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Trust Matters
Issue 10, August 2016
This informal newsletter for ETNZ members is designed to provide periodic brief
updates of issues of current interest to trustees and asset owners.
Auditor-General’s review of EDBs’ financial performance &
disclosures
The Auditor-General’s report on the 2014/15 audits of energy sector companies
was released a month or so ago, focused mainly on electricity distributors. Her
key finding was that “Generally, my auditors have found that those responsible for
governing public entities in the energy sector have the appropriate skills and
experience to manage their core operations. For entities making an investment,
particularly outside
the energy sector, those charged with governance must be careful
to apply appropriate judgements based on good business cases.“
Other findings included:

“Given the increasing diversity of company operations, the complexity of the
regulatory settings, and the often large investments at stake, we encourage
electricity distribution businesses to continue to be vigilant in maintaining their
standards of governance. ”
“For electricity distribution businesses making an investment, particularly
outside of their core operations, the governing bodies must be careful to apply
appropriate judgements based on good business cases. Also, as investments
diversify away from the core business, governing bodies might need to reassess
whether they maintain the appropriate mix of skills. “

Given that electricity distribution businesses are investing more in non-core
operations, we encourage them to pay particular attention to the oversight of
investment decisions and to risk management. This will include actively
ensuring that:
o corporate governance and management arrangements are appropriate
and robust, taking into account their increasing diversity of investments,
the management of conflicts of interest, and the geographical distance of
some such investments and activities from parent companies; o specific decisions about investments and activities, especially non-core
investments or remote activities, include consideration by directors and
managers with appropriate experience and expertise; o project management of capital expenditure be maintained and enhanced;
and o appropriate consideration be given to the time it can take to implement
projects and initiatives, and then to see returns on them.  A common concern was about the “adequacy of systems and processes for
recording complete and accurate information about the network’s reliability.
“
(Five electricity distribution businesses received qualified opinions on their
network reliability information. These companies do not have fully automated
systems to track and record network faults and interruptions. )

“It is not for us to comment on the merits of the regulations
or structures of
the electricity market. However, we note it is important that electricity
distribution businesses have the capability and capacity to understand and
respond to regulatory requirements. Otherwise, the potential regulatory benefits
to consumers might not be realised.”
We can expect more attention from the A-G, probably in 2017: “I plan to carry out
further work to produce case studies on the asset management practices of selected
electricity distribution businesses. In particular, I want to examine how these entities
are investing in ensuring that their networks are able to continue to deliver the
services required for future generations. This will involve considering how they intend
to take advantage of emerging technologies.”
Regulatory impact on lines charges
The following chart compares the lines charges of regulated vs unregulated
EDBs, excluding the 3 largest urban companies (Vector, Wellington Electricity
and Orion) as their much higher customer densities have a major impact on costs
per consumer. It’s interesting to note that the average line charge in c/kWh is a
bit lower for the unregulated group, while the average annual charge per
consumer is significantly lower for the unregulated group.
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Regulators would argue that these differences reflect a tendency for some
unregulated companies to undercharge. However, the comparison makes it fairly
clear that exempting EDBs from regulation does not lead to price gouging.
Regulated vs
Unregulated Lines
Charges 2014/15
Comparable
regulated
Exempt co.
co. Line
Line Charge
Charge
c/kWh
Alpine Energy
Regulated
Aurora Energy
Regulated
Buller Electricity
Exempt
Centralines
Regulated
Counties Power
Exempt
EA Networks
Regulated
Eastland Network
Regulated
Electra
Exempt
Electricity Invercargill
Regulated
Horizon Energy Distribution
Regulated
MainPower NZ
Exempt
Marlborough Lines
Exempt
Nelson Eectricity
Regulated
Network Tasman
Regulated
Network Waitai
Exempt
Northpower
Exempt
Orion NZ *
Regulated
OtagoNet
Regulated
Powerco
Regulated
Scanpower
Exempt
The Lines Company
Regulated
The Power Company
Exempt
Top Energy
Regulated
Unison Networks
Regulated
Vector *
Regulated
Waipa Networks
Exempt
WEL Networks
Exempt
Wellington Electricity Lines * Regulated
Westpower
Exempt
Average
Comparable
regulated
Exempt co.
co. Line
Line Charge
Charge
$/ICP/year
6.58
7.16
14.02
1,651
11.62
8.63
1,444
1,193
6.5
11.91
9.38
2,200
1,313
951
7.75
6.2
8.76
9.18
1,154
1,285
1,239
1,399
7.48
7.14
6.22
6.38
n/a
8.61
8.21
10.98
1,136
1,114
1,350
1,121
n/a
2,375
1,122
1,256
11.74
8.07
1,631
1,616
12.04
9.11
n/a
6.47
8.02
n/a
7.65
8.65
$/ICP/year
1,614
1,051
8.72
1,255
1,282
n/a
936
1,117
n/a
1,529
1,280
1,427
* = 3 largest urban companies excluded
How will the Transmission Pricing Methodology change
things?
As Brent Layton’s presentation to the ETNZ Autumn Conference demonstrated,
coming to grips with how the proposed changes to the TPM will effect consumers
is far from easy. The following chart (from the Electricity Authority’s briefing
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paper, with the industrial loads’ red highlighting added) shows the relative
apportionment of Transpower’s total annual bill (about $900 million this year):
Ultimately, the biggest losers are likely to be (mainly) domestic consumers,
who'll face a real wealth transfer reflecting the 10% additional share of
Transpower's $970m+ annual bill that is being transferred to distributors, offset
by whatever benefits that post-2004 transmission investments in areas such as
the Upper north Island have delivered or will deliver.
(A more detailed analysis of the proposed TPM’s impacts was circulated to ETNZ
members on 1 July.)
Battery storage prediction
HIS Markit (a US$13 billion consultancy conglomerate formed by US-based IHS
and London-based Markit in March this year) predicts that grid and networkconnected energy storage will more than double globally, from 1.4 GWh to 2.9
GWh by the end of 2016, and reaching 21 GWh by 2025. Lithium ion technology
will be the dominant technology involved, capturing more than 80% of the
market share for grid/network storage.
According to the IHS Markit Grid-Connected Energy Storage Forecast Database,
Japan and the United States will be the largest energy storage markets,
generating a third of market revenues totaling US$50 billion over the next
decade. In Australia and Japan, energy storage penetration is expected to exceed
5 percent of installed power capacity in 2025. Drivers for this change will include
grid stability, renewable integration and overall energy management.
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“Half of all energy storage installations will occur behind the meter, driven by
self-consumption and back-up needs. Eight countries will each have cumulative
behind-the-meter storage power exceeding 1 GWh, including Japan, China and
the United States. Looking ahead to the future, half of all energy storage will
come from households and businesses seeking to control their energy
consumption, which will massively disrupt the traditional business models from
established utilities and large equipment manufacturers.”
For more on this see: IHS: Grid-tied storage to double in 2016, to emulate growth
of solar
Residential power storage to step up sharply after 2020?
A parallel report from Chicago-based Navigant Consulting also sees residential
energy storage building momentum over the next 10 years, growing to a 3,773
MW global market by 2025 (from about 95 MW today). In that same time frame,
they see the North American residential storage market rising 55%, hitting 800
MW from the current 15 MW.
Most of the growth will occur in Australia, Germany, Japan and the United States,
and will follow a slow gradual path and then shoot up in a “hockey stick pattern”
after about 2020. The key factors driving the timing of that growth are utility
practices and the growth of rooftop solar installations. The economics of both
technologies – residential solar and storage - “can be greatly improved when the
two systems are tied together”.
‘Value of solar’ concept creeping into US regulation. Wind
also making gains
In contrast with the Electricity Authority’s simplistic view that solar investment
undermines sunk cost established hydro and geothermal schemes, the Minnesota
Public Utilities Commission (PUC) has adopted a “value of solar” approach for
determining how community solar customers will be paid for the power the
projects produce.
The Minnesota regulator’s value of solar methodology incorporates external
factors such as avoided transmission investments, the health and environmental
effects of clean energy, and the extent to which solar power can ease the burden
on the electric grid. Minnesota is the first US state to adopt a value of solar
approach for community solar.
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Meanwhile, the US Wind Energy Association predicts that output from
established and planned wind projects will mean that wind energy will provide
20% of the US electricity supply by 2030
“Small is better’” local government research also relevant to
number of EDBs?
Perhaps surprisingly, Big Business lobby group The NZ Initiative has concluded
that amalgamation of local government leads to less efficient outcomes than the
alternative of multiple municipalities. This conclusion is based by a review of
economic performances in various countries – for example:
Switzerland is the leading example of localism in practice. With a governance
structure of over 2,000 communes (municipalities), 26 cantons (provinces), and
a federal tier of government, it would appear to some to be a case of too much
government for a country of eight million people. Yet Switzerland has been
ranked as the most competitive economy for the last seven years by the World
Economic Forum. By comparison, the UK is ranked 10th, and New Zealand was
ranked 17th in 2014.
Much of this competitiveness stems from inter-jurisdictional competition, with
local authorities afforded significant freedom over policy, revenue raising and
spending decisions within their jurisdictions. This is bolstered by constitutional
protections. The ability to set tax rates in particular serves as a powerful
incentive on local government, as Swiss households and businesses are highly
mobile and move easily to jurisdictions that best meet their needs. This
efficiency is reflected in house prices. OECD figures show that in real terms,
house prices in Switzerland have remained largely stable over the past 30 years
even as the country’s population grew by 11% over the same period.
It’s not hard to draw an analogy with the number of electricity distribution
businesses in New Zealand. While scale has its advantages, proponents of EDB
mergers consistently overlook the benefits that localism can deliver, as the NZ
Initiative analysis suggests.
A summary of the NZ Initiative report can be viewed
http://nzinitiative.org.nz/site/nzinitiative/Localism%202%20%20%20two%20page%20summary.pdf
Methodology creeping into US r egulation
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