Pipes & Wires
From the editor’s desk…
Welcome
to Pipes & Wires #188. This issue has a heavy New Zealand content,
beginning with 3 regulatory decisions and a look at the developing regulatory
framework for contestable services. In amongst that we examine the final
decisions for the 3 electricity distributors in the Australian state of NSW.
We
then look at how emerging technologies are being regulated in the United
States, and conclude this issue with a look at the future of gas turbine
peakers. So … until next month, happy reading…
What we’re seeing…
Energy mix & grid security · Legal moves challenging the treatment
of forest bio-mass as renewable. · Heightened anxiety to get the carbon
price more precisely determined to unleash the next wave of decarbonisation
investment. · Diverging and seemingly inconsistent
views on the role of coal for dry-year security (less frequent, but more
critical). · Emerging battle between storing solar,
or over-building and curtailing · Charging EV’s with solar during the
day, and then use them to flatten the peaks. · 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. · Heightened appreciation of
coal-firing capability during gas supply interruptions. |
General stuff · A potential decoupling of electricity
prices from gas prices. · A possible need for a managed market
to strengthen certainty of gas supply. · The possibility of gas becoming
industry’s transition fuel away from coal. · More investment signals moving faster
and in different directions. · Increasing political awareness of the
need for a smooth transition that will minimise price shocks. · Mounting concern over the structural
integrity of many hydro dams, including the ability to fully de-water. · Heightening concern around foreign
ownership of essential infrastructure. · 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). · A shortage of skilled project
managers and electricity network designers. |
Regulating emerging technologies · Policy makers exhibiting specific
technologies biases, particularly between batteries and gas turbines. · A possibly diminished role for gas
turbines as grid peaks are de-layered to allow more insightful use of
batteries. · Regulators defining multiple classes
of services and payment categories for battery storage. |
Network access and price regulation · Increasing regulatory rejection of
grid modernization, EV charger and smart meter proposals. · What seems like regulatory push-back
against the large transmission lines required to interconnect wind-farms. · A possible step change in direction
from the previous trend of regulators squeezing fixed monthly charges to
legislation specifically allowing solar tariffs. · 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. · A mixed bag of revenue determinations
… some tougher than expected, some easier. |
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Network regulatory decisions
NZ – setting the next electricity distribution default price path
Introduction
The Commerce Commission
recently released its draft default
price-quality (DPP) decisions that will apply to all non-exempt EDB’s (that are not subject to
a CPP) for the 5 year control period beginning on 1st April 2020
(DPP3). This article examines the key features of those draft decisions to set
some context for the Commission’s final decision in late 2019.
Regulatory framework
Subpart
6 of Part 4 of the Commerce Act 1986 sets out the regulatory framework for default price-quality
regulation in general, whilst Subpart
9 sets
out specific provisions for EDB’s.
Key features of the draft decision
Key features of the draft decision
include…
· An average reduction in Year 1 revenue of 4.6%, down to $1.04b
across the industry (ranging from a 9% increase for Aurora to a 34% reduction
for Centralines).
· A WACC of 5.13% (subject to confirmation in October 2019), down
from 7.19%.
· The same core components as DPP2, but with some refinements aimed
at increasing certainty.
· A revenue cap (as distinct from a price cap).
· Treating planned and unplanned interruptions separately.
· A national average 5% increase in CapEx from DPP2 (but less than
the CapEx forecast in the March 2018 asset management plans).
Next steps
The Commission will receive
submissions on the draft decisions until 18th July 2019, and expects
to release its final decisions on 28th November 2019.
NZ – setting the next Transpower price-quality path
Introduction
The Commerce Commission
recently published its draft
decision for
the RCP3 control period that will apply to Transpower for the 5 year period commencing
on 1st April 2020. This article examines the key features of that draft
decision to set further context for examining the final decision.
Regulatory framework
The regulatory framework for
Transpower’s IPP is set out in Subpart
7 of Part 4 of the Commerce Act 1986.
Key features of the RCP3 decisions
Key features of the RCP3
decisions to date include…
Parameter |
RCP2 |
RCP3 draft proposal |
RCP3 final proposal |
RCP3 draft decision |
RCP3 final decision |
Revenue |
$4,731m |
$4,666m |
$4,419m |
$4,267m |
|
OpEx |
$1,300m |
$1,333m |
$1,343m |
$1,304m |
|
CapEx |
$1,253m |
$1,341m |
$1,337m |
$1,153m |
|
Next steps
Pipes & Wires will pick up
this story again once the Commission publishes its final decision in late 2019.
Aus – the final NSW electricity distribution revenue decisions
Introduction
The Australian Energy Regulator
recently released its Final Determinations that will apply to the 3 electricity
distributors in the Australian state of NSW (Ausgrid, Endeavour
Energy and Essential Energy) for the 5 year period commencing on 1st July 2019.
This article examines the key features of those Final 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 |
$2,690m |
$2,638m |
OpEx |
$2,402m |
$2,344m |
$2,285m |
$2,324m |
Opening RAB |
$15,716m |
$15,683m |
$15,684m |
$15,681m |
WACC |
6.33% |
5.96% |
5.99% |
5.72% |
Depreciation |
$713m |
$726m |
$793m |
$787m |
Smoothed revenue |
$8,918m |
$7,940m |
$8,032m |
$7,704m |
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 |
$1,740m |
$1,715m |
OpEx |
$1,486m |
$1,468m |
$1,453m |
$1,438m |
Opening RAB |
$6,512m |
$6,512m |
$6,529m |
$6,526m |
WACC |
6.11% |
5.96% |
5.74% |
5.73% |
Depreciation |
$604m |
$631m |
$629m |
$637m |
Smoothed revenue |
$3,892m |
$4,413m |
$3,686m |
$4,201m |
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 |
$2,081m |
$2,081m |
OpEx |
$1,698m |
$1,718m |
$1,718m |
$1,718m |
Opening RAB |
$8,215m |
$8,215m |
$8,146m |
$8,105m |
WACC |
6.34% |
5.96% |
5.96% |
5.76% |
Depreciation |
$632m |
$716m |
$645m |
$695m |
Smoothed revenue |
$5,142m |
$5,292m |
$4,853m |
$5,079m |
Pipes & Wires will revisit
this story when the AER publishes its Final Determinations.
NZ – setting the WACC for electricity
and Wellington airport
Introduction
The Commerce Commission recently released its cost of capital
decisions for the year ending 31st March
2020 for…
· Electricity
distribution businesses.
This article examines the key features of that determination.
Regulatory frameworks
The regulatory frameworks are set out in…
· Clauses 2.4.1 to 2.4.7
of the Electricity Distribution Services Input
Methodologies Determination 2012, and
· Clauses 5.1 to 5.7 of
the Commerce Act
(Specified Airports Services Input Methodologies) Determination 2010.
Key features of WACC’s
Key features of the electricity distribution WACC’s include…
|
25th percentile |
Mid-point |
67th percentile |
75th percentile |
Vanilla WACC |
4.01% |
4.69% |
5.13% |
5.37% |
Post-tax WACC |
3.59% |
4.27% |
4.71% |
4.95% |
Key features of the Wellington Airport WACC’s include…
|
Mid-point |
Vanilla WACC |
5.84% |
Post-tax WACC |
5.67% |
Regulating emerging technologies
NZ – developing a regulatory framework for contestable
services
Introduction
Regulators seem to
be trying different approaches to regulating emerging technologies. This
article examines a recently announced joint work program by New Zealand’s two electricity regulators (the
Commerce Commission and the Electricity Authority).
The joint work program
The headline of the
media statement notes that distributors are increasingly participating in
markets for contestable services, and that the purpose of the work program is
to examine whether that participation is benefitting customers or hindering
competition.
A key theme from the selection
of submissions examined is that emerging
technologies…
· Tend to
be an inherent component of the distribution network, both at an asset level
and at a real-time operational level.
· Are
likely to deliver the most benefits to the distribution segment of the supply
chain, most likely through avoiding new capacity investments.
The terms of
reference set out the
expectation that a research paper will be published. This paper will develop a
framework for identifying and assessing the costs and benefits of distributors
providing contestable services, and is expected to include case studies.
The editor comments
Competitive
provision of emerging technologies is a hot topic, with a wide range of
regulatory views emerging that includes the extreme proposal in the EU to
prohibit distributors from owning batteries. So just how sound is the argument
that distributor participation might hinder competition ?
Consider the following…
· Back in the 1950’s control of hot water cylinders was
an emerging technology. Distributors installed it, and distribution customers
benefited hugely. Admittedly we didn’t have competitive markets for electricity
service back then, but are we worse off because an emerging technology was
rolled out by a distributor ?
· Most of the EV chargers I’ve seen around New Zealand
proudly display the distributors’ name. It would seem unlikely that we are
worse off because distributors have rolled out those chargers rather than other
electricity supply chain participants.
While these are
only 2 examples (each of which have their own limitations) it should prompt
careful thought that in most cases emerging technologies are an inseparable
part of the distribution network, which makes distribution a logical owner or
at least operator of those technologies.
US – legalising solar connection charges
Introduction
Establishing fixed
charges for rooftop solar seems to be one of the many battlegrounds in the
emerging technologies and renewable energy spaces. This article examines
legislation in the US state of Iowa that would allow electric companies to
charge additional tariffs.
Senate File 583
Key features of Senate File 583 include…
· A specific recognition that electric tariffs are
traditionally designed for the provision of full electric service to customers,
not taking into account the private generation of electricity.
· The intent of the state parliament to require
customers who use specified classes of private generation to pay their share of
the costs of the electric company’s network.
· Provision for price-regulated electric companies to
request the Iowa Utilities Board’s approval of tariffs to specific customers
who use those specified classes of private generation.
· Such tariffs shall recover the electric company’s
actual costs.
Senate File 583
passed the Senate with a vote of 28 to 19 in mid-March 2019, however the
parallel House Study Bill 185 stalled.
What are the various parties claiming
?
Here’s a sample of
what are the various parties are thinking...
· Electric companies support the legislation, claiming
that growth is possible when all customers benefit from renewable energy.
· Senators seem divided along party lines.
· Renewable energy advocates understandably oppose the
legislation.
Pipes & Wires
will pick up this story again as House Study Bill 185 progresses.
US – clarifying the definitions around EV recharging
Introduction
A key theme of recent Pipes & Wires articles has
been the widening legislative interpretation gap around whether EV recharging
is a “service” or whether it is “energy sales”. This article examines proposed
rule changes in several more US states aimed at clarifying the definition.
Further state-by-state clarifications
This article augments the table from Pipes & Wires #187 with recent updates from Wisconsin and Montana…
Jurisdiction |
Pertinent legal bits |
Pipes & Wires ref. |
Wisconsin |
· Wisconsin
Public Service Commission has begun a public
investigation into a range of
issues, including… · What
limitation should be placed on ownership of public EV chargers
? · How
might public ownership impact on access and prices ? · What is
the proper role of electric companies in deploying EV chargers
? · Pipes
& Wires will comment once the PSC’s investigations are completed. |
|
Montana |
· House
Bill 456 provides that… · A
public utility may provide electric service to an EV charger at prices
approved by the PSC that enable full cost recovery without subsidy. · Entities
operating EV charges are not public utilities. · The
Bill passed the Senate with a vote of 30 to 19 in early April 2019, and was
passed by Governor
Steve Bullock on 10th
May 2019. |
|
Iowa |
· Iowa Utilities Board (IUB) files notice in
February 2019 to amend Chapter 199-20 of the Iowa Administrative Code, with
the Intent of remove EV charging stations from the definition of public
utility under Iowa Code 476.1 and 476.25. ·
The amendment states that “electric
energy sold for the purpose of electric vehicle charging at a commercial or
public electric vehicle charging station constitutes neither the furnishing
of electricity to the public nor the resale of electric service”. ·
The amendment goes on to state that “if
the electricity used for electric vehicle charging is obtained from a
rate-regulated public utility, the terms and conditions of the service to the
electric vehicle charging station shall be governed by and subject to the
utility’s filed tariff”. ·
The IUB issued an order in late April
2019 that EV chargers are not considered public utilities. |
#187 |
Pennsylvania |
·
Pennsylvania Public Utilities Commission
(PUC) approved tariff supplements for MetEd, PennElec, Pennsylvania Power and
West Penn Power (all First Energy subsidiaries) to specify that… ·
Charging at a charger owned by a
third-party will not be considered resale of electricity. ·
Such chargers will be excluded from the
pricing requirements of Pennsylvania’s Utilities Code. |
#187 |
Missouri |
·
Whether EV charging is a service, or the
supply of electricity ·
This in turn determines whether an EV
charger falls within the definition of electric plant, which in turn brings
it within the jurisdiction of the state regulator ·
Whether EV chargers can be included in
the rate base. ·
Whether EV charging tariffs can be
regulated by the state. ·
Regulator ruled that operating EV
chargers is fundamentally different from operating an electric company, and
that electric companies cannot offer EV charging as a regulated service which
would inter alia enable them to
recover the cost from all customer through the rate base (which was
overturned by a court ruling). |
#180, #181 |
Michigan |
·
Regulator recommended that the capital
cost of EV chargers should be excluded from the rate base. ·
Regulator recommended that the cost of
residential EV charger rebates should be treated as a regulated asset. |
#162 |
Kansas |
·
Regulator concluded inter alia that the
capital cost of EV chargers should not fall on KCPL’s customers. |
#157 |
Energy mix and grid security
US – what future hath gas turbines ?
Introduction
Over the last 15 months Pipes & Wires has examined
gas turbines, mainly in the same breath as batteries and peak chopping. This
article trawls those articles to see what trends and patterns are emerging.
The articles
The following articles are considered…
· PW #174 – requiring competitive purchase of DER’s.
· PW #174 – gas-fired peaking v’s gas-fired moratorium.
· PW #175 – will batteries displace gas turbines for peaking
?
· PW #177 – replacing gas turbines with batteries.
· PW #184 – batteries versus gas turbines.
· PW #187 – setting an end date for gas turbines ?
· Indiana URC’s rejection of Vectren’s proposed 850 MW of gas turbines in
preference to DER’s that are also expected to cost less.
The trends and patterns
The following trends and patterns have been identified
and clustered into themes…
Promoting competition |
· Competitive purchase of services (as distinct from simply installing
gas turbines). |
Reducing costs |
· Demonstrating that turbines are the least cost option. · Forecast gas supply constraints may increase the cost of gas turbines
by about 2023. |
Asset stranding |
· Regulatory concern that gas turbines will be stranded by lower cost
DER’s. |
Technology preferences |
· Deliberate preference against gas turbines. · Recognition that gas turbine technologies are improving, so shorter
contract durations avoids locking in old technologies. |
Security of supply |
· Recognition that gas turbines provide longer duration grid security
than batteries. |
Emission reduction |
· Batteries may help achieve emission reduction targets (which overlooks
the generation of the initial electricity). |
Grid operation |
· Peaks are being de-layered to match battery characteristics. · Still some hesitancy to rely on batteries. |
So it would appear that the major trends and patterns
are…
· Regulatory pressure in several directions, including requiring peaking
capacity to be competitively purchased, fears of stranding, and a distinct bias
against gas turbines.
· Some thoughtful de-layering of peaks to better understand how batteries
might help.
· Caution by some electric companies until experience with batteries
accumulates.
Recent client projects
Recent
client projects include…
· Identifying best customer engagement
practices on behalf of an Australian distributor.
· Development of an asset management
journey aligned to ISO 55001.
· 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.
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.
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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