From the director…
Welcome to Pipes & Wires #81.
This issue covers a wide range of matters, from regulatory policy in New
Zealand and Australia and nuclear policy in Europe to a few big deals in
Australia and in Germany. As always, comments are welcome.
About Utility Consultants
Utility Consultants Ltd is a
management consultancy specialising in the following aspects of energy and
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Regulatory policy
NZ – setting the default electricity price paths
Introduction
After many examinations of the
changes to electricity lines price regulation, Pipes
& Wires #80 examined exactly how lines businesses would have their
prices regulated from 1st April 2009 and from 1st April
2010 respectively. This article examines the Commerce Commission’s Default Price Path paper
that was released for consultation in late March setting out its expected
process for re-setting the default price path prior to 1st April
2010.
Background
Subpart
9 of Part 4 of the Commerce Amendment Act 2008 clearly states that lines
businesses that are not consumer owned will be subject to default/customised
price-quality regulation (s54G) that will be a roll-over of the current
thresholds for the year ending 31st March 2010 (s54J). For the
period from 1st April 2010, the Commission must re-set the
default/customised price-quality paths according to the process set out in s53P
(s54K), which leads into the substance of this article.
Key aspects of the expected process
The key aspect is the statutory
requirement at s54K(1) for the Commission to re-set the price paths before 1st
April 2010. However a summary of the determination that re-sets the price paths
must be published by 1st December 2009. This sets a rather tight
timeframe for the Commission to develop and properly consult on its proposed
Discussion – Decision – Drafting process.
The Discussion paper is expected
to be published in May 2009 and will consider inter alia the form of the default price path and its constituent elements,
the starting prices and rates of change, and proposed supply quality standards.
The Commission then expects to publish its draft Decisions paper in September
and its Determination in November.
The Commission’s initial views
At this early stage the
Commission is of the view that...
·
The price path should be based around CPI – X.
·
Total Factor Productivity (TFP) should be the preferred approach
to setting rates of change because of its relatively low cost and because it
should avoid the volatility associated with key indices.
·
International performance will not be included in the productivity
analysis.
·
Basing prices on current and future projected profitability may
better suit some EDB’s than simply rolling over prices from the previous
period.
·
It should be possible to re-set price paths prior to the Input
Methodologies determination. The Commission also notes that because the Input
Methodologies determination will not be made until 30th June 2010
starting prices that depend on that determination could be re-set pursuant to
s54K(3) if applying the determination would have led a to a materially
different price path being set. The Commission notes that in such circumstances
it may claw-back (ie. reallocate) any over or under charging.
·
Given that the publication of the Input Methodologies
determination could lead to a P0 after 1st April 2010, it
would seem pointless to also have a P0 on 1st April 2010
arising from a price re-set, hence it would be preferable to simply roll prices
over from 31st March 2009.
·
Supply quality should be measured by SAIDI and SAIFI, and that any
approach adopted should minimise technical breaches whilst clearly focusing on
underlying reliability.
·
Inclusion of an S-Factor in the 1st April 2010 re-set
would be impractical.
Disclaimer
This article is by necessity
brief and does not purport to be a comprehensive legal analysis. Utility
Consultants accepts no liability whatsoever for any action or inaction taken on
the basis of this article.
Aus – gas pipeline access guidelines
Introduction
Pipes
& Wires #76 examined the Australian
Energy Regulator’s (AER) draft access
arrangement guideline for gas transmission pipelines. This article examines
the AER’s final guideline.
Background
The purpose of the guidelines is
to provide pipeline owners and interested parties with guidance on how the AER
will make various decisions under the National Gas Law (NGL) and the National Gas Rules (NGR). Unlike many
articles in Pipes & Wires that examine the substance of the AER’s
decisions, the guideline is about process.
The final guidelines
Unlike a determination of
substance that can be readily summarised into a few paragraphs, the guidelines
don’t easily lend themselves to being summarised. However the key aspects
addressed include...
·
Classification of pipelines and services.
·
The decision making frameworks for access arrangements.
·
How to make submissions and what information will be treated as
confidential.
·
Submitting an access arrangement, including how to calculate the
building block components.
·
Reviewing the AER’s decisions.
Overall, the guidelines provide a
very helpful way forward for industry participants, especially around reducing
the uncertainty of compiling tariff proposals.
Industry governance
NZ – reviewing electricity sector governance
Introduction
On the 2nd March 2009,
the Minister of
Energy & Resources, the Hon. Gerry Brownlee released a revised
draft Government Policy Statement (GPS) for consultation. This article examines that revised draft and is
the second in a 2 part series which examines likely changes to the electricity
industry governance arrangements under the new National government.
Legal basis of the GPS
The governance framework for the
electricity industry is set out in Part
15 of the Electricity Act 1992. In particular s172ZK(1) requires the
Minister to set the objectives and outcomes that the government wants the Electricity Commission to
give effect to, and s172ZK(2) requires that to be done by way of policy
statements.
The revised draft Government Policy Statement
The revised draft GPS (which was
open for consultation last month) broadly includes the following issues…
·
The Commission’s security of supply objective has been restated in
the more easily understood principle of “winter energy margin” (the margin
between forecast capacity and forecast demand), which is required to be 30% of
the South Island and 17% for New Zealand overall.
·
The Energy Efficiency &
Conservation Authority (EECA) is likely to play a greater role both in
coordinating energy efficiency across government agencies and in delivering outcomes
on behalf of the Commission.
·
Streamlining the Commission’s approval process for grid projects
less than $20m.
·
Changes in rural distribution charges are expected to keep in line
with changes to urban line charges.
·
An expectation that the Electricity Commission and the Commerce Commission will continue to work
closely together, including a request to revise the Memorandum of Understanding
by 30 November 2008 [sic].
·
An expectation that the Commission will investigate the provision
of guidelines or standards for connecting domestic scale embedded generation.
·
An expectation that retail competition will place downward
pressure on generation prices.
A few comments from Pipes &
Wires
Much
of this seems pretty straightforward, and certainly doesn’t include any obvious
threats to the Electricity Commission’s continued future. Just a couple of
issues stand out in my mind…
· There
seems to be an on-going inconsistency between the need for low fixed charges on
the one hand, and cost-reflective pricing on the other hand.
· There
seems to be increased pressure to make connection of domestic scale embedded
generation easier. Pipes & Wires would be rather surprised if low uptake
was caused by barriers, and would suggest that it is more likely to be a lack
of market interest.
That’s probably a good place to
finish. Pipes & Wires will make further general comment if anything out of
the ordinary emerges from the consultation process.
Energy markets
Ireland – declining the gas tariff increase
Introduction
Pipes
& Wires #74 examined the Commission for
Energy Regulation’s (CER) proposal to approve Bord Gais Energy Supply (BGES)
two-part tariff.
Bord Gais’ proposed two-part tariff
BGES sought the CER’s approval to
implement a two-phase tariff increase comprising an initial 20% increase from 1st
September 2008 followed by a further increase from 1st January 2009
after reviewing the wholesale gas price movements over the northern autumn. The
expected impact of the initial 20% increase would be about £150 / year for the
average consumer (13,750kWh of gas).
The CER’s decision on the 1st September 2008 increase
In a draft decision paper dated
25th July 2008, the CER proposed to approve the first of the tariff
increases planned for 1st September 2008. On 8th August
2008 the CER gave its final approval for the two-part tariff and also to the
20% increase to apply for the 3 months starting 1st September 2008.
The CER’s decision on the 1st January 2009 increase
In seeking the initial approval
of its two-part tariff BGES clearly noted the requirement to review wholesale
gas price movements. In seeking specific approval for an increase for the 8
months beginning 1st January 2009, BGES sought increases of 4.2% for
residential customers and 2.8% for small industrial and commercial customers.
After conducting a full review of
likely costs for the 8 months beginning 1st January 2009 the CER
approved the following…
·
A total revenue requirement of €574.6m.
·
A margin of 2%.
·
A voluntary rebate of €8.5m.
The practical effect of this
decision is that there will be no tariff increases for the remainder of the gas
year unless wholesale prices change significantly enough for the CER to conduct
another review.
Energy policy
Europe – examining the nuclear policies
Introduction
Every so often Pipes & Wires
examines the nuclear policies of various European countries, usually on an
ad-hoc basis as issues become news-worthy. This article revisits some of the
more general trends and consolidates the observations to date.
Some general trends
A couple of trends that seem to
drive energy policy are worth noting…
·
The hand-in-hand beliefs that man-made carbon emissions cause
climate change and nuclear power is bad seem to be crumbling. Many adherents
are now being forced to either believe that if man-made emissions are the cause
of climate change, then nuclear must be a possibility, or the alternative
belief that man-made emissions don’t cause climate change.
·
Security of supply is an increasingly important issue, especially
as gas supplies from Russia become increasingly subject to interruption.
·
Some ill-conceived emission reduction targets that were hastily
agreed to are proving difficult to achieve by energy efficiency and renewables
as demand increases and old coal-fired plants are shut down.
·
It’s all very well to hold lofty ideological views from the safety
of the opposition benches, but it’s another thing to massage competing
objectives into effective policy once you’re elected.
Observations to date
Pipes & Wires observations to
date include…
·
UK – official government policy is that a new generation (possibly
up to 10) of nuclear plants will be built.
·
Germany – ruling party has openly opposed phase-out policy (which
was established in 2000), and has rejected a compromise deal to postpone the
phase-out in return for a ban on new nuclear power.
·
Sweden – will scrap the phase-out of nuclear plants (which dates
back to 1980), and will also build new nuclear plants to reduce emissions and
reduce dependence on fossil fuels.
So it seems that across Europe
there is a significant embracing of nuclear power. A couple of key issues to
watch will be…
·
Whether Sweden’s turn at the EU Presidency will reflect its
new-found belief in nuclear power.
·
Whether the economic recession will prompt the rise of the
political left (on the theme that see … ha ha … capitalism has failed), which
will in turn bring their traditional anti-nuclear views.
·
How well the market embraces the planned new construction in the
UK (which will require very firm policy undertakings from the Brown
government).
Pipes & Wires will continue
to examine the nuclear policies of the various European countries in future
issues.
Mergers,
acquisitions & take-over’s
Europe – E.On creates acquisition opportunities
Introduction
Once again Pipes & Wires
turns to the ubiquitous German utility E.On.
On the back of some previous articles that note E.On is well placed (or at
least better placed than many of its competitors) to weather the economic
storm, this article examines E.On’s asset sell down at a time that many
commentators believe is pretty rotten.
Background
The EU
Competition Office’s belief that the EU energy markets lacked competition
because of vertical consolidation was a broad driver of asset sales. In amongst
this was the specific issue of E.On offering to sell its transmission business E.On Netz in return for the EU dropping an
anti-trust case. Readers might also remember from Pipes
& Wires #72 that this move appeared to leap-frog E.On ahead of its
major rivals like EDF, RWE
Transportnetz and EnBW
who had consistently opposed forced unbundling.
The proposed asset sales
E.On had agreed to sell the
following…
·
About 4,800MW of generation capacity (which is about 20% of its
German capacity).
·
It’s UHV transmission business, E.On Netz.
On the face of it, this would
enable the UHV grid to operate as a transparent pool, completely independent of
vested interests from other segments of the market.
Progress on the asset sales
So far E.On seems to have made
good progress with the asset sales…
·
In December 2008 E.On agreed to swap 1,700MW of generation
capacity and power procurement rights with Electrabel
in return for 910MW of coal and gas-fired plant and 770MW of power procurement
rights in Belgium, giving E.On a 12% stake in the Belgian market.
·
In December 2008 E.On agreed to swap 525MW of brown and black coal
fired plants in Germany with EnBW (what E.On will receive has not been
disclosed, but industry comment suggests that it could be a cash deal, worth
about €800m).
·
In January 2009 E.On
agreed to swap assets worth €4.495b with Swedish utility Statkraft. Under
the deal E.On will receive a 44.6% stake in E.On Sverige AB and the Lövön power
station, whilst Statkraft will receive a 4.1% stake in E.On along with power
stations, gas storage contracts, electricity supply contracts and district
heating plants in Sweden, Germany and the UK (the sale & purchase agreement
was 600 pages long !!).
This still leaves E.On with about
2,100MW of generation capacity and the UHV grid to sell. In addition to a range
of parties that the grid cannot be sold to, the market for generation capacity
in Germany is pretty soft. So further sales or swaps are unlikely to be easy!!!
Aus – BG Group captures Pure Energy
Introduction
It’s been a while since Pipes
& Wires took a close look at BG Group’s
prowl around Australia, a prowl that cuts across a lot of different themes. On
the back of BG’s recent acquisition of the Queensland
Gas Company, this article examines BG’s acquisition of Pure Energy as part of their
bid to become a leading coal seam gas producer (CSG).
The themes
BG’s prowl around Australia cuts
across a lot of common themes, many of which have been discussed in Pipes &
Wires…
·
The consolidation of the Australian upstream gas industry.
·
The rise of CSG as an alternative to natural gas.
·
The security of gas supplies in the UK.
·
Strategies of backward integration.
What exactly is Pure Energy and why is it so important ?
Pure Energy began only 5 years
ago with the vision of being the leading CSG producer in Queensland and in Australia.
CSG and CSG producers like Pure are emerging as a new source of competitively
priced gas, which underscores their value as the industry consolidates.
Pure Energy’s largest shareholder
Arrow Energy is also a
major CSG producer, and has itself recently merged with CH4 Gas to create
Australia’s largest CSG producer (and to complicate things further, Arrow has a
partnership with Shell). That in itself is
a consolidation of the CSG sector within the overall gas industry.
BG’s bid for Pure Energy
The starting point for examining
BG’s bid is to note the following …
·
BG had captured 70% of Pure’s shares by late March 2009 at A$8 per
share.
·
Arrow has a 20.3% stake in Pure, along with a view to takeover
Pure (which it abandoned in early March 2009).
·
Shell also bid for Pure, but then indicated that it would sell its
11% stake in Pure to BG, thereby under-mining Arrow’s chances of acquiring
Pure.
At the time of writing, that left
BG with its already-acquired 70% stake in Pure plus the 11% stake formerly
owned by Shell. BG then offered A$8.25 per share for Pure on the condition that
it exceeds the 90% acceptance threshold (which it has since done). From Pure’s
point of view, the A$8.25 per share offer values Pure at A$1.03b, and would
give Arrow a tidy A$200m profit. Pure has recommended to its shareholders that
they accept the offer.
BG plans to build 1 of the 5
planned LNG plants in Queensland, presumably to supply its UK markets.
Germany – RWE sells gas network
Introduction
Regulatory pressure from the EU Competition Commission
and from individual governments as a key driver of asset sales has been a
recurring theme of Pipes & Wires … recent articles have examined E.On’s sales and the Pax Electrica 2 deal in
Belgium. This article examines the forced sale of RWE
Transportnetz Gas’ (TSO Gas) high-pressure gas network in the western
provinces of Germany.
Background
The background to this article is
deeply rooted in EU competition law and the allegation that RWE breached Article
82 of the EC Treaty by abusing a dominant position in a market.
What exactly is TSO Gas ?
TSO Gas is an independent high-pressure
gas transmission business within the RWE group operating in a core market in
the North Rhine, Westphalia and Lower Saxony areas. TSO ships about 15b m3
of natural gas per year through 4,100km of pipelines.
The sale process
The first step in the sale
process was to conduct a market test, which has already been completed. One of
the reasons for this was to ensure that the transfer of ownership wouldn’t
simply move the vertical integration problem to another company. RWE will now
begin the process of actually selling the network, which will be overseen by
the regulator.
This is obviously a major
transaction with the potential to reshape the German gas industry, so Pipes
& wires will make further comment as the sale proceeds.
A bit of light reading…
Book review – “Connecting The Country”
Helen Reilly’s latest book
“Connecting The Country” is a history of NZ’s national grid from 1886 to 2007
that interestingly enough splits into the development of the AC and DC systems.
Filled with photos, anecdotes and witty stories this is a really worthwhile
read.
Order your copy from Transpower’s web site … cost
is $60 incl. GST.
Wanted – old electricity history books
If anyone has an old copy of the
following books (or any similar books) they no longer want I’d be happy to give
them a good home…
·
White Diamonds North.
·
Northwards March The Pylons.
·
A Jubilee History Of The Auckland Electric Power Board (1972).
CapEx – general interest stuff
Levels of service and their impact on CapEx
This presentation was made at the
Infrastructure CapEx Summit in November 2008. If you’d like a copy, pick here.
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
With an RMA overhaul, local body governance
reform, and increased funding for critical projects all in the pipeline, the
stark reality is that the national infrastructure landscape is set to evolve
rapidly under the new Government. The question is - how will you adapt to these changes?
Conferenz’s Fast-tracking National
Infrastructure Summit will outline
all of the changes and their likely effects on your organization…
· The
need for cross-industry co-ordination in infrastructure policy
· Planning
for the new fast-tracked RMA consultation process
· Prospects
for local body governance
· Defining
the criteria for “projects of critical national importance”
· Examining
different funding mechanisms - how will PPPs fit in under the new Government?
Make the investment
and get ahead of the curve. Register now by phoning Conferenz on (09) 912 3616,
Email register@conferenz.co.nz or Register Online at www.conferenz.co.nz
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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.