Issue 31 – July 2004
From the
director…
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Welcome
to Pipes & Wires #31. This issue starts by show-casing a methodology for
improving confidence levels in the asset management spend. We then
do a brief up-date on the regulatory issues surrounding Singapore Power’s
acquisition of TXU, followed by a brief analysis of the regulatory issues
surrounding the Contact Energy sale. This is
followed by a summary-level discussion of how industrial and large commercial
customers view price & quality trade-offs. We then
take a quick look at where the next electricity price control in the UK is
going, and conclude with a quick look at Cap Gemini’s recent global update. |
Having confidence in the asset spend
Introduction
Pipes
& Wires #23 discussed the issue of getting the CapEx right. This
article expands on that theme by considering how we can increase the confidence
in all classes of asset spending.
Background
We first need to examine what the
investment and reinvestment processes look like in an ideal world – this is
shown in Figure 1 below….
Asset
condition relative to required condition
Figure 1 shows how in an ideal
world every component of an asset will start off in the ideal condition ie. there is no under-build or over-build. The asset components
will deteriorate over time to some lesser condition, at which point funds are
spent to restore the component condition back to the ideal. In this ideal
world, all components deteriorate equally from a fully known condition to a
fully known condition, from which absolutely certain
spend processes restore the components to an ideal condition of no under-build
and no over-build.
Unfortunately this ideal world
remains beyond the grasp of most of us, and we instead live in a practical
world of unknowns and uncertainties. Figure 2 illustrates these uncertainties
which are as follows…
·
The initial component conditions are spread about some mean
position (we have illustrated this with a Gaussian curve) to reflect the
inherent under-building and over-building that occurs.
·
The deterioration process is not uniform across all components, hence the Gaussian curve above “smears” toward
the actual condition. This in itself reveals that the actual condition of any
individual component may not be accurately known.
·
The restoration processes may have inherent uncertainties that
further “smear” the intended return back to the ideal condition. Hence what we
might think is a “restored condition” may in fact include a lot of under-build
and over-build.
100%
Creating confidence in the spend
Estimates of the confidence in
the actual condition of the components and the robustness of the restoration
processes can lead to some surprising answers. Consider an asset class such as
33/11kV transformers – we may be 80% confident of the actual condition, and be
70% confident that our restoration processes are robust. This means we are only
about 56% confident that the spend plan will actually restore all the
transformers to the ideal condition.
If we consider assets such as
cables and pipes that are both geographically dispersed and difficult to
examine, it is easy to see how these two confidence measures can combine to
give a low overall confidence in the asset spend.
To discuss how you can improve
the confidence in your asset spend, pick here
or call Phil on +64-7-8546541.
Aus – prohibiting vertical
reintegration
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Background Pipes
& Wires #30 discussed SingPower’s
recent acquisition of TXU’s Australian
businesses, and how this would breach the prohibition on vertical
reintegration in Victoria. Recent events As we discussed in this
article, one option to obtain ACCC
clearance for the acquisition would be for SingPower to divest SPI PowerNet. It is understood,
however, that SingPower is negotiating with the |
ACCC to retain ownership of PowerNet
but possibly distance itself from operational control. We will comment
further on this as matter become clear. |
NZ – Contact Energy sale hits the
competition hurdle
Introduction Pipes
& Wires #30 briefly mentioned Edison
Mission Energy’s move to sell its 51% stake in Contact Energy. However two
competition issues have recently been identified… ·
The possibility of a reduction in the
number of industry players controlling the Maui gas market. ·
The possibility of increased vertical
integration amongst the electricity and gas industries. |
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The Maui gas issue The remaining Maui gas
allocation is split amongst Contact
Energy, NGC, Methanex and Genesis Energy. Any consolidation
of ownership would almost certainly breach s47(1) of
the Commerce Act 1986, and would therefore either be prohibited or require
suitable concessions to be made. The vertical integration issue There maybe the potential for some
possible buyers of Contact Energy to vertically reintegrate the energy supply
chains. While this may not breach any of the line & energy separation
requirements of the Electricity Industry Reform Act 1998 it may enable
uncompetitive behavior. This is likely to be a major
matter for the NZ energy sector to deal with both in terms of transaction
magnitude and regulatory concerns. Pipes & Wires will comment further as
this matter progresses. |
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NZ - Giving choice to the customer
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Introduction The most recent price path
threshold included a requirement for all lines companies to consult with
their customers about the supply quality and price trade-offs available to
them. This has forced the industry (and its advisors) to have a long hard
think about what supply quality really means, and how realistic it is to
offer alternatives. The broad conclusion is that quality is a common good,
and it is generally not possible to provide differing levels of quality to
all but the very largest customers. Justifying the existing level of supply quality As part of their asset
management plans (AMP’s), line companies are projecting SAIDI |
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5 to 10 years ahead. As part of
advising several lines companies on modifying their AMP’s, we have considered
how a lines company justifies a SAIDI of, say, 120 minutes and not some
lesser (or greater) figure. The short answer to this is
that historical decisions have contributed to an inherent level of
reliability that is not easily changed. For instance the decision by some
utilities to reduce the cement content of concrete poles during World War 2
created a lower inherent reliability that persisted for about 50 years.
Similarly the decision by some utilities to install the first generation of
XLPE cable that was prone to condensation within the insulation created a
lower inherent reliability that is still persisting 30 years later. Hence justifying the existing
SAIDI hinges around two factors – the inherent level of reliability that
previous investment decisions have created, and the ability to fund the level
of reinvestment necessary to maintain the existing SAIDI or conversely to improve
the SAIDI. |
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Justifying variations from the existing level of supply quality Most of us have all heard
anecdotal evidence that various classes of consumers may or may not be
prepared to pay more to have more “quality”. It is also starting to emerge
that many customers would not be prepared to pay less to have less “quality”,
which strongly endorses the status quo combination of quality and price. As part of advising lines
companies on the customer consultation, we were able to gather the views of
167 industrial and large commercial customers. Of these customers, 17%
indicated they would “consider” paying more for more reliability, but only 1%
indicated a willingness to pay less for less reliability. These two related
but distinct issues are outlined on the following chart…
Price SAIDI If anyone wishes to contribute
further data from either industrial and large
commercial, or from residential customer groups so this article can be re-run
more comprehensively, please pick here
to contact me. |
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UK – the next electricity price control
Introduction OFGEM’s work on the price control for the
5 years beginning 1 April 2005 is well under way, and it’s very clear that
the levels of investment necessary to sustain secure reliable supply will be
much greater than for the current control period. |
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Correctly incentivising the investment Most of the lines businesses
are projecting significant increases in CapEx for the control period over and
above current levels, with the exception being Western Power’s South Wales
business that is projecting a decrease in CapEx of 14%. These proposed levels
of investment suggest that a high degree of renewal is necessary in most
areas of the UK hence OFGEM wishes to ensure that this investment is
efficient. One of the key mechanisms that
OFGEM is consulting with lines businesses on is the proposed use of a sliding
scale return on under and over- investment. This mechanism will also reward
lines businesses that can deliver agreed investment outcomes at a lower than
projected cost. The proposed price controls The previous and current price
controls have included a big |
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initial re-set
that is noticeably absent from the proposed 2005 control (positive numbers
represent decreases)…
The smaller re-set reflects the
higher proposed CapEx for the coming period, although it must be noted that
this P0 is a nation-wide average of widely varying figures. For
more information, visit OFGEM’s website. |
Global update – deregulation
The energy, utilities &
chemicals team at Cap Gemini has
recently published its third global utilities survey entitled “Deregulation –
meeting the delivery & sustainability challenges”.
This study comprises 130
interviews with utility executives in Western Europe, North America and Asia
Pacific who provide a range of views on how well deregulation is serving the customer.
Not surprisingly, many of the issues raised center around themes of correctly
incentivising long-term investment in both generation and networks. Pick here
to obtain your copy of this report.
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Disclaimer
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are not intended as specific legal or consulting advice. They are correct at
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