Pipes & Wires
THE MONTHLY
CLIENT NEWSLETTER FROM UTILITY
CONSULTANTS
Issue 48 – February 2006
From the
director…
|
|
Welcome
to Pipes & Wires #48 and to 2006. This issue starts by examining the
beginnings of two regulatory matters – one in the We then
take a look at the strategy of one of We then
examine |
About Utility Consultants
Utility Consultants Ltd is a
management consultancy specialising in the following aspects of energy
networks…
|
· Mergers
& acquisitions |
·
Asset management |
|
· Strategic
studies |
·
Financial analysis |
|
· Economic
regulation |
·
Risk management |
For a detailed profile of recent
projects, pick
this link.
Introduction
Readers may recall from Pipes
& Wires #33 and #39
that the UK gas distribution industry was significantly restructured in June
2005 by the sale of four local networks from within National Grid Transco into separate ownership
(whilst NGT retained ownership of the networks in the West Midlands, London,
East England and North-West England). This article examines the recent price
control review that will extend the current price controls for a further year
(until 31 March 2008) and then apply for the control period commencing 1 April
2008 for each of the eight networks.
Background
Following the successful sale of
four of NGT’s distribution businesses, the following four new gas distributors
emerged - Northern Gas Networks, Wales & West Utilities, Scotland
Gas Networks and Southern Gas Networks (these last two being owned by the
holding company Scotia Gas
Networks). As indicated above the price controls in place at the time of
sale that were due to conclude on 31 March 2007 have been extended by 1 year
until 31 March 2008.
The price control review – issues & timetable
OFGEM
released a consultation paper in December 2005 setting out the issues it
intends to consider in developing both the one year extension to the present
control and the next control. Not surprisingly much is made of the available
comparability of four independently businesses (collectively owning eight
regionally distinct networks).
Those familiar with the industry
might recall that the control period commencing on 1 April 2002 set X=2% for
the entire distribution business. Within about a year or so of this control
period commencing it was considered that disaggregating the overall price control
to the eight regional levels might have merit, and so after a consultation
period eight regional price controls took effect from 1 April 2004. These eight
regional price controls correspond to the new gas industry structure and will
form the basis of the future controls.
OFGEM expects to publish the final
proposal for the one-year extension in December 2006 and the final proposals
for the next control period in December 2007.
NZ –Transpower and the Commerce
Commission
Introduction
Late last month the Commerce Commission released its Intention
To Declare Control Of Transpower pursuant to Part
4A of the Commerce Act 1986. This article examines the Commission’s intention
and also examines how the Commission’s process differs from its approach to Unison.
Background
Like the 28 distribution companies in
Following the first two breaches, the
Commission initiated a post-breach inquiry in January 2005. As a result of
that inquiry the Commission has concluded that some of the revenue
above the threshold has not in its opinion been justified, and it has
formed an intention to declare control.
Key
differences from the Unison process
Some of the key differences outlined in the
Intention To Declare Control document include…
·
Explicit
recognition of the additional procedural obligations imposed on Transpower in
relation to the Grid Investment Test under Part F of the Electricity Governance
Rules (although it merits noting that most distributors will test their own
CapEx programs using similar principles if not procedures).
·
Recognition
of the Transpower pricing methodology although the Commission has taken the
view that the overall revenue cap imposed pursuant Part 4A of the Commerce Act
1986 must taken precedence.
·
Construction
of the counter-factual on the basis of Transpower’s stated intentions to
increase prices in contrast to the building block approach taken with Unison.
Credit
rating issues
As if Transpower’s position wasn’t difficult
enough, both Standard & Poors
and Fitch have formally expressed
concerns over Transpower’s ability to debt fund future investment.
Submissions on the Intention document are due
by 27th February, so Pipes & Wires will make further comment on this issue
in a few months.
Introduction
The last few issues of Pipes
& Wires have discussed E.On’s recent
unsolicited cash offer for ScottishPower
plc. This article examines the structural aspects of that offer in the
context of E.On’s “On Top” strategy.
Background
E.On has made its growth by
acquisition strategy very clear but perhaps the clearest statement was the
formal articulation of its “On Top” strategy which we discussed in Pipes
& Wires #23 in the context of E.On’s bid for Aquila Networks (now
called Central Networks). The
core of the “On Top” strategy was to grow five well defined markets principally
through acquisition as follows…
|
Market |
Emphasis |
Platform |
|
Pan-European gas transport and
storage. |
Acquiring privatised gas
transmission utilities in the former Soviet-bloc. |
|
|
Central European electricity
market. |
Consolidation of distribution
and retail businesses. |
|
|
Scandinavian electricity. |
Strengthening market position
through further acquisitions. |
|
|
|
Strengthening market position
through acquisitions. |
Powergen |
|
|
Long-term expansion. |
A guiding principle of “On Top”
is to systematically capture the synergies implicit in all acquisitions and
ensure those synergies are returned to shareholders (and the strong synergies
between Aquila Networks and East Midlands Electricity seemed to fulfill this
requirement).
How would the ScottishPower bid fit with the “On Top” strategy
For a start SP is one of only 3
independently owned distributors left in the UK, so that makes for a reasonably
good starting point. Some of the other attributes of SP that make for a good
fit with the existing platform are…
·
A good geographical fit between the SP MANWEB distribution
business and Central Networks.
·
A further vertical integration opportunity between the existing
Powergen business and SP’s retail business.
·
SP’s expected future profitability.
Did E.On come out “On Top” with the SP bid
On the face of it, it would seem
not – after all the opportunity to implement a key plank of the “On Top” strategy
would seem to have slipped through E.On’s fingers. However readers may recall
from Pipes
& Wires #47 that E.On’s shares rose 2.65% on the announcement that the
SP bid had been abandoned. In addition to vindicating E.On’s highly disciplined
approach it would seem that E.On did come out “On Top”.
Aus – Alinta seeks growth opportunities
Introduction
Alinta has made no secret of its growth
strategy so the recent news that Alinta had made an unsolicited (and
unsuccessful) approach to AGL was hardly
surprising. This article ties together some thoughts from previous articles on
the formation of Alinta Infrastructure Holdings (AIH) and the demerger of AGL.
Splitting the energy & network businesses
Separation of energy and network
businesses is now an obvious feature just about everywhere. What is perhaps not so obvious are the different reasons for
this, which are broadly as follows…
·
Where separation is encouraged or enforced, the reason is ostensibly
to prevent the network business giving favorable treatment to its associated
energy business to the detriment of other energy businesses.
·
Where separation is voluntary, the reason is mainly to provide
investors with more clearly defined choices between low-risk,
high cash yield securities (network) and moderate risk, compound growth
securities (energy).
Readers may recall from Pipes
& Wires #45 and #46
respectively that both Alinta and AGL have voluntarily separated their network
and energy businesses (although the processes were different).
Alinta’s strategy
Observation of Alinta’s recent
dealing and stated intentions reveals the following aspects of strategy…
·
Grow market share by acquisition.
·
Unlock shareholder value by separating network and energy
businesses.
·
Capture the tax advantages from reshuffling regulated assets into
AIH.
Interestingly enough, AGL
considered Alinta’s approach, but rejected it, reiterating their view that the
demerger process still represented the best deal for AGL shareholders.
Following the rebuff from AGL it is likely that Alinta will be a hot contender
for the almost certain privatisation of Snowy
Hydro.
Europe – Gazprom takes an interest in
the UK
Introduction
The last two issues of Pipes & Wires
have highlighted the importance of ScottishPower
plc as one of the three remaining independent electricity & gas
distributors in the
Background
The importance of the last few
remaining independently owned chunks of the
Who is Gazprom ??
Gazprom is a listed joint-stock
company that sprang from the legacy Russian oil and gas industry and remains
38% owned by the Russian government. Gazprom produces about 20% of the world’s
gas and in the 2004 year produced 25% of
Why the interest in the UK
Readers might well be aware that
the north of
Gazprom’s interest in ScottishPower and Centrica
At a recent event in the UK
Gazprom’s deputy chairman Alexander Medvedev indicated that acquisition would
be the most obvious means to building retail market share and that the “size of
a company such as ScottishPower” didn’t present any barriers to Gazprom. When
asked if Centrica might also be an acquisition target a Gazprom spokesman said
“maybe” although merchant banking sources suggest a bid would be unlikely to
occur this year.
Security of energy supply issues
After the recent spat between
Introduction
Spanish energy giant Gas Natural SDG is in the process of
making a €21b bid for rival energy company Endesa.
This article examines a range of competition issues in the context of the
government wanting a strong Spanish player that can secure
Background
Readers may recall that Gas
Natural made an unsuccessful €15.3b bid for another rival energy company Iberdrola about 3 years ago (pick here
to request a research report) which was largely modeled on E.On’s bid for Ruhr
Gas (pick here
to request a research report). The strategy behind Gas Natural’s intended
acquisition was to better penetrate the rapidly emerging Iberian market and to
dilute their exposure to volatile Latin American earnings.
The hunt for suitable
acquisitions has obviously continued, and this time it is Endesa that is being
targeted, which funnily enough was seen as a somewhat less than desirable
target 3 years ago.
The competition issue
Late last year the EU competition
regulator concluded that it had no jurisdiction over the Endesa bid and
referred the bid back to the Spanish
competition tribunal for approval. The key issue from the perspective of
the tribunal was the likely dominant market position of the enlarged Gas
Natural in contravention of competition law.
Earlier this month, however, the
Government gave its approval to the bid albeit with a number of conditions
additional to those originally proposed by Gas Natural. Not surprisingly Endesa
has stated its intention to appeal this decision to the Supreme Court
The security of supply issue
Readers may recall that when Ruhr
Gas was offered for sale the German government was keen to have a German
company such as E.On acquire it to secure
It would seem that the Spanish
government is doing the same with the Endesa bid which probably makes sense.
Introduction
It’s been a while since we’ve
covered anything major in the
The expected transactions
RWE has announced that it intends
to undertake the following transactions…
·
Sell the American Water business in
·
Sell the Thames Water business in the
RWE’s strategy
Back in August 2003 RWE made a commitment
to streamlining its core business. The announcement of the intended sales in
November 2005 included a recognition that levering off
its core businesses and strengths would involve focusing on the converging
European electricity & gas markets and that American and
Concurrent with the sale
announcement, RWE announced that it would temporarily increase the dividend
payout ratio on the completion of each transaction as well as reducing debt. From
the perspective of an outsider half a world away RWE’s strategy has surprising
similarities to E.On’s strategies – focus on converging European markets,
selling off low-synergy assets, boosting dividends and retiring debt.
Possible bidders for Thames Water
Possible reasons for buying
High growth alone could possibly
make Thames attractive to another
Conferences & events
African
Utility Week –
Utilities from all over Africa will meet at African Utility Week in
The are 4 program components which include - the 7th annual Metering, Billing
and CRM Africa 2006; the 5th annual South African Prepayment Week;
and the 8th annual Southern African Power Industry Convention and as
a new imperative dimension, ESCO Africa, which looks at DSM and energy
efficiency programs to assist cities in times of energy shortage.
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…
·
Good
·
Average
·
Poor
If you get this is a hard-copy,
your comments can be emailed to issue#48@utilityconsultants.co.nz
If you receive this second-hand by email, you can
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.