Pipes & Wires
THE JOURNAL OF COOL ENERGY
& UTILITIES STUFF
Issue 58 – April 2007
From the director…
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Welcome
to Pipes & Wires #58. This month we follow up on some of the deals
discussed last month, one of which has taken a disappointing turn for the worst
in the last day or so. We also
consider the possibility of re-regulation in the US state of Connecticut and
examine some of the energy policy and regulatory issues that are emerging in
the EU. This
issue concludes with a brief look at the life of George Battersby who spent
four decades wiring up the city of Christchurch, New Zealand. So until next
issue … happy reading. |
About Utility Consultants
Utility Consultants Ltd is a
management consultancy specialising in the following aspects of energy networks…
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Disclaimer
These articles are of a general nature and
are not intended as specific legal, consulting or investment advice, and are
correct at the time of writing. In particular Pipes & Wires may make
forward looking or speculative statements, projections or estimates of such
matters as industry structural changes, merger outcomes or regulatory determinations.
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.
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.
For help with your AMP pick here
or call Phil on (07) 854-6541.
Aus – Alinta considers demerger
Introduction
Amidst what seems to be a global
merger fever, Australian utility Alinta
reiterated its willingness to demerge its energy and infrastructure businesses
if the current bidding process for the infrastructure business does not yield
high enough bids. This article summarises the on-going tussles in the
Australian energy sector, briefly looks at the theory of demergers and
considers Alinta’s recent moves.
The tussle for the top
The recent vertical and
horizontal consolidations have left two large utilities (Australian Gas Light and Origin Energy) and a close third
(Alinta) tussling for further market share. There are obviously a number of
complex issues such competition law and of course whether it will be good for
shareholders. Readers may recall that Alinta previously indicated that it would
not bid for any assets that might be spun off from the proposed AGL – Origin
merger in order not to complicate its (Alinta’s) own sale process.
Why demerge
That’s a good question … the
prevailing thinking is that because regulated infrastructure and unregulated
energy businesses have such different business models, risk profiles
(“regulatory” v’s “market”) and investment characteristics (“yield” v’s “growth”)
it is better to separate the activities into two separate companies that can
focus on totally different strategies.
A bit of background
During 2006 Alinta had undertaken
an extensive strategic review of all its activities to identify possible
value-adding moves, one of which was to be the “value-add” for someone else’s
move. It certainly appears that there is no shortage of organisations who see
Alinta’s assets as possible “value adds” – Babcock & Brown, Spark Infrastructure, Singapore Power and Leighton Holdings are reported to have
expressed an interest.
The outcome of this review was
turned on its ear in January when news emerged of an MBO that now appears to
have its own share of “issues”. Last month Alinta’s chairman John Akehurst
indicated that a demerger was the preferred option if the current bids for
Alinta assets were insufficient.
Indicative bids
Late last month Alinta suspended
trading on the ASX as confidential and
conditional proposals were received from Macquarie
Bank and from B&B in conjunction with Singapore Power. It is understood
that these bids propose significantly different structural arrangements and
investment models.
A winner starts to emerge
Late last month Alinta chose a $7.4b
cash & shares offer from B&B and SingPower in preference to a $7.6b
cash offer from Macquarie. The overall analysis is far from simple, and also
far from over. Because there are listed companies involved Pipes & Wires
will refrain from further comment until the deal is done and dusted.
Spain – will E.On ever takeover Endesa
??
Introduction
Readers will recall from Pipes & Wires #56 that E.On
just about had Endesa in the bag after about 18 months of painstakingly
dealing with a wide range of both EU and Spanish legal, policy and regulatory
issues. That was until ENEL launched a lightning raid on Endesa shares that
threatened to gazzump E.On’s offer. This article examines ENEL’s maneuverings
and forms an adjunct to a separate article in this issue which examines ENEL’s
strategy in the turbulent EU energy market.
Previous
blocking tactics
Readers may recall that several
nationally minded Spanish institutions such as building materials supplier Acciona accumulated blocking stakes in
Endesa, and that the Spanish regulators also tried to block E.On’s bid (which
incurred the wrath of the EU).
ENEL’s
maneuverings
ENEL’s maneuverings, in contrast,
are presumably driven more by commercial positioning rather than a spirit of
nationalism. After taking the market by surprise and acquiring a 9.99% stake in
Endesa for €4.13b, ENEL indicated that it would consider raising its stake to
24.99% which it subsequently did by doing a share swap with Mediobanca
for a 2.98% stake. Any further accumulation would require ENEL to launch a full
takeover bid under Spanish law.
E.On’s
view on all this
E.On has proved very disciplined
in its acquisitions … although the On Top strategy provides very clear goals
for market penetration, one only has to examine the abandoning of their bid for
ScottishPower
to see this intense discipline at work. More recently E.On has made it clear
that it will not complete the Endesa bid unless existing Endesa shareholders
approve the removal of the 10% cap on voting rights regardless of shareholding.
It would be surprising if E.On broke with this disciplined approach and
increased its offer for the outstanding Endesa shares, but only time may tell.
Most
recent events
Well … time did tell because late
last month E.On raised its offer to €42.4b in response to news that ENEL and
Acciona (who collectively control 45.99% of Endesa) were intending to make a
bid (despite this being illegal under Spanish law within 6 months of E.On’s
offer expiring). It also seems to be getting murky as E.On sues ENEL and
Acciona in the US, and is urging Spanish regulators to also take action. To
further complicate matters, the EU has commenced legal proceedings against the
Spanish government. Sure only time will tell, but E.On’s chances of success
seem to be fading as the days go by.
Last
minute breaking news
In late breaking news today E.On
has announced that it will abandon its bid for 100% of the shares in Endesa in
return for ENEL and Acciona agreeing to on-sell about €10b of assets if their
(ENEL and Acciona’s) bid for Endesa is successful. That pretty well brings a
long and exciting story to a rather disappointing end. Pipes & Wires will
make further comment as ENEL and Acciona’s bid unfolds.
US – the race for TXU gets murky
Introduction
Pipes
& Wires #57 discussed the proposed privatisation of Texas Utilities (TXU) by a consortium led by Kohlberg, Kravis Roberts & Co and Texas Pacific Group which TXU’s
board has given approval to. Over the last few weeks many complicating factors
have emerged that make the whole deal not quite so straight forward. This
article briefly examines five of those issues.
Competing bidders
Since KKR and TPG announced its
bid, there have been media reports of interest from The Blackstone Group, The Carlyle Group and Hellman & Friedman LLC (however no bids
exceeding KKR’s bid has been received). A key factor with any competing bid
will be the need for the bidder to match the concessions made by KKR and TPG
(to abandon 8 of the 11 proposed coal-fired power stations and give customers a
10% tariff cut).
Possible insider trading
The Securities
& Exchange Commission has alleged that some unidentified investors
bought TXU stock options knowing that the stock price would rise. The SEC
alleges that about $5.3m in illegal profits was made.
Declining credit rating
Concern is beginning to amount
over just how highly levered the proposed deal is with one rating agency
expecting to downgrade TXU from BB+ to B. Meeting the debt obligations will
require very strong cashflows from the power generating business which in turn
will depend on high wholesale power prices, which in turn will depend on high
gas prices.
Increased regulatory scrutiny
There is some disquiet that the
proposed 10% tariff cut is insufficient when viewed in light of TXU’s recent
increases, and also over the minimal role that state regulators would have in
approving the sale with a Texas Senate
Committee unanimously passing a bill that would require the PUC to approve the sale. It seems that
law makers and regulators all over the world are increasingly recognising the
importance of secure low-cost electricity and the possibility that
non-beneficial ownership may not give priority to that objective.
Abandoning planned capacity
Although environmental groups are
delighted with the plans to abandon 8 proposed coal-fired plants it appears that
the authorities are very nervous about the consortium’s long-term intentions. Senator Joe Barton from the Sixth
District has demanded assurances from the TPUC inter alia that the abandoning of the coal-fired plants won’t drive
up natural gas prices, leave Texas within insufficient capacity margins and
generally leave the good folk of Texas with a mess.
At the time of writing TXU’s
board had voted to recommend shareholders accept the offer, but is still
waiting on federal regulatory approval for the deal. It may now also need the
TPUC’s approval.
Italy – what’s ENEL up to ???
Introduction
Italian utility ENEL has played a somewhat less obvious role in
consolidating the EU energy sector than other players such E.On and Electricite
de France. However ENEL recently shot to stardom by accumulating a stake in
Endesa that threatens to (and eventually
did) gazzump E.On’s bid. This article examines ENEL’s strategy as evidenced by
its recent maneuverings.
Background
As E.On approached the final
stages of its bid for Endesa, news emerged in February that ENEL was quietly
accumulating a shareholding in Endesa. Subsequent news reports revealed that
ENEL intended to take its stake to just under the 24.99% compulsory takeover
limit, which it subsequently did by doing a share swap with Mediobanca
for a 2.98% stake.
ENEL’s strategy
So what is the strategy behind
ENEL’s moves ?? ENEL claims that it simply about increasing its penetration of
the Italian and Spanish energy markets (very similar to E.On’s “On Top”
strategy of using E.On Energie to penetrate the continental European market).
There has been media speculation that ENEL is attempting to gazzump E.On’s bid
under the influence of the Italian and Spanish governments, but given the very
ordinary and systematic nature of ENEL’s funding of the Endesa stakes it
appears that ENEL is in for the long-haul. Given the number of various angles
we are examining the Endesa takeover from it is inevitable that Pipes &
Wires will be making further comment.
Germany – Ruhr Gas looks to Iran
Introduction
Security of energy supply is
becoming a significant issue not only for Europe’s utilities but also for
policy makers as it is increasingly recognised that continued access to natural
gas is now an intense political issue rather than a simple market issue. This
article considers Ruhr Gas’ recent
attempts to secure gas supply from Iran in light of recent events.
The prevailing EU policy environment
Readers will be well aware that
the EU has a vision of free movement of capital and a unified energy market
within the entire EU, a vision that some (perhaps many) individual member
countries are not quite so enthusiastic about. The pages of Pipes & Wires are
certainly no stranger to this lack of enthusiasm and indeed, to the contrary,
the strong nationalist tendencies of some member countries. Examples include…
·
The German government’s preference that Ruhr Gas be acquired by a
German utility such as E.On or RWE to secure Germany’s gas supplies.
·
The Spanish government’s preference for Endesa to acquired by Spanish owners.
·
The French government’s tardiness to liberalise its own energy
markets whilst taking advantage of other countries liberalised markets.
Gas supply from Russia
Gas supply from Russia has been
less than reliable lately. Aside from the deliberate shutting off of supply
through Belarus and the Ukraine because of pricing disputes, corridor countries
seem to be becoming less politically stable rather than more. Not surprisingly
western European nations are increasingly seeking alternative gas supplies.
Rhur Gas’ recent moves
News emerged last month that Ruhr
Gas parent company E.On has had discussions with Iran about supplying LNG for
its proposed terminal at Wilhelmshaven, although it is understood that Algeria
is also being considered as a source of LNG. Although Iran has the second
largest gas reserves in the world, there is also the complication of the
stand-off over Iran’s uranium enrichment program. Pipes & Wires will make
further comment on this matter unfolds.
US – Connecticut considers
re-regulation
Introduction
Many if not most states in the US
now have serious misgivings about deregulation and are seriously contemplating
re-regulation of some sort. The key source of dissatisfaction seems to be increasing
retail electric tariffs. However it now seems that other features such as
conservation, efficiency and renewables are occupying the legislators thinking.
Current market models do not accommodate these features easily, so not
surprisingly the legislators thinking increasingly turns to re-regulation. This
article considers recent attempts by the Connecticut lawmakers to obtain some
relief from skyrocketing tariffs.
Background
Connecticut progressively
deregulated its energy industry from 1998 to 2000, but, so history records, it
got off to a slow start as the rules for standard offer service and stranded
cost recovery were far from finalised. Retail tariffs have risen steeply since
deregulation due to underlying factors such as fuel price increases but perhaps
one of the real problems was the insertion of a wholesale-retail interface (with
its associated risk-reward profile) by requiring vertically integrated
generator-retailers to sell one or other business. Readers may remember that
inserting this interface along with capped retail tariffs was probably a major
driver of the California and Ontario meltdowns a few years ago.
Recent moves
Just last month the Legislature’s Energy Committee completed
a series of public hearings to examine energy related issues. One of the more
promising ideas to emerge was to allow Connecticut’s two public utilities (Connecticut Light & Power and United Illuminating) to backwardly integrate
into generation under state regulation (funny that !!!). After hearing many undoubtedly
conflicting and competing views the next step is for the Energy Committee to
come up with a reform bill to put to the House and then to the Senate.
My observation is that it would
be disappointing if re-regulation occurred because policy makers and
legislators incorrectly concluded that private profit motive was behind the
supposed “failure” of deregulation.
Europe – keeping the
lights on
Introduction
The
last three or four years have seen several significant transmission grid
interruptions. Although many of these interruptions have been operational
incidents rather than lack of investment there has been no shortage of calls
for “more grid investment” and undoubtedly it has seen regulatory policy in
many jurisdictions start to swing away from low tariffs in the short term
toward a more balanced view of long-term security. This article examines a
recent call by the EU for more transmission investment in light of the November
2006 blackout across Europe.
Background events
On
Saturday 4th November last year 15,000,000 consumers were plunged
into darkness as the Union for the Coordination
of Electricity Transmission synchronous area split into three islands each
with different frequencies and power imbalances. The ultimate cause was the
removal of service of the Conneford-Diele 380kV double circuit line across the
River Ems to allow a newly constructed cruise ship to safely pass under the
line at about 1am on the Sunday. This line was a key interconnect between E.On Netz and RWE Transportnetz Strom, and
once this was removed a series of cascade trippings occurred. The precise
sequence of events was as follows…
·
At
9:29pm E.On Netz performed a simulation for the scheduled tripping of the
Conneford-Diele 380kV double circuit. Based on this simulation, E.On Netz
concluded that the UCET mandated (n-1) security criteria would be met, however
a calculation with these two circuits removed was not performed.
·
At
9:38pm E.On Netz tripped both Conneford-Diele circuits, and as expected the
prevailing east-west power flows redistributed to other lines to the south.
·
At
10:07pm the Landesbergen-Wehrendorf 380kV circuit between RWE and E.On Netz
tripped on thermal overload.
·
At
10:10pm E.On Netz reconfigured Landesbergen grid substation by coupling
busbars. Two seconds later the Landesbergen-Wehrendorf circuit tripped on
overload and from there on further circuits cascade tripped.
·
The
three islands were fully resynchronized at 10:49pm with full restoration of the
UCET synchronous area occurring at about 11:45pm
The investigations’
findings
The
Bundesnetzagentur began an
investigation immediately after the blackout which included evaluating reports
prepared by the European Regulators Group for
Electricity & Gas and the UCET (which identified some legal and
regulatory framework shortfalls).
The
ERGEG report concluded inter alia
that whilst E.On Netz did perform an empirical (n-1) security simulation before
tripping the Conneford-Diele circuit they failed to perform a rigorous (n-1)
security check after removing it and recommended that all grid operators should
perform an (n-1) security check automatically at least every 15 minutes. ERGEG
believed that had a detailed simulation been performed it would have revealed
that the E.On Netz grid would not have been (n-1) secure because a tripping of
the Landesbergen-Wehrendorf circuit would have led to a cascade tripping.
The EU’s response –
is it really an investment issue ??
Given
that the ERGEG report clearly identified the cause as an operational oversight,
it was disappointing that the EU was so quick to attribute the blackout to a
lack of investment stating that “unless power grid operators are forced to
invest more in transmission networks Europeans can expect a repeat of the
November 4 blackout”. However if it shifts the emphasis of price control away
from low short-term tariffs toward long-term security maybe that’s not so bad
afterall.
Europe – unbundling lines and energy
Introduction
The notion of unbundling lines
and energy to supposedly prevent a lines business from giving favorable
treatment to its associated energy business is certainly nothing new. Pipes & Wires #56 mentioned
that a
summit was planned for March 2007 in which EU leaders will be asked to consider
the following two options for reducing such supposed market abuses by the large
European utilities…
·
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.
Readers
may recall that EU
Competition Commissioner Neelie Kroes has strongly advocated full ownership
separation.
The proposed unbundling
It is understood that at its
spring summit on the 8th and 9th of March EU leaders approved
"effective separation of supply and production activities from
network operations, based on independently run and adequately regulated network
operation systems which guarantee equal and open access to transport
infrastructures and independence of decisions on investment in
infrastructure". It is expected that draft legislation will be introduced
into the European parliament in either July or September 2007.
Member states views
Not surprisingly, member states views
appear to reflect their respective locations in the energy value chain, with
those dependent on imported energy (eg. UK, Ireland and the Netherlands)
supporting unbundling, and those benefiting from the bundled model (eg. France
and Germany) opposing unbundling.
If unbundling does occur (and it seems
very likely that it will) the face of Europe’s energy industry is likely to
change significantly. Vertically integrated giants such as E.On, RWE and Electricite de France may well have to decide
whether they want to be lines or energy businesses, and sell off the un-wanted
components of their businesses. In an era in which individual EU member
countries are giving heightened priority to their own energy interests it could
prove interesting if those un-wanted components fell into the hands of those
who don’t share the national interest. Pipes & Wires will revisit this
issue as the unbundling legislation makes its way into and through the EU
parliament.
UK – Iberdrola moves closer to
ScottishPower
Introduction
Consolidation of the EU energy
markets has been a key theme of Pipes & Wires for many years, and has often
been dominated by E.On’s acquisitions. This
article examines Iberdrola’s pursuit of
ScottishPower in an effort to
become the third largest utility in Europe with 21,400,000 customers. Acquiring
ScottishPower would give Iberdrola access to 5.2m retail customers and 6,200MW
of generation in the UK as well as providing access to the US markets via ScottishPower’s
stake in PPM Energy.
The proposed deal
Following E.On’s abandoning of
its offer for ScottishPower in late 2006, Iberdrola announced that it would pay
£4 cash and 0.1646 of its own shares for each ScottishPower share, valuing
ScottishPower at £7.77 per share. This was a 35p premium over that days’
closing price and well below the £8 that City analysts were estimating.
Regulatory approvals
In February Iberdrola obtained EU
approval to proceed with the deal, as the EU concluded that Iberdrola would not
obtain a dominant position in either the EU energy or emissions trading
markets. Approval from the New York PSC
and from the FERC in regard to
ScottishPower’s US investments followed early last month.
The end game is in sight
The
most recent move towards the end game was overwhelming shareholder approval of Iberdrola’s
offer which will be implemented by a Scheme of Arrangement pursuant to the
Companies Act 1985. The final steps will be Court hearings in April to approve
the Scheme and confirm the reduction of ScottishPower’s share capital.
George Battersby wires up the garden city
From
humble yet brave beginnings
George Herbert Battersby was born in Albany,
New Zealand in 1896 and went on to attend Auckland Grammar School. George was
in his final year of a B.Sc at Auckland
University (which he never did complete) when he joined the army. After
returning to England from Belgium and France in 1918 where he received the DCM
for bravery George won a scholarship to the City and Guilds of London
Engineering College. Three years later in 1922 he emerged with a B.Sc (Hons) in
electrical engineering, married Cecily Bingley and returned to New Zealand.
Hydro
power station design experience
After returning to New Zealand George spent
three years working for the Public Works Department on the extensions for Hora
Hora and Coleridge power stations.
Early
years at the Christchurch MED
In 1925 George joined the Christchurch
Municipal Electricity Department (now part of Orion) as an assistant engineer. During
this time he qualified for membership and eventually fellowship of the IEE and the NZIE
as well as studying accountancy by correspondence. During this time the MED’s
connected load grew from just over 10MW to about 55MW. Key industry events were
the amalgamation of the Waimairi County electricity department into the MED (a
struggle that would seem every bit as bitter as many of the amalgamation
battles of the late 1990’s) and the post-war power rationing.
Promotion
at last
After what must have seemed forever, George
was promoted to chief engineer in 1949, a role he held until 1955. Despite the
post-war labor shortages the MED’s network grew substantially through this
period. Around this time George was also asked by the Minister of Electricity
Stan Goosman to participate in the Government Electricity Advisory Council.
Somewhere amongst all this George found time to teach apprentices at the Christchurch Technical College, moderate electrical engineering exams at
the University of Canterbury and be
the president of the Electricity Supply Authorities Association.
Following the retirement of John Forsyth in
1955, George was appointed Engineer-Manager, a curious role in which he shared
the reins of power with John Denford who was Secretary-Manager. When Denford
resigned in March 1960 due to ill health, George was appointed to the single
role of General Manager from which he formally retired in June 1962 but
apparently stayed on in an advisory role until about 1965 at the Council’s
request.
George’s key achievements include introducing
ripple control, undergrounding new subdivisions, the very beginnings of 66kV
sub-transmission, hollow spun concrete poles, outside meter boxes and
restructuring the engineering division into four sections (planning,
operations, mains and substations) each with a divisional engineer reporting to
the Chief Engineer. George also achieved some notoriety in January 1959 for
falling 14 feet through an open hatchway at Armagh Street substation and
breaking his pelvis.
Later
years
After formally retiring George also did some
work at Lyttelton for the Central Canterbury Electric Power Board and in 1971
was appointed by the Electricity Distribution Commission as the conciliator for
the West Coast and Nelson amalgamation proposals. George suffered a stroke
whilst writing a paper in July 1973 and died several hours later at the age of
77.
Thanks to George’s daughter Cecily Maccoll
MBE for assistance in writing this article.
Conferences & events
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.
NZ
Regulatory Evolution Summit – 5th – 6th June 2007
(Wellington)
This conference will look at how New Zealand
can be a world leader in ensuring effective regulatory outcomes, and how can we
improve in areas where we might have lost the way.
9th
Annual Energy Summit – 13th and 14th August 2007
(Wellington)
5th
Annual Gas Industry Summit – 13th and 14th August
2007 (Wellington)
2nd
Annual Climate Change and Energy Emissions Summit – 15th August
2007 (Wellington)
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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