Pipes & Wires
THE FREE
MONTHLY CLIENT NEWSLETTER FROM UTILITY
CONSULTANTS
Issue 30 – June 2004
From the director…
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Welcome
to Pipes & Wires #30. We start this issue with an interview with Mike
Morris from American Electric Power who will discuss some of AEP’s growth
strategies. We then
examine the vertical reintegration issue arising from Singapore Power’s
recent acquisition of TXU’s Australian activities, and then we briefly
consider two impending transactions that will very likely bring significant
changes to the NZ electricity & gas sectors. We
conclude this issue with a brief re-cap of some global energy & utility
trends and a link for further information. So …. happy reading until next
month. |
Insights into strategic growth (Part 3)
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This article is the third of several in
which we are interviewing utility chief executives who have been involved in
significant strategic growth. This month we are interviewing Mike Morris, the
newly-appointed chairman & president of American
Electric Power, the United States’ largest electricity generator. |
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Pipes
& Wires
Mike, you commented in a recent article that you’d “rather put $1 billion on environmental control equipment in the
U.S. than $1 billion in a power plant in some foreign country where I don’t
know the game…” Does this signal the end of global investment for AEP, or
just in markets that AEP doesn’t know well? Mike
Morris Investing
in two regional electric companies and 4,000 megawatts of generation in the
UK gave us considerable exposure to a new market where AEP |
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did have some success early on.
We learned a lot about that market before deciding, at varying times
over the last few years, that it made more sense strategically for us to shed
these assets. We anticipate selling
our two UK power plants, our only remaining assets there, by year's end. As you know, the UK market became very
difficult two to three years ago due to oversupply conditions and very depressed
power prices. Those market conditions
have eased more recently but remain unfavorable. Given that, our generating facilities in
the UK have performed quite well. I wouldn't say definitively that this signals the end of global
investment for AEP, but - practically speaking - I don't look for AEP to make
new investments outside the U.S. over the next few years at least. Our focus over the past year, and
continuing this year, is our traditional, domestic utility business. Will we look to enter new markets in this
country? Perhaps - if we're confident
they'll enhance our existing portfolio of utility assets. |
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Pipes
& Wires
AEP caught the rising edge of global investment in the early 1990’s and seems
to have done quite well from its entry & exit strategies. Do you think
that Enron’s difficulties in late 2001 and the consequent credit crunch
through the industry prematurely curtailed global investment, or was the sun
starting to set on global investment anyway? |
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Mike Morris I can't
specifically address AEP's decisions to enter or leave markets and businesses
during the 1990s, but I'm certain we made the decisions we felt were prudent
at the time. Enron's implosion and the
subsequent tightening of credit put added pressure on those companies with
significant foreign investments that already were suffering because of
weaknesses in those economies, or other issues negatively impacting those
holdings. But it's my impression that
many companies had already begun pulling back in foreign markets by the early
part of this decade. Fallout from
Enron no doubt hastened that withdrawal. |
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Pipes
& Wires
Mike, you’ve also recently said that you’re expecting earnings growth over
the next 3 years to exceed the industry’s typical 2% or 3% by a “comfortable,
if not necessarily wide margin”. You’ve emphasised investment in generation
in West Virginia and in T&D in Texas, so is the expectation that AEP’s
superior earnings growth will come from both unregulated and regulated
activities or will there be a distinct bias ?? |
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Mike Morris Yes, we
believe that over the next several years we can exceed the organic growth of
2 percent to 3 percent that the utility business typically provides, possibly
by an additional 1-2 percent. But we
don't look for this to happen until we've completed sale of assets that don't
fit our long-term business strategy and that have been a drag on our
earnings. Part of the improvement will
be through stronger cost discipline, though cost cutting is not the best
route to prosperity. We expect investment in the utility business to fuel most of our
earnings growth. Both generation and
wires will contribute to that growth, though in what respective proportions
is premature to speculate. Our investment in generation in West Virginia is to improve the
environmental performance of our coal-fired plants there; it is part of a
six-year, companywide program in which we will invest approximately $3.5
billion. Ohio and West Virginia are
where most of the capital will be spent.
One of our main tasks will be to persuade our state regulators that
the environment will benefit AND our customers will benefit by extending the
life of these cost-effective power plants.
I think that's a very sellable notion.
I believe we'll get ROI on that activity. Although we have gotten out of
the supply business in much of our Texas territory, we continue to have a
wires business in that state. Texas
has offered customer choice of energy supplier since deregulating in 2002. We may more vigorously pursue industrial
and commercial wires customers there. |
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Pipes
& Wires
Mike, thanks for providing these insights into strategic growth. |
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Aus – prohibiting vertical
reintegration
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Background Most jurisdictions that have
vertically disaggregated their energy sectors include prohibitions on
vertical reintegration. These prohibitions are often implemented at a
practical level by establishing licenses for generation, transmission,
distribution and retail activities and then prohibiting a single entity from
holding certain combinations of licenses. |
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Relevant legislation In the case of Victoria, the
relevant legislation is Division 3 of the Electricity Industry Act 2000
(Victoria) which has the broad heading “Separation of
Generation Transmission and Distribution Sectors” and inter alia makes it unlawful for an entity to “have a controlling
interest in one or more other licensees” or “a substantial interest in 2 or
more other licensees”. |
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The transaction that triggered the issue Singapore Power’s acquisition of
TXU’s Australian activities (which is
still subject to ACCC approval) has triggered this very issue of vertical
reintegration. Singapore Power had previously acquired PowerNet from GPU (now part of First Energy), meaning that
completion of the TXU acquisition would effectively leave Singapore Power
holding a prohibited interest under Section 68 of the Act. |
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Obtaining ACCC approval The most obvious way forward
would be for Singapore Power to divest PowerNet, despite having claimed that
this will not be necessary. Such a transaction would be likely to attract a
high degree of interest including that of fund managers. Thanks to Phillips Fox for their assistance with
the legal aspects of this article. |
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NZ – reshuffling the ownership
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Stakes in two of NZ’s significant
utilities are currently on the market…. ·
The New
Plymouth District Council, the Taranaki Electricity Trust and the Powerco
Wanganui Trust are jointly selling their combined 53.6% stake in Powerco. ·
Edison
Mission Energy is selling its 51% in Contact Energy. |
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These sales are occurring
against a backdrop of very active utility acquisitions in Australia as
several US utilities exit their Australian investments and make way for Asian
utilities to increase their interests. Pipes & Wires will be watching
these transactions closely as some very interesting trends and strategies are
likely to emerge. |
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Global update - supply essentials
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Recent articles in Pipes &
Wires have identified the following global trends and themes… ·
Increasing concern over security of natural
gas supply as existing reserves begin to deplete. ·
Shifts in fuel mix away from nuclear and
coal toward natural gas. ·
Increasing concerns over transmission
reliability. ·
Volatility of wholesale prices as the
industry moves to a less risk-managed position. ·
The exit of US utilities from the third
wave of global investment, and the rise of European and Asian utilities in
the fourth wave. ·
Regional consolidation of distribution
utilities across national boundaries. ·
The widespread recognition that unregulated
merchant trading was not the huge success it was originally touted as. Increasing regulation and a
shift toward centralised planning. |
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The energy & utilities team
at PricewaterhouseCoopers have
recently put together their 2004 Utilities Global Survey entitled “Supply
Essentials” which covers these issues (and several more) in a lot of detail
and includes a survey of utility presidents. To request your copy of Supply
Essentials, pick here. |
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These articles are of a general nature and
are not intended as specific legal or consulting advice. They are correct at
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