From the director…
Welcome
to Pipes & Wires #94. Just when we thought the long, wet winter was over
New Zealand gets hit by the biggest storm in living memory, so we need to offer
a big thanks to all the faultmen, linemen and operators who have worked long
and hard to get the lights back on.
This
issue of Pipes & Wires quickly examines 2 big deals that have moved towards
completion, and also examines the emerging regulatory framework in the UK. The
hot topic of smart meters continues with 2 separate articles that examine what
appears to be the widening disconnect between policy and regulatory thinking.
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A bit of light reading…
Book review – “Switching On The King
Country”
Helen Reilly’s latest
book examines electricity in the King Country area of New Zealand’s north
island from the beginnings of electric light in 1911 through to the present era
(2008). In 220 pages jammed packed with stories, anecdotes, interviews,
photo’s, maps and drawings the book chronicles the development of the Waitomo,
Wairere and King Country Electric Power Boards and the Taumarunui, Ohakune and
Raetihi Borough electricity departments and the eventual formation of The Lines Company and King Country Energy. The chapter headings
include....
·
From candlelight to electric light 1911
– 1924.
·
Power in the borough is in short supply
1924 – 1939.
·
Rural communities are eventually
electrified 1939 – 1958.
·
Consolidation and expansion 1959 –
1969.
·
Upgrades, amalgamations and reforms
1970 – 1989.
·
A decade of government reforms and
company development 1989 – 1999.
·
Coming to grips with separation 1999 –
2007.
·
New challenges for rural electricity
companies 2008 -
For
those (like me) that enjoy history this book is a must have. Order yours for
the exceptionally low price of $39.95 (includes NZ postage and packaging) from
the King Country Electric Power Trust by picking here.
Book review – “Connecting The Country”
Helen
Reilly’s previous 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.
·
Two Per Mile.
Regulatory determinations
Switzerland – grid tariffs under
pressure
Introduction
Pipes
& Wires #86 examined the tariff reductions enforced upon Switzerland’s
380kV and 220kV grids by the Federal Electricity
Commission (ElCom). This article continues that examination by looking at
the tariff reductions recently imposed for the 2011 tariff year.
ElCom’s required tariff reductions
In
May 2010, Swissgrid published its
proposed tariff for 2011 which was 8% higher than the corresponding 2010
tariff. However ElCom intervened and directed Swissgrid to reduce the proposed
2011 tariff to the 2010 tariff.
Summary of tariff decisions
ElCom’s
treatment of previous tariffs has been as follows...
|
Tariff year |
Proposed tariff
increase |
ElCom’s
actions |
|
2009
(published May 2008) |
|
Decreed
a reduction of total grid revenue of €280m. |
|
2010
(published July 2009) |
17% |
Commenced
investigation of proposed tariff increases |
|
2011
(published in May 2010) |
8% |
Decreed
a tariff reduction to the 2010 level. |
So
it would appear that Swissgrid is under pressure to limit tariff increases.
Let’s hope that doesn’t impact on their investment plans too much.
Mergers & acquisitions
UK – Cheung Kong offers to buy EDF
Energy
Introduction
Pipes
& Wires has been closely following Electricite
de France’s sale of its’ UK wires business EDF Energy. This article examines the recently
announced “irrevocable offer” of £5.78b by a consortium lead by Cheung Kong Infrastructure (CKI).
Background
EDF
announced in October 2009 that it was considering selling its UK wires business
EDF Energy. The publicly stated reason was to reduce debt, but it was also
speculated that it could represent a migration of EDF’s capital away from lines
and towards energy. A wide range of bidders indicated their interest, of which
it was noted that E.On was noticeably absent.
In the final stage, the following 3 bidders remained...
·
Cheung Kong
Infrastructure in association with Hong
Kong Electric.
·
Abu Dhabi Investment Authority in
association with Macquarie
Capital and the Canada Pension
Plan.
·
Scottish & Southern
Energy in association with infrastructure fund Borealis.
The offer
The
offer was an “irrevocable offer” valid until 24th August 2010, and
comprised £3.2b in cash along with the assumption of £2.58b of debt. This
represents a significant premium over the £4.2b that EDF were targeting, and
will double CKI’s presence in the UK. EDF’s board approved the sale in early
September subject to approval by Cheung Kong shareholders and European
competition agencies.
CKI’s global spread
Most
of us have a fairly general idea that CKI owns a lot of different utilities,
but a little systematic analysis reveals the full extent of CKI’s pipes &
wires investments...
·
New Zealand – 50% stake in Wellington Electricity (163,000
electricity customers).
·
Australia – 51% stake in CitiPower, Powercor and ETSA Utilities (1,800,000 electricity
customers), 19% stake in Envestra
(1,000,000 gas customers).
·
UK – 47.1% stake in Northern Gas Networks
(2,600,000 gas customers), 4.8% stake in Southern Water (2,000,000 water and
sewage customers), 100% stake in Cambridge
Water (125,000 water customers).
·
Hong Kong – 39% stake in Hong Kong Electric (560,000 electricity
customers).
In
most cases, Hong Kong Electric also holds significant stakes in the above
utilities giving CKI control of most of these entities. Successful completion
of the EDF Energy offer would give CKI a further 8,000,000 electricity
customers in the UK.
Pipes
& Wires will make further comment as the offer moves through the regulatory
approvals.
US – PPL closes E.On US deal
Introduction
The
last couple of Pipes & Wires (#92
and #93)
have examined various facets of Pennsylvania
Power & Light’s acquisition of E.On’s US business, E.On US LLC, which owns LG&E
and Kentucky Utilities Co.
This article comments briefly on the closing of the deal.
Final terms of the deal
Several
of the final terms of the deal include...
·
That neither LG&E or Kentucky
Utilities would increase their base tariffs before 1st January 2013.
·
Returns on equity over and above 10.75%
would be shared with customers on 50:50 basis.
Regulatory approvals
The
following regulatory approvals are required....
·
Federal
Trade Commission (anti-trust clearance received).
·
Department
of Justice (anti-trust clearance received).
·
Federal
Energy Regulatory Commission.
·
Kentucky
Public Service Commission.
·
Tennessee
Regulatory Authority.
·
Virginia
State Corporation Commission
Pipes
& Wires will make further comment if any of these approvals do not proceed
smoothly, otherwise that will conclude coverage.
Famous power struggles
The
electrical history of many cities and countries includes bitter struggles either
between public and private interests seeking exclusive rights to distribute and
sell electricity, or between competing private interests. This historical
interest series examines some of those struggles.
City versus country in Palmerston North
(1930’s)
Introduction
Most
of us recognise the cordial and cooperative relationships between electricity
supply authorities, but on some occasions things weren’t always so sweet. This
historical interest article examines the legal scrap between the former
Palmerston North Municipal Electricity Department (PNMED) and the Manawatu-Oroua
Electric Power Board (MOEPB) in the 1930’s.
Background
Going
way back to 1889 the Borough of Palmerston North awarded a private gas company
the sole right to distribute coal gas within the borough boundaries (such
arrangements were actually very common as gas was a proven technology whilst
electricity was in its infancy). Needless to say, the gas company enjoyed its
monopoly whilst the good folk of Palmerston North were deprived of the benefits
of electric lights and tramways.
The seeds of dissent are sown
In
1915 the Borough Council resolved the dilemma by buying the gas company, which
included inter alia a commitment to
build a new gas works (which was commissioned in 1923).
Meanwhile over the border
Meanwhile,
the MOEPB had been constituted in 1921 with the provision for the Borough of
Palmerston North to be an “inner area” as was provided for in the Electric
Power Boards Act 1918 (the idea being that the dense metro inner area would be
reticulated so that reticulation of the rural outer areas could be funded at
least partly by revenue). It is noted that the Borough had previously attempted
to form an EPB with the neighboring Kairanga County but the Minister of Public
Works had managed to persuade the Borough to join with the MOEPB. So far, so good.
The fighting begins
As
part of forming the MOEPB, the MOEPB offered to buy the Borough’s electricity
business in 1923. However the Borough refused to sell unless the MOEPB also
bought the shiny new gas works which the Borough feared would be stranded by
electricity. In amongst all this the Borough’s load grew so rapidly that a bulk
supply arrangement with the MOEPB was arranged. Because the bulk charges were
based on peak demand, the Borough could reduce its charges by running the Keith
Street diesel power station at peak times leading to accusations that the
Borough wasn’t paying its fair share.
All
this fighting reached a head on 30th June 1935 when the MOEPB
tripped the bulk supply breakers to the Borough however a Supreme Court
injunction ordered the MOEPB to resume supply. In the final event, it took
until March 1937 for the Borough and the MOEPB to finally agree (and another 60
years to actually merge).
Musing on some common themes
It’s
interesting to note that many of the themes in this story, such as
multi-utilities, asset stranding, rationalisation of supply areas and peak
demand tariffs, are still common themes today.
Regulatory policy
UK – is vandalism beyond reasonable
control ?
Introduction
Vandalism
of electricity assets seems to be on the increase in the 21st
Century. Along with this increase, there also seems to be an increasing
expectation by economic and safety regulators about how much asset protection
is reasonable. This article examines OFGEM’s
deliberations over fining EDF Energy
after several significant power cables were vandalised and supply was
interrupted.
What actually happened ?
The
cable bridge over Dartford
Creek in Kent carries the 4 out-going 132kV cables from the Littlebrook
grid substation, which was built in 1959 by the CEGB.
On
20th July 2009 a fire irreparably damaged all 4 cables causing loss
of supply to about 94,000 customers in EDF’s London and Southern networks, some
of whom were without supply for up to 4 days. It was subsequently determined
that that the fire resulted from unauthorised entry to the cable bridge (the
industrial padlocks had been chiseled off).
OFGEM’s deliberations
Under
OFGEM’s Interruption Incentive Scheme (IIS), an electricity distributor can
apply to OFGEM to have interruptions outside of their control excluded from the
IIS performance measures. Understandably, EDF Energy submitted a claim to OFGEM
to have the Dartford Creek fire excluded on the basis that it was an act of
vandalism outside of EDF Energy’s reasonable control.
Based
on the results of a technical audit, OFGEM, however, considered that Dartford
Creek should not be excluded from EDF Energy’s IIS and that EDF Energy should
be exposed to the appropriate penalty (about £2m). OFGEM consulted on their
view to impose the penalty in June 2010.
OFGEM’s decision
OFGEM’s
decision is awaited at the time of writing, so Pipes & Wires will revisit
this issue when that decision emerges.
The wider questions
Putting
aside the specifics of Dartford Creek, the whole issue of vandalism and comes a
bit closer to home as New Zealand moves into an era of heightened public
safety. In amongst the emerging picture that electricity businesses will be
expected to protect the public from “significant harm” there are a number of
questions that in my opinion need addressing...
·
Will electricity businesses be able to
recover the (efficient) cost of mitigation works, or will they get stuck in an
impasse between a requirement to mitigate hazards on the one hand but an
inability to recover the costs on the other hand ie. a shareholder subsidy.
·
How exactly might an inspection regime
work ? Inspections obviously work for gradual and predictable decline in asset
condition, but how might it work for sudden events such as vandalism ? Even if
the assets are inspected daily, there could still be 23½ hours of potential
exposure to vandalism.
·
Is it reasonable to hold an electricity
business liable when vandals leave assets in an unsafe condition eg. breaking
locks off cabinets so that live wires are exposed ?
I
have an uneasy feeling that we’re not going to get clear answers on an ex-ante
basis....
US – smart meters in Maryland
Introduction
Pipes
& Wires #93 noted Baltimore Gas &
Electric’s (BG&E) plan to install smart meters which was rejected by
the Maryland Public
Service Commission (PSC) on the basis that the benefits to customers were “largely indirect, highly contingent and a long way off”.
This article briefly follows up BG&E’s re-submitted plan.
The revised plan
BG&E’s
revised plan was approved by the PSC in mid-August 2010 on the basis that
BG&E can only recover the costs of installation once the meters are
installed. This is in contrast to BG&E’s original proposal that included an
up-front surcharge to recover the purchase and installation costs.
The wider strategic and policy issues
Hopefully
this won’t be too much of a philosophical ramble, but in amongst all this we
need to get clear on exactly what the benefits of smart metering really are,
and to reconcile what appears to be a disconnect between policy claims on the
one hand and regulatory approvals on the other hand.
As
noted in the article in Pipes & Wires #93, the benefits of smart meters are
being vigorously promoted by policy makers but when a utility (such as
BG&E) wants to recover the cost of smart meters from its customers those
benefits suddenly become “largely indirect, highly contingent and a long way off”.
If smart meters and smart grids are going to succeed, better alignment of
policy positions and regulatory decisions will need to occur – either policy
makers will need to reconsider some of their bold claims about just how good
smart meters are, or regulators will need to reconsider how they treat emerging
technology risks.
UK – has RPI-X had its’ day ?
Introduction
Most
of us understand that regulation of pipes & wires businesses seeks to
emulate market outcomes (and indeed the emerging regulatory framework in New
Zealand uses the phrase “workably competitive markets”), but we all accept that
such regulation does have its limitations. Pipes
& Wires #69 examined OFGEM’s
“RPI-X @ 20” initiative which noted a wide range of issues impacting on the
effectiveness of incentive regulation, not the least of which were the
exhausting of easy OpEx efficiency gains and the regression of incentive
regulation back towards the rate of return regulation that incentive regulation
sought to shake off.
OFGEM’s consultation paper
In
late July 2010, OFGEM released a consultation
paper setting out its proposed adoption of the RIIO Model – “revenue set to
deliver strong incentives, innovation and outputs”. Some of the significant
headline features include...
·
An “outputs led” philosophy in which
the price control would focus on lines businesses delivering specified outcomes.
·
Retention of ex-ante control which
would include a return on RAV.
·
A commitment to publishing the
principles for setting a WACC-based return, with subsequent cross-checking
against credit ratings.
OFGEM
is also of a mind to establish an 8 year control period with a mid-term review,
and also anticipates the EU’s “Third Package”
of energy reforms which any emerging regulatory framework must be consistent
with.
Next steps
OFGEM
expects to gather responses to the consultation paper and publish its final
decisions in the (northern) autumn of 2010. Those final decisions will be
implemented in the 5th electricity transmission (TPCR5) and the 2nd
gas distribution (GDPCR2) price controls. Pipes & Wires will revisit
RPI-X@20 when OFGEM’s final decision emerges.
US – smart meters in California
Introduction
Pipes
& Wires #92 examined a hiccup with Pacific
Gas & Electric’s (PG&E) smart metering program in which a political
furor erupted over “thousands of complaints”. This article examines the
findings of The Structure
Group from Houston, Texas who were engaged by the California Public Utilities Commission to investigate
various aspects of PG&E’s smart metering program.
The Structure Group’s report
The
Structure Group’s report concluded inter
alia that....
·
PG&E’s smart meters are accurately
recording consumption and that billing data is being accurately processed.
PG&E had already reported some difficulties, and Structure confirmed that
those difficulties were limited and not widespread.
·
Many of the complaints about high bills
were in fact due to increased consumption that simply coincided with the smart
meter roll-out.
·
Legacy electromechanical meters may
have been under-recording actual consumption.
·
Tariff changes around the time of the
smart meter roll-out may have compounded high bills.
·
There were some customer service
failures within PG&E (which they have sought to address).
Some wider reflections on smart
metering policy
As
Pipes & Wires has noted (refer to the companion article in this issue about
smart meters in Maryland), there seem to be some gaps appearing in the
policy-level promotion of smart metering, and perhaps none so much as around the
“power bills will come down” issue. There are some brilliant technologies involved
in smart metering, and the idea of easing demand in congested networks is
fantastic, but unfortunately the 1 opportunity to make a favorable first
impression appears to have been lost amidst the simplistic “power bills will
come down” when many consumers have seen their bills increase. Sadly, I recall
that we’ve already been round this loop once already in the late 1980’s when
2-rate meters were introduced, and the need to shift load to off-peak periods
was not well explained.
Disclaimer
This
article makes reference to an extensive report by The Structure Group, and
readers are invited to pick the above link and read the official announcement in
its’ entirety before forming any firm views.
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).
William Rankine harnesses Niagara Falls
Early days
William Birch
Rankine was born at Oswego, New York on 4th January 1858, the
son of the Rev. Dr. James Rankine and Mrs Fanny Rankine. After receiving the
A.B and A.M degrees from Hobart and Union Colleges, William came to Niagara
Falls as a 19 year old to study law under the Hon Augustus Porter.
Getting connected
After
studying under Porter and being admitted to the New York bar, he subsequently
practiced law in New York City. It was here that William became very well
connected to another attorney Francis L
Stetson who was known as the “power behind the throne” of both the Vanderbilt and Morgan empires.
Spotting the opportunity
After
coming to Niagara, William quickly spotted the hydro-electric potential of the
Niagara Falls however it took almost another 20 years to accumulate sufficient
investor interest to form the Niagara Falls Power Company (NFPC) in 1899.
Several years prior to this the Canadian Niagara Power Company (CNPC) had been
formed in April 1892, also in the US (despite the name). The original
concession from the Queen
Victoria Niagara Falls Park Commission was for 25 years with the right of
renewal for 3 subsequent periods of 25 years each. Although the NFPC and the
CNPC were legally distinct entities, William was a director of both companies.
Building the power station
To
date there were 2 separate companies (albeit with at least 1 common director)
in the US and Canada, both of which held valuable concessions to develop hydro-electric
plants. Buried within these concessions were requirements to commence
construction by specified dates, so the pressure was on.
In
April 1897 construction began on the CNPC’s station about 500m upstream of Horseshow Falls near
Cedar Island. Eventually 11 generators were installed, the 1st of
which came on load on 1st January 1905, but funnily enough they were
25Hz.
Rankine’s personal life
History
records that all the sons of James
Rankine (William, and his brothers Harold, DeLancey, James and Richard) were
prominent in law and business. William was 2nd vice-president,
treasurer and resident director of the NFPC and lived in Buffalo Ave. It seems
that William’s success in business continued until his untimely death at the
age of 48 on 30th September 1905.
William didn’t
live to see the completion of his power station, as he died only 3 days after
the 3rd generator was put into operation. His legacy does live on,
however, as the station became officially known as
the William Birch Rankine
Power Station in 1927. The station now lives in graceful retirement with a
skeleton staff under the shadow of the Adam
Beck and Robert
Moses stations. Conversion of Rankine to 60Hz has been considered, but was assessed
as uneconomic.
Energy policy
Chile – examining the nuclear policy
Introduction
Chile
generates about 60,000 GWh per year from about 16,000 MW of installed capacity.
About 60% of the annual generation is hydro, about 20% gas-fired and about 17%
coal-fired. Funnily enough for a series on nuclear policy, Chile doesn’t have
any nuclear stations (which is what makes this article all the more intriguing).
The beginnings
Chile’s
nuclear energy policy started on 16th April 1964 with the formation
of the National Commission Of Nuclear Energy to oversee pretty much all things
nuclear. A name change occurred a year later in 1965 to the Chilean Commission Of Nuclear Energy
(CCHEN), and it appears that very little else happened.
The current nuclear debate
Chile’s
nuclear debate was reignited in February 2007 when the Ministry Of Energy
announced that it would closely study nuclear power. A sense of urgency was
added to this in November 2007 when President Michelle
Bachelet instructed the Minister Of Energy to prepare new studies.
The issues that Chile faces
Like
many countries, Chile finds itself having to step through a mine-field. Some of
the more prominent issues include...
·
Declining security of supply of the 90%
of Chile’s gas that is imported from Argentina, and the associated need to
build an LNG regasification plant.
·
A legislative requirement for 10% of
electricity sold by 2024 to be renewable (I guess they don’t count hydro as
renewable !!).
·
A strong anti-nuclear lobby that favors
other energy sources.
The 2009-10 presidential election
The 2009-10
presidential election featured 3 candidates who, while they recognised the
importance of diversifying Chile’s energy sources, held the full spectrum of
nuclear views. In the final event, Sebastián Piñera
won the election by a small margin over pro-nuclear candidate Eduardo Frei. Prior
to the election, Piñera had called for more research into nuclear technologies
but had stopped short of openly endorsing nuclear power.
Chile’s nuclear plans
Early
in 2010 the Minister Of
Energy, Ricardo Raineri, announced that a 1,100 MW nuclear plant should be
operating by 2024, with a further 4 more by 2035 to replace aging coal-fired
plants. As noted last month, there will probably be a lot of people
queuing up to buy nuclear reactors.
Conferences & events
The following
training course will be run by Conferenz, and is targeted at newcomers to the
industry...
·
Fundamentals
of the NZ electricity industry – Wellington, 1st – 2nd
November.
·
Fundamentals
of the NZ electricity industry – Auckland, 24th – 25th
November.
The
following conference will be run by Conferenz...
·
2nd
New Zealand Smart Grids Conference – Wellington, 17th – 18th
November.
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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.
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