From the director…
Welcome
to Pipes & Wires #90. That endless summer I spoke of last month seems to be
drawing to a close with chilly mornings and very welcome afternoon cloud cover,
but alas no rain.
This
issue starts with a look at a draft gas pipelines determination in Australia,
and then moves to a wide coverage of energy and regulatory policy issues. We
then look at the mergers scene and close with a look at an energy market and
security of supply issue.
Join Pipes & Wires at Linked In
Pipes
& Wires now has an on-line
group for readers to keep in touch on a more regular basis, bounce ideas
around or raise issues and concerns. Pick here
to visit my Linked In profile and add me
to your connections.
Join Pipes & Wires at Facebook
Pipes
& Wires now also has its own Facebook page. Just go to Facebook’s home page, search for Pipes
& Wires and then pick to become a fan.
About Utility Consultants
Utility
Consultants Ltd is a management consultancy specialising in pretty much all aspects
of energy and infrastructure networks – pick here to see more, or
to be sent a detailed profile of recent projects, pick
here.
Regulatory determinations
Aus – draft decision for the NSW gas
networks
Introduction
The Australian Energy Regulator (AER) recently
released its draft
decision on Jemena’s gas distribution access arrangement for the period 1st
July 2010 to 30th June 2015. This was in response to the access
arrangement proposal submitted by Jemena in August 2009 which is a revision of
the proposal submitted to the Independent
Pricing and Regulatory Tribunal (IPART) in 2005.
A bit about Jemena Gas Networks
Jemena
Gas Networks distributes about 100PJ of gas per year through 24,000km of
pipelines to 1,050,000 customers in the Australian state of New South Wales. The
network was originally owned by Australian Gas
Light (AGL) and was sold to Alinta
in October 2006. Ownership reshuffled again in August 2007 when Singapore Power International
acquired some of Alinta’s assets which included all the shares pertaining to
the NSW gas network.
Legal framework
The
broad legal framework is the National
Gas Law. Due to the reclassification of the Wilton – Newcastle and Wilton –
Wollongong pipelines from transmission to distribution, the background to this
issue has involved consideration of both transmission and distribution
pipelines.
Key elements of the draft decision
Key
elements of the AER’s draft decision include....
·
Reducing Jemena’s proposed opening
capital base of $2,367m to $2,278m.
·
Reducing Jemena’s proposed forecast
CapEx from $885m to 576m.
·
Acceptance of Jemena’s proposed
depreciation forecast.
·
Reducing Jemena’s proposed nominal
vanilla WACC from 11.21% to 10.11%.
·
Rejecting Jemena’s proposed use of a
pre-taxation framework, and rejecting use of the diminishing value approach to
calculating depreciation that was used in earlier proposals.
·
Reducing Jemena’s proposed forecast
OpEx of $735m to $613m.
·
Reducing Jemena’s proposed total
revenue from $2,548 to $2043m.
·
Rejection of some of the assumptions
underlying Jemena’s demand forecasts.
Next steps
The
AER has already held a public forum on the draft decision, and Jemena will be
submitting its revised Proposal by mid-March. Pipes & Wires will comment
further once the final decision is released.
Energy policy
Global – transmission subsidies for
renewable generation
Introduction
Disquiet
over renewable generation paying its way seems to be increasing both in volume
and frequency. This article builds on a recent
article in The Economist and examines the subsidies that support renewable
generation, and then considers this in light of the regulatory expectation that
prices will be cost reflective.
The principal of locating legacy
generation
The
principal of long-distance electricity transmission to shift bulk power from
remote generation to large load centers is well established. In many cases this
has and is prompting the siting of generation closer to those centers because
the cost of long-distance transmission provides a clear commercial incentive to
avoid grid charges.
The principal of locating renewable
generation
Renewables
are typically dependent on location-specific low-density energy sources, such
as windy areas, river valleys and estuaries. These are often far away from
large load centers eg. the best place for wind turbines in the UK is in the
north of Scotland, far away from most electricity demand in the south of
England. This shouldn’t be a problem given that the process of transmitting
bulk power long distances is well established and is typically governed by
reasonably robust pricing principles and mechanisms. But this is where it gets
murky....
Transmission subsidies for renewables
Precisely
where it gets murky is the expectation that renewable generation should somehow
not have to pay its full and fair share of transmission charges, and that
someone else should subsidise these renewables. Key subsidy mechanisms
include....
·
Limiting the charges that grid owners
can recover from renewable generators. The subsidy mechanism here is that the
shortfall is recovered from other grid users.
·
Putting an obligation on electricity
suppliers to source a minimum percentage of the energy sold from renewable
sources (such as the Renewables
Obligation in the UK). The subsidy mechanism here is the enforced purchase
of renewable energy and its associated transmission charges even though it may
not be the cheapest energy.
What about the principle of cost
reflective pricing ?
Regulators
are increasingly expecting (lines) prices to reflect the true economic cost of
investing and running assets, which puts at least some pressure on transmission
pricing methodologies to recover as much revenue as possible from direct
charges. As renewables proliferate, presumably the expectation that their
connection will be subsidised will create a strong opposing effect of having
line assets that obviously benefit only the renewable generator being funded
from “indirect charges”.
US – what future hath coal ?
Introduction
Pipes
& Wires #75 examined the future of coal and noted that it is plentiful,
its price is a lot more stable than gas, and most of it lies in the West – the
future did indeed look bright !!! This article examines some emerging issues
that may represent a bump – a big bump – in the road for coal....
·
Possible moves to treat coal ash as a
hazardous material.
·
The apparent lack of traction around
clean coal technologies.
·
Uncertain recovery of retrofit costs
Possible moves to treat coal ash as a
hazardous material
In
the US coal ash currently costs about $10 per ton to handle, and the sale of
ash as a cement complement allows the electric power industry to recover about
$10b per year. As of December 2009 the Environmental
Protection Agency was considering declaring coal ash a hazardous material,
so it doesn’t require much thought to figure out what will happen to the ash disposal
costs (the coal industry has claimed a figure of about $150 per ton) and how
that could make coal uncompetitive as a power generation fuel.
The apparent lack of traction around clean
coal technologies
The
whole range of clean coal technologies, from underground coal gasification to
carbon capture, seems slow to gain traction. There appear to be a number of
reasons for this lack of traction including high costs, relatively unproven
technologies and the falling cost of other fuels.
Uncertain recovery of retrofit costs
The
median age of America’s coal fired power stations is about 44 years, meaning a
lot of retrofit work will soon be required to keep these stations running. It
is thought that including clean coal technologies in these retrofits could
increase wholesale power prices by 50% to 70%, which would limit the ability of
coal-fired electricity to compete in the market.
Concluding remarks
The
strategic issues outlined in Pipes & Wires #75 presented a very strong and
bright picture for coal. The issue now becomes one of just what size bump in
the road the above 3 issues constitute ... are they just bumps that we will
pass over with some discomfort and quickly forget, or could they seriously
derail the coal industry ??
Regulatory policy
NZ – reshuffling the industry
Introduction
A
raft of proposed changes to the industry structure was introduced to Parliament
on 10th December 2009 by the Minister of Energy, Hon Gerry
Brownlee as the Electricity
Industry Bill. This article examines the more significant features of the
Bill.
Purpose of the Bill
The Bill’s stated purpose is to “improve
competition in the electricity market and improve security of supply by making
changes to the Electricity
Act 1992 and the Electricity
Industry Reform Act 1998”. The Minister subsequently commented that the aim is to
introduce more stability into pricing, rather than promise a fall in prices.
The significant features of the Bill
The
significant features of the Bill include...
·
Transferring ownership of Tekapo A and B hydro stations
from Meridian Energy to Genesis Energy.
·
Transferring the ownership of the Whirinaki gas
turbine station from direct government ownership to Meridian Energy.
·
Allowing Meridian, Genesis and Mighty River Power to undertake
virtual asset swaps over the next 15 years to provide more competition in the
island where each has little or no generation.
·
Requiring all major generators to put
in place an accessible hedge market.
·
Allowing lines businesses to re-enter
retailing.
·
Abolishing the Electricity Commission and
replacing it with a slimmed down Electricity Authority.
·
Establishing a Security &
Reliability Council to monitor Transpower’s
performance and advise on security of supply.
·
Transferring responsibility for
approving grid upgrade approvals to the Commerce
Commission.
Progress on the Bill
After
being introduced on 10th December 2009, the Bill had its first
reading on 15th December and was referred to the Finance &
Expenditure Committee. Submissions closed on 26th February 2010, and
the report is expected around 15th June.
As
this Bill has the potential to significantly re-shape several key processes and
institutions, Pipes & Wires will closely follow the Bill’s progress.
NZ – regulating the national grid
Introduction
Most
of us appreciate that regulating transmission charges is a complex issue,
certainly more complex than regulating distribution networks. This article
examines the consultation
draft of the Commerce Commission’s recommendation to the Minister on the
type of regulation to apply to Transpower
from 1st July 2011.
Background
Transpower
is currently operating under an administrative settlement with the Commerce
Commission (refer Pipes
& Wires #72) which expires on the 30th June 2011. This
administrative settlement was reached in May 2008 in respect of thresholds
established under Part 4A of the Commerce Act 1986, and although Part 4A has
been repealed, the settlement remains in force.
The
passage of the Commerce Amendment Act 2008 (which amended the Commerce
Act 1986) introduced a range of new regulatory instruments and also
established several statutory procedures that the Commission must follow.
Recommendation to the Minister
The Commission
has recommended to the Minister that Transpower should be subject to Individual
Price-Quality regulation (as described in s53ZC
of the Act) because that instrument is more likely to promote the s52A
Purpose Statement than Default Price-Quality regulation or Customised
Price-Quality regulation for the following reasons....
·
A full building blocks approach is
necessary to match Transpower’s large and uncertain CapEx profile to a revenue
profile.
·
Attempting to match such a large and
uncertain CapEx profile to a revenue profile within the statutory constraints
of Default Price-Quality regulation would be difficult.
·
Developing incentive mechanisms for
OpEx and the certain CapEx would be difficult.
·
If Default Price-Quality regulation was
chosen, Transpower would almost certainly submit a Customised Price-Quality
proposal meaning the effort in compiling the Default would be wasted.
·
Use of Individual Price-Quality
regulation allows the Commission to address the inherent uncertainties in
Transpower’s forecasts by such means as ex-post CapEx reviews and revenue
adjustments in subsequent periods.
·
Individual Price-Quality allows
long-term incentives to be retained. Under a Customised these incentives could
be lost as the Customised expires and reverts to a Default.
Next step
The
Commission received submissions until 19th February and following a
workshop in early March will make a final recommendation to the Minister in April 2010. The
draft Input Methodologies and s52P determination will be released in June 2010,
and the Minister’s final decision on the form of regulation that will apply to
Transpower will be released in August 2010.
Pipes
& Wires will pick up the story again probably around September 2010.
People in power
A
couple of years ago Pipes & Wires featured the life stories of some blokes
born in the late 1800’s who shaped the electric power industry as we now know
it. Researching and writing those articles was a lot of fun, so I’m going to
write a few more (and if anyone wants an electrical pioneer to be researched
and included, pick here
to contact me).
James Stobie – a bloke of concrete and
steel
Introduction
Most
people outside of South Australia have probably never heard of James Cyril
Stobie (and probably a lot of people in SA never have either). This
biographical profile examines the life of Stobie, the bloke who invented the
steel and concrete power pole.
Early life
Stobie
was born in the Adelaide
suburb of Parkside on 15th September 1895, and progressed well
through his early schooling years. After winning a scholarship to the School Of
Mines, his education took a backward step when his father died in 1912 and
Stobie took over his father’s grocery shop at Mile
End.
Continuing education
Stobie
returned to his education in 1915, enrolling in night classes at the School Of
Mines, where he completed a diploma of mechanical and electrical engineering in
1919. His education continued part-time at the University of Adelaide, with a Bachelor
of Engineering in 1921 and a Master of Engineering in 1932 (as Pipes &
Wires noted, many of these pioneering blokes didn’t have the luxury of
full-time study in their late teens and early twenties).
Work as ADESCO
Stobie’s
time at the Adelaide
Electric Supply Company (the predecessor of ETSA Utilities) began in 1916. By 1923 he
had been appointed chief draftsman, and soon after this he developed the Stobie
pole. In 1946 Stobie was appointed chief design engineer when ETSA was formed,
and in 1950 he was appointed assistant to the manager of engineering research.
The Stobie pole
South
Australia has a shortage of suitable timber for power poles, and a corresponding
abundance of white ants (which made importing timber poles rather pointless).
Around 1924, Stobie developed and patented what is essentially a concrete pole
sandwiched between 2 inwardly facing steel channels, and the first Stobie poles
were erected in South Terrace. Along with colleague John Brookman, Stobie
formed the Stobie Pole Syndicate and was paid £500 by ADESCO for the patent
rights (presumably after their attempt to market the poles worldwide), and
despite numerous international inquiries Stobie poles are still largely
confined to South Australia with a few in Broken Hill, New South Wales.
Later years
It
appears that Stobie did not keep good health, despite being a very jovial
bloke. Sadly Stobie died at the young age of 57 on 15th August 1953,
of coronary thrombosis. He was survived by his wife Rita and their 4 children.
Mergers & acquisitions
UK – progress on the EDF Energy sale
Introduction
Pipes
& Wires #87 examined Electricité De
France’s (EDF) moves to sell its UK electricity distribution business, EDF Energy for an expected £4b. This
article checks up on the latest moves and also sees if anything can be
discerned about EDF’s strategy yet.
Latest moves
In
addition to the straightforward release of an information memorandum, the
following moves also occurred...
·
OFGEM
announced it would restrict post-tax returns on capital, and would also review
its merger policy in mid-2010. This apparently caused Scottish & Southern
Energy to reconsider its plans for bidding although the latest news is that
it will bid.
·
New EDF president Henri Proglio has
lured former Veolia CFO and Lazard banker Thomas Piquemal to
EDF as the new CFO.
Likely
bidders
By early March, the interest of the
following bidding consortiums was aroused....
·
Macquarie Bank, the Canadian Pension Plan and the Abu Dhabi Investment Authority.
·
Scottish & Southern Energy in
conjunction with Canadian fund Borealis.
None
of these bidders (except possibly for National Grid) should come as a great
surprise.
Revealing EDF’s strategy
Two
possible strands of EDF’s strategy could be revealed by this sale process....
·
A migration of EDF’s capital from
regulated wires businesses to unregulated businesses such as generation and
retail. This seems to be the trend amongst the European giants, but we also
noted that in EDF’s case the need to retire debt quickly was also pressing.
·
The appointment of Piquemal, who was
formerly a banker and mergers advisor with Lazard’s and was also CFO at French
environmental services company Veolia during its acquisitive phase. This
suggests that EDF’s strategy will include an emphasis on acquisitions.
Bids
are due in mid-March so hopefully Pipes & Wires #91 will have something
more to say about this deal.
US – First Energy takes a poke at
Allegheny Energy
Introduction
Most
acquisition activity in the US has been by “foreigners” – recently Pipes &
Wires has examined Electricité De France’s
(EDF) bid for Constellation
Energy and Iberdrola’s acquisition
of Energy East. This article examines First Energy Corp’s
all-stock and debt bid for Allegheny Energy
to set the scene for what is expected to be about 14 months of deal making. For
the avoidance of doubt, the use of the shortened name First Energy does not
refer to FirstEnergy Capital.
The key players
The
key players in this are, of course, First Energy and Allegheny, as follows....
·
First Energy is the 5th
largest investor-owned electric utility in the US, supplying 4,500,000
customers in Ohio, Pennsylvania and New Jersey. First Energy also owns about
14,000MW of generation.
·
Allegheny Energy supplies 1,500,000
customers in Pennsylvania, West Virginia, Virginia and Maryland, and owns about
9,700MW of generation.
Then
there are the state-based regulators who will have to approve the deal – it
looks like 6 state regulators and possibly the Federal
Energy Regulatory Commission (FERC) will be involved.
Basis of the deal
Allegheny
stockholders will receive 0.667 First Energy shares for each Allegheny share,
which values Allegheny’s equity at about $4.4b (and this is obviously dependent
on First Energy’s stock price). First Energy will also assume $3.8b of
Allegheny debt.
The merged entity
The
merged entity will have about 6,000,000 customers, almost 25,000MW of
generation capacity, and expects annual earnings of about $1.4b from sales of $16b.
The strategic fit
A
quick look at some maps reveals that the acquisition will consolidate the
service territories in Pennsylvania, West Virginia and eastern Ohio, suggesting
at least some degree of strategic fit. Both utilities have regional
consolidation goals and what appear to be similar values, so the deal would
appear to be a good strategic fit.
Energy markets
US – securing energy supplies
Introduction
A
recent news article noted that the city of Paris, Arkansas is
looking for a new electricity supplier after the Oklahoma Gas & Electric Company
(OGE) notified the city that it would cease selling wholesale electricity to
the city as of 1st February 2011, and would also cease selling
wholesale electricity to the Arkansas Valley
Electric Cooperative as of November 2011. This article (or maybe it’s an opinion
piece) examines the issues surrounding that decision and in particular aims to
see whether policy and regulation has created commercial imperatives that have
back-fired on the policy makers.
The public pronouncements
The
public pronouncement from OGE is that it is “getting out of” wholesale
contracts in an effort to avoid new fossil-fired generation. It plans to cease
supplying 2 wholesale customers in western Arkansas are on track.
So what are the issues ?
On
the face of it, it appears that OGE sees the new fossil-fired generation
capacity required to supply wholesale customers as unprofitable ...
understandably the recovery of those costs takes both a long time and can be
loaded with highly uncertain regulatory and policy risks.
Playing it forwards
Paris
has engaged a consultant to help find another wholesale electricity supplier,
but what if - WHAT IF - a willing supplier can’t be found ?? Will there be
further intervention, forcing a generator to supply Paris (and possibly
prompting a whole raft of further policy and regulation around “supplier of
last resort” whilst still imposing restrictions on that generator) ?? Does it
appear that policies biased against fossil-fired generation are going lead to
security of supply problems ??
This
will be an issue worth watching, so Pipes & Wires will check back in 6
months or so.
A bit of light reading…
Book review – “Connecting The Country”
Helen
Reilly’s 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.
·
Marlborough Will Shine Through.
Conferences & events
The following
training courses will be run by Conferenz, and are targeted at newcomers to the
industry...
·
Fundamentals
of the NZ electricity industry – Auckland, 5th – 6th
May.
·
Gas
Market Fundamentals – Auckland, 7th May.
·
Fundamentals
of the NZ electricity industry – Wellington, 31st May – 1st
June.
·
Gas
Market Fundamentals – Wellington, 2nd June.
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.
Opt out from Pipes & Wires
Pick
this link
to opt out from Pipes & Wires. Please ensure that you send from the email
address we send Pipes & Wires to.
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 any 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.