Pipes & Wires
THE MONTHLY
CLIENT NEWSLETTER FROM UTILITY
CONSULTANTS
Issue 42 – July 2005
From the
director…
|
|
Welcome
to Pipes & Wires #42. This issue starts with an apology in regard to my
recent article on the final Victorian water pipes price determination which
implied that prices would decline in real terms. We then
examine three industry structural happenings – a disaggregation and two share
acquisitions that have a consolidating effect. We also examine the draft
Victorian wires determination and take a quick look at the hot topic of
cross-border leases. Finally,
just a quick reminder about the Resilient Infrastructure conference in
Rotorua in early August. So until next month … happy reading. |
An apology
One of our more vigilant readers has bought
to my attention that the recent article in Pipes
& Wires #41 on the final water pipes determination in
Aus – breaking up Western Power
Background
The successful passage of the
Electricity Corporations Bill 2005 last month represents the resurrection of a
previous attempt to vertically disaggregate Western Power Corporation in 2003.
The Act paves the way for the vertically integrated Western Power Corporation
to be split into four corporations. Three of these corporations
will take over Western Power’s generation, retail and distribution functions in
the South West Interconnected System (SWIS) whilst the fourth will take over
Western Power’s functions in the in non-interconnected regions and in the North
West Interconnected System (NWIS).
Public policy objectives
The Bill represents a
“continuation of the Government’s policy to introduce a competitive electricity
market in
·
Deliver enhanced reliability of supply.
·
Promote private sector investment in generation.
·
Put downward pressure on prices through retail competition.
Most of us would recognise these
three objectives as being fairly standard in most neo-liberal electricity
reforms models.
The political guarantees
There was a surprising degree of
Opposition support for the Bill’s passage however the Opposition did extract a
guarantee from the Government that tariffs would not go up and the
disaggregation process would not lead to increasing prices. The Government also
agreed to review the timetable for full retail contestability but rejected the
Opposition’s request that all profits from the distribution company be retained
and no dividend paid to the State.
Analysis of the political guarantees
These last two points merit some
further analysis, at least at face value…
·
Given the dominant position of Western Power in the generation
market the timetable for full retail contestability will more than likely need
to be driven by the rate at which the private sector is attracted into the
market rather than by other factors.
·
The Government’s rejection of the Opposition’s request to retain
all profits within the distribution company would seem to be at odds with the
stated objective of “delivering enhanced reliability of supply”.
There is obviously a lot of work
to be done in breaking up an entity like Western Power but as significant structural,
market and regulatory emerge Pipes & Wires will make further comment.
NZ – Vector bids for outstanding NGC
shares
Background
Late last year Vector bought itself an initial
66.05% stake in NGC with a mixture of
senior debt and notes referred to as PIPES (Pre-IPO Equity Securities). The
plan was to publicly float 24.9% of Vector to pay for this stake (although
readers will recall that plans to float at least part of Vector date back to
Mercury Energy’s original establishment plan in 1993). Pipes
& Wires #39 indicated that “events” at the Auckland Energy Consumers Trust could have gazzumped
the float. In this article we examine further progress and look at some of the
issues that have led to Vector being placed on credit watch by Standard & Poors.
Announcement of the full takeover
Late last month Vector announced
a full takeover offer for the 32.8% of NGC it does not already own. The basis
of the offer to NGC shareholders is valued at $3.40 per share comprising 78c
cash plus the balance in Vector shares. Under the requirements of the Takeovers Code Vector will be required
to obtain 90% of NGC shares before it can compulsorily acquire the outstanding
10%.
Credit rating implications
The senior debt and PIPES that
Vector paid for the original 66.05% stake in NGC with must be fully repaid by
December 2005. This puts a degree of pressure on Vector to launch the float and
gather the proceeds before the debt and PIPES mature. Not surprisingly this degree
of short-term pressure resulted in Standard & Poors placing both Vector and
NGC on creditwatch with negative implications.
However Standard & Poors
emphasised that if the NGC acquisition and the float go as planned a rating of
BBB+ with negative outlook beyond the short-term would be assigned. Positive factors
contributing to this likely rating include the low-risk nature of the pipes
& wires businesses, the diverse nature of the pipes & wires business
and the certainty of the electricity price-path certainty. Negative factors
include the uncertain state of gas transmission and distribution regulation and
the possibility that Vector may not be able to integrate NGC.
Pipes & Wires will make
further comment as the acquisition and float proceed.
Aus – Victorian draft wires determination
Introduction
Pipes & Wires regularly
summarises draft and final determinations of pipes & wires tariffs. This
article examines the draft
determination for the five electricity distributors in the Australian state
of
The big issue going forward
One of the significant issues
facing the Essential Services Commission
is that over the current five year control period each of the distributors
appears to have beaten their projected service levels whilst spending less than
their projected OpEx and CapEx. The fact that the distributors have sought
still further increases in both CapEx and OpEx for the coming period puts the
ESC in an awkward position in which it would be easy to simply decline the
increases sought.
The ESC, however, is to be
commended for its cautious approach to this issue and specifically recognising
that the reasons for the under spend may include unanticipated efficiency gains
(ie. unit costs of doing the work were less). Even more pleasing the draft
determination goes on to acknowledge that “the relationship between network
expenditure and service performance is neither precise nor limited to the short
term”.
The draft price controls
The draft price controls for each
of the five distributors assume that recovery of all costs over the impending
control period can be achieved with lower revenues than the current period.
These assumptions include increases in both customer numbers and energy
delivered, and efficiency gains. The draft controls are (including metering
charges) …
|
Distributor |
P0 (%) |
X for years 2 to 5 (%) |
|
14.0 |
2.1 |
|
|
22.3 |
1.6 |
|
|
25.5 |
1.3 |
|
|
SP AusNet (formerly TXU) |
16.5 |
0.8 |
|
23.4 |
1.4 |
Pipes & Wires will provide
further comment as the final determination emerges.
NZ – cross-border leases
Introduction
The media and opposition
political parties have made much of the recently revealed cross-border leases involving
Transpower’s HVDC converter
stations, the HVDC submarine cables and south island AC grid assets. This
article examines what exactly a cross-border lease is and why an infrastructure
owner would enter into such a deal.
For the avoidance of doubt this
article is not implying that the Transpower deal was of the exact form
discussed below nor is it to be taken as Utility Consultants’ endorsement of
such deals.
What exactly is a cross-border lease?
Cross-border leases essentially
involve an asset owner leasing the asset (usually an infrastructural asset) to
one or more
In the next step the
·
Leases the asset back to the original owner for a lesser period
(usually 25 to 30 years) which is referred to the sub lease.
·
Grants an option to the original owner to buy out the unexpired
portion of the head lease at any time up to the expiry of the head lease.
The financial transactions that
occur are…
·
The
·
The original owner fulfils its payment obligations arising from
both the sub lease and the option.
The benefit to the original owner
is the difference between the head lease payment (money in) and the sub lease
payments, option payment and transaction fees (money out). This is referred to
as a SILO (“sale in, lease out”) deal as the term of the lease is long enough
to be considered a sale under
Such deals create tax advantages
for US investors but were recently outlawed by the IRS.
What’s the catch?
Apart from being illegal it would
be hard to imagine any catches to such deals. The catch arises from the
original owners’ loss of control of the asset which could occur in two ways…
·
If the original owner doesn’t exercise the option to buy out the
unexpired portion of the head lease, effective control of the asset reverts to
the
·
There is also the risk that the
Thanks to Phillips Fox for their assistance with
this article.
Aus – Pipeline Trust buys into GasNet
Background
Last years’ breakup of Epic Energy saw a substantial reshuffle of
market share in the gas transmission market. This article briefly examines the possibility
of an industry shake-out after the recent acquisition of a stake in GasNet by the Australian Pipeline Trust (APA)
that takes APA’s stake in GasNet to 5.3%.
Industry reshuffles
Readers will recall that the
breakup of Epic Energy last year significantly reshuffled transmission pipeline
ownership. The flagship Dampier-Bunbury Pipeline was acquired by a consortium lead
by DUET whilst Epic’s other pipelines were
acquired by Hastings Funds Management. Speculation
amongst analysts is that the gas transmission industry is ripe for further
consolidation after the Epic breakup, with GasNet itself publicly stating a few
months ago that it would consider takeover offers from rivals.
Key drivers
There is no doubt that eastward
and southward transmission volumes from the northern areas of
Pipes & Wires will provide
further comment as reshuffles occur.
Conferences & events
Resilient Infrastructure 2005
–
This two-day event has been designed for the
owners and managers of major infrastructure systems across a range of sectors,
including telecommunications, ports, local and central government, airports,
insurance companies and the financial sector.
Any old books in your library ??
I’m looking for old books and
magazine articles on electricity industry and borough council history,
especially books like jubilee celebrations of utilities or back copies of the
old “Live Lines”. If you’ve got any old books like this that you don’t wish to
keep please send them to me.
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Hot links to cool stuff
·
Centre for Advanced Engineering – subscribe
to Energy21 News (distributed generation & demand response).
·
Centre for Advanced Engineering – download the report on
“Energy supply in the post-Maui era” (file size is about 780k).
Disclaimer
These articles are of a general nature and
are not intended as specific legal, consulting or investment 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 herein.