Pipes & Wires
THE JOURNAL OF COOL ENERGY
& UTILITIES STUFF
Issue 59 – May 2007
From the director…
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Welcome
to Pipes & Wires #59. This month we examine the broad thinking in a major
overhaul of regulatory law in New Zealand as well as considering the gas and
water tariff re-set processes in the Australian state of Victoria. We then
examine Europe now that Iberdrola has finally captured ScottishPower and E.On
repositions itself (for what might be an EU mandated split of lines and
energy). We also
examine the possibility of re-regulation in Texas, and the final
nationalisation of EDC in Venezuela, and conclude with a quick look at the
competing bids for Australian utility Alinta and a quaint story about David
Lilienthal and his battle for public power in the US in the 1930’s. |
About Utility Consultants
Utility Consultants Ltd is a
management consultancy specialising in the following aspects of energy
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NZ – the Parts 4, 4A and 5 review
Introduction
Early last month the Ministry of Economic Development released the
long awaited discussion document entitled Review Of
Regulatory Control Provisions Under The Commerce Act 1986. For many of us in
the New Zealand power sector this has become known more simply as the Part 4A
Review because Part 4A of the Act applied specifically to electricity lines
businesses. This article examines the background to the Review, provides a
short summary of the discussion document and notes some key issues likely to
arise.
Background
In May 2006 the Minister of
Commerce announced a review
of Parts 4 and 5 of the Commerce Act 1986 which relate to control of goods
& services and authorisations & clearances respectively. In September
2006 Cabinet
decided that Part 4A would also be included in the review and subsequently
promulgated a terms
of reference.
The review has been split into
two parts – review
of the regulatory control provisions, and review
of the authorisation and clearance provisions. This focus of this article
is on the regulatory control provisions.
Summary of the paper
The discussion paper itself is of
moderate length (only 88 pages) and neatly describes many of the structural,
procedural and technical issues that many of us have submitted on over the
years. Key features include…
·
The proposed addition of a fourth clause to s57E explicitly noting
the need to incentivise innovation and new investment (Para 6).
·
A specific recognition of the absence of any mechanism for ex-ante
approval of CapEx (Para 12).
·
Recognition of the need to determine many technical parameters
such as WACC, possibly in advance on a separate basis (Para 13).
·
Consideration of whether such methodologies should be should be in
the form of Guidelines set by the Commerce Commission or Rules set by the
Minister (Para 14).
Several alternative regulatory
models are also discussed throughout the length of the paper including where
lines businesses submit proposed price path and quality levels which the
Commerce Commission must accept if they fall within defined boundaries (“propose-accept”),
and where lines businesses negotiate price and quality levels with customers
against a back-stop of arbitration and regulation (“negotiate-arbitrate”).
Emphasis on Customer Engagement
In regard to the possibility of the
“propose-accept” model, the MED notes that robust customer engagement would be
required, including in regard to future CapEx (Para 171). Although it is not
clear exactly how a lines business might discuss its CapEx proposals with those
less knowledgeable on electricity it is likely to somehow require an increased engagement
effort on the part of many lines businesses.
Emphasis on AMP’s
The paper notes the backward
looking nature of the current thresholds regime and proposes a strengthening of
forward looking ability through increased scrutiny of OpEx and CapEx
projections in AMP’s. Combined with the steep rise in the cost of many key
inputs such as steel, copper and cement it is likely that lines businesses will
need to give additional thought to their spend projections
Next step
Submissions on the discussion
paper close on Friday 6th July 2007 at 5pm. For help with your
submission pick here
or call Phil on (07) 854-6541.
For help with your customer
engagement or AMP, pick here
or call Phil on (07) 854-6541.
Aus – gas pipes tariff review in
Victoria
Introduction
The Essential Services Commission (ESC) is
currently compiling the access arrangements that will apply to Victoria’s three
gas distributors (which is in effect four because of the cross-vesting of Envestra’s Albury network from NSW to
Victoria) for the third control period from1 January 2008 to 31 December 2012. This
article briefly examines the key aspects of the proposed access arrangements to
set the context for future analysis of the ESC’s draft and final
determinations.
Background
Following the publication of two
consultation papers in May 2006 and October 2006 respectively the ESC has
recently received revised access arrangement submissions from Envestra, Multinet, SP AusNet and Envestra Albury and
published a summary paper.
Key aspects of the proposed access arrangements
The tariff changes proposed for
the four distribution businesses are as follows…
|
Business |
Prima facie P0 (applies 2008) |
P0 excluding FRC costs (applies 2008) |
X factor (%) (applies 2009 to 2012) |
|
Envestra Victoria |
-5.1 |
0.1 |
-3.9 |
|
Envestra Albury |
-5.5 |
-0.3 |
-3.9 |
|
Multinet |
-3.0 |
1.3 |
1.0 |
|
SP AusNet |
-5.1 |
2.0 |
0 |
Hence all four distributors are
proposing real cost increases on 1 January 2008 (much of which seems to be to
cover the costs of Full Retail Contestability). Envestra are also proposing
further real tariff increases for each subsequent year whilst Multinet and SP
AusNet are proposing real tariff decreases. Salient features of the proposed
access arrangements include…
·
Significant one-off costs associated with the introduction of FRC
(accommodated by the P0).
·
An almost 50% increase in depreciation and return on capital costs
over the control period for Envestra Victoria to reflect an almost tripling of
their CapEx program.
·
An increased OpEx requirement for Envestra Albury.
·
A significantly reduced efficiency carryover for Multinet halfway
through the control period.
·
Increases in CapEx and OpEx costs for SP AusNet offset by a sharp
reduction in efficiency carryover towards the end of the control period.
·
Envestra has sought a WACC of 5.8% based on the 50th
percentile of a Monte Carol simulation, and has indicated that if the ESC
rejects this approach it will seek a 75th percentile WACC of 6.1%
which is closer to the 6.2% being sought by Multinet and SP AusNet.
Next steps
The ESC is currently seeking
submissions on the proposed access arrangements from interested stakeholders.
Following consideration of any submissions the ESC will compile its draft
determination and, after a consultation process, will deliver its final
determination.
Europe – E.On re-focuses on industry
consolidation
Introduction
Pipes
& Wires #58 recorded E.On’s agreement
to abandon its bid for Endesa in return for
ENEL and Acciona
agreeing to on-sell about €10b if their bid for Endesa is successful. This
article takes a brief look at what this might mean and how it could re-shape
Europe’s energy sector.
E.On’s stated intentions
If ENEL and Acciona successfully
acquire Endesa, they will be required under the agreement to on-sell equity
stakes in operations in Spain, Italy, France and Poland. The final
consideration will be based on accepted asset valuation methods at the time of
transaction.
Presumably the equity stakes will
be a mixture of regulatory concessions by Endesa, assets that Endesa doesn’t
want, and assets that are a good fit with E.On’s existing activities (well those
are my guesses anyway). These could include the following…
·
Part of the 80% stake in Endesa
Italia, Italy’s third largest generator with 6,340MW.
·
Part of the 65% stake in Snet, France’s second largest generator
with 2,934MW.
·
Part of the 100% stake in Endesa and its associated entity Endesa
RED with 10,400,000 distribution customers.
·
Part of the stake in Endesa Polska which owns stakes in Elektrocieplownia Bialystok SA, Gielda
Energii and Dolna Odra.
These statements are of course
speculative, but may well represent an attempt by E.On to get ahead of the game
in anticipation of some form of enforced unbundling of lines and energy.
E.On announces re-organisation plan
Earlier this month E.On announced
a plan to optimise its power generation operations and its capital structure
which is expected to include a policy on dividend payouts and a share buy-back
program. One possible take on this is that E.On has an eye to being a lines
business if the EU does enforce separation of lines and energy and is therefore
anticipating some sort of geographically distinct retail markets (with an
associated need to configure its generation businesses accordingly for an
optimum sale) and the need to shift more toward a yield investment model (with
a possibly increased debt-equity ratio). Anyway, as always, time will tell.
Aus – water under pressure in Victoria
Introduction
The Essential Services Commission has
recently commenced compiling the price controls that will apply to Victoria’s
20 water and sewage businesses for the five year control period beginning on 1
July 2008. This article examines the initial Guidance Paper to set the context
for later examination of the ESC’s assessment of each business’ Water Plan.
Background
The regulatory framework for
Victoria’s water and sewage industries are set out in the Water Industry Act
1994 and the Essential Services Commission Act 2001. Pursuant to the Water
Industry Act the Governor in Council has established a Water Industry
Regulatory Order which sets out the regulatory framework in more detail.
Salient features of the Guidance Paper
Some of the salient features of
the Guidance Paper include…
·
A further discussion and analysis of the previously expressed preference
for a five year control period.
·
The ESC has considered whether to introduce mandatory Guaranteed
Service Levels and notes the use of GSL’s in NSW and the ACT water sectors and
in the Victorian gas and electricity sectors.
·
A requirement for all businesses to separately identify in their
Water Plan the costs of obligations expected to start within the control period
(as distinct from status quo costs).
·
An expectation that CapEx will be disaggregated at least to the
level of Renewals, Growth, New Obligations and for Corporate & Retail.
·
A view to closely monitor actual CapEx against the forecasts used
to justify the revenue requirement.
·
An estimated real post-tax WACC of 5.1%.
·
The possible introduction of an efficiency carry-over mechanism
between control periods to discourage withholding of efficiency gains until the
next period.
Next steps
Following the current
consultation on the Exposure Draft, all businesses will need to submit their
Water Plans by 1 September 2007. A draft decision is expected in late January
2008 and a final decision in May 2008.
UK – Iberdrola finally captures
ScottishPower
Introduction
Pipes
& Wires #58 noted that the only outstanding issues for Iberdrola to finally capture ScottishPower were Court hearings in
late April to approve the Scheme of Arrangement and confirm the reduction of
ScottishPower’s share capital. This article examines the successful completion
of these two final moves.
Background
Following
E.On’s abandonment of its bid for
ScottishPower, Iberdrola emerged as a bidder in November 2006 initially
offering £4 cash and 0.1646 of its own shares for
each ScottishPower share.
The final moves
At a Court of Session meeting in
Edinburgh on 23 April sanction under the Companies Act 1985 was given.
Following this Iberdrola took possession of 52.3% of ScottishPower shares in
exchange of cash and the remaining 47.7% of shares in exchange for Iberdrola
shares and subsequently increased its share capital by just over €8b.
The new look Iberdrola
Iberdrola emerges from the
acquisition as Europe’s third largest electric utility with 21,400,000
customers (albeit some of these in the US) and 40,000MW of generation. Total
enterprise value is about €65b. If the past is anything to go by this
acquisition will prompt a flurry of merger activity as the big players glance
over their shoulder and see themselves’ about to be overtaken. It also begs the
question as to what is left to acquire - we may well look to the possible
unbundling of lines and energy in Europe as the next trigger.
NZ – 2007 electricity asset management
plans
The Commerce Commission has 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 previous article on the Part
4A Review notes a likely requirement for lines businesses to strengthen the
OpEx and CapEx projections in their AMP’s (and the article in this issue on the
Victorian water pipes review notes the Essential Services Commission’s plans to
closely scrutinise actual CapEx with respect to forecast). For help with either
the “words” or the “numbers” in your AMP pick here
or call Phil on (07) 854-6541.
US – Texas flirts with re-regulation
Introduction
Pipes & Wires has previously
considered re-regulation proposals in the US states of Connecticut, Montana,
Maryland and California. This time we look at House Bill 1189 introduced to the
Texas House by Republican
Phil King that would have the practical effect of re-regulating residential
electric rates. However the possibility of the state also wanting to intervene
in KKR’s bid for TXU
seems to have derailed the passage of the Bill.
House Bill 1189
House Bill 1189 proposes to amend
s39.051 of the Utilities Code by requiring any utility affiliated with more
than 5,000MW of generation or 10,000GWh of annual sales to file an unbundling
plan with the PUC by 1 January 2008. A
reading of the Background & Purpose to HB1189 suggests that the lack of retail
competition in Texas to date might be overcome if vertically integrated
generator-retailers were disaggregated.
King had subsequently teamed up
with several Democrats to include a provision in his Bill for the PUC to reduce
residential electric rates by a specific formula if rates exceeded a specified
level.
Progress on the Bill
It appears that the Bill was
proceeding well, with the provisions for reducing electric rates receiving
overwhelming bipartisan support. The debate then moved toward including
provision for allowing the PUC to review KKR’s acquisition of TXU when it
became derailed over the finer point of whether this clause was explicitly
targeting TXU or just regulated utilities in general (noting that much of the
focus of the debate had been specific to TXU). And there it seems to have come
to an end until the House process kicks some life back into HB 1189….
Venezuela – nationalising Electricidad
de Caracas
Introduction
This article examines the recent
nationalising of Electricidad de Caracas
under the rule of re-elected president Hugo Chavez’.
Background
Readers may recall that Pipes
& Wires #56 and #57
examined Chavez’ intention to nationalise key infrastructure, and that a deal
was reached with owner AES to purchase its
stake in EDC for US$739m.
Recent events
It was announced earlier this
month that state-owned oil company Petroleos de
Venezuela had purchased just under 93% of EDC’s stock for US$836.9m by open
market tender including AES’s 82% stake for the agreed price of US$739.
Aus – Alinta considers the bids
Introduction
The competing bids of Macquarie Bank and of Babcock & Brown in conjunction with
Singapore Power seem to have
done precisely that over the last month or so - compete. This article provide a
brief analysis of recent events, but as noted in Pipes & Wires #58 there
will be no serious analysis of listed entities until the dealing is complete.
Recent events
The following table sets out the per share
bids to date…
|
Bidder |
March 2007 |
May 2007 |
|
Macquarie Bank |
$15.45 cash |
$15.80 cash or in shares in a new
vehicle. |
|
B&B + SingPower |
$8.50 cash + 1.48 B&B Infrastructure shares + 2.30 B&B Power shares + 0.48 B&B wind Partners shares + 1.60 BBI exchangeable pref. shares + 1.27 Australian Pipeline Trust units |
$8.93 cash + $0.40 franking credits + 1.48 B&B Infrastructure shares + 2.30 B&B Power shares + 0.48 B&B wind Partners shares + 1.60 BBI exchangeable pref. shares + 1.27 Australian Pipeline Trust units |
At this stage Alinta’s preference appears to be for
B&B + SingPower’s offer because of the recognised growth prospects of the
B&B shares and the APT
units. Hopefully Pipes & Wires will have more to report on in the next
issue.
David Lilienthal and the battle for public power
Readers may recall from Pipes
& Wires #55 how Wendell Willkie staunchly advocated private power in
the face of Franklin Roosevelt’s New Deal in the mid-1930’s. This article
examines the life and times of David Eli Lilienthal who was a founding director
of the Tennessee Valley Authority, one of the
organisations that Wendell vigorously opposed.
David’s
early life
David was born into a poor immigrant family
in Morton, Illinois on 8 July 1899 but grew up in several small towns in
Indiana. He then attended DePauw University
and later Harvard Law School where he
made the acquaintance of Professor Felix Frankfurter. David then went on to
join the Wisconsin Public Service Commission
around 1931.
Should-tapped
for the TVA
In 1933 David was shoulder-tapped to join the
three man founding board of the TVA by chairman Arthur Morgan, along with the
third founding director Harcourt Morgan. Almost right from the start David and
Arthur disagreed over how TVA electricity should be distributed. Arthur felt
that the electricity could be sold through existing investor-owned distributors
whilst David favored an entirely new system of rural electric cooperatives.
After this debate spilled into public view in 1936, Arthur tried to persuade Roosevelt
not to reappoint David alleging corruption and abuse of power. After refusing
to substantiate his allegations, Roosevelt requested Arthur’s resignation in 1938,
and when Arthur refused to resign Roosevelt fired him.
Life
after TVA
After leaving the TVA David was asked to
chair a small group advising the President and Secretary of State on nuclear
weapons, and subsequently chaired the Atomic
Energy Commission from 1947 to 1950. Seeking a more fulfilling direction in
life David then spent five years with merchant bankers Lazard Freres and then founded the
Development and Resources Corporation (D&R) to extend the TVA model to
other communities. One of the D&R’s great successes was working with the
Shah of Iran on various TVA-like projects. However the Shah’s fall from public
favor in the late 1970’s made David’s continued role in Iran untenable which
seems to have been a source of bitterness and confusion to David in later life.
In 1980 David suffered some hip and sight
difficulties which he fully recovered from only to die peacefully in his sleep
in January 1981.
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.
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).
·
2nd
Annual Complex Infrastructure Project Management Conference – 21st and
22nd 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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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.
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