From the editor’s
desk…
Welcome
to Pipes & Wires #105. This issue has a narrower focus than usual, with
comment on 4 mergers in the US and a look at some regulatory decisions in New
Zealand, Australia and France.
In
and around this, we also look at the possible regulation of asset management
practices in New Zealand and some alleged anti-competitive behavior in the
Czech Republic. I’ve also added a short column on what I’ve been doing lately
(seeing as everyone asks).
What have I been doing lately ?
It
seems that every conversation I have with industry participants inevitably
turns to “what have you been doing lately”, so I thought I’d run a small
regular feature summarising recent work in a form that is suitably
confidential....
·
Strengthening the regulatory focus and
economic arguments in some asset management plans.
·
Advising several companies on some
aspects of how Customised Price Path’s are likely to work (based on my
experience with the Australian distribution price re-sets).
·
Safety Management Systems (SMS) are a
hot topic in New Zealand at the moment, and I have been advising several
electricity companies on compiling their SMS and understanding the audit
requirements.
·
Preparing submissions on behalf of an
electricity company in response to the Electricity Authority’s consultation
papers on tariffs and metering.
·
Developing a model for more accurately
assessing the likely remaining life of distribution assets.
·
Acting as an expert witness for an
electricity company.
·
Peer reviewing an electricity company’s
asset valuation methodology.
Feel
free to call me on (07) 854-6541 or pick here
to email me if there is anything you’d like to discuss.
Accredited supplier status
Utility
Consultants is pleased to announce that it is now an Asia-Pacific Utilities Group (APUG) accredited
supplier (registration number 88899493).
Asset
strategy
NZ – focusing on asset management practices
Introduction
The Commerce Commission is currently revising
the Information Disclosure requirements that will apply to electricity
distribution businesses (EDB’s), gas pipeline businesses (GPB’s) and to the
national electricity grid operator, Transpower.
This article focuses on 1 single aspect of the overall Information Disclosure,
namely that of assessing the maturity of asset management practices.
The AMMAT
In
mid-2011 the Commission engaged engineering consultants PB to develop an Asset
Management Maturity Assessment Tool (AMMAT) which could be used by
electricity and gas businesses to assess the maturity of their asset management
policies, processes and systems on a 5 point scale.
The wider picture
The
over-arching goal of Information Disclosure is to ensure that there is
sufficient information to enable interested persons to assess whether the
Purpose of Part
4 of the Commerce Act 1986 is being met, ie....
The
purpose of this Part is to promote the long-term benefit of consumers in
markets referred to in section 52 by promoting outcomes that
are consistent with outcomes produced in competitive markets such that
suppliers of regulated goods or services—
(a) have
incentives to innovate and to invest, including in replacement, upgraded, and
new assets; and
(b) have
incentives to improve efficiency and provide services at a quality that
reflects consumer demands; and
(c) share
with consumers the benefits of efficiency gains in the supply of the regulated
goods or services, including through lower prices; and
(d) are
limited in their ability to extract excessive profits.
Understandably,
the maturity of a business’ asset management processes, systems and practices
will provide at least some assurance to the Commission that network investment
is being systematically planned and efficiently implemented.
Next steps
The
Commission will be holding a briefing on Friday 7th October at 152
The Terrace, Wellington. This will be followed by an opportunity to make
targeted submissions on specific topics.
Energy
markets
Czech
– investigating alleged anti-competitive behavior
Introduction
Most of us have a fairly good understanding
that the state-owned generation and grid companies that emerge from the market
liberalisation process will probably have a dominant market position, and
therefore need to guard against anti-competitive behavior. This article
examines recent allegations of anti-competitive behavior by state-owned Czech
electricity company CEZ.
CEZ’s
role
CEZ is a conglomerate of generation and
transmission businesses that operates throughout most of central and eastern
Europe, and is listed on the Prague, Warsaw and Frankfurt stock exchanges. It
has annual revenues of about €8b and employs about 32,000 people.
The
allegations
The allegations against CEZ include...
·
Deliberately
reserving future transmission grid capacity in northern Bohemia for intended CEZ-owned
gas-fired generation, thereby shutting out competing generators.
·
Preventing
competing generators from building new generation capacity.
·
Deliberately
withholding lignite from competing generators.
CEZ has publically stated that it does not
believe that the EU investigation will reveal any wrong doing, citing clear
evidence that it had not manipulated wholesale electricity prices. For its
part, the EU has chosen to limit its formal investigation to the allegation
that CEZ withheld transmission grid capacity (however the EU has very
far-reaching powers in this regard, effectively being able to prolong an
inquiry indefinitely and the power to broaden the scope of investigation) but
also issued a veiled warning that it has taken on bigger players and won.
Possible
consequences
Possible consequences if the allegations are
found to be true include a fine of up to 10% of annual revenue (about €730m in
CEZ’s case) and possible breakup (readers might recall from Pipes
& Wires #72 that E.On sold its
transmission grid subsidiary E.On Netz in return for the EU Competition
Commission dropping a possibly damaging anti-trust investigation).
Pipes & Wires will examine this further
as the EU’s investigation continues.
Regulatory
decisions
NZ
– finalising the Transpower revenue decision
Introduction
The Commerce
Commission has recently been compiling the OpEx, minor CapEx and targets
that will apply to Transpower for
the remainder of the 1st Regulatory Control Period (RCP1). This
article examines the Commission’s final
decisions that were released in August 2011.
Background
The Commission’s previous work has included
considering what sort of regulatory instrument Transpower should be subject to,
recommending to the Minister that Transpower should be subject to an Individual Price-Quality regulation (as described in s53ZC
of the Act), and setting out the Maximum Allowable Revenues (MAR) and
quality targets. These are examined in Pipes
& Wires #90, #97
and #98.
Key
features of the final decision
The key features of the Commission’s final
decision that will apply for the final 3 years of RCP1 (ie. 1st July
2012 to 30th June 2015) include....
·
A
nominal OpEx of $847.3m, to be apportioned over the 3 years.
·
A
minor CapEx of $825.1m, to be apportioned over the 3 years in accordance with
the forecast commissioning schedules.
·
Reliability
targets of 21 events greater than 0.05 system minutes, 3 events greater than 1
system minute, an unplanned HVAC unavailability of 0.054%, and total system
interruptions of no more than 16.69 system minutes.
·
A
requirement to advise the Commission of progress on implementing a pre-defined
range of business improvement initiatives.
Next
steps
The Commission must set Transpower’s MAR3,
MAR4 and MAR5 by 30th November 2011, by which
time the Commission will also amend the IPP determination.
Aus
– challenging the gas distribution decisions
Introduction
The Australian
Energy Regulator (AER) recently released its final decisions for Envestra’s and APT
Allgas’ gas distribution networks (Pipes
& Wires #103) in South Australia and Queensland respectively. This
article provides a quick heads-up on Envestra’s and Allgas’ applications to the
Australian
Competition Tribunal (ACT) to have certain aspects of the AER’s decisions
reviewed.
Legal
framework for review
The
National
Gas Law is the national legislative framework regulating gas pipeline
services. It provides for merits reviews of the AER's economic regulation
decisions under Chapter 8, Part 5, Division 2.
Basis
for seeking the review
Envestra and Allgas are seeking to have the
following aspects of the AER’s decisions reviewed....
|
Aspect of decision |
Envestra |
Allgas |
|
The methodology and the estimation of the
debt risk premium. |
l |
l |
|
The estimation of the market risk
premium. |
l |
|
|
The estimation of the forecast volume of
unaccounted for gas in regard to its SA network. |
l |
|
|
The forecast costs for Envestra’s network
management fee in regard to its SA network. |
l |
|
Next
steps
Envestra and Allgas will apply to the ACT
for leave to apply for a review. The ACT will hear submissions on 12th
October 2011, and if the applications are allowed to proceed the ACT will set
out further process steps.
France
– incentivising gas transmission investment
Introduction
Amongst the thousands of pages of
regulatory decisions that emerge annually, it is becoming abundantly clear that
it all comes back to 1 number ... the allowable return on capital. This article
examines the premium awarded to GRTgaz to encourage
investment in a new LNG terminal and also recaps some similar previous
allowances.
GRTgaz
proposed investment
GRTgaz plans to develop firm transmission
capacity into Belgium (interconnecting with Fluxys) via a new interconnection
point at Veurne, which will also interconnect with EDF’s new LNG terminal at
Dunkirk.
The
CRE’s policy objectives
Readers may recall from Pipes
& Wires #86 that the Commission de Régulation de l’Énergie wanted to
consolidate the French high-pressure gas market, possibly into a single zone
covering all of Northern France. Previously the CRE had allowed GRTgaz a 300
basis points premium over the prevailing WACC of 8.5% to incentivise the CapEx
necessary to reduce capacity constraints between high-pressure balancing zones.
The
CRE’s decision
GRTgaz sought a 3% premium over the
prevailing WACC for 10 years following the start of the new control period in
2013. The CRE has agreed to the 3% premium, but only for assets that will increase
the interconnection capacity between France and Belgium.
Summary
of similar decisions
Similar decisions involving WACC premiums
are set out below...
|
Jurisdiction |
Decision |
Reason |
|
France |
Allow GRTgaz to earn 11.5% (300 basis
point premium) return for 10 years. |
Incentivise an
additional €280m of CapEx to reduce constraints between its northern, eastern
and western HP gas balancing zones. |
|
Germany |
Allow a post-tax cost of equity of 9.29%
for new investment, versus 7.56% for legacy investments. |
Encourage €6.8b of new electricity
investment over 3 years. |
|
Portugal |
Approved
an increased WACC of 9.05%, up from 7.55% for the current 3 year control
period for new investments by transmission grid operator REN. |
Promote electricity transmission grid
investment. |
NZ
– starting price adjustments for gas pipelines
Introduction
The Commerce
Commission recently released a discussion paper entitled “Setting
of starting prices for Gas Pipeline Businesses under the initial Default Price-Quality
Path”. This article briefly examines that discussion paper, and compares
the underlying principles with those of the Mid-Term Electricity Distribution
DPP Reset considered in Pipes
& Wires #104.
Legal
framework
The legal framework for regulating gas
pipeline services is Subpart
10 of Part 4 of the Commerce Act 1986. In particular, s55D provides for all
gas pipeline services to be under either a Default Price Path (DPP) or a
Customised Price Path (CPP) on and after 1st July 2010.
The
Commission’s approach to setting starting prices
Key aspects of the Commission’s approach
include...
·
Signaling
to the industry that the form of control is likely to be a total revenue cap
for Gas Transmission Businesses.
·
Confirming
that Gas Distribution Businesses will be subject to a weighted average price
cap.
·
Working
towards DPP’s that start on 1st July 2012 for Powerco and Vector’s Auckland gas distribution
networks, to coincide with the end of the Gas Authorisations.
·
Working
forward from a calculated maximum nett revenue in Year 1 of the DPP.
Comparison
with the mid-term electricity resets
Comparison with some of the key features of
the mid-term electricity resets is as follows....
|
Feature |
Electricity |
Gas |
|
Timing with respect to completion of
Input Methodologies. |
Compiled in parallel, Commission invoked s54K(3) of the Act to reset DPP’s. |
Commission
agreed to delay the Initial DPP to allow inter
alia completion of the Input Methodologies. |
|
Form of control |
Total revenue cap |
Probably total revenue cap for
Transmission, weighted average price cap for Distribution. |
|
Timing of reset |
Start of Year 3 of the 2010-15 DPP. |
Start of new control period. |
Next steps
The
Commission will receive submissions on the discussion paper until 5pm on
Wednesday 28th September 2011, and will receive cross-submissions
until 5pm on Friday 7th October 2011.
Mergers
& acquisitions
US
– update on Exelon’s bid for Constellation
Introduction
The very early stages of Exelon’s bid for Constellation Energy were introduced
in Pipes
& Wires #101. This short article notes a key regulatory approval.
Summary
of the deal
The proposed bid offered 0.93 Exelon shares
for each Constellation share, valuing the deal at about $7.7b. If the merger
proceeds to completion, the resulting utility will have annual revenues of
about $33b, about 44,000 MW of generation and about 7,200,000 customers.
Approval
of the Texas PUC
Because Exelon owns generation in Texas,
and Constellation sells electricity and gas in Texas, the approval of the Public Utilities Commission of
Texas was required. This was granted in early August 2011.
Other
regulatory approvals
As expected, the planned merger will also
be subject to approval by the Federal Energy
Regulatory Commission (FERC), the Nuclear
Regulatory Commission (NRC), Maryland
Public Service Commission and the New
York Public Service Commission.
Pipes & Wires will comment as these
approvals, and the all-important shareholder approval are obtained.
US
– regulatory hurdles for the NU – NStar merger
Introduction
Late in 2010 Northeast Utilities launched a
$4.17b bid for NStar, whilst
earlier this year the deal encountered 2 unexpected regulatory hurdles. This
article examines those hurdles, checks out the latest thinking on those hurdles
and then discusses what that might mean for future deals.
Hurdle
#1 – the Connecticut DPUC’s jurisdiction
The Connecticut Department of Public
Utility Control had originally concluded that under state law the DPUC’s
approval was only required when a new holding company would gain control over a
state utility, and that in this case there was no new holding company (NU was
not changing, simply acquiring another company). However the Attorney General,
the Senate President and the Office of Consumer
Counsel (OCC) argued that NStar would exert significant control over the
enlarged NU so although there was technically no new holding company, it could
be argued that NU was kind of a new company (and therefore subject to
approval).
In
early June 2011 the DPUC concluded that state law does not allow it to
intervene in the deal because inter alia
the 2 NU subsidiaries in Connecticut (Connecticut
Light & Power and Yankee
Gas) would still be subject to its jurisdiction. The OCC expressed its
disappointment with that conclusion, and in early July went to court to appeal
the DPUC’s decision. However the arguments proposed by the OCC as to why the
DPUC should intervene in the deal would appear to be already well covered by
the DPUC’s on-going powers to regulate those utilities.
Hurdle
#2 – the Massachusetts DPU’s increased burden of proof
The Massachusetts
Department of Public Utilities sought to impose a “demonstrate net benefits
to customers” burden of proof rather than the “no net harm to consumers”
criteria that has been used previously. Prima facie, NU and NStar have
publically quantified the merger benefits as well as confirming that grid
investment and clean energy initiatives will proceed, so this issue would appear
to hinge not so much on the creation of benefits, but rather the sharing of
those benefits with customers. However some concerns have been raised that the
merger could reduce electricity purchasing competition.
As of mid-July, the MDPU had commenced a
series of hearings around the burden of proof (and it appears that many more
issues will become entwined in the hearings). However it appears much of this
hinges around officials expectations that private utilities will implement
renewable energy policy objectives with little or no compensation.
Hurdle
#3 – waiting for the outcome of NStar’s tariff reset
The latest issue to be raised is a request
by the Massachusetts Department of Energy Resources to the MDPU to withhold any
decision until after NStar’s tariff review in 2012 is completed. NStar, in
turn, has publically stated that such a delay could gazzump the whole deal.
Jumping
the hurdles
When I started this article 2 months ago I
naively thought that Hurdles #1 and #2 might be successfully jumped anytime
now. A little thought and reflection on similar deals would’ve suggested that
more hurdles would emerge.
So
what could this mean for future deals ?
The over-riding picture is (and I don’t
think this is the 1st deal to experience this) that regulators
appear to be using their authority to decline mergers to “encourage” lower
tariffs and fulfillment of renewable energy policy objectives. It is not clear
that regulators understand how that erodes the incentives to merge.
US
– progress on AES’s acquisition of DPL
Introduction
AES’s
planned acquisition of Dayton Power &
Light’s parent company, DPL, was examined in Pipes
& Wires #101 and #103.
This article takes a brief look at progress on the deal.
Summary
of the proposed deal
This
deal is fairly simple ... AES will pay $30 cash for each share of DPL’s common
stock, which represents about an 8.7% premium to DPL’s closing price. A key
driver of the deal is possible synergies between DPL and AES subsidiary Indianapolis Power &
Light.
The
latest issues to emerge
Deals like this are obviously complex, and
the issues that emerge along the way are many and varied. Further issues that
have emerged with the DPL deal include....
·
Because
AES plans to pay DPL shareholders in cash rather than in AES shares, capital
gains tax will be in issue.
·
Holders
of DPL’s preferred stock are being excluded from the deal, which could leave
them in a less favorable future position.
·
Several
law suits claiming that DPL’s board has failed in its duty to obtain the best
possible sale price. DPL has settled some, but not all, of these suits.
At the time of writing, a shareholder vote
is planned for 23rd September. Pipes & Wires will make further
comment after that vote.
US
– update on Duke’s bid for Progress
Introduction
Duke
Energy’s bid for Progress Energy
was discussed in Pipes
& Wires #100 and #102,
and it was noted that a key issue was obtaining regulatory approval in both
North Carolina and South Carolina. This article examines the approval of a
merger accord as a step towards obtaining full regulatory approval.
Background
to the deal
Duke
offered Progress’ shareholders 2.6125 Duke shares for each Progress share, as
well as Duke assuming $12.2b of Progress’ debt. If successful, the merged
companies would have about 56,000MW of generation and supply about 7,100,000
electric customers in North Carolina, South Carolina, Indiana, Kentucky, Ohio
and Florida.
Shareholders
of both companies approved the deal in a vote held last month.
The
accord
Duke and Progress have offered the
following accord to the North Carolina Utilities
Commission and the
South Carolina Public Service
Commission...
·
Customers
in North Carolina and South Carolina will benefit from cost reductions totaling
at least $650m over the first 5 years of the merged company.
·
Ensuring
that North South Carolina customers are fully insulated from the costs of a new
nuclear station in Florida and a new coal-fired station in Indiana.
Both regulators have broadly accepted these
undertakings. Pipes & Wires will comment as additional regulatory approvals
are obtained.
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
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 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.