Pipes & Wires

THE JOURNAL OF GLOBAL ENERGY & UTILITY STUFF

Issue 56 – February 2007

 

From the director…

 

Welcome to the first issue of Pipes & Wires for 2007. This is a longer than usual issue because lots has happened since Pipes & Wires #55.

 

We examine several deals and regulatory determinations in Australia and Europe, and take a brief look at the proposed nationalisation of electricity in Venezuela. We also provide a brief analysis of the New Zealand Electricity Commission’s intention to approve a new 220kV line into Auckland.

 

This issue concludes with a brief look at the life of one of southern Africa’s electrical pioneers, Hendrik van der Bijl, the man who created ESKOM. So until next time, happy reading.

 

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 & structural regulation

·        Risk management

 

To be sent a detailed profile of recent projects, pick this link.

 

New publications

 

Utility Consultants is pleased to offer two new publications specialising in regulation of pipes & wires utilities. These publications deal specifically with cost of capital (WACCWatch) and key conclusions of regulatory determinations (RegulatoryRoundup).

 

Conference papers

 

Utility Consultants has recently presented the following conference papers which are available upon request…

 

·         “Tariff control of Pipes & Wires utilities – where is it heading??” – presented at the NZIGE Spring Technical Seminar, October 2006.

 

·         “Setting service levels for utility networks” – presented at the Electricity Network Asset Management Summit, November 2006.

 

NZ – 2007 electricity asset management plans

 

The Commerce Commission has recently advised the following…

 

·         That the format for AMP disclosure in 2007 (ie. during the year ending 31 March 2008) will be based on the Requirements that were promulgated on 31 March 2006. Hence there will be no change from the disclosure format required for the year ending 31 March 2007 including the disclosure date of 30 August (which will be 30 August 2007 for the year ending 31 March 2008).

 

·         Given that this will be the second disclosure under the revised Requirements the Commission expects AMPs to be fully compliant.

 

·         The Commission expects to complete its assessment of the 30 August 2006 AMP’s early in 2007.

 

For help with your AMP pick here or call Phil on (07) 854-6541.

 

NZ – northwards march the pylons

 

Introduction

 

Most of us will recall only too well the bitter standoff between the Electricity Commission and Transpower last year over the controversial 400kV line from Whakamaru to Otahuhu. Late last month the Commission announced its intention to approve a high capacity 220kV line along an equivalent route for which Transpower may seek approval to upgrade to 400kV “several decades” hence.

 

Avid readers might also recognise that the title of this article has been borrowed from a book on the Waitemata Electric Power Board (which I wouldn’t mind scoring if someone has an old copy lying around).

 

The regulatory framework

 

Under the Section III of Part F of the Electricity Governance Rules 2003, Transpower is required to seek the approval of the Commission for all proposed substantial investments. The Commission assesses the proposals by way of the Grid Investment Test which considers the proposal against a number of parameters such as reliability, technological robustness and possible alternatives.

 

Background events

 

Transpower submitted its initial Grid Upgrade Plan in September 2005. In April 2006 the Commission notified its intention to decline the Whakamaru – Otahuhu 400kV aspect of the Plan, which it subsequently formally declined late last year. Transpower then resubmitted its Grid Upgrade Plan to include a high capacity 220kV double circuit tower line, which brings us to the present time. In amongst all this the shackle failure at Otahuhu on 12 June 2006 highlighted the dependence on Otahuhu and led to the Grid Upgrade Plan including some strengthening of circuits through Pakuranga as well.

 

Next steps

 

The Commission has asked interested parties to submit their views and may hold a conference if enough parties request one to be held. This is likely to be in late April or Early May. Sometime after that a final decision could be expected.

 

Aus – will Origin and AGL merge??

 

Introduction

 

Deal fever has run hot in the Australian energy sector over the last few months which have seen the following structural changes…

 

·         Horizontal consolidation of the gas transmission sector as APT buys GasNet.

 

·         Vertical consolidation of the gas transmission and distribution sectors as APT buys AllGas.

 

·         Horizontal consolidation of the electricity retail sector as Origin Energy buys Sun Retail.

 

·         Horizontal consolidation of the gas retail sector as AGL buys Sun Gas.

 

So now all the low-hanging fruit has been picked its hard to imagine what is left to buy. This article examines the recent news that Origin Energy is in play.

 

The proposed deal

 

News emerged in late December 2006 of a proposed merger between AGL and Origin that would create a $13b electricity and gas supplier with over 6,000,000 retail customers, a 51.4% stake in New Zealand’s Contact Energy and access to many oil and gas fields across Australia. The deal is viewed as having two key synergies – AGL’s need for gas reserves (which Origin has) and Origin’s need for an increased customer bas (which AGL has).

 

The regulatory concerns

 

As industries become increasingly consolidated fears of market dominance arise and this proposed merger that would give a 49% market share to a merged AGL-Origin is no exception. Key concerns include…

 

§  AGL and Origin’s leading positions in the South Australian electricity market which would create an almost total monopoly if the merger were to proceed.

 

§  AGL and Origin’s strong emergent positions in the recent Queensland retail sell-downs that would give a merged entity an almost total monopoly position.

 

§  AGL and Origin have an electricity market share in Victoria of about 64%.

 

Sell-downs of retail customers would be the most obvious way forward however a number of potential buyers, however the most obvious buyer in Victoria (TRUenergy) would be prohibited from gaining further market share. It also seems unlikely that Snowy Hydro would buy any further customer bases, and without any ability to hedge through generation it seems unlikely that equity investors would have much interest. Furthermore Alinta has indicated that it will not pursue any assets offered for sale by Origin while Alinta itself is in play (refer article further down).

 

Pipes & Wires will make further comment as the merger proposal unfolds.

 

Europe – the threat of disaggregation looms

 

Introduction

 

As the Europe’s electricity and gas sectors become increasingly dominated by a few very large utilities such as E.On, Electricite de France and RWE there is increasing agitation (but so far no action) amongst EU regulators to “split up” large utilities to ensure customer choice and encourage investment following release of a report on 16 months of investigation. In particular EU Competition Commissioner Neelie Kroes has suggested a structural separation model prohibiting involvement in both lines and energy.

 

The thinking seems to center around an apparent “stranglehold” on the supply chain in which large utilities are allegedly overcharging, under-investing, squeezing out rivals and possibly colluding to allocate market segments. This article considers some issues and presents some views around the theme of vertical integration, customer choice and reinvestment.

 

Vertical integration

 

Kroes could well be right on this issue. The thinking is that a vertically integrated transmission and distribution utility might connect its own distribution on more favorable terms than another distributor, and this has led to prohibitions on owning both transmission and distribution in many jurisdictions such as the Australian state of Victoria. However a little thought reveals that a robust regulatory regime that prescribed a standard methodology for all connected distributors might be a more acceptable middle of the road solution that avoids “spooking” investors.

 

Customer choice

 

Lack of retail competition in France (one dominant supplier), Spain (a duopoly) and Germany (a quadropoly) is cited in the report which gives the UK a bit of a pat on the back for having a reasonably competitive market. The report goes on to imply that the low prices in Sweden and Finland are due to high levels of competition and further seems to imply that the high prices in Germany, Belgium and Italy are due to a lack of competition, but would seem to ignore the lower underlying cost structure derived from the high proportion of hydro generation in Scandinavia.

 

Reinvestment

 

Kroes has claimed that less than 20% of the “windfall profits made on the back of increasing demand” have been reinvested in networks. On the face of it this would seem to ignore several key issues…

 

·         The presupposition that there is some “correct” level of reinvestment and that the current figure is somehow “incorrect”.

 

·         Utilities investment plans have presumably been scrutinised by individual jurisdictional regulators who have concluded that the proposed investment levels are appropriate for the control period ahead.

 

·         Not all recent black-outs have resulted from under investment in networks. Many have been caused by operational problems such as protection mal-operation and cascade tripping.

 

·         The legitimate right of investor-owned utilities to make a risk-adjusted return on invested capital.

 

Where is it all heading ??

 

A summit is planned for March in which EU leaders will be asked to consider two options for reducing the alleged abuses…

 

·         Full ownership separation of lines (probably including pipes) and energy.

 

·         Retaining ownership but placing full operational control in the hands of an independent system operator.

 

Kroes has strongly advocated full ownership separation which has meet with condemnation by OAO Gazprom which claims that its investment plans would be jepodised. Pipes & Wires will make further comment as the conclusions of the summit emerge.

 

Aus – Alinta seeks Supreme Court ruling

 

Introduction

 

In September 2006 Alinta Asset Management (AAM) sought a ruling by the Victorian Supreme Court that it is not required to…

 

·         Hold a gas distribution license as required by s22 of the Gas Industry Act 2001.

 

·         Comply with the requirements of the Gas Code.

 

The ESC Appeals Tribunal had previously ruled that the ESC “had no authority to make electricity distributors reveal costs and revenues” which obviously applies to AAM’s relationship with United Energy.

 

The sides of the story

 

The two sides of the story seem to be…

 

·         AAM claims that because it is only an agent of gas network owner Multinet it needn’t hold a license or comply with the Gas Code.

 

·         The ESC claims that for practical purposes AAM is Multinet and therefore must hold a license.

 

 

What’s at stake ??

 

It all seems like a scrap over a mere technicality but the core issue is the ESC’s desire to force AAM to disclose financial data on its related party contracts (which AAM would be required to do if the Court rules that AAM must hold a license). A hearing is set for 23rd April so hopefully Pipes & Wires will be able to report on the Court’s findings in May.

 

Please note that an errata to the above article has been published in Pipes & Wires #57.

 

Spain –E.On’s bid for Endesa continues

 

Introduction

 

Long-time readers may well be familiar with the increasing tension between EU demands for dismantling barriers to regionalisation and individual member countries attempts at retaining national control of key infrastructure. This article continues this theme by examining the most recent unfolding of E.On’s bid for Endesa.

 

The national sovereignty and EU merger issues

 

Pipes & Wires #54 described how the Comision Nacional de Energia intended to impose a number of regulatory concessions on E.On to clearly support Spanish interests. This breached Article 21 of the EU Merger Regulation which resulted in EU Competition Commissioner Neelie Kroes threatening court action if the CNE did not abandon the proposed concessions.

 

Recent events

 

Readers may recall that in early 2005 Gas Natural SDG made a €21b for Endesa after its previous bid for Iberdrola in 2003 came to nothing (Pipes & Wires #48, 50 and 52). Endesa successfully obtained an injunction against Gas Natural’s bid as a defensive bid which under Spanish take over law also applied to E.On. Now that the Comision Nacional del Mercado de Valores has approved E.On’s deal, Endesa has asked for the Supreme Court to lift the injunction so that shareholders can decide between competing bids. The deal was also blocked by a second injunction imposed by a Madrid mercantile court which was lifted in the middle of last month.

 

The remaining obstacles are a clause in Endesa’s constitution limiting voting rights to 10% regardless of the equity stake held, and the possible accumulation of a blocking stake in Endesa by Acciona. In a further interesting (but certainly not surprising) twist the EU has threatened Spanish authorities with court action unless it dismantles conditions on E.On’s bid.

 

Aus – the Victorian gas distribution price controls

 

Introduction

 

The three gas distributors (Envestra, Multinet and SP AusNet) in the Australian state of Victoria are required to submit their draft access arrangements and proposed reference tariffs for the next five year control period to the Essential Services Commission by 30 March 2007. This control period will be from 1 January 2008 to 31 December 2012.

 

Regulatory framework

 

The principal regulatory framework is defined by the Gas Code which the Commission (and all other gas regulators) must follow in determining whether or not to approve each distributors proposed arrangements. The Gas Distribution System Code sets out the minimum technical terms & conditions that must be adhered to.

 

Next steps

 

Once the three distributors have submitted their draft access arrangement, the Commission will assess the arrangements and release its draft decision on whether to approve or decline the arrangements. Pipes & Wires will provide further comment as the process proceeds, and the final determinations will be reported in detail in our new publications RegulatoryRoundup and WACCWatch.

 

Venezuela – nationalising the power

 

Introduction

 

Amongst a flurry of private sector deals across Europe and Australia news flashed across the world on 9th January that recently re-elected president Hugo Chavez intended to nationalise key infrastructure including oil, electricity and telecoms. Chavez announcement has been viewed by many analysts as an unexpected surprise as it was understood that he supported direct foreign investment.

 

The immediate impacts

 

After swearing in a new cabinet Chavez’ claimed in a televised speech “all of that which was privatised let it be nationalised”. The most immediate responses were a trading halt of Venezuelan phone company CANTV on the NYSE and a 4.3% drop in the price of AES after its subsidiary Electricidad de Caracas (EDC) dropped more than 20% on the Caracas bourse.

 

However in an analysis by RBC Capital Markets it was noted firstly that Chavez called for the nationalisation of assets that had been privatised before 1999 and secondly that EDC was never owned by the state. Hence it was not initially clear whether EDC falls within the scope of Chavez threat.

 

The picture begins to unfold

 

The first of what will probably be many official statements indicated that only CANTV would be nationalised, not the entire telecoms sector, giving a glimmer of hope that maybe EDC would not be nationalised afterall. However a subsequent statement by Finance Minister Rodrigo Cabezas indicated that the nationalisation plan “included the entire electricity sector”. Officials have also indicated that appropriate compensation will be negotiated that takes into account the value of the assets.

 

Aus – Alinta is in play

 

Introduction

 

Amidst the flurry of mergers and takeovers across Australia, news recently emerged of a management buy-out at Alinta. Not surprisingly rumors emerged of a number of other credibly interested parties. This article is short and brief due to the sensitivities of commenting on the affairs of listed companies and serves only to highlight the level of activity in the Australian energy sector.

 

The bidders and rumored bidders

 

The bid being led by Alinta chief executive Bob Browning has been confirmed as serious. The individuals involved including chairman John Poynton have stood aside from their duties to maintain transparency and independence.

 

News then emerged that Australian merchant bank Babcock & Brown might also launch a bid, whilst it is thought that Transfield could be interested in Alinta Asset Management. Pipes & Wires will make further comment as matters proceed.

 

Holland – Essent & Nuon consider merging

 

Introduction

 

Acquisitions by the well known European giants such as E.On, RWE and Electricite de France seem to have triggered a wave of consolidation across the EU energy sector that seems to have reached tipping point. In what could well be a defensive move against being gobbled up the proposed merger between Dutch utilities Essent and Nuon to create a utility with a €20b market capitalisation should come as no great surprise.

 

The proposed deal

 

The proposed deal would see the formation of an enlarged utility in which existing Essent shareholders would own 55% and existing Nuon shareholders would own 45%. The enlarged utility would have about 4,000,000 customers (representing about 60% of the Dutch retail market) and revenues of about €11b.

 

Shareholders thoughts on it all

 

Both Essent and Nuon are wholly owned by provinces and municipalities as follows…

 

Province

Essent stake

 

Province

Nuon stake

Noord-Brabant

30.8%

 

Gelderland

44%

Municipalities

26%

 

Municipalities

23%

Overijssel

18.7%

 

Friesland

13%

Limburg

16.1%

 

Noord-Holland

10%

Groningen

6.6%

 

Amsterdam

10%

Drenthe

2.3%

 

 

 

Flevoland

0.02%

 

 

 

 

Shareholders seem to be viewing the proposed merger quite differently, with one shareholder seeking to sell its stake to a fellow shareholder. However the prevailing view seems to be that ownership by provinces and municipalities seems to put downward pressure on prices which may dampen enthusiasm for a merged Essent-Nuon to be gobbled up by a giant.

 

Regulatory & legislative concessions

 

In a statement last June the NMa indicated that a merger Essent and Nuon would need to divest about 1,000,000 retail customers to avoid market dominance. A further issue for a merged utility would be the recent legislation that provides for enforced separation of transmission and supply if a utility does not operate transparently or jepodises domestic energy supply by focusing in international activities.

 

Pipes & Wires will make further comment as events unfold.

 

Aus – the PowerLink price re-set

 

Introduction

 

In early December 2006 the Australian Energy Regulator released its draft determination for Queensland transmission operator PowerLink for the five year control period 1 July 2007 to 30 June 2012. This article briefly examines the key components of the draft determination.

 

Key elements of the draft decision

 

The key components of the Regulator’s draft determination are…

 

 

Sought by PowerLink

AER draft determination

Revenue

Ramping up from $540m to $751m over the control period.

Ramping up from $536m to $736m over the control period.

First year OpEx

$787m

$713m

First year CapEx

$2,449m

$2,032m

WACC (nominal vanilla)

8.34%

8.76%

 

In particular it is pleasing to note the AER allowing a higher WACC than that sought, due to higher bond yields since PowerLink submitted its application.

 

Once the draft determination becomes final, RegulatoryRoundup and WACCWatch will prove detailed analysis.

 

Hendrik van der Bijl lights up South Africa

This article is the second in a series that examines the lives and times of people born in the late 1800’s who played a significant part in bringing the electricity and gas industries to where they are today. This article examines the role that Hendrik Johannes van der Bijl played in lighting up South Africa.

 

Van der Bijl’s early days

 

Van der Bijl was born in Pretoria in 1887 and received his BA in physics from Victoria College (now Stellenbosch University) in 1908. He went on to complete an MA and a PhD in physics at the University of Leipzig in 1912 and a year later joined the staff at the Western Electric Laboratories analysing the behavior of triodes (which provided much of the groundwork for understanding the modulators, oscillators and amplifiers that were a core part of Western Electric’s parent business, Bell Telephone).

 

The return home

 

In 1920 Prime Minister Jan Smuts asked van der Bijl to return to South Africa to be the chief scientific advisor to the Mines Department which was then extended to becoming the Government’s chief science advisor and a member of Smuts’ cabinet. Van der Bijl heeded this call with a deep conviction that the economic future of South Africa lay in the production of cheap electricity and cheap steel.

 

Establishing and growing ESCOM

 

Electricity in South Africa had developed in a somewhat haphazard manner up to about 1920 by which time the Government owned an installed capacity of about 160MW. Following the examination of a report by consulting engineers Merz & McLellan in April 1920 the Electricity Act was passed in September 1922 which established the Electricity Supply Commission (ESCOM) effective from 1 March 1923.

 

Van der Bijl was appointed the inaugural chairman with a clear view of the benefits of the Government lending capital and the organisation being run on strict, albeit break-even, commercial disciplines. Almost immediately he began assembling an elite management team that included two successor chairmen Albertus Jacbos (who assumed the chair in 1949 following van der Bijl’s death in 1948) and Johannes Hattingh. Under his leadership ESCOM rapidly built coal fired power stations and, interestingly enough, forward integrated into distribution and retail. By 1930 annual sales had reached 800 GWh.

 

As ESCOM progressed well into the 1930’s van der Bijl somehow found time to establish the Iron & Steel Corporation (ISCOR) which produced its first steel in 1934.

 

The war years

 

During WW2 van der Bijl was firstly appointed Director General of War Supplies and subsequently Director General of Supplies which has the same status as an elected Minister of cabinet. The leadership skills that he had finely tuned during his years as chairman of ESCOM and ISCOR enabled van der Bijl to efficiently perform these supply roles whilst relinquishing many of the executive functions of the ESCOM chairmanship to Jacobs, George Harding and Percy Furness. At the end of WW2 van der Bijl resumed the executive chairman’s role and appointed Harding and Furness as joint chief executives in 1948 just prior to his death.

 

Later years

 

Following WW2 van der Bijl activities included a focus on commercial activities, going on to chair SAFMarine, and receiving numerous honors including honorary degrees from the Universities of Stellenbosch and Witwatersrand. However van der Bijl never actually retired from ESCOM and died in 1948 at the age of 61 still in the prime of life.

 

 

 

 

 

Conferences & events

 

Corrosion, Durability & Life Extension Techniques – 13th & 14th March 2007 (Auckland).

 

The seminar is an intensive examination of corrosion processes, corrosion monitoring, corrosion control and corrosion prevention techniques, with emphasis on extending the life cycle of critical infrastructure.

 

African Utility Week – 28th May to 1st June 2007 (Capetown).

 

This is expected to be the largest utilities conference held in Africa with about 1,300 attendees expected at the International Convention Center.

 

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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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#56@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

·         Free 6 Week trial of Dr Penny Burns weekly “Strategic Asset Management”.

 

·         This link connects to the (time-delayed) Australian energy market

 

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.