Pipes & Wires
THE MONTHLY
CLIENT NEWSLETTER FROM UTILITY
CONSULTANTS
Issue 54 – October 2006
From the director…
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Welcome
to Pipes & Wires #54. This issue examines three price control matters
(one in New Zealand, one in Australia and one in Holland) and three deals
(one in Australia, one in Spain and one in Romania). Just a
note that I will be chairing the Electricity Network
Asset Management Summit in Wellington next month. It would be great to
see as many of you there as possible. So
happy reading until Pipes & Wires #55 emerges. |
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NZ – Unison makes administrative
settlement offer
Introduction
Long-time readers of Pipes &
Wires will no doubt be aware of Unison’s
drawn-out struggle with the Commerce
Commission over its line charges especially in Rotorua and Taupo. This
article examines Unison’s recent administrative settlement offer which is
expected to close the post-breach inquiry.
Background
Part 4A of the Commerce Act 1986 provides
for a targeted price control regime to be established to limit the ability of
electricity lines companies to extract excessive profits. Investigatory work by
the Commission concluded that Unison’s pricing breached the intent of the
control regime hence in September 2005 the Commission announced its intention
to declare control of Unison.
Unison recognised that the option
of an administrative settlement offer was preferable to control, and has
actively engaged with the Commission over the last year to reach an acceptable
compromise.
Details of the settlement
Unison firstly made an interim
offer in March 2006 to reduce line charges by 7.1% in Rotorua and 8.3% in Taupo
effective 1 April 2006. This effectively reversed the revenue increase
resulting from the line charge increases of April 2004.
Just last month Unison has
offered to further reduce its line charges and comply with the price path
threshold requirements for the remainder of the control period which the
Commission is of a view to accept. Key components of this offer are a commitment
to implement the projected CapEx described in the asset management plan and to
rebalance charges between regions and customer groups so that they are more
“cost reflective”. Precise details of the offer will be officially released by
the Commission later this month.
Next steps
The next step will be for the
Commission to consult interested parties and finalise its view on whether to
accept Unison’s offer. If, in the light of feedback on its proposed decision to
accept Unison’s offer, the Commission ultimately rejects Unison’s offer, the
Commission still needs to make a final decision on whether to declare control.
Pipes & wires will make further comment once the Commission reaches a final
decision.
Aus – Roma to Brisbane pipeline draft
determination
Introduction
In January of this year APT Petroleum Pipelines Ltd
submitted its proposed access arrangements for the Roma to Brisbane gas
pipeline for the period 1 July 2006 – 30 June 2011 to the ACCC. The pipeline assets covered by the
proposed access arrangements and the draft determination include the 440km
mainline from Wallumbilla (near Roma) to Brisbane and a lateral from Arubial to
Peat & Scotia. This article reviews and comments on the ACCC’s draft
determination that was released in late August.
Legal framework
The proposed access arrangements
and the draft determination are made under the National Third Party Access Code
for Natural Gas Pipeline Systems (“the Code”).
The proposed access arrangement
APT sought the following reference
tariffs…
·
A capacity reference tariff of $0.4243/GJ of daily MDQ
(essentially a fixed charge)
·
A throughput reference tariff of $0.0283/GJ (a variable charge).
·
A number of charges related to issues such as over-runs and
imbalances.
Provision to adjust these tariffs
on the 1 July each year to reflect CPI movements was also sought.
The draft determination
The ACCC’s draft determination included
the following elements…
|
Parameter |
Sought by APT |
ACCC draft determination |
|
Max. daily capacity charge |
$0.4243/GJ |
$0.3819/GJ |
|
Throughput charge |
$0.0283/GJ |
$0.0255/GJ |
|
Annual revenue |
$32m - $33m |
$27m - $28m |
|
DORC |
$342.6m |
$295.84m |
|
Initial capital base |
$342.6m |
$250.63m |
|
Annual new CapEx |
$1m - $4m |
Accepted |
|
Pre-tax real WACC |
6.90% |
5.85% |
|
Annual non-capital costs |
$9.3m declining to $9.18m |
$8.11m declining to $7.93 |
|
Forecast annual throughput |
56.5PJ rising to 58.4PJ |
Accepted |
Some of the more salient aspects
of the draft determination are as follows - long-time Pipes & Wires readers
will no doubt be familiar with what seems to be age-old arguments…
·
The ACCC considered that APT’s NPV DORC valuation methodology did
not fall within the acceptable methods defined in the Code, and instead
substituted a straight line methodology.
·
The ACCC considered that the Initial Capital Base should not
include expansions funded by user contributions.
·
The ACCC considered that APT had either over-estimated a number of
components of the WACC or failed to justify its adoption of specific parameter
values.
APT is currently engaging with
the ACCC on a range of issues as the ACCC seeks to compile its final
determination which will probably be late 2006. Pipes & Wires will make further
comment around this time.
Holland – compiling the third
electricity price control
Introduction
Putting together any pipes &
wires price control requires a regulator to simulate the disciplines that set
prices and service levels in competitive markets. This article examines the
third price control that the Directie Toezicht
Energie expects to apply all Dutch electricity lines businesses for the 3
year period commencing on 1 January 2007 that explicitly states its intention
to stimulate efficient operation and deliver high-quality service.
The drive for efficiency and quality
Precise details in English are
lacking but it appears that the underlying structure of the price control
combines two elements…
·
A primary price control element which caps overall prices and will
consider inter alia the number of
water crossings and local taxes.
·
A secondary quality element that rewards or penalises network
owners based on the number of power interruptions.
The DTE has confirmed that the price
cap will be 1.3% which will presumably be applied to each of the 3 years of the
control period. The quality element will vary between network operators to
reflect the differing characteristics of each network and is expected to vary
between -0.1% and 0.6% (presumably this is the amount of additional revenue
that will be awarded or deducted based on previous performance).
The WACC
Following a period of industry
consultation the DTE has reduced the allowable nominal pre-tax WACC to 5.8% from
the 6.6% allowed in the first 2 price controls (the DTE expects to adopt a
similarly lower WACC for the third gas distribution price control which
commences on 1 January 2008). In reducing the allowable WACC the DTE took the
view that both interest rates and inflation were expected to decline over the
control period and hence a lower WACC was justified.
Aus – the race for GasNet is on !!
Introduction
Pipes
& Wires #53 ended its analysis of Babcock
& Brown Infrastructure’s bid for GasNet
with the rather throw-away line “I’d be surprised if this was the last word”,
and indeed it wasn’t. This article reviews BBI’s bid for GasNet, examines two
other bids and considers the wider industry happenings.
Background
The gas transmission industry
seemed ripe for consolidation and in May this year GasNet publicly indicated
its willingness to be part of that consolidation. A month later BBI made a
share-swap offer valuing GasNet at $2.55 per share which GasNet’s directors
subsequently recommended that shareholders reject. It was also recognised that
the Australian Pipeline Trust’s
(APT) stake in GasNet could gazzump BBI’s offer.
The latest deals
Two subsequent bids for GasNet
then emerged…
·
In mid-August Colonial
First States’ infrastructure subsidiary Global Asset Management offered
$2.88/share.
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In late August APT made a stand-alone all-cash offer of
$3.10/share valid until the middle of this month. GasNet’s directors have recommended
that shareholders accept this offer which has also received ACCC clearance as not presenting any
competition issues.
The surrounding issues
Readers will also be aware that
the race for GasNet is not occurring in isolation. The single most prominent
issue in the background is obviously the struggle to progress the Alinta and
AGL merger. A few of the other “background” issues include…
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Continued concern that the Alinta
/ AGL merger could lead to dominance in
the gas transmission market into Sydney.
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Alinta’s creeping acquisition of APT shares, seemingly in conflict
with the undertaking made to the ACCC that the merged Alinta / AGL would divest
its 30% stake in APT.
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Speculation that BBI was attempting to accumulate a further stake
in Alinta.
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Speculation that Alinta may have been part of a consortia bidding
for Thames Water.
Whilst these background issues
may take time to resolve, the APT bid for GasNet may reach a conclusion
hopefully in time for Pipes & Wires #55.
Romania – ENEL buys a stake in EMS
Introduction
Its’ been a while since Pipes
& Wires examined the on-going privatisation in the Balkan states. This
article examines ENEL’s recent acquisition of
Electrica Muntenia Sud and
considers the likely strategies of the bidders.
About EMS
EMS is one of eight distribution and supply
companies owned by SC Electrica SA
that provides national reticulation throughout Romania. EMS sells about
4,500GWh per year and with 1,074,000 customers in and around Bucharest, Giurgiu
and Ilfov (adjacent to the Bulgarian border) EMS is one of the densest (but not
the biggest) distributors. The lines activities of EMS along with the other
seven distributors are subject to regulation by the Romanian Energy Regulatory Authority.
The deal structure
Similar to the privatisations of Electrica Banat, Electrica Dobrogea, Electrica Oltenia and Electrica Moldova, the EMS privatisation
involved the successful bidder agreeing to buy part of the existing share
capital of the utility and then subscribing to a further share issue to lift
their stake. For EMS the requirement was to buy an initial 50% and then lift
the final stake to 67.5%.
Prior to the submission of final
bids it was anticipated that the sale of EMS would nett at least €750m making
it one of the highest prices to be paid for an electric utility in the Balkan
states. In the final event ENEL paid €820m which represents €763 per customer,
considerably more than the €111 per customer that Czech grid operator CEZ paid for Oltenia.
Bidders for EMS
Originally interested acquirors
for EMS included…
·
ENEL (which already owns Electrica Banat and Electrica Dobrogea).
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CEZ (which acquired the adjacent Electrica Oltenia in late 2005).
·
E.On (which already owns Electrica
Moldova and E.On Gaz Romania SA)
·
EVN
Compliant final bids were
received from ENEL, CEZ, RWE, Gaz de France and Iberdrola with ENEL submitting
the winning bid.
Likely strategies
Likely strategies of the bidders
include…
·
Buying into a high-growth market as Romania’s economy strengthens.
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Improving scale.
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Extracting operating synergies from existing acquisitions.
·
Diversifying earnings away from mature incumbent markets.
Spain –E.On’s bid for Endesa continues
Introduction
One of the many “Chronicles of E.On” told in Pipes & Wires has been their
recent €29.1b bid for Spanish utility Endesa.
This article examines two recent twists to the on-going saga, one commercial
and one regulatory.
Background
One of the most recent aspects of
this deal to arise was the imposition of several regulatory concessions on E.On
by the Spanish energy regulator CNE which
ostensibly had some very noble purposes such as maintaining Endesa’s investment
program and supporting the Spanish coal industry.
Pipes
& Wires #53 went on to describe the national sovereignty and security
of supply issues that appear to also have motivated the CNE. It is widely
thought that the competing but lower bid by Gas
Natural was preferred for these very reasons.
The regulatory issue
The regulatory issue to emerge is
Spain’s apparent breach of Article 21 of the EU Merger Regulation which inter alia promotes free movement of
capital and freedom of establishment. EU
Competition Commissioner Neelie Kroes has indicated that the Spanish governments’
allowing of the CNE to impose such conditions on E.On violated Article 21 and
were therefore unlawful. Options available to Kroes include referring the
matter to the European Court of Justice if Spain does not respond to her
demand.
The commercial issue
The commercial issue to emerge is
a totally left-field €3.9b bid for 10% of Endesa by building conglomerate Acciona which went on to indicate that it may
raise its stake to slightly less than 25%. Combining this with the 10% of
Endesa owned by Madrid bank Caja Madrid
would make life difficult for E.On and has led to speculation that a Spanish
consortium may emerge to try to stop Endesa falling into foreign hands.
The result of this left-field bid
has prompted E.On to raise its initial €29.1b to about €40b and publicly
underscore its commitment to completing the Endesa acquisition. Pipes &
Wires will make further comment as the deal progresses.
Conferences & events
·
Electricity
Network Asset Management Summit (Wellington, 6 – 7 November)
Brought to you by Conferenz, this
comprehensive agenda will go to the heart of the asset management issues faced
in the electricity sector. Utilising perspectives from across the industry,
this Summit will deliver actionable information in the form of detailed case
studies, panel discussions, comprehensive industry updates, proven strategies
and unique insights into lessons learned with roundtable discussions. Key
issues faced in delivering efficient, secure and reliable infrastructure
services include…
·
What part should regulation play in asset management?
·
Innovative solutions to infrastructure challenges.
·
Demand management - service delivery and reliability.
·
Strategic asset management and decision-making processes.
·
Progressive utility vegetation management.
·
End-to-end reliability - maintaining reliability in unforeseen
conditions.
·
Maximising asset utilisation and service delivery efficiencies.
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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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
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