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…
|
|
|
|
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.
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#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.