From the director…
This month’s edition has a real
global flavor as we examine some regulatory trends in Europe, the backward
integration strategies of some major gas utilities into LNG, and allegations of
gas marker collusion in Europe.
We also examine progress on
regulatory reform in New Zealand, with the emerging picture that the Commerce
Amendment Bill is very unlikely to get its 2nd and 3rd
readings before Parliament ends prior to the 2008 election. So … happy reading,
and as usual comments are always welcome.
About Utility Consultants
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Regulatory
determinations
Belgium – government suspends gas tariff decision
Introduction
We all know (some by painful
experience) that setting a pipes & wires tariff treads a fine line between
discouraging investment on the one hand and allowing excessive profits on the
other hand. This article examines the Belgian Government’s decision to suspend
the Commission de Régulation de l’Electricité et
du Gaz (CREG) provisional tariffs for Suez
gas transmission subsidiary Fluxys.
The provisional tariff order
In 2007 Fluxys drew up proposals
for multi-year tariffs in conjunction with the CREG. These proposals included
commitments to major productivity measures (estimated to cost €25m over 4
years) and cost allocations for new transmission projects, resulting in an
expected 15% reduction in annual tariffs starting in 2008.
In mid-May 2008 the CREG rejected
Fluxys proposals and instead proposed a 25% tariff reduction. Not surprisingly
there is a lot of slanging in the popular press as well as continued
negotiations and manoeverings.
The Government’s decision
Following the CREG’s decision,
the Minster for Climate & Energy, Paul Magnette suspended
the CREG’s decision, apparently on the basis that it could discourage
investment in security of supply and damage the Belgian economy. While it’s
difficult to get to the root of the issue, it is encouraging to see that
Government’s are taking a wider view on the importance of security of supply
and intervening where necessary.
Aus – proposed demand management incentives
Introduction
Pipes
& Wires #69 considered inter alia
the demand management incentive scheme that will apply to the NSW and ACT
distributors for the control period starting in 2009. This article examines the
scheme that is proposed for the Queensland and South Australia distributors for
the control period starting in 2010.
Background
Reducing peak demand in
electricity networks is obviously important, so a regulatory framework that
encourages demand management certainly seems a good idea. However the thorn in
the side of this one is that some regulatory and pricing arrangements require
all the benefits to be passed to consumers, which obviously discourages the
distributor from managing demand.
The Australian National Electricity Rules
recognise this at clause 6.3.3 which requires the Australian Energy Regulator to have regard to
ensuring that consumer benefits are sufficient to warrant any reward or penalty
to the distributor.
The proposed demand management incentive scheme
The proposed scheme differs from
the NSW and ACT scheme that contained an ex-ante approval process, and instead
includes an annual “use it or lose it” annual revenue allowance which will be
subject to an annual ex-post assessment. Key process steps of the incentive
scheme include…
·
A capped annual amount recoverable under the demand management
innovation allowance. The cap will reflect each distributor’s annual revenue
requirement.
·
The total amount of the allowance will be spread evenly over all
years of the control period. The distributor can spend as it sees fit in each
year, but the total amount recoverable cannot exceed the amount allocated to
the control period. In effect this means that the distributors spend profile is
not tied to the allowable annual recovery.
·
The AER will review the distributors spend at the end of each
regulatory year against the incentive criteria, and reimburse the distributor
up to the capped amount for the entire control period.
·
A wash up after the end of the control period to calculate the
carryover arising from any unspent allowance and the time value of money either
accrued or lost due to the distributors spend profile differing the allowable
recovery profile.
The criteria for eligibility
under the scheme includes projects or programs that target broad-based or peak
demand reduction that may be tariff or non-tariff based. The key exclusion is
that the costs must not be recoverable under any other scheme including a
CapEx, OpEx or incentive component of a distribution price control.
The AER will receive submissions
on this matter until 11th August 2008. Pipes & Wires will come
back to this once the submissions have been analysed and the AER has released a
further paper.
Aus – the revenue proposals
Introduction
The following wires businesses have
recently submitted their revenue proposals to the Australian Energy Regulator (AER)….
·
ActewAGL for its
distribution network in the Australian Capital Territory.
·
Transend for its
transmission network in Tasmania.
·
TransGrid for its
transmission network in New South Wales.
This article examines the key
features of those proposals to provide a reference point for future analysis
and comment.
Key features of the proposals
The key features of each proposal
includes…
|
Parameter |
Wires business |
||
|
ActewAGL |
Transend |
TransGrid |
|
|
Total CapEx |
$277.7m |
$641.6m |
$2,628.8m |
|
Total OpEx |
$305.5m |
$252.3m |
$757.6 |
|
Nominal risk free rate |
6.27% |
6.37% |
5.7% |
|
Nominal vanilla WACC |
10.7% |
10.65% |
9.15% |
|
Opening asset base |
$593m |
$987.3m |
$4,237.4m |
|
Closing asset base |
$719.9m |
$1,614.1m |
$6,788.0m |
|
Smoothed P0 |
-20.73% |
-28.5% |
0% |
|
Smoothed X |
-2.0% |
-6.4% |
-5.59% |
Next steps
The AER will receive submissions
on the proposals until 8th August (ActewAGL and TransGrid) and 11th
August (Transend) respectively. Pipes & wires will make further comment
once the AER has considered submissions and published its draft decisions.
Aus – the revised GasNet tariff finally gets approved
Introduction
Pipes
& Wires #66 examined the Australian
Competition & Consumer Commission’s (ACCC) decision of November 2007 to
decline the revised access arrangement submitted for the Victorian gas
transmission system by GasNet for the
third Access Arrangement period (AA3). This article examines progress since
then, along with the ACCC’s decision of June 2008 to approve the amended
revised access arrangement.
Background
GasNet is the owner (but not the
operator) of the Victorian Principal Transmission System (PTS), and is
therefore required to submit a proposed access arrangement to the ACCC for
approval under the provisions of the Gas Code. The ACCC’s
draft decision of November 2007 rejected several key aspects of GasNet’s
proposal including the CapEx, neglecting to include increased scale from the Australian Pipeline Trust
acquisition, and gas-fired power station volumes.
Key steps to date
Key steps in the saga to date
have been…
|
Date |
Event |
|
30 April 2007 |
GasNet submits a revised access
arrangement for AA3. |
|
14 November 2007 |
ACCC releases its draft
decision not to approve GasNet’s revised arrangement. |
|
30 April 2008 |
ACCC releases its final
decision not to approve GasNet’s revised arrangement. |
|
30 May 2008 |
GasNet submits an amended
revised access arrangement. |
|
18 June 2008 |
GasNet submits an updated
amended revised access arrangement. |
|
25 June 2008 |
ACCC releases it final approval
of the revised access arrangement. |
Key features of the ACCC’s final decision
The ACCC required GasNet to make
42 amendments to its revised access arrangement. In the final decision, the
ACCC noted that in most cases the required amendments had all been made, and in
the remaining few cases GasNet presented sufficient evidence to convince the
ACCC that the arrangement was consistent with the Gas Code. The new arrangement
took effect on 9th July 2008.
Mergers,
acquisitions & take-overs
NZ – Wellington sale approved
Introduction
Pipes
& Wires has examined Vector’s sale of its Wellington electricity network to
Wellington Electricity Distribution Network Ltd, a company 50% owned by Cheung Kong
Infrastructure and 50% owned by Hong Kong Electric for a sale price of $785m. This article examines the final step
in that process … the approval of the Overseas Investment
Office.
The OIO approval
The OIO
approved WEDNL’s application to purchase the Wellington network in mid-July.
The final settlement and transfer of ownership is expected to occur as Pipes
& Wires #73 goes to print. This brings Pipes & Wires’ coverage of this
sale process to an end.
Aus – BG makes hostile bid for
Origin
Introduction
Several
months ago the BG Group made a
bid for Origin Energy, as it aimed to capture upstream gas supplies to secure Britain’s
LNG supplies. For a moment it was all on, and then all off. This article
examines the “all back on” of BG’s recent hostile bid.
Background
The play
for Origin started in April with an unsolicited cash bid of A$14.70 per share.
After taking valuation advice that resulted in BG Group increasing its bid to
A$15.50, Origin’s board subsequently rejected BG’s offer in light of the
unrelated Santos – Petronas deal that appeared to value Origin’s coal seam gas business alone
at much greater than A$15.50. It seemed this was the short, sharp end to what
was going to be Australia’s biggest energy deal yet.
Latest moves
Last
month BG unleashed a hostile A$15.50 cash bid for Origin. The comments from BG
to Origin’s shareholders in support of their bid, and from Origin in defence of
their recommendation that shareholders reject BG’s advances certainly reveal
some deep insights into the value and risks of developing gas reserves. Pipes
& Wires will comment on this deal once some progress emerges.
Regulatory policy
NZ – progress on the Commerce
Amendment Bill
Introduction
The NZ
government is currently working on a significant overhaul of the Commerce Act
1986 which sets out the regulatory framework for electricity wires and gas
pipes businesses. This article notes recent and expected future progress on the
Commerce Amendment Bill.
Background
The Bill
proposes to rewrite the existing Parts 4 and 4A of the Commerce Act 1986 which
broadly sets out the price and quality regulatory framework for electricity
lines businesses. A key thrust of the Bill is to inter alia encourage investment in essential infrastructure.
Likely progress before the
general election
The
expected report-back date from the Commerce Committee of 22nd July
has been extended to 29th July and progress appears to be on track
for that date. However it seems very unlikely that the Bill will get its
required 2nd and 3rd reading before the current session
of Parliament ends before the general election. So there probably won’t be much
to say about this until at least the start of the new Parliament in 2009.
Holland – setting out the X
factor methodology
Introduction
Transparency
of regulatory determinations and broad acceptance of their components are
vitally important to setting correct tariffs. This article examines the recent
methodology decision for setting electricity transmission tariff X factors
published by the Dutch energy regulator DTe.
Key features of the methodology
Key
features of the methodology include…
·
A recognition of the need for consistency, embodied in the
decision to retain the core principles of the previously used methodology.
·
Recognition of the transfer of all networks above 110kV from the
distributors to TenneT.
·
A real, pre-tax WACC that can increase over the three year control
period to a final value of 5.4%.
·
Updating the cost data used to estimate efficient costs.
·
Allowing for additional investment in grid reinforcement.
Application of the methodology
The tariffs
derived from the methodology will apply to electricity transmission utility TenneT
over the three year control period which started on 1 January 2008.
Aus – preparing for the
Queensland wires determination
Introduction
Pipes & Wires #69 and #70 examined
the proposals submitted by Energex and Ergon Energy to the Australian Energy Regulator as part of compiling the 5 year control period starting on 1st
July 2010. This article examines the AER’s Framework & Approaches Paper
released in early July to address the classification of services and control
mechanisms.
Classification of services
The National Electricity
Rules (NER) requires that any
distribution determination made by the AER include a decision on the
classification of the services to be provided by the distributor. The AER must
set out its likely approach to this classification in a Frameworks &
Approaches Paper.
Energex
and Ergon both proposed a range of services to be classified as standard
control service and a further range of services that should be unregulated. The
AER agreed that while the services were correctly classified, they should be
regrouped to better allocate the impact of those services.
Forms of control mechanisms
The NER
also requires a distribution determination to impose controls over the prices
or revenues to be derived from direct control services. The AER must state the
form of control that it proposes to apply in a Framework & Approaches
Paper, along with its reasons why. The permitted control mechanisms set out in the
NER include a schedule of fixed prices, caps on the price of individual
services, caps on the revenue to be derived from a particular service etc.
Energex
and Ergon both proposed a hybrid control mechanism for their planned services
consisting of
·
A fixed revenue cap covering network services.
·
A weighted average price cap covering connection and customer
services.
·
A weighted average price cap covering all remaining standard
control services.
The AER considers
that a fixed revenue cap is appropriate for network services, that a weighted
average price cap is appropriate for the connection and customer services, but
proposes to apply a fixed revenue cap for all remaining standard control
services.
Next steps
The next
step will be for the AER 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. Pipes & Wires
will make provide further analysis and comment as this emerges.
NZ – re-set methodology update
Introduction
The Commerce Commission is compiling the price path re-set that will apply to all large
New Zealand lines businesses from 1 April 2009. This article examines the
recently released Update on the Methodology Paper.
Background
One of
the recommendations of the review into Part 4A of the Commerce Act 1986 (which
sets the regulatory framework for electricity lines businesses) was that an
Input Methodologies be established to better define how key parameters such as
WACC would be dealt with …. sort of like the National Electricity
Rules or the National Third Party
Gas Access Code in Australia.
Key features of the Update paper
The
Commission’s preliminary views set out in the Update paper include…
·
That the overall regime will comprise a CPI-X based price-path
threshold and an updated quality criterion based on reliability.
·
That the consumer
engagement criterion should be transferred to the Information Disclosure
regime.
·
That both productivity and profitability considerations remain
relevant to the setting of CPI-X based price-path thresholds.
·
That a B-factor derived from Total Factor Productivity should be
retained.
·
That a profitability adjustment should be determined.
·
That the lines sector as a whole does not face a wall of wire, but
some individual businesses do have increasing investment requirements.
·
That introduction of a specific mechanism to accommodate
significant investment requirements is not merited for the period beginning on
1 April 2009.
·
That if additional investment needs emerge during the period
beginning 1 April 2009, they should be addressed using customised thresholds.
·
That additional work should be undertaken to determine whether
customers marginal willingness to pay for additional reliability exceeds the
marginal cost of achieving that reliability.
·
That further investigation into an S-factor should be undertaken.
·
That separate quality thresholds for non-contiguous networks be
considered.
·
That losses by time period and area should be disclosed as part of
the Information Disclosure.
Next steps
The
commission expects to publish its Initial Decision Paper for consultation in
September, so Pipes & Wires will make further comment then.
Energy markets
Europe – did GDF and E.On collude
Introduction
Pipes & Wires #62 examined allegations centered on the MEGAL gas pipeline that E.On and Gaz de France (GDF) had colluded to stay out of each other’s retail gas
markets. This article examines the EU’s recent moves on this issue.
Background
The MEGAL
pipeline is the only route for Russian gas to enter France. The EU alleges that
joint ownership of the MEGAL pipeline enabled E.On and GDF to decide who gets
the gas in the pipeline.
The EU’s recent moves
In mid-June the EU released its preliminary conclusion that the companies had agreed “not to sell gas in the other party’s home market to any significant extent”. The EU is also separately investigating whether GDF had deliberately under-invested in pipeline infrastructure to block competition.
Things
seem to be moving slowly – and we seem to be moving closer to the answer - but
no doubt the EU will release its final conclusion in due course. When it does
Pipes & Wires will make further comment.
Japan – securing gas supplies
Introduction
Hot on the
tail of BG Group’s bid to secure the UK’s gas supplies through a strategy of
backward integration came news that Japan’s second largest gas utility Osaka Gas is embarking on a similar strategy. This article examines Osaka’s
recent talks with Chevron about
taking a stake in an Australian LNG project.
Background
Osaka Gas
has 6.7m customers in the Kansai area, and has recently entered a deal with the
North West Shelf Venture to buy 500,000 tons of LNG per year for 6 years starting in April
2009. This latest move would see Osaka take an equity stake in Chevron’s Gorgon project.
Osaka’s strategy
Osaka’s
strategy is one of clearly moving from being a simple purchaser of LNG to one
of backward integration by investing in LNG production. It seems that Osaka’s
next move may be to invest in new LNG technologies and possibly shape the
Australian LNG export industry. Pipes & Wires will make further comment as
progress emerges.
Foreign investment
policy
Aus – possible moves to limit
foreign sovereign investment
Introduction
Late last
month an article in The Australian
speculated that the newly elected Rudd Government would limit foreign state-owned
corporations from taking technical control of Australian companies. This
article delves into this issue a bit further and presents a few philosophical
ramblings on the matter.
A few philosophical ramblings to
start with
The
principle of economic nationalism and rejecting foreign investment is no
stranger to the pages of Pipes & Wires … we have examined the German,
French, Spanish and Romanian government’s attempts to build national energy
champions. The difficulty is that whilst nationalism is easily understood by
the electorate and is typically well accepted, the need for infrastructure
investment often isn’t well understood.
What exactly is the Rudd
Government planning
It’s hard
to determine exactly what the Rudd Government is planning. On one hand it
appears that foreign sovereign ownership may be capped at 49.9%, but on the
other hand Treasurer Wayne Swan stated “we
welcome foreign investment, we welcome it from everywhere, including from
China, but we will apply decisions on a case-by-case basis in the national
interest”. Swan’s concluding remark would seem even more problematic by
suggesting that approval maybe ad-hoc.
Possible implications for the
energy sector
The
Australian energy sector has seen much foreign investment come and go, but the
recent wave of investment by Singapore Power and the very recent interest by China’s
State Grid Corporation is of obvious interest in this
regard. These organisations are very willing to provide much needed investment
capital in Australia (and in New Zealand), so any policy of limiting their
investment needs to be carefully thought through beyond the populist appeal of
limiting foreign ownership.
CapEx – general interest stuff
Upsizing – the other half of the hidden side of CapEx
This presentation was made at the
Electricity Engineer’s Association
conference in June 2008. If you’d like a copy, pick here.
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
·
10th
Annual NZ Energy Summit (Wellington, 15th – 16th September
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.