From the director…
Welcome to Pipes & Wires #86.
This issue starts by noting 2 regulatory policy issues in New Zealand, and also
includes some events in Australia and the US. However the bulk of this issue
examines a wide range of happenings in Europe, from nuclear policy to mergers
to anti-competitive behavior.
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Regulatory policy
NZ – draft decisions on the Default Price Path reset
Introduction
Pipes & Wires has been
closely following the evolution of the price control regime for electricity
lines businesses following the amendments to Parts 4 and 4A of the Commerce Act
1986. This article examines the Commerce Commission’s draft
decisions on the Default Price Path reset that it expects to apply to all
non-consumer owned lines businesses from 1st April 2010.
Legal framework for the DPP
Subparts 5, 6 and 7 of Part 4A of
the Commerce
Act 1986 set out the various instruments that the Commission can use to
regulate the supply of goods or services. Sections 53K to 53P set out the
requirements for the Default Price-Quality Path (DPP), and in particular s53O
requires a s52P determination to be made that must include a specified range of
elements such as the structure of the DPP, starting prices, rates of change and
quality standards.
The draft decision
The draft decision expects that
the reset will...
·
Be given effect via a single DPP, that the reset DPP will include
separately defined and assessed price and quality paths, that the key parameter
used will be “notional revenue”, and that the DPP will apply for 5 years.
·
Roll over the prices from 31st March 2010 and make any
P0 adjustments once the Input Methodologies process has concluded.
·
Apply a single X factor to all lines businesses, and that the X
factor should by 0 ie. CPI – X will become CPI.
·
Continue to include a supply quality standard of “no material
deterioration” which will be based on the SAIDI and SAIFI from the 2005 to 2009
period inclusive.
·
Will not include any specific mechanisms for incentivising energy
efficiency as those mechanisms are considered complex and too difficult to
include in the 2010 reset. However the Commission does note its belief that
because lines businesses will have flexibility to adjust pricing structures
under the DPP, there is at least some incentive to promote energy efficiency.
Next steps
The Commission will be receiving
submissions on the draft decisions paper until 11am, Monday 12th
October 2009. The Commission then expects to publish an updated draft decisions
paper in November 2009.
Disclaimer
This article is a summary of the
full paper, and does not purport to capture all the details. Those affected by
the draft decision should read the paper in its entirety. Utility Consultants
does not accept any liability for any action or inaction based on this article.
US – opposition to Energy Corridors
Introduction
Pipes
& Wires #71 and #80
examined the provision buried in Title XII, Subtitle B of the Energy Policy Act 2005
for the Secretary
Of Energy to designate National Interest Electricity Transmission Corridors
(NIETC’s). This article examines the challenge by a Colorado county and a
coalition of environmental groups on a plan to approve 6,000 miles of NIETC’s
on federally-owned land in the western USA.
The basis of the challenge
A challenge to the Bush
administration’s “West
Wide Energy Corridors” was filed in the Federal District Court
in San Francisco by San Miguel County
(Colorado) and a group of environmental advocates based on 2 issues...
·
That the designation doesn’t do enough to encourage renewable
energy.
·
It puts wildlife and public lands at risk.
The group claims that the
designation violates the National
Environmental Policy Act, the Endangered Species Act
and apparently the Energy Policy Act itself.
A few comments
Most of us fully appreciate that
these sorts of battles rely on emotional appeals, and they probably always will
because in many cases there is no single right answer.
However one of the more apparently
flawed assumptions is that the transmission lines that would be built on these
corridors would somehow be conveying coal-fired electricity when in fact the
increasingly strong picture is that it is renewables (particularly wind farms
in remote areas) that are driving transmission investment in new areas.
Presumably the basis of the court filing (“doesn’t do enough to encourage
renewable energy”) overlooks this issue.
Pipes & Wires will make
further comment as the court action progresses.
NZ – the future of asset management plans
Introduction
In late July the Commerce Commission released a discussion
paper on Information Disclosure. Chapter 8 of that paper considered the role
that asset management plans (AMP’s) are likely to play in fulfilling the
purpose of Information disclosure. This article which has been reprinted from Pipes
& Wires #85 takes a brief look at what is likely to happen.
Background
Part 4 of the Commerce Act 1986
provides for regulation of sectors where there is little or no competition or
likelihood of competition, and explicitly describes the purpose of that Part to
“promote the long-term benefit of consumers ... by promoting outcomes that are
consistent with competitive markets”.
Recognising that informed choice
is a key component of a competitive market, Subpart 4 of Part 4 sets out the
framework for Information Disclosure, with its purpose being to ensure that
sufficient information is available to interested persons to assess whether the
purpose (of Part 4) is being met ie. that outcomes consistent with competitive
markets are likely to occur. Subpart 4 includes provision at s53C(2)(h) for
AMP’s to be included in that disclosed information.
Key themes of the discussion paper
The key themes of the discussion
paper include...
·
That disclosing AMP’s will promote best practice.
·
That AMP’s for regulated businesses (electricity, gas and
airports) will have to demonstrate alignment with the business’ actual
processes and practices, probably by way of having the directors certify that
this is the case.
·
How expected outcomes of energy efficiency, loss reduction,
demand-side management and innovation might firstly be incentivised and
secondly how progress towards those outcomes might be assessed from the AMP’s.
·
An expectation that linkages between customers’ expressed
preferences and asset service levels will be demonstrable and strong.
Pick here
to receive a slide show that discusses these issues in more detail. Pipes &
Wires will make further comment as the consultation process progresses.
Regulatory determinations
Switzerland – electricity under pressure
Introduction
Downward pressure on prices is
one of the key objectives of most regulatory regimes. This short article
examines the recent transmission tariff reductions ordered for Switzerland’s 380kV
and 220kV grids by the Federal
Electricity Commission (ElCom).
Last year’s tariff reductions
In June 2008 the ElCom commenced
an investigation into electricity transmission prices after complaints from the
public. After examining the costs of about 40 grid operators, ElCom decreed
that the total grid charges for the 2009 year must be reduced by about €280m
(and in all fairness, the decreed reductions were itemised and included lines
items for which there was only weak justification). Operators were ordered to
recalculate their tariffs and to refund the “over charging” from the first few
months of the 2009 tariff year. Although the operators were able to appeal
ElCom’s ruling, ElCom decreed that its ruling would take effect immediately and
would make adjustments for the results of any appeals at a later date.
This year’s tariff reductions
On the 19th May 2009 the
proposed tariffs for the 2010 year were published. These tariffs were about 17%
higher than for the 2009 year due to general cost increases and the inclusion
of additional control system assets, and some of those tariffs were
provisionally reduced after a review by ElCom. However on 28th May
2009, the ElCom decided to launch an official investigation into tariffs.
Pipes & Wires will make
comment as and when decisions (in English) emerge.
Industry re-structuring
Germany – unbundling the grid
Introduction
The impending enactment of the
Third Internal Energy Market Package is expected to result in significant
structural change in the EU energy sector as a mad scramble to unbundle lines
and energy occurs. Like all structural changes, there will be leaders and
followers, and probably few surprises about who those leaders will be. This
article examines the restructuring of RWE’s
UHV transmission grid business RWE
Transportnetz Strom into a fully functional enterprise called Amprion that will report directly to RWE’s
group chief executive.
A bit about Amprion
Amprion will employ 850 staff,
and is planning on investing €3b in new transmission capacity over the next 10
years. Amprion sees its major challenges as integration of renewables and
providing a hub for increased competition in generation.
What’s in a name ?
The name Amprion means strength,
reliable power transmission and transparency, and is derived from Ampere and
Vision. It is also seen as similar to the Latin word Amplus meaning “far” or
“extensive” which reflects its investment horizons.
So how is Amprion different from RWE Transportnetz ?
One of the key drivers of the
Third Internal Energy Market Package has been the EU’s concern that competition
in Europe’s electricity and gas markets is being dampened by the high degree of
bundling of lines and energy with its associated incentives for the incumbent
line owner to favor its own energy business. The move to visibly separate
Amprion from being generally integrated with RWE’s other businesses should
facilitate competition, but more importantly it gives RWE’s grid some history
as a stand-alone business (like a couple of years separate financial accounts
and analysts commentary) if and when the time comes to sell it.
Energy policy
Lithuania – examining the nuclear policy
Introduction
Pipes & Wires is slowly
working its way around Europe, examining various nuclear energy policies. The
article examines the nuclear policy of Lithuania, which generates about 70% of
its annual 12,500 GWh generation from nuclear.
Chronology of nuclear power
Lithuania’s foray into nuclear
power began in 1974 when planning began for a 3 x
1,500 MW station near the village of Ignalina, with construction beginning
in 1978. The station was based around the Soviet-designed RBMK-1500 (which was a scaled up
version of the RBMK-1000 used at Chernobyl, and proved to be a source of great
concern after the Chernobyl melt-down in 1986).
Unit #1 was commissioned in 1983
and shutdown in December 2004 as a condition of Lithuania’s entry into the EU.
Unit #2 was commissioned in 1987 and is scheduled for closure in December 2009,
although the closure was the subject of a referendum that failed. Unit #3 was
abandoned during construction and then demolished.
In 2006 Lithuania invited Latvia,
Estonia and Poland to join with it to build a 2 x 1,600 MW station at Ignalina
to replace the original station, and in July 2008 the Visaginas
Nuclear Plant Company was established. Construction bids are expected to be
sought over the next few months.
Nuclear policy drivers
Lithuania’s nuclear policy is
driven by 3 powerful and potentially contradictory drivers...
·
The need for a secure electricity supply to underpin economic
growth.
·
The
commitment to close Unit #2 at Ignalina as part of Lithuania’s entry to the EU.
·
Pressure from the EU to reduce dependence on imported Russian gas
(which fires about 18% of Lithuania’s annual generation).
Current policy
Lithuania’s current policy is to
honor the commitment made to shutdown Ignalina #2 and to press on with a
replacement station. This is aligned to the EU’s policy of reducing dependence
on Russian gas and supporting demonstrably safe nuclear power (the EU is very
conscious that another meltdown could reverse the tide of public opinion which
is definitely warming toward nuclear power).
Next month Pipes & Wires will
examine Bulgaria’s nuclear policy.
France – merging the gas zones
Introduction
Readers will probably recall
Pipes & Wires coverage of the consolidation of the German gas market into
“something less than 10” high-pressure zones at the behest of the Bundesnetzagentur. This
article examines the Commission de Régulation de
l’Énergie’s (CRE) desire to see a similar consolidation of the French gas
market (possibly into 1 large zone covering the northern half of France) from
April 2011.
The existing gas zones
Since 1st January
2009, the market for high-pressure transmission has been organised into 3
balancing zones. Transmission System Operator (TSO) TIGF operates the south-west zone,
whilst GDF-Suez subsidiary GRTgaz operates the remaining 2 zones.
The issues driving consolidation
Research and public consultation
by the CRE has revealed the following drivers for consolidation...
·
Access to the south of France remains difficult, with no access
for the Fos-sur-Mer LNG
terminal.
·
The desire to interconnect with the Spanish gas transmission
system.
·
The need to strengthen gas import capacity from North Africa.
Proposed consolidation
The CRE proposed 3 options for
consolidation...
·
Merging the north and south zones of the GRTgaz transmission
system.
·
Adjusting tariff rules in the south of France, and in particular
abolishing the tariff change between the TIGF and GRTgaz networks.
·
Maintaining the status quo.
The general views emerging from
the CRE’s public hearings seemed split between users and network operators, with
users commenting that the 3 zone structure established on 1st
January 2009 has been good, and that moves to 2 and ultimately 1 zone should
definitely be considered. On the other hand, network operators (in particular
GDF-Suez and Total) were
hesitant to endorse the process and timeframe for further consolidation. However
it appears that the tariff abolition between the TIGF and GRTgaz’ south zone
will proceed.
Pipes & Wires will check back
on the CRE’s moves as news emerges.
Aus – keeping generation and retail separate
Introduction
Splitting and re-amalgamating
generation and retail is always contentious (especially when many stakeholders
perceive that it hasn’t worked). This article examines the rumored
re-amalgamation of Western Australia’s generator Verve Energy and retailer Synergy
that was recently scotched by Energy
Minister Peter Collier.
The original split of generation and retail
As part of Western Australia’s
electricity reforms, the energy activities of the vertically integrated Western
Power were disaggregated into a generator called Verve Energy and a retailer
called Synergy. All Verve’s generation was to be traded through a wholesale
market (WEM). This process is usually always controversial and sensitive, but
perhaps nowhere more than in Western Australia where the strict pecking order
of base, firming and peaking generation made it far from obvious how
competition would emerge (unless of course, IPP’s stepped into the breach).
The rumored re-amalgamation
In October 2008 Premier
Colin Barnett announced that Verve and Synergy would be re-amalgamated in
2009 “in order to stem Verve’s losses”. These losses arose from Verve being
unable to recover the full cost of generation, losses, which as one commentator
observed, were always there but have now become visible due to Verve’s stand
alone structure.
Criticism of Barnett’s
announcement was wide and extreme, ranging from the electricity users “don’t
stop the reform process now because we need to give new entrants confidence” to
the political opponents unhelpful “told you so”.
The most recent decision
As of late August 2009, the
re-amalgamation appears to be off. In an address to an energy conference
Collier announced that Verve and Synergy would not be re-amalgamated, but
instead that a “shake up” of the WEM rules would occur to “fix Verve’s
financial woes”. Given that Verve simply wasn’t charging enough for its
electricity (apparently the legacy of Government-instructed tariff freezes)
it’s not clear how a “shake up” of the WEM rules will make Verve profitable.
Pipes & Wires will make
further comment as this issue progresses.
Asset strategy
US – big batteries for the Lone Star State
Introduction
News recently emerged of a 4 MW
storage battery to be located in Presidio, Texas to
improve transmission reliability. This article examines the underlying
reliability issues and exactly what Electric
Transmission Texas’ strategy is.
Background
Electricity Transmission Texas
(ETT) is a joint venture between American
Electric Power (AEP) and MidAmerican
Energy Holdings to build transmission lines in the Electric Reliability Council of Texas (ERCOT)
jurisdiction (Readers may recall from Pipes
& Wires #82 that AEP and MidAmerican also have a joint venture called Electric Transmission
America to promote 765kV grids).
A bit about the batteries
Battery technology seems to be
advancing rapidly, and has certainly advanced a long way from the sticky
graphite C cells that we gleefully dissected as kids. We then moved on to NiCad
and MerCad’s for scientific calculators, and then mobile phones needed fancy
batteries (Lion’s I believe they are called). The battery that ETT plans to
install at Presidio is a Sodium-Sulfur battery.
NaS batteries (as they are called) are ideally suited to grid reliability
support because of their high energy density and long cycle life. The battery
is contained in a steel canister (which serves as the cathode) whilst the
molten sodium core serves as the anode.
ETT’s strategy
ETT has plans (subject to
feasibility studies) to invest $1b in the ERCOT jurisdiction to improve grid
reliability. One of these projects is to improve supply reliability into one of
the oldest towns in the United States – Presidio, Texas on the Rio Grande. Presidio is a
small town of just over 4,000 people so understandably grid security levels
would probably be about (n).
The NaS battery will be part of
the new Gonzales substation which is scheduled for completion before the
mid-summer air conditioning peaks of 2010. The 2nd part of the
project will comprise a 60 mile long 69kV line from Marfa (the county capital)
to Gonzales due for completion in 2012. The battery will be able to inject up
to 4 MW for 8 hours to maintain supply at Gonzales if the Marfa line trips. The
substation and battery are estimated to cost about $23m, whilst the Marfa –
Gonzales line will cost about $44m. Making a couple of guesses about what the
battery might cost, it seems a very viable alternative to building a 2nd
line from Marfa.
Mergers & acquisitions
Germany – EnBW takes a bite of EWE
Introduction
The German electricity and gas
sectors seem to be consolidating at a frightening pace, with acknowledged
giants E.On, RWE
and Vattenfall being prominent in the
news. This article examines the recent acquisition activity of the less well
known German giant EnBW (which is actually
Germany’s 3rd largest utility and is also 45% owned by Electricité De France), and also looks at the
regulatory concessions extracted from EnBW.
The target
The acquisition target is EWE which is Germany’s fifth
largest utility with annual revenues of about €4.7b, 1,000,000 electricity
customers and 1,200,000 gas customers in the region between the Elms and Elbe Rivers. EWE, in common with
EnBW, has a cornerstone of its shares owned by municipalities, and has been looking
for strategic partners to acquire that 26% of its shares.
The deal
EnBW will acquire a 26% stake in
EWE for an expected consideration of about €2b, making this one of the biggest
deals in the energy sector for a few years. The practical effect of the deal
will be that EnBW will acquire EWE’s stake in Verbundnetz Gas AG
(VNG).
The only other bidder for the
stake was Gaz De France (GDF), which was
rumored to have bid about €1.5b.
The regulatory concessions
Most of us are very familiar with
the need to make concessions to avoid market dominance (and the precise
requirement varies between jurisdictions). The Bundeskartellamt (BKartA)
gave EnBW 2 choices to meet its competition requirements...
·
Either EnBW must sell its subsidiary GESO (which supplies energy around the
Leipzig and Dresden regions), or
·
EWE must sell its stake in VNG.
The chosen option has been for
EnBW to sell its stake in GSEO. As usual the deals are all subject to an
inter-twined arrangement of shareholder and regulatory approvals.
Energy markets
Europe – gas under pressure
Introduction
Pipes
& Wires #62 examined the alleged collusion between E.On and Gaz de
France to stay out of each others’ retail markets based on their joint
ownership of the MEGAL
Pipeline dating back to 1976. This article examines the recent fines that
E.On and GDF have received from the European Commission.
Background
The core of the EC’s argument is
that joint ownership enabled a degree of collusion. For its part, E.On has
freely acknowledged that a gas transportation agreement was in place between
the then Ruhr Gas and GDF from 1975 to 2005, but that this agreement has since
been terminated and is of no relevance.
The end game
The EC has fined both E.On and
GDF €553m each (that’s right ... over €1b in total), but what exactly for ?
The core element of the EC’s
ruling is based on the fact that Ruhr Gas (and subsequently E.On) and GDF
continued with their 1975 deal for 5 years after the requirement to liberalise
energy markets took effect in 2000, despite knowing that the deal would breach Article
81 of EC Treaty. The EC found that Ruhr Gas / E.On and GDF actively
continued to maintain collusive behavior by continuing to meet to monitor each
others’ adherence to the original deal after 2000.
Understandably, both E.On and
GDF-Suez plan to appeal the EC’s ruling. One of the themes that is foremost in
my mind as I write this is the apparent conundrum between promoting fair and
reasonable competition (and hence downward pressure on margins) and the need to
allow reasonable recovery of long-life investments (which won’t occur if that
downward pressure on margins is too fierce). Pipes & Wires will make
further comment as the appeal process progresses, and – hopefully in Pipes
& Wires #87 - will also examine a parallel “situation” that GDF-Suez has
found itself in.
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).
Conferences & events
·
The
Energy Roundtable (20th October, Wellington) - the time
has never been better for the energy sector to converge together to network,
learn, do business, debate and drive growth.
Leading the way this event brings leaders and thinkers to connect and
collaborate over one day of candid discussion on the future of energy supply
& demand, and the business and political implications of both. In Conferenz signature style, you will hear
just frank talk and ideas.
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.