From the director…
Welcome to Pipes & Wires #70.
This issue covers off the beginning of a few price determinations, and examines
some regulatory and competition issues. We also consider two more possible
acquisitions and take an in-depth look at the development of a National Policy
Statement for electricity transmission in New Zealand.
About Utility Consultants
Utility Consultants Ltd is a
management consultancy specialising in the following aspects of energy and
infrastructure networks…
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NZ – matters requiring attention
Electricity asset management plans
The Commerce Commission has
proposed significant changes to the AMP requirements. These are discussed in a
full article in Pipes
& Wires #69. For help with understanding these requirements, pick here
or call Phil on (07) 854-6541.
Review of Part 4A of the Commerce Act 1986
Refer to full article under
Regulatory Policy below for an update on the Commerce Amendment Bill.
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 an SMS might work
for you, pick here.
NZ – implementing the conclusions
of the Part 4A review
Introduction
Following
on from the article in Pipes & Wires #69, the Commerce Amendment Bill had its first reading on 20th March 2008. This article
examines the likely changes to the regulatory framework for electricity lines, gas
pipes and airports that the Bill proposes.
Key aspects of the Bill
The Bill
is touted as a “back to basics” rewrite of the price control provisions of the
Act. One of the obvious objectives of any price control regime is to balance
the need to protect consumers from excessive prices whilst also incentivising
infrastructure owners to prudently invest in capacity and security of supply.
It wouldn’t be unfair to say that there have been wide spread concerns that the
balance had swung a bit too far towards protecting consumers and was
discouraging infrastructure owners from investing. It is expected that the new
Part 4 to the Act that will replace the existing Part 4 and 4A will help to
address this. Key aspects of the new Part 4 include…
·
A purpose statement that explicitly notes encouraging investment
for the long-term benefit of consumers as a key objective.
·
A requirement for the Commerce Commission to develop an “input methodologies” that sets out the rules, requirements
and procedures for inter alia
quantifying various parameters.
·
The right of regulated companies to appeal aspects of the input
methodologies to the High Court.
·
Provision for approaches other than price control, such as
(strengthened) information disclosure, negotiate / arbitrate procedures and
default / customised regulation.
Sector specific provisions
The major
sector specific provisions of the Bill are as follows….
·
In regard to electricity lines business, all 100% consumer-owned
lines businesses will be subject only to information disclosure, whilst the
remaining lines businesses will also be subject to the new default/customised
regime. This regime is expected to include provision for up-front approval of
customised price-quality arrangements that will increase the certainty of
investment recovery.
·
In regard to gas pipelines, Powerco and Vector’s Auckland
networks will continue to be under price control until either 2016 or any
earlier date with the Commission’s agreement at which date they will be subject
to a default/customised regime. All other gas pipelines will be subject a
default / customised regime and a new information disclosure regime from 1st
July 2010.
·
In regard to airport aeronautical services, Auckland, Wellington and Christchurch will be subject to an enhanced information disclosure regime from
1st July 2010.
Next steps
The Bill
has received its first reading and was referred to the Commerce Committee which will receive submissions until 9th May 2008.
Pipes & Wires will make further comment as the Committee’s findings and
subsequent readings emerge.
Aus – approving the cost
allocation methods
Introduction
Allocation
of income, costs, assets, liabilities and equity between regulated monopoly
activities and unregulated activities within an integrated utility has
significant implications for the pricing and profits of the regulated activity.
Not surprisingly most regulators set out their requirements for treating these
parameters in detail. This article examines the Australian Energy
Regulator’s (AER) recent approval of the
cost allocation methods proposed by the distributors in New South Wales and the
Australian Capital Territory.
Legal background
The
prevailing legal framework is the transitional Chapter 6 of the National Electricity
Rules. The following particular
features are noteworthy…
·
Clause 6.15.5 requires the AER to adopt the Accounting Separation
Code in force in NSW immediately before the start of the 2009 – 2014 control
period as the Cost Allocation Guidelines for the 2009 – 2014 control period.
·
Clause 6.15.6 requires each NSW distributor to submit a proposed
Cost Allocation Method to the AER. The Method proposed must be consistent with
the Guidelines.
·
Clause 6.15.6(b)(2) requires, as far as practicably possible, that
the proposed Method be consistent with the method adopted for its last
regulatory accounts.
Clauses
6.15.7 and 6.15.8 largely mirror the above requirements for ActewAGL in the Australian Capital Territory that was subject to the Independent
Competition & Regulatory Commission.
The AER’s conclusions
The
following table sets out the AER’s conclusions…
|
|
Consistent with the Guidelines |
Consistent with previous method |
|
Yes |
Yes |
|
|
Yes |
Yes |
|
|
Yes |
Yes |
|
|
ActewAGL |
No |
Yes |
The AER
concluded that ActewAGL’s proposed allocation of shared marketing costs is not
consistent with Clause 6.15.7(3). However this requirement is subservient to
the requirement to be consistent with the method used to prepare the last set
of regulatory accounts submitted to the ICRC, and the AER was therefore required
to approve ActewAGL’s proposed cost allocation method.
Competition policy
UK – OFGEM investigates SP and
S&SE
Introduction
Readers
will recall that last month we examined OFGEM’s investigation of NGC’s allegedly uncompetitive behavior in the smart metering sector.
This article examines OFGEM’s investigation into the possibility that UK power
generators ScottishPower and Scottish & Southern Energy had abused a dominant position that arose in an electricity
market because of a transmission constraint.
Legal basis for investigation
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.
·
Section 18 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.
So the
Competition Act 1998 is clear and unambiguous on this point – abuse of a
dominant position in a UK market is prohibited unless any of the exclusions in
Section 19 of the Act apply.
The impact of transmission
constraints on electricity markets
Transmission
constraints limit the amount of power that can be transferred into a localised
market, effectively creating a sub-market that is relatively isolated from the
market at large. Supplying that market will be left to all the generators
downstream of that constraint, and if all of that generation is owned by a
small number of companies the opportunity to behave uncompetitively arises by
withdrawing plant to drive up the spot price.
Long-time
readers may recall that Pipes & Wires #3 considered a situation in the North East Massachusetts Area
(NEMA) electricity market where transmission constraints into the NEMA meant
that PG&E and Sithe Energies could control up to 90% of the generating capacity in that area. On
the face of it this would give PG&E and Sithe the opportunity to behave
uncompetitively (a similar market dominance issue was noted with the
privatisation of Snowy Hydro in Pipes & Wires #49, 50 and 52). One of
the remedies suggested to the FERC at the
time was that during periods of constrained transmission, generators should
have to sell power at the marginal cost.
OFGEM’s accusation
OFGEM is
understood to have initiated an investigation under Section 18 of the Act in
response to a formal complaint alleging abuse of a dominant position in the
electricity generation sector arising from constrained capacity on the
transmission network (which is believed to be constraints heading south across
the Scottish border).
It is
noted that this is only the very first stages of OFGEM’s investigation, and
that no conclusions have been drawn yet. It is also noted that this is an
entirely separate issue from OFGEM’s previously announced probe into
energy supply markets. Pipes & Wires will comment
further on the market dominance abuse allegations when a conclusion comes to
hand.
EU – unbundling takes an
interesting turn
Introduction
The EU’s
desire to see vertically integrated energy utilities unbundled to enhance
competition is certainly no secret. This article examines recent events since
Pipes & Wires last examined this issue in October 2007.
Background
EU
Competition commissioner Neelie Kroes initiated an inquiry in 2005 to substantiate the emerging view
that the reform of Europe’s energy markets originally mandated under EC 1996/92
still weren’t delivering the intended benefits. One of the 3 conclusions to
this inquiry was that there was insufficient unbundling of network and energy
supply activities.
The EU
subsequently set out a preferred approach of full ownership separation and a
less preferable approach of operational separation (wherein owners relinquish
operational control of networks to an ISO).
E.On – an early mover
The news early
last month that giant German utility E.On had
offered to sell its transmission subsidiary E.On Netz (which would include 4,800MW of generation) in return for the
dropping of a possibly damaging anti-trust investigation seems a somewhat high
stakes response, and would also appear to have some interesting ramifications…
·
It puts E.On at odds with both the German government and Germany’s
other 3 grid operators (EDF, RWE Transportnetz and EnBW) which have taken a nationalistic approach to energy markets and
have staunchly opposed Brussel’s efforts to force unbundling.
·
It could put pressure on EDF, RWE Transportnetz and EnBW to sell
their grids, possibly giving E.On some early mover advantage amongst the flurry
of divestments. It is thought that E.On Netz is worth about €1b, but that
E.On’s move could force EDF’s grid – valued at about €11b – into play.
·
Downward regulatory pressure on grid revenues may make it
expedient for E.On to sell its grid activities anyway and migrate that capital
to unregulated activities.
This will
be an interesting one to watch – these grid businesses are huge, and any
reshuffling of ownership will be multi-billion Euro stuff. Pipes & Wires
will continue to watch this one with keen interest.
Regulatory
determinations
Aus – compiling the Queensland wires price control
Introduction
The Australian Energy Regulator (AER) is
preparing to compile the price determinations that will apply to distributors Energex and Ergon Energy for the 5 year control period
starting on 1st July 2010. This article examines the proposals
submitted to the AER by Energex and Ergon that set out the distributors’
thoughts on classification of services and control mechanisms
Legal framework
The prevailing legal framework is
the National Electricity Rules
(NER). In this particular circumstance the NER requires the following immediate
steps to occur…
·
Under a transitional arrangement, the NER provides for Energex and
Ergon to submit proposals by 31st March 2008 (which they both did).
·
The AER, in turn, must publish a framework and approach paper on
these matters by 31st August 2008.
The objective of the framework
and approach paper is to set out the AER’s likely approach to the matters
raised in the distributors’ proposals. The AER may change its decisions on the
classification of services in the time period between the framework / approach
paper and the determinations, but cannot change its mind on the control mechanisms
during this period.
Energex proposals
Energex proposal identifies 10
classes of services that it has classified as Standard Control Services, and it
proposes a Weighted Average Price Cap (WAPC) control mechanism for all of those
Services (which includes activities such as new connections, disconnections and
meter reading) except its standard Network Services (energizing a customer
connection, shared extensions, maintenance, inspections, tree trimming etc) for
which a Revenue Cap control mechanism is proposed. Energex also proposes that
Sub Transmission Connection Services will be a Negotiated Service and therefore
not subject to a control mechanism, and that Street Lighting Services should be
unregulated.
Ergon’s proposals
Ergon has identified 10 classes
of Standard Control Services and proposes a Revenue Cap for Network Services
(similar to Energex) and a WAPC for the other 9 Services. Ergon also believes
that provision of Street Lighting is sufficiently competitive for it to fall
outside of the definition of Distribution Services.
Next steps
The next key step that is likely
to be of interest will be the AER’s framework and approach paper, so Pipes
& Wires will make further comment around September or October 2008.
UK – compiling the 5th electricity price control
Introduction
In late March 2008 UK electricity and gas
regulator OFGEM released its initial
consultation paper for DPCR5 – the 5th electricity distribution
price control that will cover the 5 year period from 1st April 2010
to 31st March 2015. This article examines the key themes of the
initial consultation paper to set some context for analysis of the draft and
final determinations.
Linkages
to the review
Readers will recall that OFGEM is
undertaking a thorough review of the CPI-X regulatory model (refer to Pipes
& Wires #69), but that DPCR5 will continue to use the CPI-X model.
Key
features of the initial consultation paper
OFGEM has set three broad objectives for
DPCR5…
·
Giving
distributors strong financial incentives to play a full role in tackling
climate change.
·
Encouraging
distributors to strike an appropriate balance between delivering quality
service and controlling network costs.
·
Incentivising
distributors to invest efficiently so that security of supply is provided at a
reasonable cost.
It is noted that OFGEM has certain statutory
obligations, and that these are reflected in these broad objectives.
Key
issues facing the industry
The following issues are likely to face the
industry during the 5th control period…
·
Increased
roll out of smart meters leading to changes in demand profiles and hence
network use.
·
Increased
renewals spend as assets age.
·
Increased
cost of key inputs.
Timing
of key steps
OFGEM will accept submissions on the initial
consultation document until 23rd June 2008. OFGEM then expects to
work with distributors over the July – November period to finalise the
distributors expected costs. A policy paper and the cost reports will be
published in December 2008. Pipes & Wires will probably make further
comment on this issue about July 2008.
Aus
– the final VENCorp price determination
Introduction
Pipes
& Wires #66 examined the Australian
Energy Regulator’s (AER) draft price control for VENCorp for the six year control period
from 1st July 2008 to 30th June 2014. This article
compares the AER’s final control with the draft control.
Key
features of the draft and final controls
|
Parameter |
Sought by VENCorp |
AER draft decision |
AER final decision |
|
Nominal revenue |
$405m in 2008/09 rising to $565.7m in 2013/14. |
$373.08m in 2008/09 rising to $516.85m in 2013/14. |
$407.59m in 2008/09 rising to $531.64m in 2013/14. |
|
Nominal OpEx |
$44m. |
$39.37m. |
$39.37m |
|
Committed augmentation charges |
$148m |
$125.16 |
$125.16m |
|
Nominal planned augmentation charges |
$63.21m |
$46.18m |
$47.45m |
|
Prescribed service charges |
$2,604.50 |
$2,534.41m |
$2,685.67m |
|
Accumulated surplus or deficit |
|
Removal of a nominal $25.19m surplus expected to be accumulated
by end of current period |
Removal of a nominal $25.19m surplus expected to be accumulated
by end of current period |
|
Maximum allowable aggregate revenue |
$2,889.80m |
$2713.93m |
$2,866.46m |
|
Proposed negotiating framework |
|
The AER concluded that VENCorp’s proposal to charge $15,000 when
a third party applied for access to a negotiated service was inconsistent
with the NER. |
The AER was satisfied that VENCorp’s amendment to allow
refunding where actual costs were less than $15,000 was consistent with the
NER. |
The AER expects to release its conclusions on
the pricing methodology next month, so Pipes & Wires will cover that in a
separate article. Apart from that, this brings our examination of VENCorp’s
price control to a close.
Public policy
NZ – national policy statement on electricity transmission
Background
The National
Policy Statement on Electricity Transmission (the NPS) was recently (13 March 2008) issued by notice in the Gazette. The objectives and policies contained in the
NPS are intended to enable the management of the effects of the electricity
transmission network under the Resource Management Act 1991 (RMA).
The NPS was introduced to address the lack of national framework guiding
local governments on decisions relating to transmission lines.
The NPS follows the October 2006 Government
Policy on Statement on Electricity Governance, which set out the principal
objectives and outcomes required of the Electricity Commission
including provision of adequate transmission services. The NPS also follows the October 2007 NZ
Energy Strategy (NZES). The NZES highlighted the importance of
reliable electricity supply, and promised an NPS to provide national direction
on the sustainable management of the electricity transmission network,
including guidance on the national significance of that network when
considering resource management proposals.
The NPS comes at an important stage,
particularly given the proposed increased investment by Transpower in the electricity
transmission infrastructure such as the North Island GUP, and the HVDC inter
island link.
The
policy hierarchy
The purpose and requirements of the RMA are
implemented through a hierarchy of planning documents (that is, policy
statements and plans). National policy statements are at the top of the
hierarchy, and enable the government to prescribe policies on resource
management matters of national significance. Local authorities have four years
to notify and process a plan change or review to give appropriate effect to the
provisions of the NPS.
Therefore there will likely be a “trickle
down” effect as local authorities implement district plan reviews to give
effect to the NPS. Exactly what those
changes are likely to involve requires an examination of the content of the
NPS.
Content
of the national policy statement
The NPS contains 14 policies intended to
guide decision-makers in drafting plan documents, in making decisions on the
notification and determination of resource consents, and in considering notices
of requirement for designations for transmission infrastructure and activities.
The NPS requires that when managing the environmental effects of transmission,
decision makers under the RMA must recognise and provide for the national, regional
and local benefits of sustainable, secure and efficient electricity
transmission (Policy 1). In practical
terms, this means that decision makers under the RMA must specifically have
regard to national benefits of the electricity transmission network in the
context of Part II of the RMA. In
addition, decision makers must take into account technical and operational
requirements of the network when considering measures to avoid, remedy, or
mitigate adverse effects (Policy 3).
Adverse effects must also be considered;
planning and development of the transmission system should minimise adverse
effect on urban amenity and avoid adverse effects on town centers and areas of
high recreational value. New
transmission networks should also seek to avoid adverse effects on outstanding
natural landscapes and areas of high natural character (Policies 7 and 8). Importantly
also, the NPS requires decision makers to manage activities to avoid reverse
sensitivity effects on the electricity transmission network and to ensure that
the operation, maintenance, upgrading, and development of the electricity
transmission network is not compromised (Policy 10). This extends to requiring local authorities
to consult with the operator of the national grid to identify an appropriate
buffer corridor within which sensitive activities will generally not be
provided for in plans and/or given resource consent (Policy 11).
Finally, regional councils must include
objectives, policies and methods to facilitate long-term planning for investment
in transmission infrastructure and its integration with land uses (Policy 14).
What
next?
In order to provide a mechanism for
implementing the NPS, the Government is currently developing two National Environmental
Standards on Electricity Transmission (NES). Enforceable regulations, the proposed NES
provide national guidance on specific aspects of the management of transmission
activities, and activities adjacent to transmission lines. The proposed NES are unlikely to come into
effect until late 2008. A National Policy Statement on Renewable Energy is also
expected to be introduced either late in 2008 or early 2009. Little information on the exact content of
this policy is available as consultation is yet to be undertaken.
Summary
The Government’s vision under the NZES is for a reliable and lasting system
delivering New Zealand sustainable, low emissions energy services. It takes a
holistic approach to dealing with the issues of providing energy to meet the
needs of New Zealand’s economy, ensuring security of supply and reducing
greenhouse gas emissions. The NPS is the latest document in a collection of
ideas and proposals to advance this vision, and provides guidance for a policy
framework to support the current government’s goal of 90 per cent renewable
energy by 2025.
Thanks to Chris
Simmons from ChanceryGreen in
Auckland for writing this article. ChanceryGreen is a specialist environment
law practice with a focus on large infrastructure projects.
Mergers,
acquisitions & take-overs
UK – British Energy in the spotlight
Introduction
News emerged in early April 2008
that Electricité de France may be plotting a
takeover of UK nuclear generator British
Energy. This article briefly re-caps British Energy’s troubled past, and
then examines EDF’s interest.
British Energy’s troubled past
British Energy PLC emerged from
the separation of the AGR and PWR reactors from the former Nuclear Electric whilst
the older MAGNOX stations were allocated to Magnox Electric which remains owned
by the UK government. It has since endured wide swings of fortune that included
privatisation, re-nationalisation and then a cautious partial re-privatisation
that has left the UK government holding 35% of the equity and a Golden Share
that allows the government to out-vote any other shareholder.
Given that British energy is one
of the few components of the UK electricity system that is still “available”,
it is not surprising that bids and rumors of bids from E.On, RWE, Centrica, Scottish & Southern and,
indeed, EDF emerge from time to time.
The latest interest in British Energy
EDF has publicly indicated that
the UK is one of four countries that it was interested in specifically for
nuclear power. This would suggest that its interest in British Energy may be
more than just backward integration to support its own retail business, and may
well extend to using British Energy as a platform for rolling out more nuclear
stations. British Energy shares jumped 7.3% on the LSE whilst EDF shares managed a
slight increase of 0.4% on the Paris bourse
suggesting at least some degree of market approval.
Possible regulatory issues
It is believed that any sale of
British Energy would be politically sensitive, and there is talk that outright
sale to a foreign utility may well be unacceptable. Sale to a consortium that
might include some British participants is seen to be a more likely approach.
It should also be noted that if
EDF’s pursuit of Iberdrola is
successful, EDF would then own ScottishPower
(which includes MANWEB) as well as the former London Electricity, SEEBoard and Eastern
Electricity networks. The ownership of 5 of the 14 legacy distributors by one
company would no doubt cause some angst at White Hall.
Aus – AGL considers selling a few assets
Introduction
The NSW government recently
announced its intention to privatise its generation companies and the retail
components of its electricity distributors (refer to Pipes
& Wires #66 and #69).
This article examines the not-so-surprising announcement that Australian Gas Light (AGL) may sell up to
$2.1b of assets to fund the purchase of these assets.
Background
AGL has made several attempts to
gain further scale in a rapidly consolidating industry, some successful and
some unsuccessful…
·
The proposed merger with rival Origin Energy in early 2007 that was
ultimately abandoned.
·
The acquisition of Queensland electricity retailer PowerDirect in March 2007.
·
AGL’s planned demerger into infrastructure and merchant businesses
that was gazzumped by Alinta’s
unsolicited raid on its share register (which in itself held the slim chance of
a merger that never came off).
·
An interest in Snowy Hydro before that privatisation
was abandoned in mid-2006.
·
The acquisition of Pulse from Shell,
Woodside Petroleum and United Energy in mid-2002.
Successful or otherwise, each of
these maneuvers seems to represent a fairly clear understanding of the need to
position AGL for growth.
What assets might AGL sell ??
At its half-yearly results
release in February 2008 AGL acknowledged that it may sell its 10% stake in Oil Search’s LNG project in PNG. An analyst’s
report in March also speculated that AGL may be planning to sell its stakes in Loy Yang Power and Queensland Gas which are collectively worth
about $1.1b.
What can we infer about AGL’s strategy from all of this ??
The following aspects of AGL’s strategy
can be inferred both from its interest in the NSW assets and what it might sell
to fund those assets…
·
Selling its stake in Oil Search’s LNG project could imply that AGL
wishes to withdraw from off-shore activities, upstream activities or both.
·
Selling its stake in Queensland Gas (a coal seam methane producer)
could imply a withdrawal from upstream activities.
·
Selling its stake in Loy Yang could imply a need to match retail
demand with more localised generation.
Notwithstanding the limited
number of data points, it seems that AGL might well be migrating from a broad
and perhaps shallow business platform to a narrower platform with more depth.
No doubt time will tell.
CapEx – general interest stuff
Upsizing – the other half of the hidden side of CapEx
I will be presenting a paper
entitled “Upsizing – the other half of the hidden side of CapEx” at the
Electricity Engineers Association conference in June. Pick here
to order a copy of this presentation.
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
·
African
Utility Week (Cape Town, 20 – 23 May 2008)
·
Power
Indaba Conference (Cape Town, 21 – 22 May 2008)
·
Southern Africa
Energy Efficiency Convention (Gauteng, 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.