Pipes & Wires
THE MONTHLY
CLIENT NEWSLETTER FROM UTILITY
CONSULTANTS
Issue 44 – September 2005
From the
director…
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Welcome
to Pipes & Wires #44. This
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
Background
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.
Recent events
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
Background
Pipes
& Wires #43 discussed the proposed sale of the Valley Power peaker, a
300MW gas turbine power station in the Australian state of
Recent events
In what has been considered a
very bullish market, Snowy Hydro
has acquired the peaker from the consortium for A$243m
and has also acquired the dormant energy retailer Red Energy from Contact.
Regulatory issues
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
Recent events
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.
Background
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…
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Publish its intention in the Gazette.
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Give reasonable opportunity for interested parties to present
their views.
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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
Introduction
Pipes
& 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
emerged. As
Background
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
Introduction
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:
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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…
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If you get this is a hard-copy,
your comments can be emailed to issue#44@utilityconsultants.co.nz
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receive Pipes & Wires directly by picking here.
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.