From the director…
Welcome to Pipes & Wires #82.
This month starts with some extensive analysis of several regulatory decisions
from Australia. We then dive into a wide array of policy examination, with
examination of competition policy in the UK and Europe and then energy policy
in the US, France and the UK. Issue #82 then closes with an examination of the
judicial review of a major transmission investment decision in new Zealand.
About Utility Consultants
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Regulatory determinations
Aus – varying GasNet’s access arrangement
Introduction
Most of us appreciate that any
tariff determination is based on projections and assumptions that look forward
5 years, and would understand that any robust regulatory regime will include
provision to review the determination if there are material changes to the
underlying costs, asset configurations or operating modes. Following on from
discussions in Pipes
& Wires #66 and #73,
this article examines GasNet’s 2nd requested variation and the AER’s
draft response.
Background
The prevailing regulatory
framework is the National Gas Rules
(NGR), and in particular Rule 65 which provides for a pipeline owner to seek a
variation to an access arrangement.
GasNet’s variation proposal
The basis of GasNet’s proposed
variation is the changes in the way compressor fuel gas is treated under the
Victorian gas industry Market & System Operation Rules which effects the
application of tariffs for the Western Underground Gas Storage (WUGS) and the
SEA Gas connection points. GasNet proposed a number of variations including removing
the WUGS Transmission Refill Tariff and applying the standard South West Zone
withdrawal tariff to all withdrawals from WUGS (understanding why GasNet sought
the variation requires an understanding of the asset configuration and
operating modes, which are described in the AER’s draft decision).
The AER’s draft decision
In its draft decision of April
2009, the AER proposes to decline GasNet’s proposed variation for several
reasons. The AER notes that while GasNet has raised some valid issues, the AER
is concerned about GasNet’s proposed means of addressing those issues.
Aus – final electricity distribution determinations
Introduction
In April 2009 the Australian Energy Regulator (AER) released
its Final Decisions for the electricity distributors in New South Wales and the
Australian Capital Territory. This article examines those decisions in the
context of the Draft Decisions of December 2008 that were examined Pipes
& Wires #78.
Background
The legal framework for
electricity price decisions is the National
Electricity Rules (NER), which includes the following requirements…
·
The requirement for an electricity distributor to submit a
Proposal for the next price control period 13 months prior to the start of that
period. The next control period for the NSW-ACT distributors (Integral Energy, EnergyAustralia, Country Energy and ActewAGL) starts on 1 July 2009, hence
their Proposals had to be submitted by 31st May 2008.
·
Setting out what a Proposal must contain.
·
The requirement for the AER to make its Final Decision at least 2
months prior to the start of the next control period.
Comparison of Proposals and Draft Decisions
The following table compares the
Proposals, the Draft Decisions and the Final Decisions…
|
Parameter |
Integral Energy |
EnergyAustralia |
Country Energy |
ActewAGL |
||||||||
|
Prop. |
Draft |
Final |
Prop. |
Draft |
Final |
Prop. |
Draft |
Final |
Prop. |
Draft |
Final |
|
|
Opening RAB ($m) |
$3,835m |
$3,678m |
$3,690m |
$8,218m |
$8,188m |
$8,325m |
$4,236m |
$4,247m |
$4,319m |
$593m |
$588m |
$598m |
|
CapEx ($m) |
$2,953m |
$2,914m |
$2,721m |
$8,659m |
$8,435m |
$7,838m |
$4,008m |
$3,955m |
$3,826m |
$287m |
$278m |
$275m |
|
OpEx ($m) |
$1,477m |
$1,460m |
$1,516m |
$3,047m |
$2,638m |
$2,628m |
$2,160m |
$1,975m |
$2,052m |
$359m |
$296m |
$341m |
|
Depreciation ($m) |
$482m |
$568m |
$608m |
$609m |
$600m |
$626m |
$716m |
$784m |
$814m |
$87m |
$89m |
$94m |
|
Revenue ($m) |
$4,695m |
$4,632m |
$4,485m |
$10,009m |
$9,447m |
$8,786m |
$5,978m |
$5,819m |
$5,672m |
$823m |
$779m |
$793m |
|
WACC |
9.76% |
9.72% |
8.83% |
9.76% |
9.72% |
8.78% |
9.76% |
9.72% |
8.78% |
10.7% |
9.82% |
8.79% |
Pipes & Wires will continue
its examination of the Australian distribution Decisions towards the end of
2009 when the Draft Decisions for SA and Queensland emerge.
Aus – final electricity transmission determinations
Introduction
Pipes
& Wires #73 noted the Regulatory Proposals submitted by two Australian
electricity transmission businesses, TransGrid
in NSW and Transend in Tasmania. This
article examines the Australian Energy
Regulators’ (AER) Draft and Final Decisions (and my apologies that an
article examining the Draft Decisions never happened).
Comparing the Proposal, Draft and Final Decisions
The key features of each Proposal,
Draft and Final Decision included…
|
Parameter |
TransGrid |
Transend |
||||
|
Prop. |
Draft |
Final |
Prop. |
Draft |
Final |
|
|
Total CapEx |
$2,627m |
$2,377m |
$2,405m |
$681m |
$615m |
$606m |
|
Total OpEx |
$855m |
$765m |
$758m |
$281m |
$260m |
$254m |
|
Nominal risk free rate |
5.70% |
5.46% |
4.29% |
6.37% |
5.27% |
4.30% |
|
Nominal vanilla WACC |
9.15% |
9.82% |
8.79% |
10.65% |
9.64% |
8.80% |
|
Opening asset base |
$4,237m |
$4,234 |
$4,218m |
$987m |
$994m |
$951m |
|
Smoothed P0 |
0% |
0% |
0% |
-28.5% |
-18.9% |
0% |
|
Smoothed X |
-5.59% |
-4.39% |
-4.10% |
-6.4% |
-5.8% |
-5.2% |
Pipes & Wires will continue
its examination of the Australian decisions towards the end of 2009 when the
Draft Decisions for the SA and Queensland distributors emerge.
Aus – final decision on WACC
Introduction
Pipes
& Wires #75 and #79
examined the Australian Energy Regulator’s
(AER) planned review of the WACC components that would apply to all forthcoming
wires decisions. This article summaries the AER’s final decisions and compares
them to the proposed conclusions that were set out several months ago.
Comparing the proposed and final conclusions
The AER’s proposed and final
conclusions are compared below...
|
Proposed conclusions |
Final conclusions for transmission and
distribution |
|
The nominal risk-free rate (Rf) shall be based on a
moving average annualised yield on Commonwealth Government bonds having a
maturity period that matches the term of the control period. |
The nominal risk-free rate (Rf) shall be based on a
moving average annualised yield on Commonwealth Government bonds. However the maturity period shall be
10 years. |
|
The time period during which
the risk-free rate is to be calculated shall be a period proposed by the TNSP
or DNSP that is as close as practically possible to the start of the control
period, or some other period specified by the AER if it does not agree with
the period proposed. |
The time period during which the risk-free
rate is to be calculated shall be a period proposed by the TNSP or DNSP that
is as close as practically possible to the start of the control period, or
some other period specified by the AER if it does not agree with the period
proposed. |
|
The equity beta (βe) shall be reduced
from the current range of between 0.9 and 1.0 to a lesser figure of 0.8. |
The equity beta (βe) shall be 0.8. |
|
The market risk premium (MRP)
shall remain unchanged at 6.0%. |
The market risk premium (MRP) shall be 6.5%. |
|
The ratio of debt to (debt +
equity) shall remain unchanged at 0.6. |
The ratio of debt to (debt + equity) shall
remain unchanged at 0.6. |
|
The benchmark credit rating
shall increase from BBB+ to A-. |
The benchmark credit rating shall remain at BBB+. |
|
The assumed utilisation of
imputation credits (γ) shall
increase from 0.5 to a greater figure of 0.65. |
The assumed utilisation of
imputation credits (γ) shall
increase from 0.5 to a greater figure of 0.65. |
Disclaimer
Readers should read all relevant
AER publications in their entirety. Neither Utility Consultants Ltd nor its
shareholder or directors shall be responsible for any action or failure to act
based on this article.
Competition
policy
Europe – concluding the gas market investigation
Introduction
Accusations of anti-competitive
behavior in the energy sector are certainly not uncommon. This article examines
the EU’s recent investigation into alleged anti-competitive behavior by
German gas transmission utility RWE
Transportnetz Gas.
Background to the investigation
In May 2006, the EU Competition
Commission commenced an investigation into the German energy market as an
adjunct to the energy sector competition inquiry (which was discussed in Pipes
& Wires #56 and #58).
Anti-trust proceedings were then opened against RWE a year later in May 2007.
The legal basis of anti-competitive behavior
The legal basis of
anti-competitive behavior is based on Article
82 of the EC Treaty which prohibits a business that holds a dominant
position in an EU market from abusing that position. Abusing a dominant
position is defined to include inter alia…
·
Directly or indirectly
imposing unfair purchase or selling prices or other unfair trading conditions.
·
Limiting production,
markets or technical development to the prejudice of consumers.
·
Applying dissimilar
conditions to equivalent transactions with other trading parties, thereby
placing them at a competitive disadvantage.
· Making the conclusion of contracts subject to acceptance by the other
parties of supplementary obligations which, by their nature or according to
commercial usage, have no connection with the subject of such contracts.
Within this broad framework of competition law, the Commission needs to act
in accordance with Chapter
III of Regulation 1/2003 and Regulation 773/2004. The detail of this is
beyond the scope of this article, but the important feature to note is that
Article 9 of Regulation 1/2003 allows the Commission to turn a voluntary
commitment by a business into a legally binding requirement.
The EU’s accusations
The EU Competition Commission
believes that RWE’s behavior may have been anti-competitive on the following 2
counts…
·
RWE may have refused access to its network, ostensibly by using its
dominant role to keep the network’s transmission capacity all to itself.
·
RWE may have intentionally set its transmission tariffs at an
artificially high level to squeeze the margins of those competitors that did
have access to the network.
The required remedy
In order to avoid a fine of up to
10% of its revenues (which would amount to about €1b), RWE has undertaken to
sell its gas transmission network. The Commisson’s acceptance of RWE’s
undertaking escalates that undertaking into a legally binding commitment
pursuant to Article 9 of Regulation 1/2003, but in return closes the anti-trust
investigation. RWE must sell the network to an entity that does not have an
interest in allocating transmission capacity. The sale will be overseen by a
Trustee with the final sale being approved by regulators.
For its part, RWE says its
commitment to sell the network is not an admission of guilt, but simply
represents a prudent business decision to avoid protracted litigation.
UK – selling the airports
Introduction
It’s been a long while since
Pipes & Wire’s has discussed airports, but a recent decision in the UK that
is in keeping with a common theme of competition law makes for some interesting
analysis and comment. This article examines the Competition
Commission’s conclusion that common ownership of airports within
geographical clusters was restricting competition.
Background
The British Airports Authority
owns 7 airports in the UK that fall into 2 broad geographical clusters – Heathrow, Gatwick, Stansted and Southampton in the south of
England, and Glasgow, Edinburgh and Aberdeen in Scotland.
In March 2007 the Office of Fair
Trading referred the supply of airfield services in these markets to the Competition
Commission for investigation. The Office
believed it had reasonable grounds for suspecting that a feature or
combination of features in the market or markets in which BAA supplies airfield
services prevents, restricts or distorts competition.
The Commission’s findings
In March 2009 the Commission
released its findings,
which were broadly as follows...
·
That BAA’s common ownership of airports in south-east England and
lowland Scotland gives rise to adverse effects on competition in the markets
for airfield services.
·
That Heathrow is the only significant hub in the south-east, or
indeed in all of England.
·
That Aberdeen is geographically isolated and it would be
unattractive to establish a competing airport.
The Commission’s recommended
remedies included...
·
That Stansted and Gatwick be sold to different
organisations.
·
That Edinburgh or Glasgow be sold.
BAA’s response to the Commission’s remedies
BAA’s official response was very
measured. The need to change is recognised, and BAA clearly notes that is
attempting to improve its service levels and had already commenced the sale of
Gatwick in September 2008.
Perhaps more importantly in the
context of Pipes & Wires’ on-going examination of competition law and its
usual consequences, the climate for selling infrastructure businesses is not
exactly good at the moment.
Energy policy
US – the super-grid question
Introduction
As the move away from fossil-fuelled
generation intensifies (particularly towards wind) and electric utilities seek
better utilisation of generation plant, interconnection of grids is a hot topic.
This article examines the possibility of a super-grid that was discussed in a recent article by
the Manhattan Institute.
Some engineering background to interconnection
For those who aren’t from an
engineering background, the principle of interconnection exploits the different
times at which individual customers’ demand peaks (and it only takes about 20
houses to get a reasonable diversity). This enables expensive peaking plant to
be avoided, and as interconnection spreads it begins to further exploit factors
such as time zones and weather zones (which now includes catching wind over as
wider area as possible).
The value of interconnection
The article by the Manhattan
Institute estimates that market price spreads and under-utilised capital add
about 5c to 6c per kWh whilst a nation-wide super-grid could move about 25% of
the nations’ generation at less than 0.5c per kWh. So whatever the precise
numbers are, it probably does merit a further look.
The plans for a super-grid
Late last year Electric
Transmission America (ETA) raised the profile of a possible 765kV
super-grid, ostensibly using the environmental argument that less corridor
width is required than for the equivalent power transfer at 345kV or 500kV.
ETA’s partners are American Electric Power (AEP) and MidAmerican Energy Holdings, so
the background in 765kV transmission is certainly well established. ETA also
sees itself as being well positioned to overlay a 765kV super-grid on the
existing grids emphasising that this will facilitate wind generation and will
enable markets that are currently exposed to fossil fuel price volatility to
obtain lower and more certain prices.
Mixing grids and markets
The roll-out of a super-grid
overlaying existing grids would, on the face of it, remove transmission
constraints that are leading to price spreads between markets (the very thing
that the Manhattan Institute article discussed). If we connect this to the
current threat of unbundling in Europe (especially E.On’s
planned voluntary sale of its UHV grid business E.On Netz) and the underlying reasoning
that a grid owner can manipulate energy supply decisions to its own advantage,
the super-grid could require a careful policy framework.
France – examining the nuclear policy
Introduction
Pipes
& Wires #81 consolidated some previous ad-hoc examinations of nuclear
policies in Sweden, Germany and the UK. This article continues that theme with
a brief look at France’s nuclear policy.
France’s current dependence on nuclear power
France has the highest dependence
on nuclear power in the world ... between 75% and 90% of France’s electricity
is generated by 59
reactors totaling 63,000MW. Of its typical annual nuclear generation of
430,000GWh, France exports between 60,000GWh and 80,000GWh per year to Belgium,
Germany, Italy, Spain, Switzerland and the UK. As an aside it’s really ironic
that some of these countries have rather strong anti-nuclear policies.
The beginnings of France’s nuclear industry
The history of France’s nuclear
power industry seems closely connected (in fact almost indistinguishable) from
its nuclear weapons program after WW2, and appeared to stumble along until the
1st oil shock of 1973. Around this time France realised that it was
short on indigenous energy resources but very strong in heavy engineering
capability. As a result Electricité de France
(EDF) installed 56 reactors by about 1990.
Current policy positions
Public opinion in France is very
supportive of nuclear power, and seems to have taken less of a beating from the
environmental movement than the nuclear policies of other European countries.
At an official level, France’s
energy policy explicitly acknowledges the importance of nuclear power in
securing energy supplies. This importance was recently re-affirmed by the
establishment of a top-level council of ministers and officials to specifically
drive nuclear initiatives. Curiously enough, nuclear energy has had historical
support from France’s political left, which is in distinct contrast to Germany
and Sweden.
UK – securing Britain’s electricity supplies
Introduction
The importance of natural gas in
filling Britain’s emerging electricity supply gap has been a common theme of
Pipes & Wires over recent months. This article notes the emergence of 3,800MW
of gas-fired generation and examines the security of supply issues around that
generation.
The new power stations
The new power stations are...
·
Npower received approval to
build a 2,000MW combined-cycle plant at Pembroke.
·
Centrica received approval
to build a 1,020MW combined-cycle plant at King’s Lynn.
·
Powerfuel
plans to build an 800MW combined-cycle plant at Yorkshire by 2012.
Security of gas supply
One of the salient features to
have emerged from the debate around the next generation of nuclear stations is
the critical role that gas-fired generation will play over the next few years
between the closure of several large coal-fired stations and the new nuclear
stations coming on stream. A key reason for this is the short time to construct
and commission a gas-fired station. However this reliance on gas-fired plant
does seem puzzling given that the UK’s gas supplies seem far from secure ...
the UK is more and more dependent on piped gas from Russia that is increasingly
subject to interruption so it will be interesting to see just how well these
gas-fired stations will fill the gap.
US – Maryland seeks to re-regulate
Introduction
Long-time readers might remember
that Pipes
& Wires #71 examined the possibility of using the Baltimore Metropolitan Council’s
reservoirs to generate peak MW’s. That article also noted that as part of the
election campaign for Governor,
unsuccessful candidate Douglas
M. Duncan wanted to re-regulate Maryland’s power industry “so that customer
bills would automatically return to pre-deregulation levels”. This article
examines 2 cross-filed bills that were introduced to the Maryland legislature
in February 2009 requiring a return to a regulated market that seemed to be
underpinned by a belief that reregulation will magically lower power prices.
Key features of the bills
The 2 bills are...
·
The Public Service Commission – New Electric Generation Facilities
– Rate Regulation & Contracts was filed as Senate Bill 844
cross-filed with House
Bill 1530. These bills would broadly require electric utilities to file
long-term development plans with the Public Service Commission (PSC), require
the PSC to consider those plans, empower the PSC to instruct an electric
utility to build new generation, and state an intended return to a regulated
market.
·
The Maryland Electricity Reregulation And Energy Independence Act
2009, which was filed as House Bill 1312 cross-filed with Senate Bill 795. The
broad provisions of these bills are similar to SB844 and HB1530.
Passage of the bills
As of late April 2009 the passage
of the bills is as follows...
·
SB844 passed its third reading 27 votes to 19 on 30th
March, whilst HB1530 was withdrawn after receiving an unfavorable report by the
Economic Matters committee.
·
HB1312 was withdrawn after an unfavorable report by the Economic
Matters committee, whilst SB795 had only progressed to its first reading.
So although SB844 passed
through the Senate successfully, it stalled in the House and had not progressed
any further when the General Assembly adjourned on 13th April. This
means that the bills are technically dead and will need to be reintroduced in
the next legislative session.
Pipes & Wires comments
If we go back to what appears to
be the underpinning motivation for these bills (ie. that reregulation will
magically reduce electric tariffs to their pre-deregulation level), I think
there will be some surprises. Sure the creation of a wholesale market which has
then faced a short-fall of generation capacity has probably contributed to the
tariff increases (and it remains to be seen whether instructing utilities to
build new capacity will fix that issue), but the whole approach does seem to
overlook the significant increases in coal and gas prices over the last 10
years. Like most things, time will tell.
Legal decisions
NZ – judicial review of the 400kV decision
Introduction
Most of us can recall only too
well the controversy around the Electricity Commission’s decision
to approve an amended version of Transpower’s proposed
400kV line from
Whakamaru to Otahuhu. This article examines the judicial review of that decision sought
by New Era Energy.
What exactly is a judicial review ?
Broadly
speaking, a judicial review is a process in which the High Court reviews the
exercise of power, typically by a government agency or local authority. A
judicial review is usually restricted to matters of process rather than
substance. Because it is process
focused, a successful judicial review would normally only result in the Court
ordering the decision-maker to reconsider its decision and it would be rare for
the Court to ever substitute its own decision for that of the original
decision-maker (ie. judge on issues of substance).
The Commission’s decision
In January 2007, the Electricity
Commission announced that it intended to approve an amended version of
Transpower’s proposed 400kV line. This decision was confirmed as final in June
2007, and was a reversal of the Commission’s previous decision to decline the
originally proposed line.
What exactly was New Era Energy seeking ?
New Era Energy believed that the
Commission did not adopt proper and fair processes in reaching its decision of
January 2007, and wanted the High Court to set aside that decision. The basis
of New Era Energy’s
claim included illegality, irrationality, pre-determination & bias,
and mistake of fact.
The High Court’s decision and New Era’s response
In a ruling released in early May
2009, the High Court turned down New Era’s request for a judicial review,
rejecting the claim on all grounds and contemplating costs against New Era.
Subsequently, in mid-May 2009 New Era announced that it would appeal the High
Court’s decision.
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.
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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
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determinations.
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