Pipes & Wires

Though leadership of critical energy & infrastructure matters

Issue 182 – December 2018

From the editor’s desk…

Welcome to Pipes & Wires #182. We start this issue with some emerging ideas on who can own batteries, and then examine two regulatory policy issues from New Zealand. We then examine four gas, rail and electricity revenue decisions. We then examine the possibility of introducing competing generators in South Africa, and ensuring sufficient winter supply in Sweden. This issue then concludes with a look at the Australian Government’s rejection of a major acquisition.

I’d take this opportunity to wish you and yours a joyful and restful Christmas and New Year. Pipes & Wires will return in February 2019.

What we’re seeing…

· Re-integration of lines and energy as distributors invest in generation.

· What seems like regulatory push-back against the large transmission lines required to interconnect wind-farms.

· Heightening concern around foreign ownership of essential infrastructure.

· 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…

· Identifying learnings from the RIIO – ED1 reset on behalf of an Australian distributor.

· 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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Regulating emerging technologies

US – who can legally own batteries ?

Introduction

Who can legally own batteries seems to be the next war within the wider battle of regulating emerging technologies. This article examines a recent dispute in the US state of Texas, and then tries to translate that into the New Zealand context.

The Texas dispute

Following AEP Texas’ application to the Texas Public Utilities Commission to use battery storage as an alternative to traditional grid investment, several generators recently submitted to the TPUC that transmission and distribution (T&D) companies cannot legally own batteries whilst other parties including battery suppliers argued that it is legal. The key issue is that the Public Utility Regulatory Act (PURA) inter alia prohibits T&D companies operating with the Electric Reliability Council of Texas (ERCOT) from owning generation, with the implication that batteries are classified as “generation”. Arguments include…

· In favor - that the PURA doesn’t prohibit T&D owning storage devices for increasing reliability (as distinct from selling energy or wholesaling ancillary services).

· Against - that PURA didn’t really contemplate non-traditional technologies, and the declining cost of batteries means that third parties can easily own batteries.

A way forward seems to be to allow T&D to own batteries, but not participate in the energy market.

The New Zealand context

New Zealand is facing similar issues to those described above in Texas…

· Retailers have disputed whether distributors should be allowed to own and operate batteries within the scope of electricity line services.

· The Commerce Commission’s recent Electricity Distribution Information Disclosure Amendments Determination 2017 require distributors to disclose forecast network expenditure and constraints on a map (in the context of related party transactions) which certainly lends itself to the distributor itself or a third party proposing to install batteries instead of traditional network investment.

Pipes & Wires will keep watching how regulators are treating batteries, solar panels and EV chargers.

Revenue and pricing frameworks

NZ – setting the framework for DPP3

Introduction

Non-exempt electricity distribution businesses (EDB’s) are currently subject to the second default price-quality path (DPP2) which expires on 31^st March 2020. This article examines the Commerce Commission’s recently released issues paper on the DPP3 that will apply from 1^st April 2020.

Regulatory framework

The regulatory framework is set out in Part 4 of the Commerce Act 1986…

· Subpart 3 sets out the requirements for the Input Methodologies.

· Subpart 6 sets out inter alia the requirements for the DPP.

Key features of the DPP3 issues paper

Key features of the DPP3 issues paper include…

· How the Commission intends to set DPP3 in the context of its statutory requirements.

· Setting out the Commission’s priorities for EDB’s, and how those priorities will be reflected in DPP3.

· Sets out the core components of DPP3.

· Discusses specific DPP3 issues and how they might need to addressed.

Those specific issues include…

· Implementing the change in the form of control from a weighted-average price cap to a revenue cap as a result of the Input Methodologies review in 2016.

· Provision for accelerated depreciation of assets (also as a result of the 2016 Input Methodologies review).

· The transition to and from customised price-quality paths (CPP’s).

· Refining the process for dealing with requests to reconsider or amend a DPP.

· How reliability performance will be managed, including setting standards, setting reliability incentives, and how SAIDI and SAIFI might be normalised.

· Whether other dimensions of supply quality should be considered, including fault response time, phone answering time, time taken to process a new connection application, and providing sufficient notice of planned shutdowns.

As always, interested parties should read the detail of the papers for themselves.

Next steps

The next steps include consultation on the issues paper until 20^th December 2018, receiving cross-submissions until 31^st January 2019, workshops on specific issues during February and March 2019, and the release of the Draft DPP Decision during May 2019.

NZ – accelerated depreciation for electricity lines

Introduction

Pipes & Wires #178 noted the Commerce Commission’s draft Electricity Distribution Services Input Methodologies Amendments Determination 2018 and the associated draft Reasons Paper in regard to accelerated depreciation of electricity distribution assets. This article examines the key features of the Electricity Distribution Services Input Methodologies (Accelerated Depreciation) Amendments Determination 2018.

Regulatory framework

The regulatory framework is set out in Part 4 of the Commerce Act 1986…

· Subpart 3 sets out the requirements for the Input Methodologies.

· Subpart 6 sets out the requirements for the DPP.

Key features of the Amendments Determination

Key features of the Amendments Determination include…

· The amendments apply for a DPP in force from 1^st April 2020.

· The definition of adjusted depreciation has been amended.

· The introduction of limits to the adjustment factor.

As always, interested readers should examine the detail of the Determination and the Reasons Paper themselves.

Next steps

Interested parties should note the 1^st March 2019 as the final date for submitting applications for accelerated depreciation.

Revenue and pricing decisions

NZ – gas under pressure

Introduction

The Commerce Commission recently released its cost of capital determination that will apply for the Disclosure Year 2019 for the gas pipeline businesses owned by First Gas (transmission and distribution) and Powerco (distribution only). This article examines the key features of that determination.

Regulatory frameworks

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

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

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

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…

Parameter	25^th percentile	Mid-point	67^th percentile	75^th percentile
Vanilla WACC	4.64%	5.34%	5.80%	6.05%
Post-tax WACC	4.17%	4.88%	5.34%	5.58%

UK – the final rail price determination

Introduction

Pipes & Wires #166, #173 and #177 examined the PR18 price review that will apply to Network Rail for the CP6 control period from 1^st April 2019 to 31^st March 2024. This article recaps the process to date and examines the Office of Rail Regulation’s final determination.

Key features of the CP6 Strategic Business Plans

Key features of Network Rail’s CP6 Strategic Business Plans include…

· Improved passenger and public safety, including reducing the risk of train accidents by 10% and the risk of level crossing incidents by 13%.

· Reducing the number of delayed trains by 15%.

· Reducing operating costs per passenger kilometer by 9%.

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.

The final determination

Key features of the final determination include…

· A broad acceptance that the proposed expenditure for each route was appropriate.

· A general acceptance that asset sustainability could be achieved with about £500m of RepEx, down from the £1b that ORR proposed in its draft determination.

· An increase in efficiency gains from £460m to £617m.

· An acceptance that an additional £80m should be spent on safety.

· An acceptance of the £245m proposed for research and development.

· A nett revenue requirement of £37.4b.

This concludes Pipes & Wires analysis of the UK rail pricing (at least for another 4 years).

Aus – the NSW electricity distribution Draft Determinations

Introduction

The Australian Energy Regulator recently released its Draft Determinations for the 3 electricity distributors in NSW (Ausgrid, Endeavour Energy and Essential Energy) for the 5 year period commencing on 1^st July 2019. This article examines the key features of those Draft 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…

Parameter	Proposal	Draft Determination	Revised Proposal	Final Determination
CapEx	$3,084m	$2,209m
OpEx	$2,402m	$2,344m
Opening RAB	$15,716m	$15,683m
WACC	6.33%	5.96%
Depreciation	$713m	$726m
Smoothed revenue	$8,918m	$7,940m

Endeavour Energy - key features of the revenue reset process

Key features of the process to date include…

Parameter	Proposal	Draft Determination	Revised Proposal	Final Determination
CapEx	$2,166m	$1,700m
OpEx	$1,486m	$1,468m
Opening RAB	$6,512m	$6,512m
WACC	6.11%	5.96%
Depreciation	$504m	$631m
Smoothed revenue	$3,892m	$4,413m

Essential Energy - key features of the revenue reset process

Key features of the process to date include…

Parameter	Proposal	Draft Determination	Revised Proposal	Final Determination
CapEx	$2,100m	$2,081m
OpEx	$1,698m	$1,718m
Opening RAB	$8,215m	$8,215m
WACC	6.34%	5.96%
Depreciation	$632m	$716m
Smoothed revenue	$5,142m	$5,292m

Pipes & Wires will revisit this story when the 3 distributors submit their Revised Proposals.

South Africa – setting Eskom’s fourth price determination

Introduction

Eskom recently submitted its application to the National Energy Regulator (NERSA) for the fourth Multi-Year Price Determination (MYPD4) for the period 1^st April 2019 to 31^st March 2022^*. This article summarises the key features of the MYPD4 application to set some context for examining NERSA’s decisions.

* NERSA’s revenue and tariff decisions will apply from 1^st April 2019 for Eskom’s non-municipal customers, and from 1^st July 2019 for municipal customers.

Regulatory framework

The over-arching regulatory framework is the Electricity Regulation Act 2006, which inter alia provides for the recovery of efficient costs by the licensee and approval of tariffs by NERSA.

Key feature of the MYPD4 proposal

Key features of the MYPD4 proposal include…

Parameter	Proposal	Decision
Expenditure	R179b
Primary energy	R229b
Opening RAB	R1,268b
Depreciation	R213b
Local IPP’s	R105b
Returns	R0.86b
Revenue	R763b

Pipes & Wires will comment further once NERSA’s decision emerges (expected to be around March 2019).

Energy markets & restructuring

South Africa – introducing competing generators

Introduction

News emerged recently that the Democratic Alliance introduced a private members bill that would introduce competition by inter alia breaking up Eskom into competing generation companies (which is actually the latest of several attempts to introduce competition stemming back to 2011). This article briefly examines the DA’s bill as a starting point for considering the key features of breaking up a vertically integrated electric company.

The DA’s bill

The DA introduced the Independent System & Market Operator Bill in late October. The key feature of the Bill is to establish an independent, state-owned entity that will buy electricity from competing generators including from independent power producers (IPP’s), however it appears that financially strong municipalities may also be able to buy electricity directly from generators through a transparent trading function.

Breaking up a vertically integrated electric company

Breaking up a vertically integrated electric company essentially involves 4 activities…

· Establishment of the transmission grid as a separate entity that provides transparent access to all generators that meet its technical and commercial standards.

· Breaking the generation fleet into competing businesses. There may also be limits to the market share of the newly established generators, effectively requiring any additional generation to be built by an IPP.

· Establishment of a market and system operator to dispatch generation based on bids, and then to transact the purchased electricity. This entity may also be responsible for transmission grid planning (eg. the AEMO in Australia).

· Establishment of an economic regulator to inter alia set the prices (or revenue) and reliability of the transmission and distribution activities. South Africa has already established NERSA as its economic regulator.

Exploring the generation breakup in more detail

A little thought would reveal that breaking up a generation fleet into competing businesses could prove difficult if the legacy plant has been built around a merit order (eg. Western Australia), includes thermal and hydro with small catchments (eg. New Zealand), or includes nuclear decommissioning liabilities (eg. Britain). In contrast, Eskom’s generation fleet comprises…

· A broad mix of coal-fired steam turbine plant of varying ages and thermal efficiencies, and perhaps more importantly, differing coal supply arrangements and costs.

· The 1 nuclear plant at Koeburg.

· A fleet of pumped storage and gas turbine peaking plants.

So at least on the face of it forming several competing generators each with a mix of similar baseload and peaking plant should be straightforward. Pipes & Wires will re-visit this issue as the ISMO Bill progresses through the parliamentary process.

Energy mix and grid security

Sweden – ensuring secure supply for winter

Introduction

Over the last decade, Sweden has exported about 10% to 15% of its annual generation (between 10,000 GWh and 20,000 GWh). These are, however, annual figures which don’t reflect the shifting patterns of export and import during any 1 year, and it is the possibility of having to import electricity during the 2018/19 winter that is the focus of this article.

Some wider context

Pipes & Wires #154 and #172 examined Sweden’s surprising swing back towards nuclear energy. Key features of the swing back towards nuclear energy included…

· Phasing out of the tax on nuclear electricity that was introduced in 1984 and is currently €7.5 per MWh (about 33% of the cost of nuclear generation). This tax generates annual revenues of about €465m.

· Allowing the construction of up to 10 new nuclear reactors to replace aging reactors.

· A target of 100% renewable energy by 2040 (which is clearly underscored as a goal, and not as a final cut-off date for the nuclear generation).

The expected end-of-life closure of nuclear generation will create a capacity shortfall of about 3,300 MW by 2040 (just under 10% of currently installed capacity) and possibly 7,000 MW by 2045.

Sweden’s current supply situation

Sweden’s peak demand is about 27,000 MW, whilst installed capacity is about 37,000 MW as follows…

· 9,300 MW – nuclear.

· 16,200 MW – hydro.

· 3,700 MW – wind.

· 8,000 MW - other thermal generation.

So on the face of it there is about 10,000 MW of reserve capacity margin (excluding imports), or about 35% which is significantly more than the 15% to 18% that was traditionally planned for. That is until we consider the following issues…

· The possibility of a “1 in 10 cold winter” which drives demand even higher.

· The closure firstly of Oskarshamm #1 (500 MW) in June 2017 and then the planned closure of Ringhals #1 and #2 (1,730 MW) in 2019 and 2020 which will remove 2,230 MW of secure generation from the supply curve.

· The possibility of little or no wind (especially during a really cold winter), which could remove a further 3,000 MW from the supply curve.

Putting aside any low hydro storage or inflows, the above 3 issues alone could remove over half of the reserve capacity margin suggesting that additional secure generation will be needed. Pipes & Wires will pick up this story again after the northern winter to see how the reserve margin fared and what remedial actions have resulted.

Merger & acquisitions

Aus – federal government rejects CKI bid

Introduction

Pipes & Wires #177, #179 and #181 examined CK Infrastructure’s bid for the APA Group. This article examines the Australian government’s rejection of that bid in November 2018.

Quick recap of the deal so far

CK Infrastructure’s launched its’ A$13b bid for APA which would create an enlarged CK Infrastructure that would have electricity distribution, gas distribution or gas transmission assets in all jurisdictions except Tasmania. Key events include…

· In mid-August 2018, APA’s board recommended that shareholders accept the $13b bid, which at that time was still subject to regulatory approval.

· The ACCC approved the bid in mid-September 2018. This included a court-enforceable undertaking from CKI that it would sell the APA pipelines in Western Australia to maintain competition in the gas transmission pipeline market because it (CKI) already owns a stake in the Dampier – Bunbury pipeline.

· In early November the government handed down a preliminary rejection of CKI’s proposal which apparently left room for a revised offer which many analysts said was unlikely.

The rejection

The government’s final decision was to outrightly reject the proposal, stating that it would be contrary to the national interest. Treasurer Josh Frydenburg elaborated "I have formed this view on the basis that it would result in a single foreign company group having sole ownership and control over Australia’s most significant gas transmission business".

This concludes Pipes & wires coverage of this deal.

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.

· Episode #3 – The People Want More.

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. A couple of titles are of particular interest to me…

· Power System Economics – Designing Markets for Electricity by Steven Stoft.

· Electrifying America – Social Meaning of a New Technology by David E. Nye.

· The California Electricity Crisis by James L. Sweeney.

· TVA’s Public Planning – The Vision, The Reality by Walter L. Creese.

· Electricity Restructuring – The Texas Story by Lynne Kiesling and Andrew N. Kleit.

So if anyone has a copy of these books they no longer want, 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.