Trust Matters
Issue 1, April 2015
This is the first issue of an informal newsletter for ETNZ members, designed to provide
periodic brief updates of issues of current interest to trustees and asset owners.
Input Methodologies Reset
This is by far the most significant regulatory threat to asset values facing the industry at
present. The Commerce Commission is required to undertake periodic reviews of the
various Input Methodologies (IMs) that were established in 2010 as the “consistent”
foundations of the price control and information disclosure regimes. While the first
review is not required to be completed before Q4 2017, the Commission is proposing to
advance the process by around 9 months, with a view to completing it by the end of
2016.
What are the IMs?
In broad terms, there are 6 primary IMs applying to the 17 electricity distributors that
are subject to price control, and the 3 most important of these IMs apply to all 29
companies for Information disclosure purposes:
Primary IMs
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Cost allocation
Asset valuation
Treatment of taxation
Cost of capital (WACC)
IM ‘reopening’ process in the event of a catastrophe
Information availability
The first 3 of these apply to all companies for Information disclosure purposes, meaning
that even exempt companies have to disclose information on their rates of return, etc.
on the same basis that price controlled companies have to.
What are the main threats to trust interests?
The Major Electricity Users Group (MEUG) has already suggested to the Commission
that the scope of the IM review be extended to cover issues such as the number of EDBs,
and – in particular – the supposed case for writing down values due to the looming
demand impacts of solar and other disruptive technologies.
For its part, the Commission currently says that it will be seeking a collaborative
approach focussed in particular on the issues that matter most – notably the regulatory
WACC – and on shifting timing of incentives to minimise the impacts of WACC changes
etc. on cashflow. However, hints it has made about a ‘two-tier WACC’ are especially
concerning, as they imply that older assets could effectively be written down.
The MEUG/NZIER Memo
MEUG has already written to the Commission on its ambitions for the reset, and the
following excerpts give a clear picture of what it wants:
59.
The distribution system appears to us to be inefficient and is likely costing
consumers dearly. If this is so the inefficiencies will get worse as…disruptive technologies
flatten load curves and render current asset management plans redundant….
60.
Thinking about the distribution ‘system’ further – electricity distribution around
New Zealand is handled by 29 EDBs and a number of community trusts. These entities all
have governance and management structures that consume resources and create costs
that are passed through to consumers. We have little understanding at this time as to
whether these costs and inefficiencies are necessary or whether there are better
alternatives to the management of electricity distribution. We need to find out and find
out soon.
66.
…we could also easily imagine that energy networks will ‘shrink’. By this we see
the need to replace a material amount of old assets in existing distribution and
transmission networks [that] will disappear as cheaper alternatives to distribution lines
will emerge from these technology disruptions
67.
Our key observation is that the scope of the IM review needs to be expanded to
consider the risks of stranded assets posed both by the slow response to the flattening of
electricity demand and the potential for disruptive technologies to shift load patterns in
the network.
EA told to focus on distribution pricing
Source: EnergyNews (Felicity Wolfe - Tue, 31 Mar 2015)
The never-ending Transmission Pricing Methodology review has been criticised by
virtually all of the companies submitting on the Electricity Authority’s 2015 work plan.
Notably, Mighty River Power has told the EA that it’s preoccupation with reforming
Transpower’s pricing methodology won’t achieve much for consumers, and instead it
should concentrate on distribution pricing as distribution charges are far more
significant to residential users.
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The authority intends to make final decisions on TPM guidelines in the coming financial
year and says it plans to consult on a distribution pricing issues paper in May.
Electricity Authority’s dialogue with Commerce Select Committee
Last month Parliament’s Commerce Select Committee carried out its annual review of
the EA, and made the following comments (amongst others):
Small-scale solar
We asked whether the authority is concerned that energy companies that both
generate and retail electricity are increasing connection fees for solar customers
and reducing payments for their excess power. The authority is concerned about
the possibility of solar customers feeding their excess solar-generated energy into
the grid, and not having to pay for connection to the grid. This would leave the
remaining, typically less affluent, consumers with proportionately higher grid
maintenance costs. The authority said its approach is to ensure a level playing field
for all types of electricity generation, and that it is not currently worried about the
state of the electricity market.
Electricity infrastructure – Penrose Substation Outage
We expressed some concern over recent substation faults and resultant power
outages in Auckland, and asked what the authority is doing about Auckland’s
security of supply. The Minister for Energy and Resources has tasked the authority
with conducting a review of these events. The report, which is due in April, will
focus on the overall reliability of the electricity supply, rather than the technical
details of the faults. The next step will be a cost benefit analysis of any changes
proposed as a result of the review.
Disconnections & vulnerable consumers
We asked what the authority is doing to engage with and protect financially
vulnerable and medically dependent customers. First, the authority told us that it
has provided training for staff at the Citizens’ Advice Bureau, the New Zealand
Federation of Family Budgeting Services, Work and Income, and a number of
community organisations, in an effort to facilitate switching and cost-saving.
Also, the authority has monitored the guidelines for dealing with vulnerable and
medically dependent customers. We heard that the electricity industry set up an
independently chaired Retail Working Group to address problems with
implementing the guidelines, and as a result disconnections were reduced from
around 11,000 in the fourth quarter of 2013 to 5,000 a year later.
Electricity Demand
One of the authority’s models of energy demand in New Zealand assumes 2 percent
annual growth over the next five years. We queried this figure, as the Organisation
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for Economic Cooperation and Development is now expecting a one percent annual
reduction in energy demand in advanced economies for the foreseeable future. The
authority said that while many developed economies have seen a fall in demand in
recent years, demand in New Zealand has remained steady. The authority believes
that if our economy continues to grow, we will see an increase in energy demand.
The authority also noted that electric vehicles have strong potential in New
Zealand, because of our high proportion of renewable generation, and they could
contribute to growth in demand.
Consumer perceptions
The authority recently commissioned research comparing New Zealand consumer
perceptions of the retail energy market with similar perceptions in three
competitive overseas markets. The results show that New Zealand consumers are
less proactive than those in the other markets, while New Zealand retailers target
customers more actively than retailers overseas. The authority hopes the ‘What’s
My Number?’ campaign will continue to improve the competiveness of the market,
and hopes to publish the research shortly.
New Zealand’s Power Pricing Pretty Average
(Source: http://www.publications.parliament.uk/pa/ld201415/ldselect/ldsctech/121/121.pdf )
Given our low customer density and relative lack of efficient large, 24/7 industrial
loads, New Zealand’s electricity prices look very reasonable by world standards, as
the following chart from a recent UK House of Lords’ research paper shows:
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