Pipes & Wires
THE JOURNAL OF ENERGY &
INFRASTRUCTURE MATTERS
Issue 61 – July 2007
From the director…
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Welcome
to Pipes & Wires #61. This issue is very much a mixed bag of deals,
regulatory determinations and a look at asset strategy and renewals. We examine
BBI and Singapore Power’s successful bid for Alinta, ENEL’s successful bid
for Endesa and the troubled merger of Suez and Gaz de France. We also look at
the start of the next electricity price control in South Australia and how
the national regulator in Australia is looking to incentivise reduction of
transmission constraints. We then
take a look at the impending wholesale electricity market in Ireland,
consider part two of a two-part article on the changing role of equity and
then consider asset renewals in light of last weeks steam pipe rupture in
Manhattan. |
About Utility Consultants
Utility Consultants Ltd is a
management consultancy specialising in the following aspects of energy and
infrastructure networks…
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recent projects, pick
this link.
NZ – northward march the pylons
Introduction
Earlier this month the Electricity Commission
released its final
decision to approve a new transmission line from Whakamaru to Pakuranga
that will initially operate at 220kV but will eventually operate at 400kV. This
article briefly summarises the key aspects of the Commission’s decision.
Key aspects of the Commission’s decision
Key features of the final
decision are…
·
By a 3 to 1 vote with 1 abstention, the Commission confirmed Transpower’s proposed 220kV line with
eventual upgrade to 400kV. By implication, a majority of the Commissioners
believe that Transpower’s proposal meets the criteria set out in Part F,
Section 3, Rule 13.4.1 of the Electricity Governance Rules 2003.
·
The Commission believes that Transpower’s proposal will achieve
the necessary grid reliability through good electricity industry practice.
·
The Commission believes that Transpower has complied with all the
procedural requirements as required by Part F, Section 3, Rule 13.4.1.2.
·
A majority of Commissioner’s concluded that Transpower’s proposal
would minimise the overall cost.
·
The Commission notes that Commissioner Graham Pinnell’s dissenting
view stems from the assumptions in the Grid Investment Test.
Pipes & Wires will make
further comment if any significant additional matters emerge.
Zambia – pro-bono opportunity to serve
A pro-bono opportunity has arisen
at the North West
Zambia Development Trust for an experienced hydro power station manager.
The Trust has recently commissioned the Kalene Power Station and is looking for
someone with both plant operating and commercial skills that can put systems
and processes in place. This is a voluntary position for as long as the person
is prepared to commit to - housing, food and transport would be provided.
Interested parties can pick here
to contact Phil Caffyn in the first instance.
Aus – work on the SA transmission price
cap begins
Introduction
In late May ElectraNet submitted its proposed
revenue cap to the Australian Energy Regulator
for the period 1 July 2008 to 30 June 2013 for the electricity transmission
grid in South Australia. This article examines the key features of ElectraNet’s
proposal to set some context for future analysis.
Key features of ElectraNet’s proposal
Key features of ElectraNet’s
proposal are as follows…
·
A forecast CapEx of $778m for the control period including $138m
for the mandated reinforcement for the Adelaide CBD, compared with about $435m
for the current control period.
·
A forecast Controllable OpEx of $292m for the control period,
compared with $223 for the current control period.
·
A forecast opening RAB of $1,276.5m for the control period, which
includes about $116m of expected additions to the closing RAB for the current
period.
·
A forecast regulatory depreciation of $327.3m and forecast tax
depreciation of $193.7m for the control period.
·
A forecast nominal vanilla WACC of 8.79% for the control period.
ElectraNet expects its proposal
to add about $7.50 per year or about 0.7% to the average domestic power bill.
Next steps
The AER is currently receiving
submissions on ElectraNet’s proposal until 17th August, and in due
course will publish its draft and final determinations. Pipes & Wires will
make further comment as they emerge.
PAS 55 – the emerging standard for
asset management
Introduction
Many jurisdictions have required regulated utilities to prepare
and publicly disclose asset management plans (AMP’s) for many years. Some
jurisdictional regulators are, or have already, moved on from simply requiring
disclosure of an AMP to requiring assurance that the systems and processes used
to generate the AMP (and more importantly, to manage the assets) are robust.
This article briefly examines Publicly Available Specification
(PAS) 55-1:2004 “Specification for the optimised management of physical
infrastructure assets” and describes how your company
can use the framework set out in PAS 55-1 to strengthen its AM activities.
What
exactly is PAS 55-1
PAS 55-1 describes the asset management activities that a business
heavily dependent on fixed assets should be performing. It is a
non-prescriptive approach that avoids “box-ticking”. The rationale for
including an asset management activity in PAS 55-1 is that omitting the
activity would make the organisations asset management processes deficient.
The development of PAS 55-1 arose from the demand from
asset-dependent industries for a good practice framework, and it was considered
that such a standard could be bought to market quicker as a PAS rather than a
BS or ISO standard.
Is PAS
55-1 a substitute for wisdom and experience ??
Certainly not - just like a road map shows the way but doesn’t
make a good driver, PAS 55-1 describes what a prudent asset manager or steward
should be doing but it is not a substitute for experienced people. Furthermore
it doesn’t tell the asset manager how to do things – that is left for local
knowledge and interpretation.
Regulatory
drivers for prudent asset management
Around 2002 OFGEM’s sought
assurance about the integrity of the UK’s electricity and gas networks. This
was heightened by failures in other infrastructure sectors around that time.
OFGEM was keen to maintain its hands-off approach to regulation and did not
wish to micro-manage utilities internal processes. The approach adopted was the
Asset Risk Management survey that was designed to determine what the utilities
were doing, not how they were doing it. Around this time the newly founded Institute
of Asset Management started developing PAS 55 in
conjunction with the British Standards
Institution.
OFGEM has now stated that it won't re-run its bespoke survey if
companies obtain independent certification to PAS55 by an external auditor.
This is now the direction of travel and many UK companies have obtained certification,
with others following. Certification does not mean that OFGEM will
unquestioningly accept the spend plans proposed by an certified utility, but it
does mean that a utilities processes have been audited to a best-practice
benchmark and there is a common language and approach that will help smooth the
review of capital investment plans.
Improving
your AM activities
Improving your AM activities essentially involves the following
steps…
·
Identifying where you existing policies, strategies, processes and
systems should reasonably be having regard to the organisation’s size and
resources.
·
Identifying the status of your existing policies, strategies,
processes and systems.
·
Identifying the gaps.
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Defining the improvements that need to be made to existing
policies, strategies, processes and systems to close the gaps.
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Establishing clear priorities for implementing the improvements.
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Implementing the improvements.
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Reviewing how successful the improvements have been and then
starting the cycle again.
To find out more about improving your AM activities pick here or call
Phil on +64-7-8546541, or to simply request a Slide Show on implementing PAS
55-1 pick here.
Finance – the changing role of equity
(Part 2)
The motivations begin to shift
The motivations of the equity
holders during these waves appeared to be 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 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.
Aus – it’s all over for Alinta
Introduction
Alinta’s plans to improve shareholder
value have finally come to an end as Babcock
& Brown and Singapore Power
emerges as the successful bidder. This article briefly examines the deal’s
history and summarises the key points of B&B’s offer.
Background
Alinta’s determined strategy for
growing shareholder wealth is no stranger to the pages of Pipes & Wires
however a convenient starting point for this story is the management buy-out
that was launched earlier this year which was rapidly followed by speculation
that B&B would launch a bid. The management buy-out eventually came to
nothing but by April 2007 B&B had made a clear bid in conjunction with
Singapore Power, whilst Macquarie Bank
also launched a competing bid.
By the end of April Alinta had indicatively
chosen a $7.4b cash & shares offer from B&B and SingPower in preference
to a $7.6b cash offer from Macquarie, and then during May Alinta announced that
B&B and SingPower’s bid was the confirmed winner.
Details of the deal
B&B and SingPower’s final offer, on a
per-Alinta share basis, was as follows…
·
$8.93 cash
·
0.752 B&B Infrastructure shares
(valued at $1.32).
·
0.669 B&B Power shares (valued at
$2.30).
·
0.26 B&B Wind Partner shares (valued
at $0.50).
·
1.599 B&B Infrastructure exchangeable
preference shares (valued at $1.60).
·
0.301 Australian Pipeline Trust units
(valued at $1.26).
·
$0.40 franking credits
The final offer was worth $16.31
per Alinta share (based on the previous five days trading prices of the B&B
securities) compared to a closing price of $15.91 on 27th June.
Spain – ENEL captures Endesa
Introduction
Previous issues of Pipes &
Wires have examined E.On’s disciplined €42.4b
attempt to acquire Spanish utility Endesa
and how this was gazzumped by ENEL’s
lightning raid on Endesa’s share register. This article briefly summarises
ENEL’s final capture of Endesa.
Background
E.On is well known for its
disciplined approach to acquisitions (which we saw as they abandoned their bid
for ScottishPower), so their pain-staking
attempt to sort out all the commercial and regulatory issues associated with
the Endesa bid was not surprising. However the accumulating of blocking stakes
by nationally-minded Spanish companies was somewhat unexpected, and the
lightning raid by ENEL … well that just seemed to come from nowhere !!! In the
end E.On abandoned its pursuit of Endesa in return for reaching an agreement
with ENEL and Acciona to on-sell about €10b of
assets if their (ENEL and Acciona’s) bid for Endesa is successful.
Bringing the dealings to a close
Earlier this month the EU
approved Acciona and ENEL’s €43.7b takeover of Endesa after concluding that it
did not present any significant competition issues. The Spanish energy
regulator CNE also gave its approval which
contained 12 conditions, whilst approval from the Spanish securities market
regulator CNMV was awaited at the time of
writing.
What does all this mean for energy consolidation in the EU ??
Probably one of the most
significant issues for energy consolidation is the mounting tension between the
EU’s call to regionalisation and individual member states becoming more
nationally focused than ever, with strong nationally owned utilities being seen
as a safeguard for energy supplies. This was very clear in the Spanish
government’s preference for Endesa to merge with SDG Gas Natural (and in an ironic sort of
way, Spain’s energy sector is probably weaker then ever now), and also in
former French Prime Minister Dominque de Villepin’s cry of “economic
nationalism” in regard to Suez and Gaz de France merging.
So … it will be interesting to
see the practical outworking of this tension. My guess is that France will come
under further pressure to liberalise its own energy markets given that it has
taken advantage of sector liberalisation in the UK and Germany.
Ireland – creating a single electricity
market
Introduction
At the request of one of our
readers, Pipes & Wires is examining the All Island Project, a joint
initiative by the Commission for Energy Regulation
and the Northern Ireland Authority for
Utility Regulation to create a single gas and electricity market across the
two sovereign jurisdictions in Ireland. The stated goals of the All Island
Project are…
·
Increased competition amongst suppliers.
·
Downward pressure on costs.
·
Improved security of supply.
The key step in the All Island Project
The first step in the All Island
Project was the development of a Single Electricity Market based around a pool
into which all generation must be sold and from which all energy consumed
within or exported from Ireland must be purchased from. The SEM high-level
design was completed in June 2005, whilst version 1.0 of the Trading &
Settlement Code was published in February 2006. Even more recently the legal
framework for the SEM went was enacted in both jurisdictions on 3rd
July 2007 in preparation for the commencement of the SEM on 1st
November 2007.
Governance arrangements
Because the All Island Project is
a joint initiative between two separate sovereignties, the CER and the NIAUR
will refer all SEM issues to a joint Committee for consideration. Similarly the
operation of the SEM will be jointly managed by EIRGrid
and SONI under recently issued licenses.
Pipes & Wires will make
further comment once the SEM kicks off in November.
Aus – incentivising transmission
reliability
Introduction
Unplanned transmission outages can
and do disrupt the proper functioning of energy markets by forcing the use of
out-of-merit generation. This article examines the reasoning behind a recent
discussion paper by the Australian Energy
Regulator to strengthen the linkages between transmission reliability and
energy market outcomes.
Linkages between reliability and market efficiency
The AER has identified the
following three transmission issues that can impact on wholesale energy market
efficiencies…
·
Total Cost of Constraints (TCC) which is derived by modeling the
cost of generation in the absence of all constraints. The TCC can be highly
variable depending on whether a generator that is “constrained off” needs to be
replaced by a low or a high cost generator.
·
Outage Cost of Constraints which is similar to but slightly
narrower than the TCC in that it only considers the costs of transmission
outages rather than constraints in general.
·
Marginal Cost of Constraint which estimates how much the overall
generation cost would be reduced if a given constraint was reduced by 1MW.
Modeling and data compilation by
the AER has revealed that during the 2005/06 year 41 constraints in the
mainland interconnected grid resulted in a TCC of about $66m, which although
low in comparison to the value of energy being traded, is a significant
increase over previous years. Most of the constraints (by number) are between
the legacy state grids rather than within them. The OCC has risen over recent
years from about from 25% of TCC in 2003/04 to about 41% in 2005/06, showing
that outages are an increasing driver of lost energy market efficiencies.
The AER’s approach
The $66m mentioned above obviously
wouldn’t go very far in relieving 41 constraints, and indeed the AER recognises
this and takes the view that any incentives developed as a result of the
analysis should focus on operational processes rather than attempting to drive
CapEx programs. Some of the operational processes suggested by the paper
include…
·
Scheduling of planned outages away from known grid peaks.
·
Provision for re-scheduling or abandoning planned outages if power
flows alter prior to the outage.
·
Reducing outages through live-line work.
·
Encouraging customers to adopt demand-side reductions during grid
peaks.
·
Use of tactical upgrades to increase line ratings.
·
Better coordination of planned outages on adjacent or electrically
connected plant that say links two legacy state grids, or a generator and an
associated line.
The AER believes that individual
grid operators should be financially incentivised to consider practices such as
the above.
Next steps
The AER is accepting submissions
on the discussion paper until 17th August. As they reach
conclusions, Pipes & Wires will make further comment.
Global –
a few thoughts on asset renewals
Introduction
Last weeks steam pipe rupture in
Manhattan makes it timely to once again examine asset renewals. This article
considers what actually happened and then discusses a few principles of asset
renewal.
The events
The 83 year old steam pipe at the
middle of it all is owned by utility Consolidated
Edison, and was located at the corner of East 41st and Lexington
in mid-town Manhattan. It is thought that ingress of cold water possibly after
heavy rain may have caused the rupture. It not yet clear whether repairs to a
pipe joint in the general vicinity several months ago may be related to last
weeks rupture.
So what about the asset renewals
Proper debate on asset renewals
being condition driven and the funding of renewals within a regulatory regime
seems to have been unfortunately (but not surprisingly) lost in the frenzy that
old is somehow bad and events such as this are yet further evidence that
utilities are unaccountable and out of control.
So what can we make of all this
?? One way or another renewing aging infrastructure is going to be expensive …
really expensive. The American Society Of Civil
Engineers estimated last week that roading, airports and sanitary renewals
in the US alone will cost about $1,600b over the next five years – that
excludes gas, electricity and rail infrastructure. Similar figures may well be
applicable to other jurisdictions.
If we consider that $1,600b
estimate for the US alone, even a 1% efficiency improvement through more
accurate timing and scoping of renewal, and more efficient work practices could
yield savings of about $16b over 5 years. On that very subject of improving
CapEx, I’m going to be presenting a presentation on “Getting the CapEx right”
at a conference in September, so if you’d like to be sent a copy of that
presentation after the conference, pick here.
France – update on the Suez – GDF merger
Introduction
Pipes
& Wires #60 noted that incoming Prime Minister Francios Fillon expected
to give the Suez – GDF merger a lesser priority than former PM
Dominque de Villepin had. This article briefly examines events over the last
month and considers where de Villepin’s “national energy champion” might end
up.
Recent events
The last month has seen the
following events…
·
Prime Minister Fillon wishes to take time to reflect on the deal,
but not necessarily delay it.
·
President Sarkozy seems to favor some sort of pan-national
consolidation of gas utilities to strengthen regional supply capacity, possibly
involving Spain’s SDG Gas Natural.
However this would require full privatisation of GDF, something Sarkozy
promised not to do when he was Finance Minister in 2004.
·
Trade union initiated court action postponed a GDF board meeting
at which a merger with Suez was to be approved.
So all in all it’s not looking
good on a number of fronts. As the giants like E.On,
EDF and ENEL
further consolidate the EU energy sector smaller players like GDF may not have
the time to sit and consider their options. It seems that the French government
is now faced with some very hard and conflicting issues for which a way forward
for “a national energy champion” is far from clear.
Ezra Scattergood, the father of municipal power
Ezra’s
early years and education
Ezra Frederick Scattergood was born in 1871
(not quite late 1800’s, but this is a good story) on a farm in New Jersey, and
at an early age decided to devote himself to a life of public service. He went
on to complete a BSEE degree at Rutgers
University and a Master’s degree in mechanical engineering at Cornell University some time around 1897.
Over the next five years he tutored electricity and experimental engineering at
the Georgia School of Technology and
married Lulie Chilton.
The
shift out west
In 1902 Ezra and Lulie shifted to Los Angeles
and in 1906 Ezra was retained by the City Of
Los Angeles as its consulting engineer to extract hydroelectric power from
the recently built 233 mile long Owens River Aqueduct. Ezra’s involvement in
the aqueduct projects shaped his belief that Los Angeles destiny lay in
providing cheap water and electricity, and moreover that the municipality
should provide it. This vision obviously did not go unnoticed as Ezra was
appointed the chief electrical engineer of the Bureau of Los Angeles Aqueduct
Power in 1909, and two years later when the Bureau’s charter was amended to
establish a municipal power system Ezra was confirmed as its chief electrical
engineer.
Ezra’s
years at the helm
Ezra’s appointment as Bureau chief in 1909
marked the beginning of an outstanding 31 year career as head of what is now
the LADWP. One of his first tasks was to
construct additional hydroelectric plants along the Owens River Aqueduct. The
success of these plants enabled the Bureau to buy out most of the private power
companies in the city area, including that part of SoCalEd’s
network that was within the city of Los Angeles which was purchased in 1922
(history records that the battle between public and private power was already
intense by this early stage).
Ezra also continued pursuing his vision of
cheap electricity to underpin growth by advocating the construction of the
Boulder Canyon Dam (originally planned to be called Hoover Dam, which it subsequently
became in 1947) which was finally approved by Congress in 1928. Ezra
subsequently negotiated a $23m federal loan to construct 266 miles of 287.5kV
transmission lines into Los Angeles. These lines were the highest voltage lines
ever built at the time, and represented a leap beyond the well established
standard of 230kV which obviously required non-standard transformers.
Apparently the 287.5kV was simply 2,500x the standard 115V which was the limit
of the current insulation technologies and also of the tower design and
conductor type chosen. The LADWP subsequently became an industry leader in EHV
transmission that even the manufacturers sought advice from.
In 1937 the Bureau of Power & Light was
merged with the Bureau of Water Works & Supply to form what we now know as
the LADWP. The LADWP subsequently became the sole electricity distributor
within the city by buying the electricity network of the Los Angeles Gas &
Electric Corporation as Ezra continued his relentless focus on low cost
electricity. History also records that this may not have been a mutually agreed
transaction because the Charter of the City Of Los Angeles of 1925 appears to
have given the City a priority right to distribute electricity.
In the late 1930’s Ezra was appointed to the
National Power Policy Committee on Preparedness by President Roosevelt, whilst
continuing as chief electrical engineer of the LADWP until his retirement in
1940 at the age of 69. After retiring Ezra continued to advise the LADWP and
was a founding member of the APPA. Ezra
passed away in 1947, and was the subject of many tributes including that of
mayor Fletcher Bowron.
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).
·
NZIGE
Spring Technical Seminar – 17th – 18th September 2007
(Wellington).
·
East Africa
Power Industry Convention – 19th to 21st September
2007 (Addis Ababa).
·
Land Pipeline
Engineering – 25th – 26th September 2007 (New
Plymouth).
·
1st Annual Metering, Billing
& CRM Conference – 16th to 18th October 2007 (New
Delhi).
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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