Pipes & Wires
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
Introduction
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.
Parameter |
25th percentile |
Mid-point |
67th percentile |
75th percentile |
Vanilla WACC |
4.54% |
5.22% |
5.67% |
5.90% |
Post-tax WACC |
4.04% |
4.72% |
5.16% |
5.40% |
·
GasNet and Vector.
Parameter |
25th percentile |
Mid-point |
67th percentile |
75th percentile |
Vanilla WACC |
4.85% |
5.56% |
6.02% |
6.27% |
Post-tax WACC |
4.36% |
5.07% |
5.53% |
5.77% |
·
Auckland and Christchurch Airports.
Parameter |
25th percentile |
Mid-point |
67th percentile |
75th percentile |
Vanilla WACC |
- |
6.30% |
- |
- |
Post-tax WACC |
- |
6.09% |
- |
- |
NZ – the Transpower draft RCP3 proposal
Introduction
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…
Parameter |
RCP2 |
RCP3 draft proposal |
RCP3 final proposal |
RCP3 final decision |
Revenue |
$4,731m |
$4,666m |
|
|
OpEx |
$1,300m |
$1,333m |
|
|
CapEx |
$1,253m |
$1,341m |
|
|
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
Introduction
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.
Background
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
Introduction
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
Introduction
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
Introduction
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
Introduction
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
Introduction
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
Introduction
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.
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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
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