From the director…
Welcome to Pipes & Wires #69.
We cover a real mix of issues this month, but perhaps most importantly we
briefly examine the Commerce Amendment Bill which promises to significantly
alter the way electricity lines businesses in New Zealand are regulated.
I’d take this opportunity to wish
you all a great Easter, so happy reading until next month.
About Utility Consultants
Utility Consultants Ltd is a
management consultancy specialising in the following aspects of energy and
infrastructure networks…
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recent projects, pick
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NZ – matters requiring attention
Electricity asset management plans
Refer to full article below under
Regulatory Policy.
Review of Part 4a of the Commerce Act 1986
The Commerce Amendment Bill was
released in mid-March 2008. Refer to the full article Regulatory Policy below.
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.
UK – National Grid allegedly
abuses its market position
Introduction
Regulators
place a high importance on the efficient operation of markets. This article
examines the recent £41.6m fine exacted upon National Grid by OFGEM for
restricting the rate at which old gas meters could be replaced, but firstly
sets out some theoretical and legal bases for this issue. At the time of
writing this article National Grid disputes OFGEM’s conclusion and is appealing
their decision.
The economic theory behind this
issue
Regulators
usually emphasise the following three aspects of efficiency in regard to
markets…
·
Allocative efficiency wherein scarce
resources are used to create the outcomes most wanted by society.
·
Productive efficiency wherein these most
wanted outcomes are created with the minimum resource consumption.
·
Dynamic efficiency wherein producers are
incentivised over time to move toward the above two efficient points.
One of the catch phrases associated with the third
bullet is “promoting innovation”, and it is this phrase that seems to be the
sticky point for National Grid.
The legal framework around this
issue
The legal
framework surrounding this issue is two pronged…
·
Article 82 of the EC Treaty prohibits a business that holds a
dominant position in an EU market from abusing that position. Paragraph (b) of
Article 82 explicitly identifies “limiting … technical development to the
prejudice of consumers” as abuse.
·
Chapter 2 of the Competition Act 1998 prohibits a business that
holds a dominant position in a UK market from abusing that position. This Act
closely follows Article 82 of the EC Treaty.
It would
therefore seem reasonable to interpret OFGEM’s accusation of restricting the
rate at which old gas meters are replaced as falling within the “limiting …
technical development to the prejudice of consumers” as those gas consumers
would then be unable to participate in the benefits of smart metering as the UK
gas market mature.
OFGEM’s of the story
OFGEM’s
contends that National Grid entered into long-term contracts with 5 of the 6
major energy suppliers to supply and maintain gas meters, and that these
contracts include financial penalties if suppliers replace more than the small
number of meters that the contracts permit to be replaced. This means that gas
customers are firstly being deprived of alternative metering providers, and
secondly are likely to be deprived of the benefits of smart metering (which
cannot be rolled out).
National Grid’s side of the story
National
Grid states that the contracts were negotiated over a two year period, and were
voluntarily entered into by the gas suppliers. These contracts provided for the
replacement of 1 million gas meters per year with all pre-payment meters to be
replaced within 7 years and were linked to the life of the metering assets.
National Grid recovers its investment by way of rental charges hence there was
a need to guard against premature replacement. National Grid therefore
negotiated the inclusion of a clause in the contracts that provided for the
outstanding investment to be recovered if a meter was prematurely replaced –
suppliers agreed to this, and in return received a lower rental charge.
These
contracts delivered immediate cost reductions and saved customers about £120m
in the first 4 years of their operation. Most importantly, OFGEM were consulted
throughout the contract development and acknowledged that National Grid had no
intention of breaching competition law.
Finally
National Grid has publicly supported a 10 year roll-out of smart metering, and
does not believe that contracts providing for the orderly replacement of 1
million meters per year are inconsistent with that support.
Next steps
National
Grid has appealed OFGEM’s decision and its success or otherwise will no doubt
influence how other energy suppliers structure their contracts. Pipes &
Wires will make further comment as the appeal process continues.
Regulatory policy
NZ – changes to AMP disclosure
requirements
Introduction
In late
December 2007 the Commerce Commission released its Review of the Information Disclosure Regime –
Companion Paper to the Exposure Draft. This
article considers Paragraphs 446 to 466 of this Paper set out the expected
changes to the disclosure requirements for asset management plans that will
take effect from 31 March 2008.
Key changes proposed in the
Companion Paper
The key
changes that are proposed for the current AMP disclosure requirements include…
·
Instead of having AMP’s disclosed 5 months after the AMP begins,
it is proposed that AMP’s be disclosed 4 months before the AMP begins. This
would mean that the next AMP would be disclosed by 30 November 2008 for a 10
year planning period beginning on 1 April 2009. This would also mean that the
2008/09 year would be missed out of the year-on-year AMP disclosure.
·
A greater emphasis on reconciling actual and forecast spends,
along with the view that the AMP should be the center point of variance
disclosure.
·
A more prescriptive requirement to disaggregate both CapEx and
OpEx into defined categories. These categories are almost identical to those
recommended by Utility Consultants to several clients for their 2006/07 and 2007/08 AMP’s.
·
A requirement to publish the first 5 years of the spend plan in a
separate AM1 report that is likely to be subject to reporting standards and
director sign-off, and will be submitted in tandem with the financial and
performance measure components of Information Disclosure.
Getting a compliant AMP
For help
with compiling your AMP spend plans in accordance with the new requirements (or
for AMP help in general) pick here or call
Phil on (07) 854-6541.
Aus – final thoughts on the NSW and
ACT schemes
Introduction
This
article examines the schemes included in the 2009 electricity lines price
re-sets in the Australian state of New South Wales and the Australian Capital
Territory, and also brings to a close the story that began in Pipes & Wires #66 and #67.
Background
The National Electricity
Rules (NER) require the Australian Energy
Regulator (AER) to develop and publish details
of the schemes it proposes to include in the 2009 NSW and ACT price re-sets by
1 March 2008 if it decides that the re-set will include such a scheme. The AER
had intended to include the following schemes…
·
A demand management incentive scheme.
·
An efficiency benefit sharing scheme.
·
A service target performance incentive scheme.
·
Control mechanisms for alternative control services
·
Control mechanisms for direct control services.
·
Determining materiality of pass-through events
and
accordingly was required to develop and publish these schemes by 1 March (which
it did).
The AER’s final thinking
The
progression of the AER’s thinking is set out in the following table…
|
Issue |
AER’s
views in issues paper |
AER’s
views after comments |
AER’s
final views |
|
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. |
·
The D-factor will be included, and will be identical to that set
out in IPART’s guidelines for the 2004 price control. ·
A demand management innovation allowance will be applied in the
ACT and in NSW. |
|
Efficiency
benefit sharing scheme |
·
Proposed to calculate efficiency gain based on actual minus
forecast OpEx minus the difference in the previous year. |
·
Modeling based on comments indicates that some sort of OpEx
incentive is essential. ·
Recognises the need for some adjustments to improve certainty. |
·
Will exclude all non-network alternatives costs from the
efficiency incentive scheme. |
|
Service
target performance incentive scheme |
·
Proposed not to implement a scheme. |
·
Proposes to gather data during 2009-14 control period with a view
to including an incentive in the 2014-19 control. |
·
Will only gather data during the 2009-14 control period so no
revenue will be at risk. ·
Expects that 2014-19 control will include this incentive. |
|
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. |
·
The existing form of control in the ACT will continue. ·
Will apply a schedule of fixed prices in the first year of the
control period, with a price path based on efficient costs to apply for
subsequent years. |
|
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%. |
·
Yet to be published at the time of writing this article. |
This brings
this particular aspect of the 2009 price re-set to a close however Pipes &
Wires will make further comment on the re-set as a whole as the AER publishes
its various determinations.
NZ – Review of Part 4a of the
Commerce Act 1986
Introduction
The
long-awaited review of Part 4a of the Commerce Act 1986 moved a step further in
mid-March 2008 with the release of the Commerce Amendment Bill under the tag line of “better incentives for infrastructure
investment”. This article briefly recaps the Review and examines the key
provisions of the Bill.
Background
Almost 2
years ago in May 2006 a review of Parts 4 and 5 of the Commerce Act 1986 was
announced and in September 2006 Cabinet decided that Part 4a would be included
in the review. The subsequent discussion paper included many of the structural,
procedural and technical issues that had dogged the regime since its inception.
The conclusions of the Review were announced in November 2007 and included many
pleasing amendments to inter alia
increase investment certainty (Pipes & Wires #59 and #66 examine
the detail of the discussion paper and the conclusion more fully).
Key provisions of the Bill
The key
provisions of the Bill include…
·
Repealing of Part 4a.
·
Including the phrase “have incentives to innovate and invest,
including in replacement, upgraded, and new assets” to create an amended
purpose statement.
·
Providing for different regulatory regimes in addition to the
current price path thresholds.
·
Provision for establishing an input methodologies requirement,
which specifies what parameters and features must be addressed by the
methodology, along with the process the Commission must follow in establishing and publicising the input
methodologies.
·
Provision for exempting consumer-owned suppliers from the default
/ customised price-quality regulation.
The
complete Bill is long and involved (about 132 pages), so the above coverage is
by necessity short. Pipes & Wires will make further comment as the Bill
progresses through Parliament.
UK – rethinking the gas and
electricity price controls
Introduction
A recent
speech by OFGEM chief executive Alistair Buchanan announced that in 2010 the RPI (incentive) regime will be 20
years old. This article considers OFGEM’s plans to review the regulatory regime
for monopoly energy networks after 4 intense years of focusing on the detail of
5 sets of price controls.
Key drivers of the review
Since the
original development of RPI in the late 1980’s following privatisation, the
energy network landscape has changed tremendously. Just a few of the issues
that need to be considered going forward include….
·
The formation of a new EU-wide regulatory body.
·
The EU’s views on vertical integration of the energy giants.
·
Climate change and renewable obligations.
·
Increasing complexity of price controls.
·
The end of “easy” OpEx efficiency gains.
·
Concerns that the RPI regime is moving toward a Rates-based
regime.
·
Concerns that valuation and financial parameters and principles
may have become less valid over time.
·
The need to properly recognise increased security requirements
since 9/11 and 7/7.
The
review expects to consider regulatory regimes from other jurisdictions and the
policy positions of various UK and EU agencies.
Impact on the immediately pending
controls
Buchanan
recognises the importance of retaining the confidence of the capital markets,
and indicated in his speech that the next electricity distribution price
control (DPCR5) which will take effect in 2009 is unlikely to be effected by
the review which will not be concluded until 2010. However, Buchanan also
qualified this by saying it is not intended to bind the review’s final
conclusions.
Likely progress with the review
OFGEM
expects to have the project team finalised by mid-2008. Unless anything
noteworthy emerges before the final conclusions in 2010, Pipes & Wires will
let this one lie until the final report emerges.
Regulatory
determinations
Aus – compiling the Queensland wires price control
Introduction
The Australian Energy Regulator (AER) has
recently announced its expected timing for compiling the price control that
apply to the two distributors in the Australian state of Queensland (Energex and Ergon Energy) for the five year control period beginning on 1 July
2010. This article examines that timing to set some context for later analysis
and discussion.
Transition from QCA to AER
The current control period which
began on 1 July 2005 was compiled by, and is administered by, the Queensland Competition Authority. As part of
the transition to the single national energy regulator (the AER), the AER will
take over responsibility for compiling and administering the next control.
The AER’s proposed timetable
The timeline and scope of
activities that the AER must adhere to are set out in the National Electricity Rules (NER).
In particular, the AER must publish a Frameworks & Approach Paper at least
19 months prior to the commencement of the control period. Key dates that the
AER expects to work to are…
·
Late March 2008 – Energex and Ergon expect to submit proposals to
the AER on classification of services and control mechanisms as provided for by
the NER.
·
End of August 2008 – AER expects to publish the first part of its
Frameworks & Approach Paper that will deal with the classification of
distribution services and the likely forms of control.
·
End of November 2008 – AER expects to publish the second part of
its Frameworks & Approach Paper dealing with specific schemes such as
demand management incentive schemes and efficiency benefit sharing schemes
(readers may have already noted previous articles discussing the application of
such schemes in NSW and the ACT).
·
End of May 2009 – regulatory proposals submitted to the AER.
·
End of April 2010 – AER makes and publishes final determinations
Pipes & Wires will start its
coverage of this re-set with an analysis of Energex and Ergon’s proposals
sometime over the next couple of issues.
Aus – the final Victorian gas distribution price control
Introduction
The Essential Services Commission (ESC)
recently released its final access determination for Envestra, Multinet, SP AusNet and Envestra Albury
(cross-vested from NSW to Victoria) for the third control period from1 January
2008 to 31 December 2012. This article quickly compares the final determination
to the draft determination.
Key features of the draft determination
Readers will recall that in
forming its draft determinations the ESC concluded that none of the 4 proposed
access arrangements complied with the requirements of the Gas Code and must
therefore be declined. Key reasons for the ESC’s conclusions include…
·
Proposed CapEx was too high.
·
Proposed OpEx was too high.
·
Proposed gas throughput was too low.
·
Proposed rates of return on capital were too high. In particular
the ESC determined a draft equity beta of 0.7, which is towards the top end of
its assessed range of 0.5 to 0.8.
Comparing the draft and final determination
Key features of the draft and
final determinations include…
|
Parameter |
Envestra Victoria |
Envestra Albury |
Multinet |
SP AusNet |
|
|
Prima facie P0 (applies 2008) |
Sought by business |
-5.1% |
-5.5% |
-3.0% |
-9.2% * |
|
Draft determination |
5.7% |
11.4% |
15.5% |
7.8% |
|
|
Final determination |
-6.5% |
-5.7% |
-7.7% |
-14.0% |
|
|
X factor (applies 2009 to 2012) |
Sought by business |
-3.9% |
-3.9% |
1.0% |
0.0% |
|
Draft determination |
1.0% |
1.0% |
3.0% |
2.5% |
|
|
Final determination |
-6.5% |
-5.7% |
0.0% |
0.0% |
|
|
Total revenue |
Sought by business |
$761.2m |
$24.9m |
$793.7m |
$864.7m |
|
Draft determination |
$643.4m |
$20.5m |
$653.8m |
$730.9m |
|
|
Final determination |
$718.8m |
$22.9m |
$771.9m |
$826.2m |
|
* This is a revised figure from
that originally proposed by SP AusNet.
This article brings Pipes &
Wires analysis of the Victorian gas distribution price controls to a close.
Energy markets
Germany – consolidating the gas market areas
Introduction
Several years ago the German gas
market had over 700 market zones. This article examines moves by the Bundesnetzagentur to consolidate
the number of zones to “something less than 10”.
Background to the consolidation
Historically the German gas
industry was very fragmented, and included gas suppliers of varying sizes from
small municipal undertakings to giants such as Ruhr
Gas. It was observed that this fragmentation was leading to a lack of
competition and liquidity in the market hence in early January 2008 the Bund
decided that some consolidation of market zones to a number less than 10 by 1
October 2008 would be appropriate.
Previous moves to consolidation
Around the time of the Bund’s
announcement, Bayernets GmbH
and E.On
Gastransport (EGT) announced that they would form a single market zone for
H-Gas stretching from the North Sea coast to the Alps which reduced the number
of gas markets to 11.
More recent moves to consolidation
In addition to the Bayernets –
EGT consolidation, the following market zones will be formed…
·
Consolidation of the zone supplied by Gaz de France Deutschland, GVS Netz and ENI Gas Transport Deutschland.
·
Elimination of the Gas
Union zone.
·
RWE
·
VNG-Ontras
·
EWE
·
EVG Münster
·
BEB (recently sold to Gasunie)
Pipes & Wires will re-examine
this market consolidation later in 2008.
Privatisation
Aus – progress on privatising the NSW generators
Introduction
Pipes
& Wires #66 examined the New South Wales’ governments’ rather
surprising decision to sell the state-owned electricity retailers and lease the
state-owned generators to the private sector. This article examines the recent
and already contentious proposal to escalate the lease of the generators to a
public float.
Background
A core aspect of this matter was
the recent report by Prof
Tony Owen of Curtin University that firstly concluded that NSW would require
additional base-load generation by 2013/14, and secondly that the best way to build
that generation was to strengthen the commercial and policy signals to the
private sector. Owen’s final recommendation was that the state divests itself
of all ownership of both retail and generation.
At that stage the Government,
obviously sensing the strong opposition to privatisation, decided to lease the
generators (rather than sell them) and also to retain the retail price caps
(which Owen had recommended removing in 2010).
The latest proposal
The latest twist in this saga is
the proposal from former
Labor Premier Barrie Unsworth, chairman of a special committee on
privatisation, that proposes the following…
·
Consolidate the three generators (Eraring Energy, Delta Electricity and Macquarie Generation) into two
companies of approximately equal size.
·
Attach retail customer bases to those companies.
·
Float the two companies in an IPO.
·
Offer staff up to $10,000 of free shares depending on their length
of service.
A key aspect of the proposed IPO
is the targeting of Mum & Dad investors, rather than institutional
investors, possibly to make the process seem less like privatisation.
Stakeholder reactions
Not surprisingly the unions are
dead against Unsworth’s proposal, claiming it will be a disaster. At a deeper
level, Unsworth’s proposal goes beyond the 55 to 99 year leases that the NSW
government’s strongest support of privatisation (Treasurer Michael Costa)
had advocated.
The current Government seems well
aware of the political sensitivities, but is none-the-less determined to make
it happen. Pipes & Wires will examine this further as progress occurs.
Mergers,
acquisitions & take-overs
US – the Energy East acquisition
Introduction
Pipes & Wires coverage of Iberdrola’s bid for Energy East ended last month with the
possibility of the New York Public
Service Commission refusing to approve the deal because Iberdrola itself
was in the sights of Electricite De France and
Spanish construction company Grupo ACS.
Their concern was that if Iberdrola was carved up, Energy East would not have a
strong parent and its ability to reinvest in its own networks could decline.
This article examines the intensifying debate that has moved from the NYPSC to
the Senate and presents a few
philosophical musings on the sale of essential infrastructure.
Background the deal
Iberdrola’s €6.4b bid for Energy
East would give it 3 million customers in the eastern US, complimenting its
customer base in the western US (ScottishPower
subsidiary Pacificorp). To date the FERC, Massachusetts,
New Hampshire, Connecticut and Maine have all given their approval to the
deal.
The concerns expressed in the NY Senate
The sale of essential
infrastructure to foreign investors is becoming a very politically sensitive
issue, so its not surprising that politicians have waded into the debate. Senator Charles Schumer has been particularly
vocal about Iberdrola’s likely commitment to Energy East subsidiaries Rochester Gas & Electric and New York State Electricity & Gas. Schumer’s
demands include…
·
That Iberdrola set up a $1b trust fund to subsidise consumers.
·
Establishment of a performance assurance plan that provides for
fines for service lapses.
·
That Iberdrola aggressively pursue wind energy in up-sate areas.
·
That the Russell Power Plant be re-powered with gas rather than
with coal
Most of these demands seem reasonable
on the face of it. However some deeper reflection reveals an element of
“implement our public policy objectives or we will prohibit your deal”. This is
becoming worrying, as many of the conditions that the Main PUC attached to its
approval, and indeed were also attached to the TXU
privatisation seemed to be of this nature.
Despite the political wranglings
Iberdrola is still hopeful of completing the deal before 1 July 2008. Pipes
& Wires will make further comment as progress 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.
Conferences & events
·
Electricity
Engineers Association (EEA) conference & exhibition (Christchurch, 20 –
21 June 2008).
·
Southern Africa
Energy Efficiency Convention (Johannesburg, 6 – 7 November 2008).
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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.