Pipes & Wires
From the editor’s desk…
Welcome
to Pipes & Wires #180. Under the heading of energy markets and tariffs, this
issue begins with an in-depth look at the draft report on New Zealand’s
electricity pricing review, followed by a look at downward pressure on fixed
prices in the US.
We
then examine competing views on Mercury and Infratil’s bid for Tilt Renewables,
and then look at some emerging trends of regulating emerging technologies in
the United States.
We
then look at 3 electricity distribution draft revenue decisions in Australia,
and conclude with a look at the changing energy and climate policies in
Australia. So … until next month, happy reading…
What we’re seeing…
· A possible emerging trend of regulators
squeezing fixed monthly charges which are increasingly seen as interfering with
renewable energy policy objectives.
· 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.
· 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.
· 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.
· 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).
· 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…
· Developing a smart metering strategy.
· Advising on likely available electrical
contractors.
· Undertaking a customer survey to
identify customer preferences for off-peak EV recharging.
· Developing a strategy for complying
with the related party transaction provisions.
· Advising on the regulatory implications
of an aging timber transmission pole fleet.
· Compiling some introductory thoughts on
digital transformation and blockchain.
· 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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Energy markets & tariffs
NZ – draft report on the enquiry
Introduction
Pipes & Wires #174 examined the review of the electricity
sector that would have a particular emphasis on whether the current electricity
market is delivering fair and equitable prices to end consumers. This lengthy article
examines the key findings of the First Report.
The reviews terms of reference
The
review’s terms of reference included inter alia…
· Examine whether the prices paid by end
consumers are efficient, fair and equitable. Various perspectives on equitable
are noted, including consideration of the costs being socialised or spread on
different bases.
· Consider the entire electricity supply
chain.
· Evaluate whether the regulatory
frameworks for both competitive and monopoly segments of the supply chain are
delivering efficiency and fairness.
· Consider whether the current market and
regulatory framework will both enable and deliver benefits from emerging
technologies and innovation.
· Include issues of security, reliability
and environmental sustainability when considering whether prices are efficient,
fair and equitable.
· Consider what factors if any may form
entry barriers or limit competition along the supply chain, particularly at the
boundary of contestable and non-contestable services.
· Consider the impact of market behavior
on various customer segments.
· Consider cost allocations between
market segments, including the impact of the Electricity (Low Fixed Charge Tariff Option for
Domestic Consumers) Regulations 2004.
· Consider how new technologies are
likely to effect services, price and different customer groups, and how the
current regulatory framework might promote the benefits of emerging
technologies.
The
TOR specifically excludes matters of technical detail, consideration of the
Input Methodologies, and evaluation of regulatory body’s performance against
their statutory objectives.
Key findings of the First Report
The key findings of the First
Report include…
· Reliability - the electricity system is broadly reliable.
Investment is sufficient to meet demand, at least for now.
· Emissions – about 80% of demand is already being met by renewable
generation. This will help move towards zero emissions.
· Affordability – overall, the picture is not so good. Since 2000,
residential prices have risen faster than most other OECD nations, and about
103,000 households spend more than 10% of their household income on energy.
· Fair pricing – again, not so good. Residential prices have risen
79% since 1990, whilst industrial prices have risen 18% and commercial prices
have fallen 24%.
· Retail market – this seems to be diverging into 2 quite separate
segments of those who enjoy low prices from shopping around and capturing the
prompt payment discounts, and those who don’t.
· Subsidising emerging technologies – current pricing structures
will result in subsidies from those who don’t have rooftop solar or EV’s to
those who do (long-time Pipes & Wires readers will recognise that such
subsidies are not new, and have long been a feature of air conditioners).
Moreover, the cost of any additional capacity for peak-time charging of EV’s is
likely to fall disproportionately on low-income customers.
· Generation market power – some concerns have been expressed about
generators ability to exercise market power when supply is tight.
· Decarbonisation – this will obviously require a lot more annual
generation (almost double by my reckoning, requiring the annual capacity factor
to increase from about 50% to about 85%), but that current market and industry
arrangements should be able to meet demand growth provided there are strong
incentives to invest.
· Transmission – decarbonisation will require significant grid
investment. These was no evidence that Transpower is making excessive profits.
· Distribution – several factors are thought to be holding things
back, including outdated pricing structures, aging assets, the quality of
governance, short planning horizons, access to meter data, and the small size
of distributors. There was no evidence that distributors are making excessive
profits.
· Retailers – competition has generally increased, but not all
customers have been able to take advantage of that.
There is also a useful at-a-glance
1 pager. Pipes
& Wires will comment further once the Final Report emerges.
US – downward pressure on fixed charges
Introduction
Fixed charges have been a
sticky point for many years (probably even decades), and have become a bit of
an ideological frontier. This article notes what could be a trend of regulators
increasingly rejecting fixed charges.
The arguments around fixed charges
Some of the arguments around
fixed charges include…
|
Arguments in favor of fixed
charges |
Arguments against fixed
charges |
|
· Distribution companies have high fixed costs that need to be
recovered regardless of customers kWh consumption. · Legacy consumption profiles that adequately recovered fixed
costs on a kWh basis no longer hold true (air conditioning, rooftop solar
etc). · It reduces the need for volume risk premiums to be added to the
kWh component of the bill. |
· Dampens the incentive to reduce kWh consumption. · Reduces the benefits (avoided costs) of rooftop solar. · They disproportionately impact low income families. · They’re just not fair !!! |
There are probably heaps more
arguments on both sides, but these seem to be the main arguments (and which
Pipes & Wires has extensively examined).
The emerging trend
The North Carolina Clean Energy Technology
Center
examined 46
actions on residential fixed charges during Q2 of 2018. The NCCETC notes that 3 states reduced
residential fixed charges during Q2, which they note as an increase from the 1
or 2 reduction orders per quarter that previously occurred. These reductions
are…
|
State |
Company |
Ruling |
|
Connecticut |
Eversource |
Reduce existing charge from
$19.25 per month to $9.21 per month. |
|
New York |
Central Hudson Gas &
Electric |
Reduce existing charge from
$24 per month to $19.50 per month. |
|
Colorado |
Black Hills Energy |
Rejected request to increase
from $16.50 per month to $20.13 per month, and instead reduced to $8.77 per
month. |
Electric companies seem divided
on whether an increase to 3 unfavorable decisions per quarter represents an
emerging trend, but they do seem to agree it needs to be watched closely as
regulators try to balance the various competing arguments of which the
obligation to prevent tariff structures from interfering with public policy
objectives seems to be getting louder.
Mergers & acquisitions
Aus / NZ - recommendation that Tilt shareholders reject offer
Introduction
Pipes
& Wires #179 noted Mercury and Infratil’s recent joint bid for the 29.1% stake in Tilt Renewables they don’t already own. This article notes recent public
announcements by both Tilt and Infratil.
Recapping the deal
In May 2018, Mercury bought 19.9%
of the Tauranga
Energy Consumer Trust’s (TECT)
26.7% stake in Tilt for $144m cash, valuing Tilt at $720m. In August 2018
Mercury and Infratil offered the same $2.30 per share paid to TECT to Tilt’s
remaining shareholders. TECT indicated that it will sell its remaining 6.81% to
Mercury.
Infratil and Mercury also
announced that they had obtained the approval
of the Foreign Investment Review Board (FIRB).
The independent directors’ recommendations
In early September 2018 Tilt’s
independent directors’ recommended
that shareholders reject the $2.30 per share bid as “simply too low” and which “does not adequately recognise the
value of current operational assets and the strong pipeline of future
projects”. Infratil countered this recommendation with a statement that the
offer is “fair and reasonable”. Details of the independent
directors’ recommendations from
mid-September include…
· The independent adviser’s valuation range for Tilt is between
$2.56 and $3.01 with a midpoint of $2.79, which is significantly above the
$2.30 offer.
· The $2.30 offer overlooks the significant shareholder benefits
expected from the Dundonnell windfarm.
· The $2.30 offer does not fully recognise the value of Tilt’s
existing assets or its development pipeline.
· The $2.30 offer is only an 8% premium to Tilt’s share price prior
to the offer, which is considered insufficient.
Infratil’s response to Tilt’s
recommendations
Following on from Tilt’s
independent directors’ recommendations, Infratil commissioned its own expert
advice which challenges the advice received by Tilt and estimates a valuation
range from $1.87 to $2.46 per share. A key aspect of Infratil’s expert advice
is that the WACC adopted by Tilt’s advisor is too low, and doesn’t adequately
value either the uncertainty of Australia’s energy markets following the change
in leadership nor the increased exposure to merchant prices when existing
revenue contracts expire. Infratil goes on to say that adoption of its advisors
mid-point WACC’s for Australia and New Zealand of 7.9% and 7.35% respectively
would decrease the Tilt valuation by $0.44 per share.
Pipes & Wires will continue
this story as the takeover continues.
Regulating emerging technologies
US – court concludes Missouri PSC does have EV charger
jurisdiction
Introduction
Pipes
& Wires #174 noted
the Missouri
Public Service Commission’s decision that it did not have jurisdiction over EV charging stations. This
article examines a recent Missouri
Court of Appeals decision that
says actually the PSC does have jurisdiction over EV chargers.
Recapping the Missouri PSC’s conclusions
As part of
considering Ameren’s rate case, the Missouri Public Service Commission concluded
inter alia that because the product
being sold is a charging service, not the electricity itself, the PSC does not
have jurisdiction over EV charging stations because they do not fit within the
definition of electric plant in state legislation. It is fundamentally
important to understand that the MPSC did not reject Ameren’s rate case, but
rather determined that it had no jurisdiction to determine it. The following
excerpts from media sources expand on this critical issue…
·
The board ruled that the
installation and operation of EV charging stations is fundamentally different
from operating an electric utility. That means that although utilities can
enter that business, they cannot do it as regulated monopolies and may not
spread the cost among all of their customers. They would have to operate in the
free marketplace (quoted from MidWest Energy News, 24th April 2017)
· Regulators concluded that if they had jurisdiction over
electric vehicle charging infrastructure, that ruling "would conceivably
assert jurisdiction over other similar battery-charging services, such as smart
phone charging stations or kiosks, RV parks that allow vehicles to connect to
the park’s electricity supply, or airports that connect planes to a hangar’s
electricity supply while parked." (quoted from
Utility Dive, 25th April 2017).
Key features of the Court decision
The Court’s decision was based inter alia on an appeal by Kansas City Power & Light that the Missouri PSC erred in refusing to include EV charging in
KCP&L’s rate base on the basis that charging stations were not electric
plant. Key features of the Missouri Court of Appeals decision include…
· Agreement with KCP&L that the PSC erred both in determining
that EV chargers did not fall within the statutory definition of electric plant
because the product being sold is a charging service rather than the
electricity itself, and that PSC jurisdiction over conceivably competitive
activities was outside of the scope of Missouri’s public service statutes.
· A deconstruction of the PSC’s reasoning that EV chargers were not
selling electricity using a parallel argument that a self-service gas station
is not providing any service but rather selling gasoline, and that indeed EV
chargers do sell electricity.
· More detailed reasoning is that the battery is merely a storage
device, and the fact that the electricity is stored rather than used
immediately does not convert the transaction from the “sale of electricity” to
a “service”.
· The view that the PSC’s analogies of laundromats and other
charging facilities are unpersuasive.
· The view that while the PSC’s views on conceivable competitive
activities may be well-founded, nothing in the definition of electric plant
authorises the PSC to exclude EV chargers.
The Court ordered the PSC to
reconsider its decision consistent with the Court’s decision.
What might this mean for electric companies ?
The following table highlights
the significantly different implications between the PSC’s and the Court’s
decisions…
|
Attribute |
PSC’s decision |
Court’s decision |
|
Setting
charging tariff |
EV charger
operators are free to set the charging tariff on the basis of a competitive
market. |
EV charging
tariffs could be regulated. |
|
Including in
rate base |
It cannot
add the cost of the chargers to its regulated asset base and recover the cost
through its regulated tariffs, which would effectively protect electric
customers from subsidising EV chargers. |
It can treat
EV chargers as electric plant, add the cost to its rate base, and recover the
cost of EV chargers from its customers at large. |
Pipes &
Wires will continue to examine this issue if and when it evolves.
US – are all customers equal before the
law ?
Introduction
Southern California Edison (SoCalEd) recently sought regulatory
approval to inter alia interrupt
customers with battery storage first during periods of distribution network
congestion. This article examines SoCalEd’s request and the Federal Energy
Regulatory Commission’s (FERC) rejection of that request.
Regulatory framework
The
pertinent regulatory framework is s205 of the Federal Power Act which inter alia…
· (Requires that) all rates and charges …
and all rules and regulations pertaining to such rates and charges shall be
just and reasonable.
· Prohibits making or granting any undue
preference or advantage, or subjecting any person to undue prejudice or
disadvantage.
· Prohibits maintaining any unreasonable
difference in rates, charges, services, facilities … as between classes of
service.
SoCalEd’s request
As
part of a rate filing in March 2018, SoCalEd sought to revise its
Wholesale Distribution Access Tariff (WDAT) to allow it to inter alia interrupt supply to its customers with battery storage
before interrupting customers without storage. This filing examines some very
detailed issues around the application of s205 that goes way beyond what might
appear to be the simple conclusion that s205 prohibits discrimination between
customer classes, with a key issue being that SoCalEd is still refining its
procedures for assessing the impact of battery storage on the distribution
network.
FERC ruling
In
its decision of August 2018 the FERC ruled inter alia that SoCalEd had failed to demonstrate why it is just,
reasonable, and not unduly discriminatory or preferential to interrupt 1
particular class of customers without providing that customer with the
opportunity to have their effects studied and the opportunity to pay for
whatever system upgrades might be necessary for them to be interrupted on the
same basis as other customers, and rejected that part of SoCalEd’s revised
WDAT. The FERC did note, however, that were SoCalEd to offer a customer the
opportunity to be studied for a system upgrade and that customer declines, then
it could perhaps be just and reasonable to interrupt that customer.
Network regulatory decisions
Aus – the TasNetworks Draft Decision
Introduction
TasNetworks
distribution business is currently subject to a 2 year regulatory period ending
on 30th June 2019 to align its distribution and transmission
business regulatory cycles. This article examines the Australian Energy
Regulator’s (AER) recently released Draft Decision that will apply to the transmission and
distribution businesses for the 5 years commencing on 1st July 2019.
Regulatory framework
The regulatory
framework is based on the National Electricity (South Australia) Act 1996, which provides for the making of the National Electricity Rules (version 111 at the time of writing).
Electricity distribution determinations are principally made pursuant to Chapters 6 and 6A of the Rules.
The transmission determination process to date
The transmission
determination process to date includes the following…
|
Parameter |
Proposal |
Draft
determination |
Revised
proposal |
Final
determination |
|
CapEx |
$260.6m |
$222.6m |
|
|
|
OpEx |
$206.7m |
$206.6m |
|
|
|
Opening RAB |
$1,467.4m |
$1,459.4m |
|
|
|
WACC |
6.15% |
5.77% |
|
|
|
Regulatory
depreciation |
$124.9m |
123.5m |
|
|
|
Total
smoothed revenue |
$799.6m |
$787.5m |
|
|
The distribution determination process to date
The distribution
determination process to date includes the following…
|
Parameter |
Proposal |
Draft
determination |
Revised
proposal |
Final
determination |
|
CapEx |
$738.8m |
$550.9m |
|
|
|
OpEx |
$441.5m |
$441.5m |
|
|
|
Opening RAB |
$1,755.8m |
$1,747.0m |
|
|
|
WACC |
5.89% |
5.51% |
|
|
|
Regulatory
depreciation |
$345.4m |
$341.8m |
|
|
|
Total
smoothed revenue |
$1,392.7m |
$1,308.3m |
|
|
Pipes &
Wires will continue this story once TasNetworks submits its Revised Proposal.
Aus – the South Australia draft distribution proposal
Introduction
SA Power Networks recently
published their Draft
Plan for the 5 year period starting on 1st July 2020. In addition to Pipes & Wires usual analysis of regulatory
proposals (rate cases), this article also looks at the role of the Draft Plan.
Regulatory framework
The regulatory
framework is based on the National Electricity (South Australia) Act 1996, which provides for the making of the National Electricity Rules (version 111 at the time of writing).
Electricity distribution determinations are principally made pursuant to Chapters 6 of the Rules.
The role of the Draft Plan
The role of the Draft Plan is
to inch forward in a less formal manner than the customary formal submission of
the Regulatory Proposal. This provides opportunity for the applicant to
demonstrate its customer engagement and that its’ spend plans align with
customer preferences, but also to engage less formally with the AER on points
of detail so that the Regulatory Proposal can be refined.
Key features of the process to date
Key features of the process to
date include…
|
Parameter |
Draft Plan |
Proposal |
Draft Determination |
Revised Proposal |
Final Determination |
|
CapEx |
$1,850m |
|
|
|
|
|
OpEx |
$1,468m |
|
|
|
|
|
Opening RAB |
Not stated |
|
|
|
|
|
Nominal WACC |
5.5% |
|
|
|
|
|
Depreciation |
$1,024m |
|
|
|
|
|
Smoothed revenue |
Not stated |
|
|
|
|
Pipes & Wires will comment
further once SA Power Networks submits its Regulatory Proposal.
Aus –
the Evoenergy revenue determination
Introduction
The Australian Energy Regulator
(AER) recently published its Draft
Determination for
the electricity distributor in the Australian Capital Territory (Evoenergy) for the 5 year period commencing on 1st July 2019.
This article examines the key features of that Draft Determination.
Regulatory framework
The basis of the regulatory
framework is Chapter
6 of the National Electricity Rules, which are made pursuant to the National
Electricity Law.
Key features of the revenue reset process
Key features of the process to
date include…
|
Parameter |
Proposal |
Draft Determination |
Revised Proposal |
Final Determination |
|
CapEx |
$330m |
$261.4m |
|
|
|
OpEx |
$309m |
$297.1m |
|
|
|
Opening RAB |
$966m |
$965m |
|
|
|
Nominal vanilla WACC |
6.42% |
5.80% |
|
|
|
Depreciation |
$248m |
$244.6m |
|
|
|
Smoothed revenue |
$952m |
$871.5m |
|
|
Pipes & Wires will revisit
this story when EvoEnergy submits its Revised Proposal.
Energy mix and grid security
Aus – coal makes a come back
Introduction
The last 6 weeks have seen a significant change in the
Australian political landscape, most notably the appointment of former
Treasurer Scott Morrison as Prime Minister and Angus Taylor as Minister for
Energy. This article examines the impact that these changes are likely to have
on Australia’s climate change policies.
Background comments in the popular media
The popular media is overflowing with criticisms that
Taylor rejects man-made climate change. He is also off to an apparently
strained start with Victorian Energy
& Environment Minister Lily D’Ambrosio.
The likely direction of climate change policy
Australia’s climate change policy is likely to include
the following features going forward…
· A commitment to energy sources that will provide cheaper electricity.
· A focus on keeping the lights on.
· A possible end of the National Energy Guarantee.
· Dismantling the subsidies for wind farms.
· Reliance on coal to reduce prices.
There’s obviously a lot of energy and not much climate
change in the above … perhaps a lot should be read into Morrison’s separation
of the ministerial portfolios of Energy and Environment.
Implications for the energy trilemma
Australia has undoubtedly moved towards the low
emissions corner of the energy trilemma, which has
resulted in increasing costs and declining reliability. Taylor’s stated intention
is to move Australia back towards the low cost and high reliability corner of
the trilemma, but in a world that seems to be on an inexorable path to low
emissions regardless of the price and reliability implications Morrison and
Taylor could go as quickly as they came.
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.
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