Pipes & Wires
THE MONTHLY
CLIENT NEWSLETTER FROM UTILITY
CONSULTANTS
Issue 33 – September 2004
From the
director…
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Welcome
to Pipes & Wires #33 - its’ a busy time for the global gas pipes industry
with 3 major transactions on the go which are covered below. We also examine
AEP’s exit from the UK in a move that further re-shapes the UK power industry. On the
legislative fronts we examine California’s consideration of re-de-regulation
(if that’s actually a word) and progress on the Electricity & Gas
Industries Bill in New Zealand. Also on the legislative front I’ve been
teaching a class in Energy Policy Reform at the University of Waikato School
of Law over the last 2 weeks. We
conclude this issue with a discussion of the review of Australia’s Gas Access
Regime. So …. Happy reading until next month. |
NZ – Australian Gas Light heads for
home
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Background Pipes
& Wires #32 indicated that Natural
Gas Corporation (NGC) was the ball in the air, and its future was heavily
dependent on its 66.05% shareholder, Australian
Gas Light (AGL). Most of had our suspicions that AGL would exit the NGC
stake after failing to capture either the Contact Energy or Powerco stakes, and this suspicion was
confirmed late last month when AGL announced its intended exit. |
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Possible bidders Interested bidders may include
the Australian Pipeline Trust
(APA), Prime Infrastructure,
Singapore Power, DUET, Alinta, Cheung Kong Infrastructure and VECTOR . However it’s an awkward
time as several of these parties already have balls in the air in one corner
of the world or another. Unlocking NGC’s value A major upside of NGC is the
strategic value of its prepaid gas supplies, whilst a possible downside is that
because NGC is such a complex business it’s hard to see a total alignment
with any one of these bidders’ core competencies. The nature of the component
businesses could, however, permit on-selling of assets to occur without too
much loss of synergy value, but that would be difficult to achieve without a
full takeover (for which an offer must be made under the Takeovers Code anyway). It’s likely to be a few more
days before the sale process really moves ahead, and when it does Pipes &
Wires will be watching. |
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UK – American Electric Power heads for
home
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Background Earlier last month American Electric Power (AEP) announced the
sale of its’ Fiddlers’ Ferry and Ferrybridge power stations to Scottish & Southern Energy plc.
Both of these stations have four 500MW coal-fired units and are located in
Cheshire and West Yorkshire respectively. |
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The transactions AEP purchased the two stations
from Edison Mission Energy in 2001 for
US$960m, which included electricity, coal and freight contracts. AEP sold the
stations to S&SE for a total consideration of US$456m of which the
generating plant represented US$248m. This halving of value has undoubtedly
been driven by declining wholesale prices. Industry structural changes The major structural change in
the industry occurred as the retail function shifted from lines to generation
– generators all over the world embarked on forward integration strategies to
lock in markets for their energy and avoid wholesale price volatility. Now
that the issue is for security of both installed capacity and fuel supply, the
trend is for retailers to backwardly integrate into generation. |
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Aus – update on the Dampier – Bunbury
Pipeline
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Introduction Most of us are only too aware
of Epic Energy’s difficulties with the
Dampier – Bunbury Natural Gas Pipeline (DBNGP). The pipeline was recently
placed into receivership by a consortium of banks that were owed a total of
A$1.85b. Underscoring this were strict instructions to the receiver not to
accept lesser bids. |
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Interested bidders Three parties submitted
acceptable bids by the closing date… · Australian Pipeline Trust (APA)
despite the withdrawal of its Canadian partner Enbridge. · Investment
bank Babcock & Brown. · A
consortium of DUET (60%), Alinta (20%) and ALCOA (20%). Envestra missed the closing time, and
had requested a “short extension” to finalise the details of its bid. |
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Regulatory issues Although there are no statutes
in Western Australia specifically prohibiting vertical reintegration of gas
transmission and distribution, both the state government and the ACCC had expressed concern that a major
customer of the pipeline might also become its owner. |
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Security of gas supply issues The other issue the state government
is watching is the security of gas supply. Expanding the pipeline’s capacity from
the current 520TJ per day to about 700TJ per day was one of the key aspects
of the original sale which bidders were instructed to make allowance for. Due
to the tariff dispute, no expansion has occurred and it is expected that
shortfalls in gas transmission capacity could lead to electricity shortages
as early as 2005. |
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A winner emerges After only several days’ evaluation,
the DUET / Alinta / ALCOA consortium emerged as the winner with an offer of
A$1.85b. In response to the ACCC concerns the consortium has made several
enforceable undertakings including a commitment to expand capacity, a
commitment to ring-fence Alinta from commercial negotiations, and a commitment
not to seek revocation of coverage under the Gas Code. And so the Epic journey finally
comes to an end…. |
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US – California considers deregulation
(again !!)
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Background As demand soars toward
46,000MW, Democrats and Republicans slug it out over the exact content of Assembly Bill 2006 which
in its present form distinctly favors vertically integrated utilities over
merchant generators. Merchant generators such as Calpine have argued that excluding them
will fail to create real competition, whilst regulated utilities such as SoCalEd argued that any thought of
re-deregulation is simply asking for more trouble. AB2006’s proposed regulatory framework The key component of AB2006
that has got Republicans steamed is that customers |
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with a
maximum demand of less than 500kW can only be supplied on a cost-of-service
basis either by the utility building its own plant or by that utility purchasing
energy from a merchant generator. The Republicans argue that this
cost-of-service regulatory framework will lead to inefficient investment, and
that putting merchant generators in a secondary position will lead to a
shortfall in capacity. |
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AB2006’s progress Despite Republican opposition,
AB2006 was approved by the Democrat-dominated Assembly in May and passed to the
Democrat-dominated Senate where it has been
read, amended, re-read, re-amended, and bounced around three sub-committees.
The final hurdle is almost certain to be Governor
Schwarzenegger who strongly favors allowing merchant generators to enter
the industry. |
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NZ – progress on the E&GIB
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Background Pipes
& Wires #29 outlined the objectives of the Bill, and its structure.
This article examines the amendments arising from the Select Committee in
June. |
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Amendments to the Bill Key amendments to the Bill are
as follows…. · Trust-owned
electricity providers will be prohibited from paying a different (presumably
lesser) discount or rebate to customers on low fixed-charge tariffs solely
because that customer has chosen to be on a low fixed-charge tariff. · An
insertion to the Bill ensures that the Electricity Commissions
powers can only be used as a last resort. · A recommendation
that the Electricity Act 1992 be amended to remove the Minister’s powers to
direct the Electricity Commission. |
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· A
requirement for the Electricity Commission to consult industry participants
in levying fees. · The
ability to transfer jurisdiction for all large lines businesses except
Transpower from the Commerce Commission
to the Electricity Commission is to be deferred until 31 March 2009. Pick here
and here
to download detailed commentaries on the Bill. Progress on the Bill The Bill completed its’ second
reading on 10 August, and was debated by the House on 1 September. The
remaining steps are the clause-by-clause debate by the full house, the third
reading, and royal ascent. Thanks to Phillips
Fox for their assistance with this article. |
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UK – Transco sells regional gas pipes
businesses
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Background The long-awaited sale of four
of National Grid Transco’s regional
distribution networks has finally been announced (subject to various regulatory
approvals). NGT will sell these four networks for a total of ₤5.8b. |
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The sales The proposed individual sales
are as follows…
NGT will retain ownership of
the West Midlands, London, East England and
North-West England distribution networks. |
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NGT’s plans NGT plans to use the sale
proceeds as follows… ·
A capital return to shareholders of
₤2b. ·
Retirement of ₤2.3b of debt. ·
Boost this years’ dividend from 20p to
23.7p per share along with an expected dividend increase of 7% through to
March 2008. |
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NGT has also indicated an
interest in increasing its electricity transmission activities in the US. Strategies of the intending buyers Geographical penetration with
existing water and / or electricity networks would appear to be a major
component of United and S&SE’s strategies. My guess is that bundling
multi-utility services, synergies from activities such as meter reading and
field services, and increasing the scale of back-office services will create
synergies worth several tens of millions of pounds per year. |
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Aus – the Gas Access Regime review
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Background In June 2003 the Productivity Commission was instructed by
the Treasurer to conduct a review of the Gas Access Regime and to report back
within 12 months. One of the terms of reference of the review was to assess
the benefits, costs and effects of the Regime, including its effect on
investment in the sector and on upstream and downstream markets. The final
report was recently released and forms the subject of this article. |
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Key findings of the review One of the key issues raised in
the final report is that although competition and interconnection of
transmission pipelines has increased and is beginning to limit market power,
it has not yet reached the point where an Access Regime is unwarranted. The
report does, however, acknowledge the current Access Regime is problematic in
the following areas… ·
The costs the Access Regime imposes,
particularly in gathering and processing the large amounts of information
regulators need to fulfill their responsibilities. ·
The potential to distort investment
patterns toward lower risk projects or delay new investment through
uncertainty over various parameters such as the WACC. ·
The potential to inhibit innovation. ·
The whole legal framework has potentially
conflicting objectives. The report goes on to recommend
a range of amendments along the lines of (and these are my words) “the Access
Regime was fine while the industry moved from a vertically-integrated
state-owned structure but now it needs some tweaking to address future growth
and investment requirements and the declining market power of some individual
pipelines”. |
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The next steps You might want to consider
taking the following steps… ·
Assess the likely impact of the reports’
recommendations on your key revenue, cost and valuation parameters. ·
Persuading state and Commonwealth officials
to adopt the favorable recommendations of the report. Utility Consultants has
teamed up with Phillips Fox to
provide a full advisory service that includes policy, legal, lobbying,
regulatory economics, corporate strategy, financial and asset management
experience. Please pick here
to email us, or phone Phil on +64-7-8546541 or Simon on +61-3-92745470. |
Conferences & events
·
NZ
2004 SCADA Summit – Auckland (27 – 28 September 2004)
·
NZ Power Summit
– Auckland (15 – 16 March 2005)
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Disclaimer
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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