to be a bit of a back-pedal to the separate treatment of CapEx and OpEx).


·     The view that regulated businesses would have greater freedom to make efficient CapEx – OpEx trade-offs.


·     Recognition of the need to consolidate the various incentive schemes to reduce the different treatments of CapEx and OpEx.


Pipes & Wires will pick up this story again as the TotEx approach gathers speed.


Merger & acquisitions


Aus – CKI’s bid for APA




Pipes & Wires #177 examined month CK Infrastructure’s unsolicited bid for the APA Group, Australia’s largest gas pipeline operator. This article notes APA’s recommendation that shareholders accept that bid.


Background to the deal


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.


An enlarged CK Infrastructure will have electricity distribution, gas distribution or gas transmission assets in all jurisdictions except Tasmania.


APA’s recommendation to accept the bid


In mid-August, APA’s board recommended that shareholders accept the $13b bid, which is still subject to regulatory approval. For its’ part, CKI believes it will obtain all necessary approvals.


Concerns over the bid


This bid has raised several concerns…


·     Possible increased dominance in the gas transmission market. APA owns 13 of Australia’s major gas transmission pipeline (of which 8 are unregulated), with CKI already owning 1 major and 5 minor pipelines.  Possible ways forward include re-regulating some of these pipelines or divesting some of the major east coast pipelines.


·     National security concerns over increased Chinese control of vital infrastructure, for which former treasurer Scott Morrison was asked to intervene under the Foreign Acquisitions and Takeovers Act 1975 (noting that the Foreign Investment Review Board rejected CKI’s bid for Ausgrid, but approved CKI’s bid for DUET).


·     General concern that gas prices are rising uncontrollably, and that consolidated ownership would be unhelpful.


Pipes & Wires will examine this further as the various machinations around divestment and re-regulation play out.


Aus / NZ – taking Tilt Renewables private




Mercury and Infratil recently launched a joint bid for the 29.1% stake in Tilt Renewables they don’t already own. This article examines Tilt and the proposed deal to set some context for future analysis.


Background to Tilt Renewables


Tilt Renewables began from the demerger of TrustPower’s operational wind assets and its wind and solar development program in 2016. The operational wind assets include…


·     NZ – Tararua and Mahinerangi.


·     Australia – Snowtown, Crookwell, Blayney and Salt Creek.


Deals to date


In May 2018, Mercury bought the Tauranga Energy Consumer Trust’s (TECT) 19.9% stake in Tilt for $144m cash, valuing Tilt at $720m.


The proposed deal


Mercury and Infratil are offering the same $2.30 per share paid to TECT to Tilt’s remaining shareholders. Pipes & Wires will examine this further as the deal progresses.


Energy markets


US – cancelling the Wind Catcher




American Electric Power recently cancelled its 2,000MW Wind Catcher project. This article examines the details of the regulatory decision to reject the Wind Catcher.


A bit about the Wind Catcher


Wind Catcher was a 2,000MW wind farm to be built in the Oklahoma Panhandle near I-44 between Oklahoma City and Tulsa that would’ve included 800 wind turbines. The project would’ve also included 350 miles of 765kV lines to export electricity to Arkansas, Texas and Louisiana.


A key benefit of the project was capturing 100% of the Production Tax Credit, which in turn required the project to be completed by the end of 2020. The likely inability to complete Wind Catcher by 2020, and therefore the inability to capture 100% of the available Production Tax Credits led AEP to cancel Wind Catcher soon after the Texas Public Utilities Commission (PUC) rejected AEP’s application.


The regulatory framework


Wind Catcher needed regulatory approval from Texas because it would supply 2 small areas of Texas that are within the Southwest Power Pool (and not in the ERCOT), which gave the Texas PUC jurisdiction. 


The Texas PUC’s decision


The core of the Texas PUC’s decision was whether Wind Catcher would actually deliver the promised savings of $1.7b over 25 years. This in turn hinged on 2 key issues…


·     The regulatory framework which the Texas PUC felt didn’t sufficiently insulate customers from Wind Catcher’s cost risks.


·     Whether the current low gas prices will stay low enough long enough to provide lower cost electricity than grid-scale wind.


Energy mix and grid security


UK – what if the lights go out ?


A couple a weeks ago I found this cool BBC Two docudrama on YouTube. It is 1 of a series of What If survivalist shows from 2004 that is played forward to the winter of 2010 and hypothesises a terror attack on a major gas transmission compressor station in northern Russia that the UK relies on for its increasing dependence on gas-fired generation. Some of the many interrelated themes include…


·     A very pointed questioning of why Britain has retreated from a balanced, secure and risk-averse fuel mix of coal, nuclear and indigenous gas to a position so dependent on imported gas.


·     A frightening prescience about the difficulties and delays of building new nuclear and gas-fired stations.


·     The difficult situation of a deregulated market in which there is no single point of responsibility for keeping the lights on.


It is well worth a watch and a serious think about.


US – balancing emissions with grid security




Pipes & Wires #164 examined the dismantling of the Clean Power Plan (CPP). This article examines the recently announced plan for setting less stringent CO2 emission requirements for the electricity sector that will have inevitable consequences for the energy trilemma.


Recapping the Clean Power Plan


The CPP was one of President Obama’s flagship policies, and embodied multiple objectives of reducing CO2 emissions, lowering energy costs and improving air quality.


The regulatory framework for the CPP is based on s111 of the Clean Air Act (Title 42 of the United States Code, Section 7411) which authorises the EPA to issue nationally applicable New Source Performance Standards which limit air pollution. Section 7411 has long been used to limit emissions of SOx, NOx and particulates from coal-fired generation but in 2015 the EPA used this Section to also set CO2 emission limits.


However the CPP was put on hold by the Supreme Court in 2016 whilst a range of issues were worked through.


Key features of the Affordable Clean Energy (ACE) rule


Key features of the ACE rule include…


·     National guidelines from which individual states can develop plans to address CO2 emissions from existing coal-fired generation.


·     Defining the best system of emission reduction (BSER) as heat-rate improvements of individual stations.


·     Providing states with a list of candidate technologies that can be used to establish performance standards.


·     Updating the new source review (NSR) permitting program to encourage efficiency gains at existing stations.


·     Alignment of regulations under s111 of the Clean Air Act to give individual states the time and flexibility to develop state plans, including consideration of generation plan remaining life.


Next steps


The EPA will receive comments on the proposed ACE rule until mid-October 2018. Opposition from environmental groups, renewable energy groups and states opposed to the current government is pretty much guaranteed. Pipes & Wires will comment further as the proposed ACE rule progresses through Washington’s corridors of power.


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.


A potted history of electricity transmission


I’ve recently compiled a potted history of electricity transmission. Pick here to download.


Video series – Powering NZ


The team at Whiteboard Energy are compiling a series of cool 20 minutes videos on the history of electricity in NZ, which are now on YouTube…


·     Episode #1 – The Powerboard Of Fame.


·     Episode #2 – The Power Of The State.


The series eventually will run to 5 episodes … an opportunity to fund Episode #5 is here.


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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