Pipes & Wires
THE MONTHLY
CLIENT NEWSLETTER FROM UTILITY
CONSULTANTS
Issue 34 – October 2004
From the
director…
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Welcome
to Pipes & Wires #34. We start this month with a quick summary of three
big deals in NZ, and then discuss a range of issues from the joint marketing
of Pohokura gas in NZ to the partial IPO of India’s biggest generator. I’m
also pleased to announce that Utility Consultants is working in association
with Waugh Consultants Ltd who
provide specialist asset management services to the water & wastewater sector.
This association provides a two-way transfer of asset and risk management
skills as well as expanding our resource base. Finally,
congratulations to those Pipes & Wires readers who were successful in the
recent local body elections (and commiserations to those who took the effort
to stand for election but were unsuccessful). |
NZ – industry update
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It’s been a fairly hectic time
for the deal-makers (and the lawyers) here, so we’ll do a quick update on the
following three deals… |
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Contact Energy sale Origin Energy’s acquisition of a
51.2% stake in Contact Energy
seems to have gone pretty much as it was always intended to (with Origin only
taking a controlling stake). As required under Rule 21 of the Takeovers Code, an independent
valuation report was commissioned by the independent directors. This report
concluded that because the fair value of Contact Energy is between $5.74 and
$6.34 that Origin’s offer of $5.57 is below fair value and that the other
shareholders shouldn’t sell. |
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NGC sale AGL’s
sale of its’ 66.05% shareholding in NGC
seems to have moved lightning fast since indicative offers closed last week. VECTOR has already entered into a
conditional deal at $3 per share, valuing the stake at $877.4m. Key
conditions on the deal are obtaining an exemption from the Takeovers Panel to acquire the
holding company AGL (NZ) Ltd which holds 64.2% of the shares, and an
exemption under the Electricity Industry Reform Act in regard to NGC’s
electricity generation activities. A similar offer to all other
shareholders as required under the Takeovers Code is expected to be made very
soon. |
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Powerco sale Prime Infrastructure’s
acquisition of a 53.6% stake in Powerco
seems to have encountered a few difficulties around the same offer being made
to all shareholders. Prime’s initial offer to the three major shareholders
was based on a mixture of cash and Prime bonds which in themselves have
proved controversial. The Takeovers
Panel granted an exemption to the Code so that the negligible number of Powerco shareholders with Australian registered
addresses were able to take a higher component of the consideration in
cash. However it then became apparent that large numbers of shareholders were
transferring their shares to Australian registered addresses which had the
nett effect of depleting the pool of cash available to shareholders with NZ
registered addresses. The Takeovers Panel subsequently concluded that this arrangement
did not contravene the Takeovers Code requirements. A final decision from the Overseas Investment Commission is expected
any day now. |
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UK – update on the distribution price
control
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Background Recent issues of Pipes &
Wires have highlighted the CapEx catch-up that both electricity and water
utilities are planning over the next few years to meet increased demand and
the consequent need for security of supply. This article examines OFGEM’s progress toward finalising the
parameters for the five year control period beginning on 1 April 2005. OFGEM has recently released a
draft Impact Assessment, which it is required to under a recent amendment to
the Utilities Act 2000. A key purpose of the Impact Assessment is to ensure
that proper regard is inter alia
had for less able classes of consumers as well as for the long-term interests
of the industry. |
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Issues under consideration A few of the issues that the
Impact Assessment is grappling with are… ·
Ensuring that the unbundling of metering
from regulated distribution charges that is planned for 1 April 2007 includes
correct incentivises. ·
Correctly incentivising key cost areas
(particularly the CapEx) so that regulatory targets are not too easy or too
hard. ·
Correctly incentivising service quality
levels to minimise the risks of over or under-investment. ·
Ensuring that distributed generation is encouraged. |
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Revising the price controls The initially proposed control
(refer to Pipes
& Wires #31) of an RPI - 2% reduction in Year 1 followed by an RPI -
1% reduction in Years 2 to 5 have been revised in the industries favor to RPI
- 0% for all five years of the control period, viz…
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Markets – the price is right (or is it ??)
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Background Most of us can think of several
situations where the wholesale energy price has either risen
to the point where the politicians intervene, or where it has fallen to the
point where some market players have faced bankruptcy. Examples that Pipes
& Wires has discussed include California and Ontario (price rises) and England & Wales and Victoria (price
collapses). |
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The reasons why According to the opponents of
energy market reform, the answer is simple - “market failure”. The real
answer lies in the realm of mis-match of supply and demand – simple enough on
the face of it, but also complex at a detail level. Probably one of the most
salient features is how much reserve capacity exists when the market
commences – a shortfall in capacity (such as occurred in California) will
cause wholesale prices to rise, because after all that’s one of things that
markets do – they signal price increases. Conversely places like England
& Wales and Victoria that ended up with a surplus of capacity saw the
wholesale prices decline which severely wounded some key market players. |
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So what is the real answer ?? Probably as close as we can get
to a practical answer is to consider the reserve margins in a proposed market
structure (including transmission interconnections) and postpone commencement
of the market until sufficient reserve margin exists. |
NZ – joint marketing of Pohokura gas
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Background In September 2003 the Commerce Commission authorised the four
developers of the Pohokura gas field (Shell Exploration, Shell, OMV and Todd) to jointly market the gas. It was
recognised that such an arrangement was uncompetitive on the face of it, and
as such was not in consumers interest, but it would have allowed the first
gas to have flowed probably one year sooner than if it had been developed
separately. Given the sooner-than-expected run-down of Maui, this one year
“head-start” was of huge national importance. |
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Details of the authorisation Subject to conditions, the
Commission authorised the four developers to discuss and agree on such
matters as price, quantity, rate and specification of the gas. The
authorisation also allowed the four developers to jointly act as a single
seller of gas in order to accelerate commercial development of the field. |
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Recent developments In April 2004, Shell and OMV
advised the Commission that they had decided to market the gas separately. As
this represented a material change in circumstances the Commission thought it
appropriate to consider revoking the original authorisation. This matter is
currently open for consultation. |
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UK – more on the British Energy bailout
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Background Pipes
& Wires # 20 and #32
examined British Energy’s
journey to the edge of bankruptcy, and outlined a proposed ₤5b deal
that would see the UK government holding about 65% of the equity. The last
few weeks have seen some intense activity by shareholders incensed at the
prospect of being left with only a 2.5% stake, but one of the more off-the-wall
issues thrown into the mix has been that of illegal state subsidies. Illegal state subsidy issues Under current European
Commission competition law, governments are broadly prohibited from
subsidising ailing industries. A key concern is that the ₤5b bailout
might also find its way into British |
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Energy’s coal-fired generation
(the 2,000MW plant at Eggborough) and energy sales business units. The proposed split of British Energy A restructuring plan has been
developed that would see British Energy split into three ring-fenced business
units – nuclear generation, coal-fired generation, and energy sales – that
would prevent the bailout (which is intended to cover the decommissioning
costs over the next 100 years) cross-subsidising the coal-fired generation
and energy sales business units. Proceeding with the bailout is
subject to some tough restrictions on acquisition of new capacity and
under-cutting competitors. |
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India – the demand for power
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Introduction As the new economy gains
traction and demand for electricity in India soars, so too did the demand for
shares in National Thermal Power Corporation. Background to the company NTPC is India’s largest utility
and the sixth largest thermal generating utility in the world with an
installed capacity of almost 22,000MW which is expected to grow rapidly. NTPC
operates a range of coal and gas-fired plants and supplies about 27% of
India’s electricity. |
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Details of the deal NTPC recently sold 433 million
new shares as well as 433 million existing shares owned by the government in
a deal valued at just over US$1b. Amazingly, the offer was more than 100%
over-subscribed within one minute of opening, seemingly by US investors. This sale of 10% of NPTC’s
equity will fund capacity expansion and allow the government to reduce its
budget deficit |
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Conferences & events
·
Climate Change and Business –
Auckland (3 – 5 November 2004)
How will climate change affect your business?
Find out at Climate Change & Business: The Australia-New Zealand Conference
& Expo 2004.
This inaugural Australasian conference will
focus on business risks and opportunities arising from climate change. It is an
initiative of the Australia - New Zealand climate change partnership and aims
to increase information flows and dialogue between businesses and governments
within Australasia.
Expert speakers from New Zealand, Australia,
China, Japan, USA and Europe will describe the size and nature of emerging carbon
markets, will background regional governments' policies and incentives, and
will describe new technologies and business risks. Global and regional energy
requirements for the next 50 years will be profiled.
The conference is a unique opportunity to understand
the links between business and climate change and the associated policy
implications. It will be one of this year's largest local gatherings of
decision-makers looking for emissions reduction solutions.
·
NZ Power Summit – Auckland
(15 – 16 March 2005)
Conferenz is
delighted to confirm the dates for our 7th Annual NZ Power Summit, New
Zealand's largest power summit for 2005, and the first point of reference for
all key decision-makers and executives working within the energy sectors. With
an audience of the highest level delegates and speakers, the 2005 NZ Power
Summit represents an unprecedented opportunity to network with other senior
energy executives and new business contacts.
The 2005 NZ Power Summit will be featuring key regulatory decision-makers, 2
international addresses, 16 chief executives and many other industry experts.
·
Metering, Billing & South
African Prepayment Week – Cape
Town (June 2005)
SPIntelligent will again
be hosting the hugely successful 6th Annual Metering, Billing, CRM / CIS Africa 2004 which will be co-located
with the 4th annual South
African Prepayment Week (SAPW) conference and exhibition in Cape Town.
This event has been
supported by utilities, government bodies and vendors throughout Africa for the
last six years and is a calendar highlight for companies involved in metering, billing
and CRM / CIS. The event provides a forum for electricity, water and gas
stakeholders to discuss pertinent issues on the value of metering, billing
systems and CRM / CIS in the revenue cycle chain in utilities.
Co-located is the South African Prepayment Week
conference and exhibition, which provides an opportunity for electricity, water
and telecommunications prepayment experts to discuss the latest developments
affecting the industry in South Africa, while at the same time providing a
forum to showcase the vast experience of the industry to an international
audience.
Links to cool stuff
·
Energy21
News (distributed generation & demand response) – Centre for Advanced
Engineering
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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
the time of writing. 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
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