Pipes & Wires
THE JOURNAL OF COOL ENERGY
& UTILITIES STUFF
Issue 60 – June 2007
From the director…
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Welcome
to Pipes & Wires #60. This issue starts with an analysis of the Commerce
Commission’s reasons for not declaring control of Unison Networks Ltd, and
then takes a brief look at the gas distribution price controls in the UK, the
electricity transmission price control in Queensland, and progress on the
first electricity lines price re-set in New Zealand. We then
take a look at the changing role of equity in the first of a two part series
and then examine three deals in Europe that are at various stages. This
issue concludes with a brief look at Norman Speer who worked for the Auckland
Electric Power Board for 47 years. So happy reading until next month… |
About Utility Consultants
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NZ – Unison’s woes formally come to an
end
Introduction
In May this year the Commerce Commission released its Reasons
For Not Declaring Control Of Unison Networks Ltd. This article summarises those
reasons, but more importantly marks what I believe is a significant shift for
the better in New Zealand’s regulatory thinking.
Background
Late last year the Commerce
Commission announced its draft decision not to declare control of Unison’s electricity distribution services
under Part 5 of the Commerce Act 1986. The Commission reached this decision after
considering Unison’s administrative settlement offers and concluding that the
specific objectives set out in the Purpose Statement in s57E of the Commerce
Act 1986 would firstly be better fulfilled by allowing Unison to voluntarily
implement the terms of its settlement offer and secondly that the direct and
indirect costs of control under Part 5 would be avoided.
Summary of the Reasons
Key aspects of the Reasons paper are as
follows…
·
Recognition
that allowing Unison to retain efficiency gains for the remainder of this
period (by not re-setting the price path to a lower level) will encourage them
to seek further gains in future periods.
·
Recognition
that allowing a WACC from the top-end of the WACC distribution would encourage
investment.
·
Strong
and obvious acceptance of the August 2006 GPS and associated Notice emphasising
the importance of encouraging regulated utilities to invest.
·
Recognition
that encouraging investment in long-term reliability could also be consistent
with the Purpose Statement (and not simply reducing short-term tariffs).
·
An
increased recognition firstly of the need for dynamic efficiency in preference
to allocative and productive efficiency and secondly that the regulator plays a
key role in improving dynamic efficiency by setting a certain and stable
regulatory regime.
·
A
strengthened and more practical recognition of the asymmetries of under and
over-investing.
In concluding it is my view that the above
pleasing shifts in the Commission’s thinking along with the correct recognition
of many issues set out in the Part 4, 4A and 5 review paper represent a
significant turn for the better for New Zealand’s regulated utilities.
UK – gas distribution price controls
Introduction
Pipes & Wires #48 discussed
the one year extension to the then current price controls applying to Northern Gas Networks, Wales & West Utilities, Scotland Gas Networks and Southern Gas Networks that would
extend that control period for a further one year until 31 March 2008. This
article examines progress to date on compiling the price controls that will
apply for the five year period from 1 April 2008 to 31 March 2013.
Background
Following the successful sale of
four of National Grid Transco’s
distribution businesses, the four new gas distributors emerged. Not surprisingly
much was made of the available comparability of four independent businesses
(collectively owning eight regionally distinct networks) hence it was
considered that disaggregating the overall price control to the eight regional
levels might have merit. After a consultation period eight regional price
controls took effect from 1 April 2004 which corresponded to the new gas
industry structure and will form the basis of the future controls.
Progress to date
OFGEM
released its Initial Proposals document setting out its key thoughts for the
five year control period starting on 1 April 2008. These thoughts are as
follows…
·
A
proposed (average) OpEx reduction of 3.3% per year in real terms for each of
the five years (amounting to about 17% over the entire control period) despite
OFGEM’s recognition that the costs of many aspects of gas distribution are
increasing faster than inflation and that costs are higher in some parts of the
UK. Based on comprehensive benchmarking or similar tasks across other sectors
of the economy OFGEM also believes that distributors can make further
efficiency gains.
·
A
proposed (average) new CapEx reduction amounting to about 17% in real terms
over the five year control period. OFGEM recognises that increasing numbers of
new connections will certainly increase required CapEX but also believes that
the distributors’ estimates are too high.
·
A proposed (average) RepEx (replacement)
reduction amounting to about 18% in real terms over the five year control
period. OFGEM recognises that a large part of this RepEx is required to address
mandated safety concerns and although the distributors’ proposed RepEx has
increased significantly from the previous five year control period OFGEM has
proposed a reduction.
·
Proposed
introduction of a reward for estimating future CapEx that is close to OFGEM’s
estimates (the IQI approach). This has been specifically proposed to discourage
over-estimating CapEx with a view to capturing a higher than necessary revenue
requirement.
·
Proposed
adoption of a post-tax WACC of 4.22%.
This is expected to result in a real price
increase for the average domestic customer of about £1 per year for each of the
five years. Pipes & Wires expects to make further comment in about
September when OFGEM publishes its draft determinations.
Zambia – pro-bono opportunity to serve
A pro-bono opportunity has arisen
at the North West Zambia Development Trust
for an experienced utility manager. The Trust has recently commissioned the Zengamina Hydro Power
Station on the Zambesi River and is looking for someone with management and
commercial skills that can develop the systems and processes necessary for supplying
a local min-grid. This is a voluntary position for one year - housing, food and
transport would be provided.
Interested parties can pick here
to contact Phil Caffyn in the first instance.
NZ – progress on the electricity lines
price re-set
Introduction
The current electricity lines
targeted control regime established price path and quality thresholds that
applied for the five year period commencing on 1 April 2004. This article
briefly sets out the Commerce Commission’s
proposed
approach to setting new thresholds to apply for the five years starting on
1 April 2009.
Background
Part 4A of the Commerce Act 1986
sets out the regulatory framework for large electricity lines businesses, and inter alia requires the Commerce
Commission to set thresholds at which control might be declared over a lines
business. The Commission’s activities include confirming that each lines
business has complied with its respective thresholds each year, investigating
any breach of those thresholds, and determining whether or not to declare
control over that lines business.
Planned timetable
·
September 2007 – publication of, and consultation on, options for
an updated quality threshold.
·
November 2007 – publication of a discussion paper focusing on
general issues and initial options for the price component of the regime.
·
May 2008 – publication and consultation on the methodology paper.
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September 2008 – publication of, and consultation on, a draft
decisions paper.
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October 2008 – conference and cross-submissions on the draft
decision paper.
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December 2008 – publication of the final decision paper.
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February 2009 – Publication of, and consultation on, the draft
Gazette notice.
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1 April 2009 – publication of final thresholds decision.
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1 April 2009 – new threshold regime begins following publication
of Gazette notice.
Pipes & Wires will
undoubtedly follow this process closely as various documents are released.
Finance – the changing role of equity
(Part 1)
Introduction
Equity, and perhaps more
importantly, the sources of that equity have played a changing role over the
last 20 years or so. This two-part article examines the various different
sources of utility and infrastructure equity over that period, and also the
motivations and concentrations of governance power associated with various
sources of equity.
In the beginning
Going back to the days of
nationalised infrastructure and utilities (which can also be extended to
include cooperative arrangements such as in the US) equity was often treated as
costless – I’ve used the phrase “power board equity” to embody this notion –
which would explain why most of these entities had little if any term debt.
Privatisation – the equity cycle begins
To set the scene we need to examine
three industry privatisations…
·
The UK power industry around 1990, in which one of the first
sources of equity was “mum & dad” shareholders, which if I recall correctly
was part of Margaret Thatcher’s plan to instill a shareholder mentality in the
UK public.
·
The very early stages of privatisation in Argentina and to a
lesser extent Brazil in which the key sources of equity were utilities with
global ambitions – predominantly US utilities such as AES and Entergy,
but also some European utilities such as EDF
and United Utilities plc.
·
The Australian state of Victoria, in which the mum & dad
shareholder stage was skipped and the utilities were sold off directly to a mix
of overseas utilities and private Australian utilities.
What emerged during this time is
what I’ve referred to as the First Wave of global utility investment in which
equity migrated from the US (and to a lesser extent from Europe) to Argentina
and Brazil, and the Second Wave in which equity migrated from the US to the UK
and Victoria.
The global utility sector than
moved on through what I’ve identified as the Third Wave in which the US utilities
went home (wounded and bleeding in some cases), the European utilities such as E.On, RWE and
EDF invested heavily in the UK and eastern Europe, and in which Asian utilities
(most notably Singapore Power)
invested heavily in Australia. This was followed by the Fourth Wave in which
European utilities began to focus their sights on the US.
The motivations begin to shift
The motivations of the equity
holders during these waves appeared to Investigative (learning about
deregulating markets) and Traditional (simply making a better return on equity
than they could at home). As the Victorian gas industry was privatised (and as
a bunch of gas networks in New Zealand were put up for sale) equity investors
such as TXU and Aquila began to experiment with
Transformational strategies.
The cycles begin to shift
All four of these waves (up to
about 2000, perhaps 2001) seem to have been strongly characterised by simple
equity investments. Probably the only obvious exception was Aquila’s (back when
it was called Utilicorp) investment in United
Energy (Victoria) in which an investment fund was also involved. That forms
a starting point for the rest of this story.
And the role of equity becomes more complicated
Once upon a time predominant or
total equity stakes were taken. This carried with it a number of associated
consequences such as capturing all the returns, being able to appoint most or
all of the directors, and (the downside) of having a high risk exposure. Since
about 2000 (or perhaps 2001) the role of equity seems to have changed markedly.
In an approximate time sequence the following roles of equity have emerged…
·
First there was the inclusion of institutional investors. It seems
that Aquila’s investment model for United Energy may have been a pioneer, which
has been more recently followed by the Ontario
Teachers Pension Plan. One of the characteristics of this model was that
the utility only ever took a partial equity position and that it sought
unregulated revenues from managing the business.
·
Then there was the move to partial sell downs or partial IPO’s
where a utility had originally taken a full or predominant equity position. The
recent IPO’s of Spark
Infrastructure and SP AusNet in
Australia are good examples. The ensuing strategy appears to be to retain
control, retain the management contract and free up cash for further
acquisitions.
·
Now the latest (although not surprising) is the role of private
equity funds. This seemed to emerge when Nomura
was interested in Dwr Cymru Welsh Water
a few years back, but seems to have sprung to prominence with Babcock & Brown’s various
acquisitions and of course KKR’s bid for TXU.
One of the significant underlying issues of this model that emerged when Nomura
pursued Dwr Cymru was OFWAT’s
nervousness over management expertise. Tied up with all this are various funds
that are being spun off to focus on market segments with specific risk-reward
profiles to better meet investor preferences.
Part two of this article will
feature in Pipes & Wires #61.
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.
Articles in previous issues of
Pipes & Wires note increased regulatory scrutiny of OpEx and CapEx
projections in the AMP’s and of 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.
Europe – EDF makes a bid for RWE
Introduction
Acquisitions by the big three
European utilities (E.On, RWE and EDF) are
certainly not unusual, however the rumors last month that EDF might be making a
bid for RWE pushed RWE’s stock price up 7% on the Frankfurt bourse. This article briefly
examines some of the salient features of both EDF and RWE to set some context
for future analysis.
Salient features of EDF
Most of us are well aware of both
RWE’s size and diverse operations, so it might be surprising to note that EDF’s
market cap is 3x that of RWE. What might not be so well known is that EDF
already has a presence in Germany through its 45% stake in EnBW which is Germany’s third largest utility
with revenues of over €13b.
Salient features of RWE
Although RWE represents a good
market expansion platform for EDF, RWE’s coal fired generation will also
represent an increase in risk exposure in a carbon-conscious market.
Pipes & Wires will make
further comment if any deal starts to emerge.
Aus – final grid pricing decision in
Queensland
Introduction
The AER recently released its final transmission
network revenue cap for Queensland grid operator PowerLink for the five year period
starting on 1 July 2007. This article examines the key features of that
decision and makes a brief comparison with Powerlink’s proposed cap and the
AER’s draft decision.
Key features of the final decision
Key features of the final
decision are…
·
A revenue cap that increases from $537m in 2007/08 to $815m in
2011/12.
·
An opening RAV of $3,753m.
·
A total CapEx of $2,249m.
·
A total OpEx of $731m.
·
A nominal vanilla WACC of 8.76%.
Comparisons of the proposal, draft decision and final decision
The following table compares
Powerlink’s proposed parameters, the AER’s draft decision and the AER’s final
decision...
|
Parameter |
Powerlink proposed value |
AER draft decision |
AER final decision |
|
Unsmoothed total revenue |
$3,238m |
$3,157m |
$3,334m |
|
Smoothed total revenue |
|
$3,161m |
$3,342m |
|
Opening RAV |
|
$3,781m |
$3,753m |
|
Total CapEx |
$2,449m |
$2,032m |
$2,249m |
|
Total OpEx |
$787m |
$713m |
$731m |
|
Nominal vanilla WACC |
8.34% |
8.76% |
8.76% |
Note that in December 2006
Powerlink submitted a supplementary proposal to the AER seeking an additional
$469 CapEx allowance based on new information. This was after the draft
decision but was given consideration in the final decision.
UK – progress on the British Energy
sell-down
Introduction
Long-time readers will no doubt
be aware of British Energy’s vexed
history of privatisation and re-nationalisation. This article examines the UK
government’s recent announcement to reduce its stake from 64% to 36% through an
issue of new shares.
Background
British Energy’s journey to the
edge of bankruptcy and back to a reasonably successful re-listing on the LSE has been extensively chronicled
in Pipes & Wires #20, #32, #34 and #37. As British Energy’s stock price
soared in mid and late 2006 on the back off increasing wholesale prices the
government decided the time was right to reduce its stake until a number of
boiler tube cracks at Hunterston, Hinkley Point and Hartlepool required
shutdowns and prompted a reduction in output of similar units at other
stations.
Recent events
News earlier this month that the
government would reduce its stake through an issue of new shares sent British
Energy’s stock price tumbling from £5.70 to £5.27 when it was revealed that the
issue would almost halve the earnings per share from a projected 82p down to
about 43p.
Pipes & Wires will make
further comment on this and the parallel issue of the new generation of nuclear
stations as progress unfolds.
France – the GDF – Suez merger becomes
political
Introduction
It’s certainly no secret that
deals are political, and as we’ve seen with so many big deals in the EU
protectionist issues always seem to surface. So it’s interesting to wonder how
much more political a deal could get. This article examines the political
machinations behind the long-awaited merger of Gaz
De France and Suez.
Background
Back in early 2006 former Prime
Minister Dominque de Villepin effectively scuttled ENEL’s
hostile bid for Suez. In line with his policy of “economic patriotism” Villepin
is understood to have summoned the chief executives of both Suez and GDF to his
official residence where he publicly announced the creation of a national energy
champion.
Recent events
Since the election of Nicolas
Sarkozy as President a few weeks ago the creation of Villepin’s national energy
champion seems doubtful…
·
France’s new Prime Minister Francios Fillon has indicated that
consideration of the merger and other possibilities is not a priority.
·
Former EU President Jacques Delors has stated that France has a
problem accepting a market economy and that it creates the image of France
living in “a different world” from that of its European neighbors (remember
this was before EDF was rumored to have made a bid for RWE).
·
In the meantime Suez has amassed an 11% stake in Gas Natural indicating that it sees a broader
geographical base as the key to success.
Once the French politicians get
their feet securely under the table it will be interesting to see whether they
continue the theme of a narrowly focused national champion consolidating the
French market or whether they correctly recognise the need to integrate
forwardly into new retail markets and backwardly into new gas reserves and
transmission corridors. Pipes & Wires will make further comment as events
unfold.
Norman Speer powers up the queen city
Early
years and education
Norman McLeod Speer was born in East Tamaki,
which although now an established residential and industrial area, was a
farming district back in the 1890’s. Although Norman’s exact birth date has
proved elusive, his record of war service suggests he was probably born around
1897.
Norman was educated at several schools around
eastern and central Auckland before attending Seddon Memorial Technical College
and Auckland University (both of which
probably occurred after his war service).
Early
working life and the war years
After working for a firm of general
merchants, Norman joined the Auckland City Council’s electricity department in
1912 as an office junior. In early 1916 at the tender age of 19 Norman
commanded two companies of senior cadets in the territorial forces and was
wounded at Messines.
A
life of electricity
Upon his return from the war, Norman rejoined
the electricity department and was promoted to the position of chief clerk
which he held until 1922 when the Auckland Electric Power Board was formed.
After negotiating the sale and purchase agreement of the electricity department
to the board, Norman was appointed secretary-treasurer. He held this position
until 1950 when he was appointed general manager. Norman retired from the
general manager’s role in 1959 after spending 47 years powering up the queen
city.
Apart from being awarded an MBE for in 1961,
details of Norman’s later life remain sketchy.
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
·
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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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.
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