From the director…
Welcome to Pipes & Wires #67
and to 2008. Hopefully everyone (at least south of the equator) has enjoyed
what seems to have been a long hot summer.
This issue covers a lot of
ground, and in particular looks at the build up to the April 2009 lines price
re-set in New Zealand. Other articles include the build up to the next water
and sewage price control in the UK, examination of two price control matters in
Australia and what appears to be the closing stage of the nuclear power debate
in the UK.
About Utility Consultants
Utility Consultants Ltd is a
management consultancy specialising in the following aspects of energy and
infrastructure networks…
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To be sent a detailed profile of
recent projects, pick
this link.
NZ – matters requiring attention
Discussion document on 2009 threshold re-set
Refer to full article below under
the Competition & Regulatory Policy section.
Review of Information Disclosure Requirements
The Commerce Commission is currently
consulting on the Information Disclosure regime and will receive submissions
until Friday 7th March 2008. Note that the original closing date of
Friday 22nd February 2008 was extended in the Commission’s email of
14th January 2008.
Review of Part 4A of the Commerce Act 1986
The conclusions of the review
were released in late November 2007. The broad conclusion was that fully
beneficially owned and governed electricity lines business should not be
subject to a price path threshold regime. Refer to the full article in Pipes
& Wires #66.
Review of gas and electricity safety provisions
The Ministry of Economic
Development has released two
separate discussion papers outlining the proposed replacement of the Gas
Regulations 1993 and the Electricity Regulations 1997 to reflect the increased
safety requirements set out in the 2006 amendments to the Gas Act 1992 and the
Electricity Act 1992. Submissions on the discussion papers will be received
until 29 February 2008 – for help with preparing your submission, pick here.
Requirement to facilitate connection of distributed generation
The Electricity
Governance (Connection of Distributed Generation) Regulations 2007 came
into force on 30 August 2007. For more information or
just to chat about how your company can comply, pick here.
Requirement to implement a public safety management system (PSMS)
The Electricity Amendment Act
2006 and the Gas Amendment Act 2006 both spell out the requirement for Safety
Management Systems. These Acts set out what any Regulations made under the
respective Acts must include and what it may include. If you
would like further information or simply to chat about how a PSMS might work
for you, pick here.
Review of Government Policy Statement on Electricity
The GPS on Electricity is being
updated and revised to reflect the NZ Energy Strategy. A draft for consultation
is expected in late January or February.
Section 62 (Obligation to continue supply) review
A cabinet decision was expected
by the end of the 2007 calendar year, with any legislative changes expected to
follow in the 2008 calendar year.
Proposed change to ODV disclosure date
The Commerce Commission does not
intend requiring electricity lines businesses to undertake a full ODV update as
at 31st March 2008, but proposes instead that this be deferred until
31st March 2009. Read
the full notice.
Transmission for renewables
Following the introduction of a
target of 90% of electricity being generated by renewables by 2025, the
Electricity Commission has embarked on a Transmission
to Enable Renewables program that will include an explanation of how Part F
of the Electricity Governance Rules might work, and a renewables map that will
feed into the next Statement Of Opportunities.
Review of Government Policy Statement on Gas Governance
The draft
version of the GPS on Gas Governance was released in December, and submissions
close on 1 February 2008. Refer to the full article below under the Public
Policy section.
Competition & regulatory
policy
NZ – preliminary thoughts on the
2009 lines price threshold
Introduction
In July
2007 the Commerce Commission indicated the process it would adopt for the 2009 electricity
lines price re-set that will apply to all lines businesses excluding Transpower.
This article considers the key aspects of the Commission’s
preliminary thoughts that were released in
mid-December 2009.
Background
Part 4A
of the Commerce Act 1986 sets out the legal basis for the price path and supply
quality thresholds that will apply to all 28 large electricity lines
businesses. The current five year price path threshold expires on 31st
March 2009 and it was expected that the next threshold would apply to all 28
businesses. However the broad conclusion of the review of Part 4A of the
Commerce Act 1986 is that lines businesses that are clearly beneficially owned
and controlled (ie. by their customers) should not be subject to a price path
subject to meeting certain conditions. If that conclusion is implemented, the
thresholds under development will be transitioned to become the proposed default
price-quality path.
The Commission’s preliminary
thoughts
The
Commission’s principal thoughts are as follows…
·
That price and supply quality should remain the focus of the
regime.
·
That benchmarking (as opposed to building block analysis) should continue
to be the primary approach to setting threshold parameters given the small
scale of the sector.
Four
broad areas were considered in reaching these thoughts…
·
The purpose statement clearly sets out efficient operation of
markets as a key objective, which the Commission has interpreted as allocative
and productive efficiencies. The
Commission believes that a CPI-X instrument is consistent with the efficiency
objectives, and furthermore that addressing profitability issues through the
adoption of a P0 is also appropriate.
·
The third aspect of efficiency (dynamic) centers on incentives to
invest. The Commission is acutely aware of the need to correctly incentivise
reinvestment in fixed assets, but does note the level of re-investment expected
for the 2009 – 2014 period does not appear to merit any specific incentive
factors as the 2014 – 2019 period is expected to.
·
Supply quality will continue to be part of the regime in keeping
with the Commission’s belief that prices can be reduced if service levels are
allowed to decline. The Commission notes the need to better address extreme
events and data variability, and to consider the performance of disaggregated
networks. The Commission proposes to establish peer groups to better understand
what an acceptable level of reliability is, and has also reached the view that
an S-Factor (similar to that used in the Australian state of Victoria) might be
an appropriate way of improving reliability.
·
Potential refinements of such matters as promoting energy
efficiency, excluded services and pass-through costs.
Next steps
The
Commission will receive submissions until Monday 18th February, and
expects to publish a methodology paper, a draft decisions paper and a final
decisions paper in May/June, late September and December respectively.
UK – initial thoughts for the 2010
water price control
Introduction
The
current water and sewage price controls expire on 31st March 2010.
This article examines OFWAT’s initial
thoughts for PR09, the five year control period beginning on 1st
April 2010.
OFWAT’s broad thoughts on PR09
First and
foremost OFWAT sets out its belief that innovation and creativity will be
essential as the industry seeks to provide good value for money whilst addressing
increasing consumer demands, volatile weather and a growing population. It is
therefore pleasing to note OFWAT’s comment that vigorous competition can drive
dynamic innovation in a way that regulation never will, and that regulation is
unlikely to fully mimic competitive markets.
OFWAT
also intends to require each water company to produce a 25 year strategic
direction statement and consider PR09 as the first period of five within that
context.
Specific issues for PR09 identified
by OFWAT
The
specific issues identified by OFWAT for PR09 include….
·
Whilst recognising the benefits and efficiency gains of price caps
since privatisation, OFWAT believes that introducing competition where possible
will spur further innovation and improvement.
·
The need to better incentivise CapEx, which OFWAT hopes to do
through a “menu” based approach that provides a choice of expenditure options
matched to incentives for outperforming regulatory targets. It is hoped that
this will encourage companies to take greater ownership of their decisions
rather than seeing them as fait accompli.
·
Balancing the impact of decisions with the costs and risks imposed
on all stakeholders, which is expected to include significant consultation. In
particular OFWAT expects all cost-benefit analyses to include shadow carbon
pricing.
Next steps
OFWAT
hopes to publish a final decision on its price review methodology in March
2008.
Aus – preliminary position on ACT
and NSW price controls
Introduction
Pipes & Wires #66 examined the Australian Energy Regulator’s issues paper on the price controls that will apply in the ACT and
NSW for the control period starting on 1 July 2009. This article examines the
AER’s preliminary positions on demand management incentive schemes, control
mechanisms for alternative control services, and an approach to determining
materiality for pass-through events.
Background
In
November 2007 the AER sought industry comment on a wide range of matters
through publication of an issues paper. The AER has now considered the comments
that were due on 10th December 2007 and has formed its preliminary
positions which will progress toward the final determinations in May 2009.
The AER’s views after
consultation
The AER’s
views from the issues paper and after considering comments on the issues paper
are as follows…
|
Issue |
AER’s
views in issues paper |
AER’s
views after comments |
|
Demand
management incentive scheme |
·
Considers that the D-factor introduced into the current price
control by IPART provides a practical starting point for the NSW
distributors. ·
Does not believe it would be appropriate to introduce a D-factor
incentive scheme for ACT for the next control period. |
·
Believes that while the current D-factor does have limitations,
there is insufficient information to replace it at this stage, hence the D-factor
will remain for NSW. ·
Continues to believe that a D-factor should not be introduced
for the ACT. |
|
Control
mechanism for alternative control services |
·
Expects to continue the existing form of control for ACT. ·
Appears that the form of the Excluded Services Rule may be
inconsistent with the requirements of the transitional Rules for the NSW
distributors. |
·
Proposes to continue the existing form of control in the ACT. ·
Proposes to set out explicit control mechanisms for public
lighting in NSW in recognition that the current arrangement is inconsistent
with the transitional Rules. |
|
Determining
materiality of pass-through events |
·
Consider adopting a percentage threshold of a relevant revenue
allowance consistent with the ICRC’s and IPART’s approaches. |
·
An event will be considered material if its revenue impact in
any one year exceeds 1% of the revenue for the first year of the control
period, or if its CapEx exceeds 5%. |
This
suggests that apart from tidying up some loose ends and ensuring consistency
with the transitional provisions of the NER, no shifts in thinking have
occurred. Pipes & Wires will make further comment in March or April 2008
after the AER has considered comments on the other matters set out in the
November 2007 issues paper.
Global strategy
Aus – follow the money trail
Introduction
Long-time
readers will have undoubtedly followed my observations of global investment
patterns and the classifications of these patterns into waves. Pipes & Wires #66 commented that a wide and deep money trail from Australia to the
UK is starting to emerge. This article briefly recounts two recent transactions
that suggest Australian investment in the UK (and also in other areas) may form
a Sixth Wave.
Some recent transactions
The
following two transactions suggest an emerging pattern of Australian investment
in utilities. Whilst these transactions are not big in global terms (compared
to deals such as Endesa or TXU) they nonetheless represent an emerging pattern.
|
Transaction |
Australian
party |
Deal
value |
Australian
contribution |
|
Purchase
of United
Utilities wires business by NWENL |
£1.78b |
50% |
|
|
Purchase
of Southern Water from Royal Bank of Scotland |
£4.2b |
18% |
It is
also noted that Spark Infrastructure from Australia are also actively seeking UK acquisitions. So in
the now immortal words of Deep Throat Pipes & Wires will continue to “follow the money”.
Regulatory
determinations
Aus – final decision on the EA revenue cap revocation
Introduction
Pipes
& Wires #66 examined Energy
Australia’s request to the Australian
Energy Regulator (AER) to revoke and substitute its revenue cap for the
2004 – 2009 control period. That article anticipated a response from the AER which
forms the subject of this article.
Background
Broadly speaking, the National
Electricity Rules provide for a regulated entity to seek a revocation and
substitution of its revenue cap if the entity believes inter alia that there was a material error in setting the cap.
Energy Australia sought a revocation on the following three bases…
·
That debt financing data provided to the ACCC was either false or
materially misleading for the purpose to which it was applied.
·
That the ACCC materially erred in substance by using this data
with no adjustment despite having received advice from Energy Australia that
using such unadjusted data would understate its debt financing costs.
·
That the ACCC materially erred in process by failing to consider
Energy Australia’s concerns.
The AER’s final decision
In its final decision, the AER
concluded that although the methodology (which was provided by a third party) used
to estimate Energy Australia’s cost of debt has resulted in a material error,
it cannot be considered to be false or materially misleading within the
provisions set out in the National Electricity Code for calculating debt costs.
Taking some cues from the recent TransGrid
revocation and substitution, the AER increased Energy Australia’s cost of debt by
22 basis points. The nett effect of this is to increase Energy Australia’s
maximum allowable revenue (MAR) for each year of the control period, and also
to recover a shortfall in the final year of the control period that is NPV
neutral. Accordingly the AER revoked the current X factor of -5.4% and
substituted an X factor of -11.29%.
Public policy
UK – nuclear gets the go ahead
Introduction
Pipes & Wires has previously
examined the Blair administration’s plans for a new generation of nuclear power
stations to replace the rapidly aging MAGNOX and PWR stations. This article
examines the Brown administration’s plans to proceed with a program of new
nuclear stations by 2020 and effectively brings Pipes & Wire’s discussion
of this issue to a close.
Background
Electricity demand in the UK is
expected to exceed current capacity by about 20% by 2015. In addition, the
contribution of the current nuclear stations is likely to decline from 18% to
about 4% as aging stations are closed. It was noted that filling this capacity
gap with coal-fired plant would defeat the UK’s commitment to emissions
reductions whilst filling it with gas-fired plant would make the UK
increasingly dependent on politically unstable countries.
Whitehall’s recent announcements
In a speech to the
Commons in early January 2008 the Rt Hon John Hutton,
Secretary of State for Business, Enterprise and Regulatory Reform, emphasised
security of supply, price and emissions concerns and set out a three point plan
for addressing these concerns. These three points include improving energy
efficiency, using cleaner energy and avoiding dependence on any one source of
energy. Hutton’s speech went on to emphasis the role that nuclear power would
play in addressing these three issues.
The nuclear industry’s response
Almost immediately after Hutton’s
speech EDF announced it would build 4 nuclear
stations, the first of which should be operating. E.On,
Centrica and RWE also expressed interest in building new
plants. It is expected that these new stations will be built adjacent to
existing sites such as Sizewell, Dungeness, Hinkley Point and Bradwell.
Moving forward
Not surprisingly the anti-nuclear
lobby is aghast at Whitehall’s decision and has already got its legal people
working on various challenges. So the way forward for a low-emissions future
for UK electricity is not yet totally clear.
NZ – review of the GPS on Gas Governance
Introduction
The government released its Draft
Government Policy Statement on Gas Governance just in time for Christmas
2007 which is intended to replace the GPS on Gas Governance dated October 2004.
The draft GPS sets out the objectives and outcomes that the Government wants
the Gas Industry Company
to achieve based on the recommendations of the NZ Energy Strategy.
Key aspects of the draft version
While the core policy objective
and outcomes of the GPS have not changed, the industry and its associated
processes have understandably developed and matured over the last 3 years. In
particular the latest draft makes specific reference to the Gas Industry
Company and its work streams which focus on getting the detailed aspects right.
Pipes & Wires will make
further comment once submissions have been considered and a final version
emerges.
CapEx – general interest stuff
Getting the CapEx right in the infrastructure sectors
This presentation was made at the
NZIGE Spring Technical Seminar in
September 2007. If you’d like a copy, pick here.
Renewals – (half) the hidden side of CapEx
This presentation was made at the
Electricity Networks Asset Management Summit in November 2007 on the broad
topic of asset renewals. If you’d like a copy, pick here.
PAS 55 – the emerging standard for asset management
To find out more about improving
your asset management activities through adopting the emerging global standard
for asset management PAS 55-1:2004 pick here
or call Phil on +64-7-8546541, or to request a Slide Show on implementing PAS
55-1 pick here.
Website promoting best practice CapEx
Utility
Consultants is pleased to announce the release of a specialist website
dedicated to promoting best practice CapEx policies, processes and planning in
the infrastructure sectors.
Assorted conference papers
Utility Consultants has recently
presented the following conference papers which are available upon request…
·
“Tariff
control of Pipes & Wires utilities – where is it heading??” – presented
at the NZIGE Spring Technical Seminar,
October 2006.
·
“Setting
service levels for utility networks” – presented at the Electricity Network
Asset Management Summit, November 2006.
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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.
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.