Pipes & Wires
THE
UTILITIES & INFRASTRUCTURE COMMENTARY FROM UTILITY CONSULTANTS
Issue 23 – November 2003
From the
director…
|
|
First
up this month is a profile of a client project, in which Utility Consultants
provided due diligence advice for an acquisition bid. Next is
a re-print of a 3-part article from Issues #13,
#14
and #15
on re-thinking electricity transmission. As the This
month’s closing article discusses the asymmetries of over and
under-investment, and how the risks of either can be reduced. |
Utility Consultants advises Aurora
Energy
|
|
Utility Consultants provided
due diligence services to Aurora
Energy (formerly Dunedin Electricity Ltd) in the matter of its bid for
the network assets of Otago Power Ltd that sold for $109m. Building on a long
relationship with both |
|
|
management company,
DELTA
Utility Services, Utility Consultants was able to provide the following
services to |
||
|
·
Assessment of line and substation physical
condition. ·
Examination of capital expenditure
estimates. ·
Identification of cross-boundary capital
and operational synergies. ·
Identification of alternative bulk supply
options. “The quality and depth of
Utility Consultants analysis enabled us to confidently increase our final bid
by several million dollars” said John Walsh, chief executive of DELTA. To download a profile of
Utility Consultants recent projects, pick here or contact |
|
|
Rethinking electricity transmission
|
|
Introduction Transmission
can be competitive in many cases - multiple transmission paths exist between
many nodes, many with surplus capacity. This suggests a whole new paradigm
from thinking of transmission as a simple one-way down-hill path from the
generator to the customer that should be run on a cost-plus basis. Policy shifts & structural changes A few policy
and regulatory level happenings provide a good context for this discussion… |
|
|
· The FERC’s wishes for control of
utility transmission grids to be operated on a regional basis to streamline
operations and facilitate transparent access. · Increased attention to transmission grid characteristics that
contribute to wholesale price variations, including better signaling of
congestion. · Interconnection of localised grids providing better utilisation of generation
and greater supply security. · An increasing willingness of many state-owned transmission utilities
to let private sector players take the risk of new capacity as markets become
less certain. · A lack of understanding of the true value of emerging transmission
products by incumbent owners. |
||
|
A
few examples of re-thought transmission businesses Trans-Elect
has recently acquired a transmission grid in |
||
|
Trans
Energie has recently built the 180MW Direct Link between NSW and |
|
|
|
Direct Link is unregulated because there
are alternative connections between NSW and Some of the key issues outlined above that
have been addressed by these re-thought businesses are…. · A move toward
coordinated regional control of transmission grids to streamline operations. · Improved
utilisation of generation capacity. · Shifting the risk
away from state-owned utilities to the private sector. |
||
|
Strategies & business models for re-thinking the
transmission business The previously identified drivers for
re-thinking transmission have mostly been based around regulatory and
government policy issues. Probably the most significant drivers, however, are
market deregulation (commercial), technical and environmental (which we
deliberately avoided introducing above). These drivers are creating arbitrage
opportunities between low cost generation and high value markets, which forms
the basis of the strategies and business models of utilities such as Trans-Elect, Trans Energie and ATSI. The concept
that the cost of energy delivered to a distribution grid equals the cost of
generation plus the cost of transmission is the leap in logic that re-thinks
the transmission business. It also broadly defines the maximum revenue of the
re-thought transmission business. The tactics
articulated by the three utilities above are all different, yet they all
achieve a similar outcome… · Acquire under-valued transmission assets that directly connect
arbitrage opportunities (Trans-Elect). This may require several assets to be
acquired and cascaded to connect opportunities. · Construct new transmission assets that directly connect arbitrage
opportunities (Trans Energie). · Re-configure existing transmission assets into a consolidated entity
and then operate those assets to exploit arbitrage opportunities instead of
operating them as simple one-way down-hill paths (ATSI). A further
tactic is to shift the re-thought transmission business outside of
conventional regulatory (price control) boundaries by ensuring that the
re-thought transmission business competes with existing transmission assets. |
||
E.On gets “On Top” of
|
Background Last months Pipes
& Wires examined Scottish
& Southern Energy’s unsuccessful attempt to acquire Aquila Networks for a total
consideration of ₤1,112m. We now examine a similarly structured bid
from E.On via its |
||||||||||||||||||||||||||
|
E.On’s bid for E.On’s bid comprised the
following components, and as such is very similar to Scottish & Southern
Energy’s recent bid as shown on the right. |
* Powergen press release, 21 October 2003 ** Presentation to AEPH bond-holders, 4
September 2003 *** S&SE news release, 25
September 2003 |
|||||||||||||||||||||||||
|
|
|
|||||||||||||||||||||||||
|
E.On’s strategy – “On Top” E.On’s recently announced “On
Top” strategy aims to generate double-digit percentage growth in dividend
payout over the 2003 to 2006 period. The five goal areas which may involve up
to €28b of acquisitions by the end of 2005 are… · Pan-European
gas transport and storage which will be overseen by Ruhrgas, and will focus strongly on
privatisation of gas transmission utilities in the former Soviet bloc. · Consolidation
of the central European distribution & retail energy markets that will be
overseen by E.On Energie. · Strengthening
of the Scandinavian market position primarily through Sydkraft which is already in the process
of acquiring Graninge. · Strengthening
of the · Expansion
in the A guiding principle of “On Top”
is to systematically capture the synergies implicit in all acquisitions and
ensure those synergies are returned to shareholders. The acquisition of
Aquila Networks with its obvious synergies to East Midlands Electricity
represents a robust fit with “On Top” – pick here
to download a presentation by E.On. To request a slide-show on |
||||||||||||||||||||||||||
Getting the CapEx right
|
|
Is it possible to get the CapEx wrong ?? The answer to this has to be a
very clear “yes”. Some brief reflection on this whole issue does, however,
reveal that the measure of “right” and “wrong” has been, still is, and
probably always will be a very fluid and dynamic concept. Measuring the “rightness” of CapEx There are two ways to get any
investment decision “wrong” …. over-investment or
under-investment. The fuzziness of the real world with the added impact of
regulation |
||||||||||||||||
|
dictates that
the point of “right” CapEx will need to be a band or tolerance of finite
width rather than a single point (and defining this tolerance should be
subject to the same cost-benefit criteria as any other business decision). What does complicate the
“getting it right” issue is that the consequences of getting it wrong are highly
asymmetrical. It is easily appreciated that under-investment can lead to
declining network reliability and eventual asset failure, which in many
circumstances will be over-shadowed by the consequential losses. In contrast,
over-investment means that an asset might cost a bit more (with the costs possibly
spread over a wider customer base), but in many instances such
over-investment is common to an entire industry so no one company became
uncompetitive from over-investing. So perhaps the most obvious
measure of how “right” CapEx has been is whether an asset performs to its
intended levels over its entire life. Expressing this more eloquently as
“optimising the life cycle investment level” introduces an element of
financial discipline to the whole CapEx process. |
|||||||||||||||||
|
CapEx processes within industry structures The following table summarises
the consequences of over- and under-investment in the three more prominent
industry models that network utilities have existed within…
|
|||||||||||||||||
|
Getting the CapEx right in the era of regulation The threat of excluding over-investment
from the regulatory asset value (RAV) provides a strong disincentive to
over-invest. Minimising such over-investment whilst avoiding the quite
logical alternative of under-investment requires a structured approach to
optimising life cycle investment to deliver defined service levels. This
requires robustly structured policies and processes for each phase of the
asset lifecycle that follow through from robust investment criteria that are
founded on the ability to make a fair, reasonable and certain profit. To discuss aligning of your
company’s policies and processes to get the CapEx “right” pick here
or call |
|
||||||||||||||||
Reader response
Please pick one of the links
below to tell me what you think of this issue of Pipes & Wires…
·
Good
·
Average
·
Poor
If you get this is a hard-copy,
your comments can be emailed to issue#23@utilityconsultants.co.nz
If you receive this second-hand, you can receive Pipes
& Wires directly by picking here.
Conferences & events
·
Understanding electricity markets
–
·
Irish energy –
·
Implementing the new
Irish electricity market –
·
Second
re-building Iraq conference –
·
Middle East
Electricity (includes exhibition) –
·
Wideband code division
multiple access –
·
Italian energy –