From the director…
Welcome to Pipes & Wires #84.
This issue covers a wide range of stuff, and starts by examining 3 wide ranging
regulatory matters in New Zealand, Australia and the US. We then look at some
energy policy issues in Europe and the US and conclude this issue with a look
at acquisitions in the US and Spain and some energy market trends in Germany
and the US.
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Regulatory policy
NZ – assessing spend estimates
Introduction
Investment and regulatory
certainty is becoming an increasingly important issue in the regulated
infrastructure space, especially as CapEx requirements climb steadily. This
article briefly examines the Input Methodologies that will be used to hopefully
create this increased certainty within the emerging New Zealand regulatory
framework, and comments on the likely approaches for assessing CapEx.
Background
Readers will be well aware of the
regulatory reform process, commonly known at the Part
4A Review (because it extensively reviewed Part 4A of the Commerce Act 1986).
Subpart 3 of Part 4 of the amended Act provides for...
·
Establishing an Input Methodologies requirement.
·
What matters must be addressed by the Input Methodologies.
·
The process that must be followed in setting the Input
Methodologies.
The spend assessment report
In June 2009 the Commerce Commission released a Discussion
Paper, and appended to that Paper was a report
by Farrier Swier Consulting of Melbourne on assessing expenditure under a
customised price-path regime. Assessing expenditure is obviously a key
component of approving a revenue profile hence it is worth examining two of the
more salient issues raised in the Farrier Swier report....
·
The timeframe set out in the Act for the Commission to assess
customised price path is short, certainly significantly shorter than in the UK
and Australia.
·
The report suggests that engineering techniques (as opposed to
economic techniques) are likely to be the preferred assessment methods.
Both of these features will
require careful thought and planning, the first by the Commission and the
second by regulated businesses.
Where could this lead ?
The Farrier Swier report emphasises
the likely expectation that the sharp end of a customised price path proposal
will be a strong AMP. This has already led to an increasing recognition that
AMP’s will need to be considerably stronger than in previous years. Utility
Consultants has extensive experience in linking AM policies, plans and
practices to regulatory requirements both in New Zealand and in Australia. To
discuss how your 2010 AMP and associated processes could be strengthened, pick here
or call Phil on (07) 854-6541.
Disclaimer
The subject of this article is a Discussion
Paper, and does not represent the Commission’s final thoughts on the matter.
Accordingly the views and conclusions expressed in this article may or may not
occur, and Utility Consultants accepts no liability for any action or inaction
by readers.
Regulatory determinations
Aus – the SA and Queensland electricity resets
Introduction
ETSA Utilities, Energex and Ergon Energy recently submitted Regulatory
Proposals to the Australian Energy Regulator
(AER) for the 5 year control period beginning on 1st July 2010. This
article notes the parameters sought by those proposals to set some context for
future analysis.
Background
Chapter 6 of the National
Electricity Rules requires the AER to make determinations in regard to the
prices that Australian electricity distributors can charge for their various
distribution services. The timeframe requires the distributors in question (in
this case, ETSA, Energex and Ergon) to submit their Regulatory Proposals 13
months prior to the start of the control period (NER 6.8.2). In this instance,
the submitters were given an extra month because of the timing of WACC Review
(Pipes & Wires #75,
#79
and #82).
Proposed parameters for ETSA
The parameters proposed by ETSA
are as follows...
|
Parameter |
Proposal |
Draft decision |
Revised proposal |
Final proposal |
|
Total CapEx |
$2,315.4m |
|
|
|
|
Total OpEx |
$1,131.1m |
|
|
|
|
Opening RAB |
$3,011m |
|
|
|
|
Risk-free rate |
4.22% |
|
|
|
|
Nominal vanilla WACC |
9.04% |
|
|
|
|
P0 |
-10% |
|
|
|
|
Smoothed X |
-10% |
|
|
|
Proposed parameters for Energex
The parameters proposed by
Energex are as follows...
|
Parameter |
Proposal |
Draft decision |
Revised proposal |
Final proposal |
|
Total CapEx |
$6,466.0m |
|
|
|
|
Total OpEx |
$1,843.1m |
|
|
|
|
Opening RAB |
$7,887.4m |
|
|
|
|
Risk-free rate |
5.08% |
|
|
|
|
Nominal vanilla WACC |
9.49% |
|
|
|
|
P0 |
-16.9% |
|
|
|
|
Smoothed X |
-8.4% |
|
|
|
Proposed parameters for Ergon
The parameters proposed by Ergon
are as follows...
|
Parameter |
Proposal |
Draft decision |
Revised proposal |
Final proposal |
|
Total CapEx |
$6,032.9m |
|
|
|
|
Total OpEx |
$1,898.5m |
|
|
|
|
Opening RAB |
$6999.4m |
|
|
|
|
Risk-free rate |
5.08% |
|
|
|
|
Nominal vanilla WACC |
9.49% |
|
|
|
|
P0 |
-19.36% |
|
|
|
|
Smoothed X |
-7.69% |
|
|
|
Disclosure of interest
UMS Group Asia
Pacific in association with Utility
Consultants advised ETSA Utilities on parts of its Proposal.
US – the NY Regional Interconnect gives up
Introduction
Back in Pipes & Wires #80 we
examined the New York Regional
Interconnect in the context of whether the Federal
Energy Regulatory Commission (FERC) could invoke its powers under Title XII
of the Energy
Policy Act 2005. This article revisits the saga of the Interconnect and
notes its’ sad ending amidst a different line of bureaucracy.
What exactly is the Interconnect ?
The Interconnect is a proposed
200 mile long, ±400kV, 1200MW HVDC transmission line from the Edic substation
in upstate New York to the Rock Tavern substation in the power-hungry south-eastern
metro area. One of the stated objectives of the Interconnect is to offset the
reliability risk of aging transmission infrastructure.
What exactly is Title XII ?
Buried within Title XII is a
broad provision for the FERC to grant approval to modify or construct
transmission lines in a National Interest Electricity Transmission Corridor (NIETC)
if State regulators have withheld approval for more than 1 year after the
filing of an application. In February 2008 the FERC’s power’s were somewhat
chastened when the Fourth
Circuit Court Of Appeals in Virginia ruled that the FERC could only permit
transmission lines if a state had withheld its decision for more than 12
months, but that the FERC could not overturn state decisions. It appears that
the FERC had interpreted the phrase “withheld” as including “denied” as well as
“delayed”. By a 2 out of 3 majority, the Court ruled that making a clear decision
to deny a permit for the line was different to delaying a decision, and
therefore Title XII did not give the FERC the authority to overturn a clear
decision (even a negative decision) made within 12 months.
Why is Title XII relevant ?
The Interconnect was cited as an
example of a line subject to Title XII, and here’s where it is important. If
the PSC had denied the application by 7th August 2009, the
FERC would not have the power to overturn that denial. If, however, the PSC failed
to make a decision (either approval or denial) by 7th August
2009, the FERC’s jurisdiction could be invoked.
The end of the Interconnect
Sadly, the Interconnect won’t
progress as far as the 7th August 2009.
A key component of approving any
new line is obtaining an Article VII Certificate, which certifies environmental
compatibility and public need. In April 2009 the Interconnect advised the Public Service Commission of New York
that it was withdrawing from the Article VII process because the FERC had
denied the Interconnect’s request to review the New York ISO’s recently
approved transmission tariffs which would create an unacceptable financial risk
for the Interconnect’s investors.
The wider public policy issues
The issue of willing investors
being discouraged or prohibited from investing is a recurring theme in Pipes
& Wires. Here we have willing investors that have progressed a long way to
promoting a sensible objective of relieving congestion and off-setting
declining reliability and they get gazzumped by a tariff structure that
discourages their involvement.
Energy policy
US – lobbying for energy policy in Mississippi
Introduction
Pipes & Wires regularly
examines the energy policies of individual US states, not in any systematic
order but more as comment-worthy events emerge. This article examines not so
much the energy policies of the state of Mississippi but rather the role of the
newly launched Mississippi
Energy Policy Institute.
State v’s federal policies
Much of Mississippi’s
underpinning energy is fossil-based, so understandably President Obama’s cap
& trade tax and renewable energy standards seem unlikely to favor
Mississippi. One of Gov. Haley Barbour’s
stated policy objective is to have “more American energy and more affordable
energy” and he contrasts that against the alleged outcomes of Obama’s policies
of “less energy, and less affordable energy”.
The role of the Institute
The newly launched Mississippi
Energy Policy Institute is a privately funded institute with a membership
including Mississippi Power, Northrop Grumman and Chevron, but perhaps most importantly it has
the backing of the state
government. The role of the Institute is to ensure that Mississippi’s traditional
(fossil) and emerging (renewable) energy interests are strongly represented and
advocated in Washington, and its first attack appears to be on the federal
climate change bill that is before Congress. However, with both the House (lower) and the Senate (upper) being dominated by Democrats,
the Institute could have a tough job ahead !!!
Holland – examining the nuclear policy
Introduction
This article continues Pipes
& Wires recent examination of nuclear energy policies in Western Europe by
examining Holland.
The emerging picture in Western Europe
The emerging picture of nuclear
policy in Western Europe is one of left-leaning governments seizing upon anti-nuclear
sentiment that generally leads to 2 key policy elements – a moratorium on new
nuclear stations, and phasing out of existing nuclear stations. Everywhere
except France that is, where the political left have fervently embraced nuclear
power.
Holland’s nuclear industry
Unlike many other European
countries, only about 4% of Holland’s electricity is generated by nuclear
plants. Holland’s first nuclear station was a 55MW boiling water reactor
(BWR) at Dodewaard,
and it was hoped that this would pave the way for wide-scale nuclear
development that would overtake fossil-fired plants. The second of Holland’s 2
nuclear plants is a 452MW Siemens’ pressurised water
reactor (PWR) at Borssele
which was connected to the grid in 1973. Following the shut-down of Dodewaard
in 1997 (for cost reasons), Borssele became Holland’s only nuclear plant.
Holland’s recent nuclear policy
Around 1960, Holland’s policy was
to embrace nuclear power with the expectation that it would overtake
fossil-fired plants (as noted above). Like many countries, the Chernobyl melt-down
in 1986 seemed to create a tipping point at which government policy shifted
quite clearly into the anti-nuclear camp. However it does need to be noted that
large gas discoveries in the 1960’s had also dampened Holland’s enthusiasm for
nuclear power.
The anti-nuclear policy seemed to
really bare its teeth in 1994 when the Dutch government voted to phase out
Borssele by 2003, however this decision ran into legal difficulties. In 2003
the government deferred the phase out by 10 years until 2013, and then 2 years
later in 2005 abandoned the phase out decision altogether. In 2006 the
government concluded an agreement with Borssele’s owners that would allow it to
operate until 2034 subject to a commitment to high safety standards and a €250m
investment into sustainable energy.
Holland’s emerging nuclear policy
A plan submitted to parliament in
September 2006 noted the need to transition to a sustainable energy supply.
Interestingly enough, this plan noted that deferring the Borssele phase out was
a key component of this transition and could also reduce emissions. Recent
policy moves seem likely to intensify the move back into nuclear energy.
Mergers & acquisitions
US – progress on EDF’s bid for Constellation Energy
Introduction
Pipes & Wires has closely
followed Electricité de France’s (EDF) bid for
Constellation
Energy. This article examines the latest manoeverings on the deal.
Background
The story began when Pipes &
Wires examined EDF’s bid for Iberdrola (Pipes
& Wires #68,
#74
and #77)
that included a stake in Energy East,
and continued when Pipes & Wires noted EDF’s joint venture with
Constellation to build nuclear power stations in the US that included EDF
taking a 5% stake in Constellation. The credit-crunch led to EDF increasing its
stake to 10%, but then a competing bid from MidAmerican Energy Holdings emerged.
Readers may recall that even though MidAmerican’s bid was substantially lower
than the EDF-led bid, the MidAmerican bid would have provided a sorely-needed
cash injection for Constellation as well as fewer expected regulatory hurdles.
In mid-December 2008,
Constellation announced that it had terminated its negotiations with
MidAmerican and had further agreed to EDF acquiring 49.99% of its nuclear
business in return for an immediate injection of $1b cash. We thought that this
was the final closing of the deal.
The latest manoeverings
Since we thought it was a done
deal back in December, the following events have occurred...
·
The Maryland
Public Service Commission ruled that it had the right to determine whether
the deal is in the public interest (even though the PSC’s jurisdiction extends
only as far as Constellation subsidiary Baltimore
Gas & Electric). Constellation appealed the PSC’s ruling, claiming that
the deal is clearly permitted under an agreement passed by the state of
Maryland last year (whilst the states’ lawyers are arguing that a
yet-to-be-made decision cannot be appealed).
·
The Baltimore Circuit
Court ruled that Constellation’s appeal was premature and in any case the
Court lacked the jurisdiction to hear an appeal on a PSC ruling that was not
final.
·
Meanwhile Constellation argued that the PSC’s approval of
Constellation’s nuclear joint venture is not required because it will not
impact on BG&E.
·
Constellation appealed the Court’s ruling to the Maryland Court of Special
Appeals.
So there are plenty of legal
manoeverings going on !!!
What appears to be the problem ?
The root of the problem appears
to be a fear at state government level that BG&E will be used as a cash-cow
to fund Constellation and EDF’s wider activities. At first glance this would
appear to give the PSC at least some jurisdiction over the deal. However this
ignores the various structural and procedural arrangements that would be put in
place as part of the deal, such as EDF only appointing 1 of Constellation’s
directors and ensuring that the sole appointee does not vote on BG&E
matters nor have access to non-public BG&E information.
More disappointingly, at a wider
public policy level blocking the deal would also jepodise an estimated 4,000
construction jobs and 400 on-going jobs at the proposed third reactor at Calvert Cliffs nuclear power plant, a
plant that would provide much-needed generation and reduce CO2
emissions. For the avoidance of doubt, it should be noted that the PSC has
approved a third reactor, but whether or not it proceeds will depend on the
merger outcome.
Pipes & Wires will check back
in a couple of months to see what progress has been made and what policy issues
have emerged.
Spain – update on Gas Natural’s
pursuit of Union Fenosa
Introduction
Last time we looked at this deal
in November 2008 merger clearance from the Spanish competition regulator was
expected in either late December or early January, and full completion of the
takeover was expected by about May or June 2009. This article examines recent
progress on the deal.
Background
Gas
Natural has seen itself as a key player in consolidating the Spanish energy
sector. It has taken pokes at Iberdrola
(back in 2003) and Endesa (in early 2006),
but neither of these were successful. So when Grupo
ACS sought to sell its 45% stake in Union
Fenosa (as part of its joint-bid for Iberdrola), Gas Natural was ready and
waiting to accumulate 100% of Union Fenosa’s shares.
Latest movements
In late June 2009 Union Fenosa
shareholders approved the sale to Gas Natural. The enlarged Gas Natural will be
one of Europe’s 10 largest utilities with 20,000,000 customers (including some
in South America). The next step will be for Gas Natural to integrate the two
companies to exploit the newly acquired dual-fuel capability and to expand of a
broadened business platform.
While this ends Pipes & Wires
coverage of the Union Fenosa takeover, consolidation of the Spanish energy
sector is likely to be an on-going theme as Pipes & Wires examines the
Endesa takeover and Gas Natural’s apparent rejection of any interest in a
carve-up of Iberdrola.
Energy markets
Germany – consolidating the gas markets
Introduction
Fragmentation versus
consolidation within markets is often a contentious issue, but somewhere in the
middle there seems to a degree of consolidation that provides an optimum degree
of competition whilst also minimising the impacts of loss of scale, loss of
liquidity and increasing reconciliation requirements. This article continues
Pipes & Wires examination of Germany’s plans to reduce its gas market zones
to “something less than 10” by 1st October 2008.
Background
Historically Germany had over 20
gas transmission companies, and over 700 gas distributors (of which only a
handful had more than 100,000 customers). The Bundesnetzagentur decided that
“something less than 10” zones would provide more intense competition and
liquidity, and subsequently announced that 7 market zones would be formed. A
key driver of the need to consolidate is the requirement for inter-zonal
capacity contracts to support a widely competitive market, but a large number
of zones (as historically existed) also requires a burdensome number of
contracts.
Progress on consolidation
The Bund’s 2008 Report to
the European Commission indicated that the 19 gas market zones existing at
1st October 2006 had consolidated to 14 by the 1st
October 2007 and that further mergers were scheduled to occur by 1st
October 2008. However the Bund’s Report also notes that the further consolidation
of market zones that the Bund demanded would require inter-company cooperation.
Pipes & Wires will examine
the Bund’s 2009 Report in a few months to see if further progress has been
made.
US – public power generation in Maryland
Introduction
Pipes & Wires #71
and #76
examined possible moves towards public power generation in the US state of Maryland
following a number of pronouncements by Gov.
Martin O’Malley. This article re-examines that issue and also notes the additional
issue of Electricité De France’s (EDF) planned
acquisition of a 49.99% stake in Constellation
Energy’s nuclear business.
The background issues
The salient background issues
include...
·
Baltimore Gas & Electric’s
proposed tariff increases about 3 years became an election issue.
·
Criticisms of tariff increases seem to have totally ignored the
50% increase in coal prices over the period concerned.
·
The Maryland
PSC released a report forecasting rolling brown-outs by 2011 if no new
capacity was built.
·
The Baltimore Metropolitan
Council owns a number of water reservoirs that could be used to provide
peaking hydro generation on hot summer days.
The
emerging issues
The emerging issues include...
·
EDF plans to acquire 49.99% of Constellation Energy’s nuclear
business.
·
The PSC is trying to block the deal by claiming its jurisdiction
over Constellation subsidiary BG&E gives it a say in Constellation’s wider
activities, and that BG&E’s regulated business would (somehow) be used as a
cash cow.
The current situation
For the meantime it appears that
O’Malley’s vision of hydro peaking has been overtaken by the State’s stoush
with EDF and Constellation. What makes this particularly sad is that EDF
planned to build a third reactor at the Calvert
Cliffs nuclear power plant, providing the additional generation that the
PSC admits will be needed by 2011 (as well providing much needed jobs).
What started as a clever spark of
imagination seems to be dead in the water, so it’s probably a good place to
give up on this story.
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
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.