From the director…
Welcome to Pipes & Wires #71.
This month examines a wide range of issues … first up we examine the
anticipated conclusion of Vector’s sale of Wellington and then quickly
introduce BG Group’s bid for Origin Energy.
We then examine the public policy
issues of publicly owned peaking plant in the US, and balancing security of
supply and the environment in the UK. Moving on to regulatory policy, we examine
the federal power to designate transmission line corridors in the US and then
look at altering the terms of a gas access arrangement in Australia. We then
jump to Australia to examine two recent transmission pricing methodology
decisions. In the midst of all this we examine the amendments to the
information disclosure requirements 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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recent projects, pick
this link.
NZ – matters requiring attention
Review of information disclosure regime
The Commerce Commission released
its final decisions on 30 April 2008. Read the full article below under the Regulatory
Policy section.
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.
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.
Mergers,
acquisitions & take-overs
NZ – the Vector sale all but
concludes
Introduction
Late last
month Vector announced the long-awaited sale of its Wellington electricity
networks to Cheung Kong Infrastructure of Hong Kong. This article briefly chronicles the sale process
and details of the final deal that was flagged in Pipes & Wires #63.
Background
In August
2007 Vector announced that it had engaged Goldman Sachs JB Were to investigate
the possibility of selling its Wellington network after it had received an
unsolicited approach from a potential buyer. At that time Vector noted that a range of
approaches were possible including an outright sale, bringing in joint venture
partners, asset swaps or a float (similar to what SP AusNet
and Spark Infrastructure
had done in Victoria, Australia).
The bidders
Along the
way, the following bidders were reported in the media as having shown an
interest.
·
Powerco (owned by Babcock & Brown
Infrastructure).
·
Orion (who originally
neither confirmed or denied their interest, but eventually did confirm an
interest).
·
Electra in conjunction with
Allco Finance Group.
·
Unison in conjunction with Macquarie Bank.
·
Hastings Funds Management
in conjunction with its parent entity, Westpac Bank.
·
DUET (Macquarie Bank and AMP Capital).
·
Challenger Infrastructure Fund.
·
SP
AusNet (owned by Singapore Power).
·
Spark
Infrastructure (Cheung Kong Infrastructure and RREEF Infrastructure,
a subsidiary of Deutsche Bank).
·
Cheung
Kong Infrastructure (Hong Kong)
One of
the four short-listed bidders was the China State Grid
Corporation that was not reported as being
in the initial bidders.
The final deal
Cheung
Kong Infrastructure emerged from the final bidding round as the successful
bidder with an offer of $785m. Vector expects to use the sale proceeds to
reduce debt.
The sale
is still conditional on shareholder approval and of course, the approval of the
Overseas Investment
Commission. However several well-placed
M&A lawyers commented in the media a few weeks ago that the Commission (or
the Government) would be unlikely to block this deal.
Aus – BG Group makes a play for
Origin
Introduction
Most of
us remember Origin Energy’s various attempts to consolidate the Australian gas and
electricity industries. This article notes BG Group’s recent cash offer for all shares in Origin to set some context
for future analysis. Because both BG and Origin are listed companies, Pipes
& Wires will refrain from detailed analysis or comment until any deals are
completed other than noting the preliminary nature of BG’s offer.
BG Group’s offer for Origin
BG Group
(one of the off-shoots of the old British Gas) made an unsolicited $12.9b for
Origin with a view to establishing itself as a major player in the South
Pacific region, particularly in the LNG market (which, as was subsequently
revealed, is more about securing the UK’s gas supplies than growing the
business). BG’s offer equates to $14.70 per share, which is a 40% premium over
the previous night’s closing price of $10.47. Pipes & Wires will make
further comment once matters come to a conclusion.
Energy policy
US – Maryland might consider
public generation
Introduction
Long-time
readers may recall from Pipes & Wires #52 that the present Governor of Maryland,
Martin O’Malley, (who was then Mayor of
Baltimore) had a few things to say about energy matters. This article examines (and
then comments on) O’Malley’s recent pronouncement that publicly owned power
generation should be explored as a possible means of warding off a looming energy
crunch.
Background
About 2
years ago when O’Malley was running for Governor one of the hot election issues
was a proposed electric tariff increase of 72% on 1 July 2006 by Baltimore Gas &
Electric. The other Democrat candidate,
Douglas M. Duncan, campaigned that Maryland should re-regulate the power
industry so that customer bills would automatically return to pre-deregulation
levels (which Pipes & Wires suggested was an overly simplistic view). So,
anyway, O’Malley won, Duncan lost, and the power supply issue still hasn’t gone
away.
A report
released late year by the Maryland PSC concludes that the state could face rolling brownouts or
blackouts by 2011 if nothing is done. The issues identified include increasing
demand, limited supply, congested transmission and aging distribution
infrastructure.
O’Malley’s idea of public power
generation
The core
of O’Malley’s proposal seems to be publicly owned peaking plant that can be
used to avoid price spikes such as on hot summer days, rather than base load
plant that would compete with existing generators. The Baltimore
Metropolitan Council’s reservoirs that supply Baltimore
and 5 surrounding counties seem to have formed the underlying model of
O’Malley’s thinking.
Is the idea of public power
generation a good idea ??
No doubt
we’ve all got a view on this issue, but let’s step back and examine some
crunchy issues…
·
Maryland officially deregulated its power industry in 1999. That
provided a commercial framework that sent - and still does send – investment
signals to market participants, including signals about what happens during
periods of high demand.
·
If prices spike during periods of high demand, that suggests that
the market is working as it largely should, not that the market has failed as
some suggest. If prices are spiking often, that should incentivise market
participants to invest in peaking capacity. If market participants are
unwilling to invest in peaking capacity, perhaps they lack confidence in the
robustness of the investment signals.
·
Market participants have made investments in good faith with a
view to recovering those investments through agreed market processes. If the
ability to recover investment is interfered with, market participants are
likely to withhold investment, leading to – surprise, surprise – capacity
shortfalls.
·
Private utilities pay tax to the state, so the thought that they might
be deprived of peaking revenue by public generators funded with their taxes is,
well, abhorrent to say the least.
None of
these issues really answers whether public power generation is a good idea or
not. What it hopefully does do is highlight that any intervention in a market
by the state needs to…
·
Be done as a matter of well-thought policy and not on an ad-hoc
basis.
·
Needs to recognise the need to compensate private utilities for any
curtailing of recovery of approved investment.
·
Needs to clearly understand that ill-conceived changes to market
structures are likely to discourage much needed investment.
Anyway,
that’s enough ranting and raving. Pipes & Wires will check back in a few
months to see how well O’Malley’s plans have progressed.
UK – balancing security of supply
and the environment
Introduction
Recent
years have seen a big push to make electricity generation more environmentally
friendly. It seems that many agencies overseeing the world’ power industries
are now rapidly recognising that security of electricity supply has been a much
neglected issue and that some very hard choices lie ahead. This article
examines the UK government’s recent thinking on these issues.
The UK’s electricity security
woes
It’s
probably not unfair to say that the UK’s electricity supply is somewhat less
than secure. The last 20 years have seen the following issues shape the
industry…
·
The decline of the domestic coal industry following the “dash for
gas”.
·
Dependence on politically volatile Russian gas as the North Sea
Gas dwindles.
·
The impending closure of many nuclear stations as they near the
end of their lives, and at least some uncertainty around the new generation of
nuclear stations.
·
The likely closure of remaining coal-fired plants under the
European Large Combustion Plant Directive (LCPD).
·
A heightened dependence on wind generation with its associated low
load factor.
The UK’s
current reserve capacity margin is about 20% which some commentators expect to
have eroded completely by 2015. Other forecasters treat this as a worst case
scenario, but all seem to agree that things are going to get uncomfortably tight.
Has the environment – security
balance got out of balance ??
Looking
at the above issues there seems little doubt that the security side of the
equation has definitely suffered. Considering that three of the above five
issues have strong environmental drivers, its probably fair to say that yes the
environment – security balance has got out of balance.
What does the UK government
propose to do about it ??
So what
actually is the UK government doing about it ?? Certainly in regard to burning
coal, their hands are tied by the LCPD, but there are a few other moves being
contemplated…
·
The new generation of nuclear plants flagged by the Blair
Government seems to be gaining public favor. However any new capacity is
probably at least 10 years away, several years past the critical 2015 point.
·
Several new gas-fired plants are under construction. While this
might theoretically ease the capacity shortfall, it relies on an uninterrupted
supply of gas from Russia.
·
Carbon Capture & Storage (CCS) may allow coal to make a
come-back. Some of the more environmentally sensitive are rumored to have
quietly admitted that CCS would make their objections to coal disappear.
·
BG Group’s bid for Origin Energy seems to be an attempt to
diversify the UK’s gas supplies.
While
there may be other moves afoot, those listed above may, at best, only offset
nuclear and coal plants marked for closure. Pipes & Wires will reexamine
this issue in a few months to see what progress Whitehall has made with
re-thinking the balance.
Regulatory policy
US – easing congestion gets some
legal teeth
Introduction
Most of
us that don’t live in the US probably have a vague awareness that the Federal Energy
Regulatory Commission (FERC) has a theoretical jurisdiction
under the Constitution over inter-state electricity transmission but
practically tends to defer to the rulings of state regulators. This article
examines the new powers of the FERC to ease congestion under the Energy Policy
Act 2005 and why the FERC appears to have functionally over turned the ruling
of the Arizona Corporations Commission (ACC).
The proposed line
SoCalEd’s proposed Devers – Palo Verde #2 will comprise 230 miles of 500kV overhead line between the Palo Verde nuclear plant near Phoenix Arizona and Devers grid substation near Palm
Springs, California. The DPV#2 largely duplicates the existing #1 circuit, but
will also include a further 40 mile connection between SoCalEd’s Devers and
Valley grid substations. The purpose of the DPV#2 circuit and the separate
Tehachapi project is to ease the transmission constraints in southern California.
The approvals to date
Given
that California regularly pushes its reserve capacity margin to nail-biting
extremes during the summers it’s not surprising that the California Public
Utilities Commission (CPUC) finally approved the
DPV#2 back in January 2007 after resisting it for years. It’s also not
surprising that the ACC declined to allow SoCalEd to plug a 230 mile extension
cord into Arizona’s generation capacity. Although this might look like a zero-sum
game in which California would win and Arizona would lose (thereby making it
hard to see any clear basis for the FERC to either approve or reject the DPV#2),
it is best viewed as positive-sum game but with some dispute over how the gains
will be allocated.
The power to ease congestion
Title
XII, Subtitle B of the Energy
Policy Act 2005 is entitled Transmission
Infrastructure Modernisation, and in particular Section 1221 addresses the
siting of interstate transmission facilities. This Section broadly provides for
the Secretary of Energy to conduct a study of transmission congestion every 3 years and
to designate any geographical area experiencing serious constraints as a
National Interest Electricity Transmission Corridor (NIETC). The Secretary is
also empowered to recommend options for relieving congestion, but must consider
a range of criteria specified in the Act when assessing options, including the
views of affected States (which is where the ACC’s objection comes in).
Buried a
bit further down Section 1221 is a broad provision for the FERC to grant
approval to modify or construct transmission lines in a NIETC if State regulators
have withheld approval for more than 1 year after the filing of an application.
The ACC’s objection
The stated
basis of the ACC’s objection to DPV#2 is that Arizona itself is experiencing
high demand growth, that DPV#2 will not provide the level of access to
renewable generation that SoCalEd claims, that SoCalEd has plenty of other
low-cost supply options, and that Arizona electricity customers will end up
paying about $240m to subsidise California’s customers. So it isn’t surprising
that the ACC rejected SoCalEd’s application. All of these reasons have been
contested.
The FERC wades into the debate
In what
appears to be a legal first, the FERC has indicated it may use its powers under
Section 216 of the Federal Power Act along with Section 1221 of the Energy
Policy Act to approve some version of the DPV#2. The legal issues have focused
on whether the phrase “withheld approval for more than 1 year” could also mean
“deny”, in which case the FERC could step in to approve the DPV#2 because it is
in a NIETC. This matter is currently working its way through the various
courts, so Pipes & Wires will make further comment as rulings emerge.
Thanks to
the team at Spiegel & McDiarmid in Washington, DC for their help with this article.
NZ – amending the information
disclosure requirements
Introduction
Pipes & Wires #69 noted the likely changes to the specific area of asset management
plan disclosure requirements that were released by the Commerce Commission just in time for Christmas 2007. This article briefly summaries
the two papers released by the Commission on 30 April 2008 that set out the
Commission’s final decisions on the whole valuation and disclosure activities.
The new disclosure requirements
The first
of the two papers is the Electricity Information Disclosure Amendment
Requirements 2008. The following points are a high level summary of the new
Requirements….
·
A later disclosure date for some components of the Disclosure for
the year ending 31 March 2008.
·
Disclosure of a valuation report every 5 years instead of every 4
years.
·
A later disclosure date for asset management plans (the draft
paper had proposed 1 November 2008 for the AMP’s starting on 1 April 2009, but
the final paper has deferred this date to 1 April 2009).
The process for implementation of
the New Disclosure Requirements
The
purpose of the Process Paper is to make the announcements referred to in the
Commission’s process note of March 2008, and in particular to set out the
Commission’s decisions on the process it will follow to implement the New
Requirements. This paper notes the following issues and lines businesses
responses to those issues…
·
The possible change from ODV to IHC valuation.
·
Possible changes to the Commerce Act 1986.
·
Compliance costs and practical issues.
·
Proposed changes to the submission date for AMP’s.
Therefore
the following minor amendments will apply from 1 May 2008…
|
ODV disclosure date |
·
The date at which a full ODV revaluation
must be conducted has been changed from 31 March 2008 to 31 March 2009. ·
The current requirement for a full ODV
revaluation if line length or transformer capacity has altered by more than
10% since the previous full ODV revaluation has been revoked. |
|
Disclosure of financial statements and
performance measures |
·
The disclosure that was due on 30 August
2008 is now due on 28 February 2009. |
|
AMP disclosure date |
·
AMP’s must now be disclosed by 1 April,
starting with the 2009/10 AMP which is due by 1 April 2009. |
Key process steps
The
following process steps are likely…
·
Week of 16 June 2008 – possible workshop on non-financial
performance measures.
·
End of July 2008 – Commission expects to release exposure draft
and explanatory paper.
·
Mid-August 2008 – submissions due on revised exposure draft and
explanatory paper.
·
End of September 2008 – new Requirements published.
Disclaimer
This
article is brief by nature, and does not purport to be professional advice. In
particular readers should refer to the Commission’s two documents in their
entirety. Utility Consultants Ltd accepts no responsibility for any action or
inaction based solely on this article.
Aus – reviewing the terms of an
access arrangement
Introduction
Access
arrangements assume the carrying out of certain, reasonably expected activities
that have a known implicit cost structure. It would therefore seem reasonable
that any increased or reduced costs resulting from an unexpected activity might
be cause for review. This article examines a gas pipeline event in the
Australian state of Queensland that could trigger a review of the access
arrangement before the scheduled review date.
The Carpentaria Gas Pipeline
access arrangement
The
Carpentaria Gas Pipeline (CGP) is subject to an access arrangement made under
the National Third Party Access Code For Natural Gas Pipelines (the Gas Code).
The CGP access arrangement includes a review trigger mechanism which provides
for a review of the access arrangement before the scheduled review date if a
specified event occurs.
The specified event unfolds
In this
case the specified event was an apparent reversal of gas flow in the CGP.
Clause 8.4 of the CGP access arrangement specifically records inter alia that an event having a
substantial effect on the direction of gas flow requires the CGP joint venture
partners to submit proposed revisions to the non-tariff elements to the
Regulator. In June 2007 the ACCC
investigated whether a specified event had occurred, and consequently whether a
review of the CGP access arrangement had been triggered. One of the CGP joint
venture partners, the Australian Pipeline Trust (APA) was the only party that made a submission to the ACCC.
After the
ACCC’s investigation, the owners of the South-West Queensland Pipeline (SWQP), Epic Energy, advised the ACCC that during August 2007 gas flows in the SWQP
had reversed, effectively creating a new point of gas injection into the CGP.
Given this new information, the ACCC then asked APA to reconsider its previous
view on whether a specified event had occurred. APA responded that even if the
reversal of gas flow in the SWQP did represent a new source of gas injection
into the CGP, neither the direction of gas flow in the CGP had occurred nor was
there likely to be any substantial change in the types of services sought by
the market. Hence, APA concluded, a review of the CGP access arrangement had
not been triggered.
Why is a review such a big deal??
Utilities
put a lot of effort into proposing access arrangement and responding to the
regulators demands, whilst equity markets rely reasonably heavily on revenues,
costs and returns being locked in for the entire arrangement (typically 5
years). Any variation to those parameters effectively adds regulatory risk to
their investment which is obviously unwelcome.
Next steps
The ACCC
is seeking industry submissions on this issue at the time of writing, and will
publish its conclusions in due course. Pipes & Wires will examine those
conclusions probably around June 2008.
Pricing methodology
decisions
Aus – ElectraNet’s revised
proposed pricing methodology
Introduction
Pipes & Wires #66 considered the Australian Energy Regulator’s draft determination for South Australian electricity transmission
grid operator ElectraNet for the control period 1 July 2008 to 30 June 2013. This article
considers the specific sub-set of that draft determination of approving
ElectraNet’s pricing methodology which, after a re-submission by ElectraNet, the
AER approved in late April 2008.
Background
The AER’s
draft transmission determination of 9th November included an
assessment of ElectraNet’s proposed pricing methodology against the AER’s
guidelines which ElectraNet was able to request under the National Electricity
Rules (NER). The NER requires the AER to approve a pricing methodology that is
consistent with the pricing principles and the guidelines.
Basis for declining ElectraNet’s
pricing methodology
The
agreed interim requirements require a proposed pricing methodology to…
·
Be consistent with the principles in Clause 6A.23 of the NER.
·
Be consistent with Part C of the old NER to the extent that Part C
is not inconsistent with the pricing principles in Part J of the NER.
The AER
noted that whilst ElectraNet’s pricing for locational components of prescribed
services and postage stamp prices complied with the final pricing methodology
guidelines, much of the proposed pricing methodology did not comply. The AER
reached this conclusion on two points…
·
The references to Part C of the old NER were not appropriate for a
methodology being assessed pursuant to Part J of the NER.
·
ElectraNet did not include all the information required by the
final pricing methodology guidelines.
ElectraNet
duly submitted a revised pricing methodology which the AER approved on 30 April
2008.
Key aspects of the revised
pricing methodology
Key
aspects of the revised methodology submitted by ElectraNet include how the
Aggregate Annual Revenue Requirement (AARR) is calculated, how it is allocated
to the various categories of prescribed transmission services, and how the
charges for those prescribed transmission services are in turn allocated to
each connection point.
The AER’s approval
The AER
concluded that the revised methodology was broadly compliant with the NER, and
therefore approved it. In assessing the revised methodology for compliance, the
AER did however request that ElectraNet redraft parts of the methodology using
the phrase “directly attributable” instead of “fully dedicated” and provide
further details on how costs would be allocated amongst multiple users of
connection points.
Aus – revised VENCorp pricing
methodology
Introduction
The Australian Energy
Regulator recently approved VENCorp’s electricity transmission pricing methodology which it had
previously declined to do. This article briefly recounts the background to this
process and then considers the key aspects of the approved methodology.
Background
Under the
agreed interim requirements of the National Electricity Rules, VENCorp elected
to have its proposed pricing methodology assessed by the AER against Part J of
the NER and the pricing methodology guidelines. Although much of VENCorp’s
proposed methodology did comply, there were several throw backs to Part C of
the old NER along with insufficient information being provided against
specified areas that led the AER to decline to approve the methodology.
VENCorp
subsequently submitted its revised pricing methodology on the 14th
December as required.
Key aspects of the revised
pricing methodology
The AER
required VENCorp to update various aspects of terminology and provide
additional information on a few aspects of the methodology, to which VENCorp
duly complied. These aspects include…
·
A clause verifying that the cost of additional assets will be
calculated using an ORC methodology.
·
Statements that the priority ordering system will be adopted where
assets are attributable to both prescribed transmission services (TUOS) and
prescribed services.
·
An explanation of how the proposed methodology for the forthcoming
control period differs from the current methodology.
·
A description of how VENCorp will monitor its compliance with Part
J of the NER.
The AER
concluded that implementation of the above issues would make VENCorp’s pricing
methodology compliant with the NER, and has therefore approved the methodology.
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
·
African
Utility Week (Cape Town, 20 – 23 May 2008)
·
Power
Indaba Conference (Cape Town, 21 – 22 May 2008)
·
SCADA
& Process Control Summit (Auckland, 27th June 2008)
·
10th Annual NZ Energy Summit (Wellington, 18th
– 19th August 2008)
·
6th Annual NZ Gas Industry Summit (Wellington, 15th
– 16th September 2008)
·
NZIGE Spring Technical
Seminar (Rotorua, 15th – 16th September 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.