From the editor’s
desk…
Welcome
to Pipes & Wires #104. This issue has a fairly broad topical and
geographical coverage, starting with some regulatory decisions in New Zealand and
Australia.
We
then look closely at the sale of electricity transmission grids in Germany and
summarise the deals so far, and then conclude with a mix of articles on the
European gas market, privatisation in the Philippines and electric car
recharging in the US.
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Matters
for attention
NZ
– public safety management systems
Just a reminder that the requirement for
all electricity businesses (of more than 10MW capacity) to have their PSMS in
place and externally audited is only 7 months away. For help with compiling
your PSMS, or to have a pre-audit review undertaken, phone Phil on (07)
854-6541 or pick
here.
Regulatory
decisions
NZ – resetting the electricity default
price path
Introduction
In mid-July 2011 the Commerce Commission released its draft decision on resetting the default price paths (DPP) that it intended to apply to non-exempt electricity distribution
businesses (EDB’s) on 1st April 2012 for the remaining 3 years of
the 2010 – 2015 DPP ie. the years ending 31st March 2013, 2014 and
2015. This article examines the background and comments on some salient
features of the draft decision.
Provision for resetting mid-period
The broad legal framework for the
regulatory regime is Part 4 of the Commerce Act 1986. The Commission was required by s52P of the Act to issue a
determination setting out the requirements of the price-quality path that would
apply to non-exempt EDB’s over the period 1st April 2010 to 31st
March 2015 (the “2010 – 15 DPP”), which it did in November 2009.
Because the Input Methodologies were
still being compiled in November 2009, the Commission was able to invoke
s54K(3) of the Act which provides for the 2010 – 15 DPP to be reset if the
final Input Methodology would’ve resulted in a materially different DPP. The
Commission has argued that it would’ve, hence it is justified in resetting the
2010 – 15 DPP.
Application of claw-back
Claw-back is the process by which any
under-recovery or over-recovery in a previous period can be compensated for by
adjusting prices in a current period, and its application is set out in s52D of
the Act. The Commission does not propose to apply claw-back for this reset.
Individual company resets
The resets that the Commission intends
to apply to each EDB are as follows (MAR3 is the maximum allowable
revenue in Year 3, P3 is the reset at the start of Year 3, and X4,5
is the rate of change that will apply for Years 4 and 5. Note that a negative P3
represents a decrease, whilst a negative X4,5 represents an increase
due to the subtraction of a negative in the CPI-X component)...
|
EDB |
MAR3 |
P3 |
X4,5 |
|
EDB |
MAR3 |
P3 |
X 4,5 |
|
$30.2m |
15% |
-5% |
|
$28.4m |
8% |
0% |
||
|
$57.7m |
4% |
0% |
|
$22.5m |
8% |
0% |
||
|
$7.9m |
13% |
-10% |
|
$220.9m |
-9% |
0% |
||
|
$20.5m |
-2% |
0% |
|
$29.9m |
14% |
-5% |
||
|
$29.0m |
10% |
0% |
|
$29.6m |
20% |
-10% |
||
|
$12.8m |
3% |
0% |
|
$90.7m |
7% |
0% |
||
|
$19.5m |
-10% |
0% |
|
$399.4m |
-9% |
0% |
||
|
$6.7m |
3% |
0% |
|
$109.1m |
-4% |
0% |
Next steps
The Commission will receive submissions
on the draft decision until 11am, Wednesday 24th August, and will
receive cross-submissions until 11am, Monday 5th September.
Aus – final decision for the Amadeus Gas Pipeline
Introduction
Pipes
& Wires #101 and #102
discussed NT Gas’ proposed access
arrangement for the Amadeus
Gas Pipeline (AGP) for the regulatory period from 1st July 2011
to 30th June 2016. This short article concludes that series by examining
the Australian Energy Regulator’s (AER)
final decision.
The
revised access arrangement
The following table compares the AER’s
draft decision with NT Gas’ proposed access arrangement (and will be completed
as the revised arrangement and final decision come to hand):
|
Component |
Proposed access arrangement |
Draft decision |
Revised access arrangement |
Final decision |
|
Total revenue requirement |
$169.8m |
$129.7m |
$170.2m |
$146.5m |
|
Reference tariff |
$0.7596/GJ |
$0.5778/GJ |
$0.7605/GJ |
$0.6513/GJ |
|
Nominal risk free
rate |
5.48% |
5.53% |
5.54% |
5.53% |
|
Inflation forecast |
2.50%/yr |
2.57%/yr |
2.57% |
2.55% |
|
Real risk free
rate |
2.66% |
2.89% |
Not stated |
Not stated |
|
Cost of debt |
10.94% |
9.32% |
10.14% |
9.33% |
|
Debt risk premium |
5.46% |
3.79% |
4.60% |
3.80% |
|
Cost of equity |
11.98% |
10.335% |
12.04% |
10.33% |
|
Equity beta |
1.00 |
0.80 |
1.0 |
0.80 |
|
Market risk
premium |
6.50% |
6.00% |
6.50% |
6.00% |
|
Gearing |
60% |
60% |
60% |
60% |
|
Nominal vanilla WACC |
11.36% |
9.72% |
10.90% |
9.73% |
|
Opening capital base |
$112.4m |
$97.0m |
$102.7m |
$92.1m |
|
CapEx |
$14.4m |
$13.9m |
$40.7m |
$21.0m |
|
OpEx |
$73.0m |
$58.6m |
$71.9m |
$71.9m |
This concludes Pipes & Wires examination
of the AGP until about early 2015, when it is expected that the groundwork for
the next reset will be laid.
Mergers
& acquisitions
Germany
– RWE sells Amprion
Introduction
Pipes
& Wires #86 examined the formation of RWE’s UHV transmission grid
business RWE
Transportnetz Strom into a fully functional enterprise called Amprion GmbH, and hypothesised that this was
the first step of a sell-down that reflected a migration of RWE’s capital away
from lines and into energy. This article examines RWE’s recent sale of a 74.9%
stake in Amprion.
Details
of the transaction
A consortium of insurance companies and
pension funds led by Commerz
Real AG will ultimately buy a 74.9% stake in Amprion based on an enterprise
value of €1.3b. This represents most of Amprion’s RAB, and an EBITDA ratio of
about 8. This will relieve RWE of much of the expected €3b of renewal and
growth CapEx planned for the next 10 years.
RWE’s
strategy
A major part of RWE’s strategy is to
off-load about €8b of assets over the next few years to strengthen the balance
sheet, and, like several other European giants, the sell off is focusing on
grids and networks reflecting a migration of capital to unregulated energy
activities which are considered to be a better investment in the face of a lot
of CapEx and tightening regulation.
Similar
grid sales
This deal represents a continuation of the
trend set by E.On’s sale of its 380kV and 220kV transmission grid business Transpower
Stromübertragungs GmbH to state-owned
Dutch transmission utility TenneT
(refer to Pipes
& Wires #88).
Germany
– will EnBW sell its’ grid ?
Introduction
On the back of a flurry of grid sales in
Germany, this article examines EnBW’s recent announcement
that it is willing to sell a minority stake in its transmission grid business.
EnBW’s
transmission business
EnBW Transportnetze AG (TNG) comprises 3,645km of 380kV and
220kV grids across southern Germany. About 80 substations interconnect TNG with
local 110kV lines and other grid operators such as Amprion, TenneT and SwissGrid. Like many grids, TNG has a high
CapEx forecast, prompting EnBW to consider selling a stake to mitigate its exposure
to that CapEx. The recently elected Green government of Baden-Wuerttemburg
has suggested that the proceeds be used to invest in renewables and gas-fired
generation.
Potential
buyers
So who might be interested in buying a
minority stake in TNG ? Possibilities include...
·
A
group of local (German) pension funds or insurance companies that have an
appetite for the low risk and the reasonably certain cash returns that a
regulated grid business provides.
·
A
group of German cities or states.
·
A
wider group of investors (such as middle-east wealth funds or Australian
banks), possibly in conjunction with a European grid operator.
·
Specialist
utility investors such as Cheung Kong
Infrastructure.
·
A
European grid operator.
Given that any stake sold is likely to be
fairly small relative to other similar deals, it would seem to rule out the
interest of global groups or specialist utility investors. TNG’s location in
southern Germany could make it strategically significant to other utilities in
terms of connecting low-cost markets (like the TenneT deal described in Pipes
& Wires #88), however that could encounter anti-trust concerns. Given that
TNG is already 45% owned by the state of Baden-Wuerttemburg and 45% owned by
local cities, state ownership of a separated TNG would seem unlikely.
Likely
sale price
Some very simplistic analysis of recent
grid sales indicates sale prices between €80,000 and €150,000 per line km,
which suggests that even a 49% stake in TNG could sell for somewhere between
€140m and €270m. That’s certainly not a huge transaction amongst the scale of
what we’ve observed recently.
So ... anyway ... enough speculation. We
will just have to wait and see what emerges. Pipes & Wires will comment
further as and when a deal unfolds.
Energy
markets
Europe
– RWE and Gazprom form joint venture
Introduction
There is little doubt that most if not all
of Europe’s future gas supply will come from Russia. This article examines a
recently announced joint venture between German electric utility RWE and Russian gas supplier OAO Gazprom to build gas-fired generation
across Europe.
The
impending security of supply crisis
Many individual countries in Europe are
facing a security of electricity supply crisis. Some of the key drivers
include....
·
Shutdown
of coal-fired plants due to dwindling coal mining capability and pressure to reduce
CO2 emissions.
·
The
end of indigenous gas reserves such as the North Sea fields that supplied the
UK.
·
A
reliance on insecure renewable generation.
·
The
expected decommissioning of many older nuclear stations (such as the Magnox
stations in the UK).
·
More
recently, a slowdown of France’s nuclear construction program.
The recent policy shift in Germany (refer
to Pipes
& Wires #102) following the Fukushima earthquake in Japan will result
in the staged shutdown of Germany’s nuclear plants (much of which will impact
on RWE), leaving a further hole in Europe’s secure generation.
The
joint venture
The joint venture will form a company
focused on existing and new gas-fired (and hard coal-fired) generation in
Germany, Belgium, Holland, Luxembourg and the UK. It appears that RWE will
bring the electricity generation expertise to the joint venture, while Gazprom
will supply the gas. RWE has publicly denied that Gazprom would buy a stake in
RWE that would be of the nature of a bail-out.
Gazprom’s
strategy
Part of Gazprom’s strategy is to increase
its exposure to electricity generation in western Europe (long-time readers
might have spotted this trend amongst gas suppliers). Germany’s recent decision
to shut down its’ nuclear stations has provided a perfect opportunity for
Gazprom to meet a sudden gap in the market.
Competition
considerations
Understandably the cooperation of 2 very
large market players has raised the distinct possibility of anti-trust
concerns, and indeed the Bundeskartellamt
has indicated that it will be closely examining the joint venture.
This joint venture is likely to provide a
heap of good stuff for Pipes & Wires to examine – strategy, energy markets,
competition law, regulation, energy policy etc. So be prepared for some
extensive analysis over the next few months !!!
Industry
restructuring
Germany
– selling the grids (summary)
Sale of transmission grids in Germany has
been a recurring theme of Pipes & Wires over the last 2 years. This article
quickly summarises those deals....
|
Grid assets |
Line length |
Seller |
Buyer |
Price |
Stake |
Strategy |
|
RWE
Transportnetz Strom (Amprion) |
11,000km |
German pension funds and insurance
companies. |
€1.3b |
74.9% |
Migrate capital away from lines to
energy, avoid future CapEx. |
|
|
10,700km |
Dutch grid operator TenneT. |
€1.1b |
100% |
Migrate capital away from lines to
energy, avoid future CapEx. |
||
|
9,700km |
Belgian grid operator Elia (60%), Australian funds manager IFM
(40%). |
€810m |
100% |
Migrate capital away from lines to
energy, avoid future CapEx. |
||
|
3,645km |
No sale confirmed yet. |
|
Minority |
Avoid future CapEx, possibly migrate
capital to renewables or gas-fired generation. |
Philippines
– privatisation surges ahead
Introduction
The Philippines is a country most of know
little about. This article examines the recent progress on electricity reform
and restructuring that has been in progress since 2001.
The
original industry structure
Like many other countries with state-owned
electric systems, the Philippines system was dominated by the
vertically-integrated National Power
Corporation (Napocor) which was established in 1936. In 1978 Napocor
concluded the purchase of metro Manila’s supplier MERALCO’s generation plants, leading to a
single, nation-wide integrated generation utility. In 1988 Napocor further
purchased the small generation plants in all other areas.
The
reform process
Vertical disaggregation of the industry was
foreshadowed in 1998 by the Omnibus Power Bill which (not surprisingly) did the
following....
·
Disaggregated
Napocor into 7 competing generation companies that would be prohibited from
owning either transmission or generation.
·
Formation
of a separate open-access transmission grid business.
·
Establishment
of regulated distribution companies, with the added features of having
protected distribution areas but also having supplier-of-last-resort
obligations.
·
Establishment
of spot and bilateral contract markets.
·
Formation
of a government entity to own all the assets and liabilities that
were likely to be unsustainable in a competitive market, to be known as Power Sector Assets &
Liabilities Management (PSALM).
A
few hiccups along the way
Like most reform and privatisation
processes, there is usually a strong tension between the potentially
conflicting objectives of maximising the sale price on one hand, and protecting
consumer interests on the other hand. This was perhaps more of an issue in the
Philippines were populist politicians had kept electricity tariffs low by government
decree, which not surprisingly has led to significant under-investment.
Recent
progress
Recent softening of regulatory policy and
sweetening of the investment incentives, have however, strengthened the
interest of private investors to the point where over 33% of the market
capitalisation of the Philippines Stock
Exchange is from electric companies. Some of the private investors involved
so far include...
·
Former
brewery San Miguel now owns 4
generation plants and a 33% stake in MERALCO.
·
A
consortium comprising OneTaipan, Calaca High Power Corporation and the State Grid Corporation of China
has been awarded a 25 year concession to operate the National Grid.
·
Abolitz Power Corporation has bought
out its’ partner in the Luzon
Hydro Corporation.
It appears that the private sector’s
interest will continue, especially on the back of the Energy Regulatory Commission’s approval of
PHP5b (about US$117m) of new projects.
Regulatory
policy
UK
– determining the efficient expenditure
Introduction
Pipes
& Wires #103 examined the Office of Rail Regulation’s Periodic Review
2013 (PR13) that will shape the 5th rail Control Period (CP5)
starting on 1st April 2014 (with a yet-to-be-determined end date).
This article examines a paper entitled “determining the
efficient expenditure” released as part of PR13, and also considers it in
the wider context of pipes & wires businesses.
A
few key background issues
Network
Rail’s turbulent birth out of the Hatfield accident and the subsequent
placing of Railtrack PLC into
administration in 2002 resulted in the annual OpEx and Renewal CapEx increasing
from £3.9b to £7.2b over a 2 year period to address a significant back-log.
However, addressing this back-log came at the expense of declining efficiency.
CP3 (1st April 2004 to 31st March 2009) expected a 31%
efficiency improvement, and while Network Rail was able to achieve a 27%
efficiency improvement it struggled to deliver on the track renewal program.
Subsequently, CP4 (1st April
2009 to 31st March 2014) expected a further efficiency improvement
of 21% which, in contrast to CP3, was allowed to claim a reduced volume of
renewal work as an efficiency gain (as distinct from just unit cost
improvements).
Key
features of the “determining the efficient expenditure” paper
The key features of ORR’s paper include....
·
A
reiteration that Network Rail’s proposed CP4 spend of £35.1b would be reduced
to £32.2b by a requirement to generate inter
alia cost efficiencies of 21%.
·
A
reiteration of ORR’s approach of assuming efficiency improvements and then
incentivising Network Rail to out-perform that assumption, rather than
specifying a minimum efficiency gain.
·
A
recognition that Network Rail’s devolution of management and granting
infrastructure management concessions to third parties will require a different
regulatory approach.
·
A
fairly standard mix of building block assessments, including bottom-up analysis
of work volumes, benchmarking of unit costs, a top-down analysis to support the
overall picture, and a view on the likely efficiency gains that could be made.
ORR’s general approach
ORR has indicated that its’ general approach to
setting CP5 will include....
· A more geographically disaggregated analysis
by route lines rather than just by England & Wales, and Scotland.
· A greater focus on bottom-up analysis.
· Include wider benchmarking cohorts, such as
the global rail sector and specific tasks.
· Giving greater attention to exploring the
drivers of efficiency gaps (presumably to determine whether further efficiency
gains are feasible).
· A continued refining of the information
disclosure requirements applicable to Network Rail.
· A greater scrutiny of Network Rail’s asset
management processes and practices.
ORR’s specific approach to assessing likely efficiency gains
In assessing the likely efficiency gains, ORR has
considered the following 2 dimensions....
·
Catch-up
efficiency gains, wherein Network Rail will be encouraged to achieve the
efficiency levels of the most efficient operators in the benchmarking cohort.
·
Frontier
shift efficiency gains, wherein the most efficient operators in the
benchmarking cohort will be expected to make further continuous improvements.
Considering
the elements of “determining the efficient expenditure” in the wider pipes
& wires context
On the whole, the paper shows a continual
refining of the building blocks approach, but certainly nothing exceptional nor
anything that is significantly ahead of other pipes & wires regulators.
Having said that, ORR are to be commended for intending to place a greater
emphasis on bottom-up analysis and for intending to more closely examine the
drivers of efficiency gains and gaps.
Pipes & Wires will comment further as
the PR13 process progresses.
Energy
policy
US
– recharging electric cars
Introduction
Pipes
& Wires #98 noted that Dominion Resources
was seeking approval from the Virginia
State Corporation Commission to introduce a voluntary tariff that
encourages off-peak recharging. This article examines the VSCC’s decision.
The key issues
I
don’t think it would be unfair to say that the whole issue of recharging
electric cars is poorly understood by both the wider community and by many
policy makers. In particular, the whole need for electric cars to recharged at
off-peak times seems poorly understood (and in many countries even off-peak
recharging will still be with fossil-fired plants, so it will only result in
avoiding new generation capacity, not the emissions).
Dominion’s
proposed recharging tariff
The basis of Dominion’s recharging tariff
is the 10pm to 6am off-peak period. Dominion has proposed a price of $0.34 to
recharge a car sufficient for 40 miles (this much electricity would normally
cost about $0.86), whilst also proposing to charge $1.23 for a similar recharge
during peak periods.
Dominion has projected 86,000 electric cars
in Virginia alone by 2021, which would require an extra 270MW of generation
capacity if recharged at peak times.
Key
aspects of the VSCC’s decision
The VSCC approved Dominion’s plan in July
2011. Key aspects of that decision include...
·
Up
to 750 customers will be able to sign up for the pilot project from 3rd
October 2011, and must stay with the project for at least 1 year.
·
An
“electric vehicle only” option, in which Dominion estimates a price of $0.41 to
recharge for a 40 mile commute. This has a circuit supplied from a 2nd
meter.
·
A
“whole house” option that encourages other household activities to be shifted
to off-peak periods, whilst imposing a higher rate for peak periods.
The pilot project will conclude on 30th
November 2014, over which period Dominion will be reporting to the VSCC on
uptake rate and the emerging feasibility of a wider scheme.
A bit of light reading…
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.
·
Two Per Mile.
·
Live Lines (the old ESAA journal)
Conferences & training courses
The following
conferences and training courses are planned...
·
Infrastructure:
Investment & Regulation – Sydney, 21st October, 2011.
·
Fundamentals
of the NZ electricity industry – Auckland, 26th – 27th
October, 2011.
·
Fundamentals
of the NZ electricity industry – Wellington, 9th – 10th
November, 2011.
·
Fundamentals
of the NZ electricity industry – Wellington, 8th – 9th
May, 2012.
·
Fundamentals
of the NZ electricity industry – Auckland, 22nd – 23rd
May, 2012
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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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