Issue 44 – September 2005
From the director…
Welcome to Pipes & Wires #44.
month we examine two high profile events in
Finally we close this issue with a discussion of renewing pipes & wires assets and examine ways of providing a more realistic basis for renewal than a simple theoretical life. So enjoy this issue … as usual comments and criticisms always welcome.
NZ – Vector completes NGC takeover
Pipes & Wires #43 recorded Vector’s successful acquisition of a 92% stake in NGC (as well as Vector’s debut on the NZX). This article examines the subsequent compulsory acquisition of the outstanding 8% stake.
Readers will recall that Vector’s offer to NGC shareholders comprised Vector shares to the value of $2.62 and $0.78 cash in return for each NGC share. Following the successful acquisition of a 92% stake, Vector issued a compulsory acquisition notice to the holders of the remaining 8% of NGC shares which expired earlier this month. Vector shares and cash are now being held in trust for these outstanding shareholders.
A few reflections on the takeover
Speculation in September 2004 that AGL planned to exit its 66.05% stake in NGC added further excitement to the Contact Energy and Powerco sales that were also running around that time. Pipes & Wires #33 indicated that likely bidders for the NGC stake were Australian Pipeline Trust (APA), Prime Infrastructure, Singapore Power, DUET, Alinta, Cheung Kong Infrastructure and Vector. I guess most of us were taken by surprise at the speed of Vector’s successful bid although I think it would be fair to say that capturing the other stakes has proved a long and tortuous battle.
A few broader reflections
Back in … must have been about
September 1994 … I recall the banner headline in the New Zealand Herald that Mercury Energy
had launched a bid for Power New Zealand with the intention of on-selling the
Aus – Snowy buys Valley Power peaker
& Wires #43 discussed the proposed sale of the Valley Power peaker, a
300MW gas turbine power station in the Australian state of
Readers will recall that one of the two issues that prompted the sale of the peaker by the International Power consortium was a concession to the ACCC in regard to market dominance from the consortium’s existing portfolio of generation in Victoria and South Australia (the other issue being Contact’s withdrawal from Australia).
Concern has now arisen that Snowy may now be able to dominate the market for peak power as the peaker acquisition gives it control over about 50% of Victoria’s 4,900MW of peaking capacity. It is understood that the ACCC will be reviewing the peaker acquisition and when it does Pipes & Wires will make further comment.
NZ – electricity under pressure
Most readers in the NZ power sector will have been closely following Unison’s recent woes. Earlier this month the Commerce Commission published its intention to declare control of Unison under Part 4A of the Commerce Act 1986. This article examines the background of the price path threshold regime, the legal basis for declaring control and the possible next steps.
The first price controls on electricity lines businesses were issued in a Gazette notice in June 2003. This was a complex document that effectively established a CPI-X regime that set X = CPI for the period from 8 August 2001 to 6 September 2003. The Commission then went on to re-set the X’s for each individual electricity lines business for the 5 year control period starting on 1 April 2004. Unison was assigned X = 0 for this period.
The Commission has identified that Unison had breached its price path threshold on 3 occasions due to price increases in April 2002 and March 2004. The Commission also identified that Unison intended to reach its target WACC of 9.42% by increasing its prices in excess of the CPI in each of the five years in the control period.
Legal framework for declaring control
Part 4A of the Commerce Act 1986 provides the legal framework for the price path threshold regime and inter alia required the Commission to develop a targeted control regime. In particular sections 57d to 57n of the Act require the Commission to set thresholds for declaring control of a lines business. Section 57f provides for the Commission to declare control “over all or any of the goods or services supplied by a large electricity lines business in markets directly related to electricity distribution and transmission services”. Section 57i outlines the process the Commission must follow.
Possible next steps
Section 57i(1) outlines the three steps that the Commission must complete before making any declaration of control under s57f. These steps are…
· Publish its intention in the Gazette.
· Give reasonable opportunity for interested parties to present their views.
· Have regard for those views.
The Commission has set a closing date of 21 October for submissions by interested parties and will hold a conference during the week beginning 7 November to allow submitters to present.
Aus – all eyes on Southern Hydro
& Wires #43 outlined Meridian
Energy’s plans to sell Southern
Hydro and indicated that CLP Power
could have been a strong contender but would probably need to address some
market dominance concerns. Since then a short list including Origin Energy, Babcock & Brown, AGL and Canadian property, infrastructure and
generation investor Brascan has
Meridian purchased Southern in
2003 for A$600m with the intention of selling it around 2008 but the bullish
market for generation plant that has seen both Pacific Hydro and the Valley Power
peaker sold for high prices prompted Meridian to test the market for Southern.
Who is interested in Southern and why
Stepping back for a moment, the Southern sale appears to have attracted a different mix of bidders from the Pacific Hydro sale.
In considering why such a different mix of bidders were attracted we need to consider Pacific’s globally diverse portfolio of hydro and wind generation. Much of this plant is in recently deregulated markets that are struggling to keep up with demand from new-found economies. This of course represents a very solid investment for those pursuing a financial objective like the recent purchasers IFM Renewable Energy.
However for those pursuing operational investments like balancing a market exposure with generation, Pacific would have been a difficult investment to extract focused value from. This is thought to have been a deterrent to both AGL and Origin whose strong interest in Southern is likely to stem from their retail market exposures. Interestingly enough, AGL and Origin jointly bid unsuccessfully for Southern two years ago when it sold for A$600m, some A$900m less than the expected sale price this time around.
As the sale process progresses Pipes & Wires will provide further updates.
Asset strategy – getting the renewals right
Pipes & Wires #23 talked about “getting the CapEx right” and emphasised the highly asymmetric consequences of getting the CapEx wrong. This article examines a key aspect of getting the CapEx right – that of correctly estimating the “bow wave” of renewals.
What are renewals
First a bit of background - assets exist to provide levels of service such as capacity, reliability or security of supply (this is a big issue in itself which we would be happy to discuss with you if need be). The levels of service that an asset can provide will often relate to its physical dimensions and characteristics, and will almost always decline due to use or simply the passage of time itself (examining the key failure modes of components is also a huge subject that we can advise on if need be). Restoring the level of service to the original design level can involve 2 classes of work – maintenance and renewal. There is also a third class of work called extensions which relates to making assets “bigger” or “longer”.
Simply put, maintenance involves replacing consumable components such as brushes in a motor, contacts in a circuit-breaker or seals in a pump. Renewals in contrast would involve replacing a non-consumable component such as the housing of a pump.
Renewals can therefore be characterised as follows…
· Typically involves replacing “non-consumable” or “permanent” components.
· Generally has to exceed some threshold of size or value, often expressed in $ terms or in length for pipes & wires.
· Generally must be capitalised, and therefore effects the asset valuation and the balance sheet.
· Typically involves replacing with like functionality. Technological advances especially with SCADA make this “like for like” replacement a complicated matter which seems to be reasonably well addressed by the principle of replacement with the “modern equivalent”.
Identifying the renewals profile
Many pipes & wires utilities have undertaken intense periods of development, probably the most significant of which was the post WW2 reconstruction from about 1952 to 1965. This means that many utilities will have to replace a large percentage of their asset base in a reasonably narrow window of time which in some cases is upon us already. Given the level of investment required it would be hoped that some clever thinking is being applied to constructing the renewal profile, certainly beyond a simple [date of installation] + [standard engineering life]. Adoption of such a simple approach may well lead to the under and over investment discussed in Pipes & Wires #23 with its consequent outcomes.
Refining the renewals profile
The next step in moving from the simple [date of installation] + [standard engineering life] approach is to modify the standard engineering life to embody the actual condition of the asset. A variety of ways of modifying the standard engineering life are possible…
· Physical inspection of the entire asset base (very expensive and probably impossible) to determine the likely remaining life.
· Drawing on the accumulated collective global experience of infrastructure life cycles to modify the standard engineering life with a range of parameters to reflect quality of manufacture and installation, duty and loading cycles, corrosivity of the prevailing environment, maintenance history and so forth.
· An “in between” approach in which a statistically reasonable sample of the entire asset base is used to calibrate a “modified standard engineering life” derived from the above approach.
These approaches will assist in developing renewal profiles that all stakeholders can have confidence in.
For further information
To discuss how a more robust
renewals profile can be developed for your business call Ross on (03) 686-6994
for water, sewerage and drainage or pick here.
For electricity and gas call
Phil on (07) 854-6541 or pick here.
Conferences & events
International Infrastructure Management Summit (Rotorua, 17 – 19 October)
This summit will bring together infrastructure leaders and decision makers from around the world. It offers a unique opportunity to network and learn more about managing, maintaining and future-proofing infrastructural assets, from energy and water to buildings and transport. The information being shared and offered makes this a must attend event for those working in all areas of infrastructure management, from both the public and private sectors including those involved in:
The summit features an optional asset management workshop on Monday 17th October. This is followed by two days of innovative, challenging presentations and special interest groups, featuring national and international experts in a variety of areas of infrastructure asset management, and concludes with optional presentations from practitioners on Thursday 20th October, to hear about asset management practices in action.
Don’t miss this unique opportunity to hear from, and work with, this impressive team of presenters and facilitators, as together you learn the lessons of the past and benchmark the future of infrastructure management. For further information pick the bold link above, pick here to email Ross Vincent from Ingenium or call Ross on +64-7-8683960.
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.
Tell me how good this issue was…
Please pick one of the links below to tell me what you think of this issue of Pipes & Wires…
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).
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.