From the director…
|
Welcome
to Pipes & Wires #63. This month we examine three price determinations in
Australia (two gas and one electricity) and also examine five deals in
various parts of the world that are in various stages. Your
feedback on the general condition of the infrastructure in your country and
sector would be much appreciated. I’ve also decided to start each issue with
a quick “matters requiring attention” column for the New Zealand electricity
lines sector. This
article concludes with a quick look at the live and accomplishments of one of
New Zealand’s electrical pioneers, Tom Overton. So happy reading until next
month. |
About Utility Consultants
Utility Consultants Ltd is a
management consultancy specialising in the following aspects of energy and
infrastructure networks…
|
|
|
|
To be sent a detailed profile of
recent projects, pick
this link.
NZ – matters requiring attention
Requirement to implement a public safety management system (PSMS)
The Electricity Amendment Act
2006 and the Gas Amendment Act 2006 both spell out the requirement for Safety
Management Systems. These Acts set out what any Regulations made under the
respective Acts must include and what it may include. A PSMS must
provide for…
·
The systematic identification of existing hazards, and of new
hazards (if possible before they arise, otherwise as they arise).
·
The taking of all practicable steps to eliminate, isolate or
minimise those hazards.
·
The regular assessment of each hazard identified.
·
The documentation of the SMS.
·
The audit of the SMS.
A PSMS may include…
·
Requirements relating to the design, construction, operation,
maintenance and inspection of the systems.
·
Requirements relating to the security and control of access to the
systems.
·
Requirements relating to the skills, knowledge and experience of
persons who do, or assist in doing, work on or in connection with the systems.
·
Requirements relating to the implementation and management of
contingency plans for emergency situations that affect or be affected by the
systems.
·
Requirements for processes for on-going improvement of safety in
connection with the systems.
·
Requirements for the investigation of accidents that involve or
affect the systems.
If you would like further
information or simply to chat about how a PSMS might work for you, pick here.
Requirement to facilitate connection of distributed generation
The Electricity Governance (Connection of
Distributed Generation) Regulations 2007 came into force on 30 August 2007. Key features of the Regulations are as follows…
·
The requirement to establish a process by which generators can
apply to a lines business to connect generation.
·
Setting out regulated terms and conditions for connecting
distributed generation if the generator and lines business cannot agree on
acceptable terms.
·
Establishment of a default dispute resolution process.
·
Defining the pricing principles that a lines business must apply
when setting connection charges.
·
Setting maximum fees for processing connection applications and
inspecting prior to commissioning.
For more information or just to
chat about how your company can comply, pick here.
Aus – draft Victorian gas pipes
determination
Introduction
Pipes
& Wires #59 discussed the access arrangements sought by Envestra, Multinet, SP AusNet and Envestra Albury
(cross-vested from NSW to Victoria) for the third control period from1 January
2008 to 31 December 2012. This article examines the Essential Services Commission’s draft
determination released late last month, and anticipates the final determination
later in 2007.
Legal basis for determining pipeline access arrangements
The ESC is authorised by the
Essential Services Commission Act 2001 to regulate industries specified in
Section 3 of the Act within the state of Victoria. The ESC is required to
follow the specific procedures set out in the Gas Code when it considers the
access arrangements proposed by gas pipeline owners.
The access arrangements sought by the operators
All four distributors sought a
negative P0 (an increase at the start of the control period) whilst
Envestra also sought negative X’s for both of its businesses (increases in
excess of inflation). Multinet and SP AusNet proposed tariff decreases.
Key features of the draft determination
In forming its draft
determination the ESC concluded that none of the 4 proposed access arrangements
complied with the requirements of the Gas Code and must therefore be declined.
Key reasons for the ESC’s conclusions include…
·
Proposed CapEx was too high.
·
Proposed OpEx was too high.
·
Proposed gas throughput was too low.
·
Proposed rates of return on capital were too high. In particular
the ESC determined a draft equity beta of 0.7, which is towards the top end of
its assessed range of 0.5 to 0.8. This issue will be discussed in a specific
article in Pipes & Wires #64.
Key features of the draft
determination include…
Parameter |
Envestra Victoria |
Envestra Albury |
Multinet |
SP AusNet |
|
Prima facie P0 (applies 2008) |
Sought by business |
-5.1% |
-5.5% |
-3.0% |
-9.2% * |
Draft determination |
5.7% |
11.4% |
15.5% |
7.8% |
|
X factor (applies 2009 to 2012) |
Sought by business |
-3.9% |
-3.9% |
1.0% |
0.0% |
Draft determination |
1.0% |
1.0% |
3.0% |
2.5% |
|
Total revenue |
Sought by business |
$761.2m |
$24.9m |
$793.7m |
$864.7m |
Draft determination |
$643.4m |
$20.5m |
$653.8m |
$730.9m |
* This is a revised figure from
that originally proposed by SP AusNet.
The ESC expects to release its
final decision around mid-November, so hopefully Pipes & Wires #65 will be
able to provide further analysis.
NZ – Vector considers its options
In one of those surprising but
not-so-surprising moves, Vector’s announcement of annual results for the year
ending 30 June 2007 included the news that Vector had received several
expressions of interest in buying the Wellington and Hutt Valley electricity
networks. Because Vector itself and possibly those interested in buying the
networks are listed companies this article simply flags a possible deal to set
some context for future analysis.
If and when any deal happens
Pipes & Wires will provide some analysis.
France – the GDF Suez merger
Introduction
The big news of this month is
that France gets its national energy champion. Speculation that new PM Francios
Fillon expected to give the Suez – GDF merger a lesser priority than former PM
Dominque de Villepin seems to have taken an about face as the formation of GDF
Suez was announced earlier this month.
Background
The last few years have seen
France and Spain growing increasingly anxious about energy security and national
energy sovereignty, perhaps more so as E.On
acquired Ruhr Gas and then went on the
prowl for more. Previous issues of Pipes & Wires have considered both de
Villepin’s desire to see a national energy champion emerge (which ultimately
gazzumped ENEL’s hostile bid for Suez) and
President Sarkozy’s promise not to privatise.
The merged company
The merged company is expected to
have a market cap of about €90b, annual revenues of about €72b and an EBITDA of
about €11b placing it within the top 3 largest utilities worldwide. The French
government will have a 35% stake in GDF Suez making it the largest shareholder.
As part of the deal Suez environmental activities will be spun off in an IPO.
The reshuffled European energy market
The European energy market seems
to be in a state of reshuffle … the recent acquisition of Endesa by ENEL including the on-sale of €10b
of businesses to E.On, and Iberdrola’s
acquisition of ScottishPower have
certainly caused step changes in the industry structure. It is also quite
likely that the possible move by the EU to require separation of lines and
energy will precipitate further consolidation of lines businesses (as it did in
New Zealand). However the formation of a company as big as GDF Suez will
undoubtedly heighten the urgency for other obviously acquisitive utilities such
as E.On, ENEL and possibly SDG Gas Natural
to gain further scale.
A possible role for EDF in the market consolidation
Amongst all the frenzy it would
be easy to overlook Electricité de France and
the role it might play in consolidation. It would also be easy to forget (at
least from this end of the world) that EDF owns EDF Energy in the UK, EnBW in Germany and EDENOR in Argentina.
Presumably Sarkozy’s promise not
to privatise GDF presumably also applies to EDF (noting that French law
requires the Government to retain 50%) however that doesn’t rule out the
possibility of some future tie up of EDF with GDF Suez. Like all these things,
time will tell.
Aus – gas under pressure
Introduction
Last month the ACCC recently released its final
determination in regard to the Dawson Valley coal seam methane pipeline in the
Australian state of Queensland for the control period starting on 5 September
2007. This article examines the parameters sought by Anglo Coal, and determined by the ACCC.
The
pipeline
The Dawson Valley Pipeline (DVP) is a nominal
150mm pipeline that stretches 47km from the Dawson Valley coal seam methane gas
fields to the Wallumbilla to Gladstone Pipeline. The pipeline was constructed
in 1996 and has a maximum daily capacity of about 30TJ. It is owned by Anglo
Coal and Mitsui Moura Investment Pty Ltd.
Legal
framework for regulation
The DVP became a covered pipeline when the Gas Code came into effect in
Queensland in 2000 but that coverage was subsequently revoked later that year.
No access arrangement was put into place during the brief period of coverage.
In May 2006 the Queensland Minister for Industry, Tourism & Resources determined
that the DVP should once again be a covered pipeline under the Gas Code,
thereby requiring the ACCC to approve an access arrangement proposed by the
DVP’s owners.
Key
features of the determinations
Key features of the AER’s draft and final
determinations are as follows….
Parameter |
Sought by Anglo |
ACCC draft decision |
ACCC final decision |
OpEx |
A$651,000
for Y1 escalating at CPI |
A$378,441
for Y1 |
A$378,441
for Y1 |
Nominal return on equity |
11.74% |
11.97% |
11.97% |
Post-tax nominal WACC |
8.86% |
|
|
Nominal vanilla WACC |
|
9.08% |
9.08% |
Expected opening RAB |
A$7.641m |
|
A$7.600m |
Reference tariff |
A$0.406/GJ
of MDQ |
|
A$0.329/GJ
of MDQ |
Global infrastructure – reader response
Is our infrastructure in crisis,
just groaning or is it mostly fine?? Pick the link to tell me your view on the
general condition of infrastructure in your country and the sector(s) you work
in. All individual responses will remain strictly confidential, however I would
like to summarise the results for a conference paper in November.
·
Groaning
Aus – draft Victorian wires determination
Introduction
Late last month the AER released its draft determination for SP AusNet’s transmission grid in the
Australian state of Victoria for the six year control period starting on 1
April 2008 and ending on 31 March 2014. This article briefly examines the legal
framework of the price control and compares the AER’s draft determination with
the parameters sought by SP AusNet.
Legal
framework
The function of economic regulation of
monopoly transmission services was conferred upon the AER on 1 July 2005 by the
National Electricity Law and
the National Electricity Rules.
The SP Aus Net draft determination was released under the new Chapter 6 of the
Rules which commenced on16 November 2006. Because SP AusNet was required to
submit its proposed access arrangements by the end of February 2007 whilst the
AER was not required to publish transmission guidelines until September and
October 2007, a number of transitional provisions apply.
Key
features of the draft determination
Key features of the AER’s draft determination
include…
Parameter |
Sought by SP AusNet |
AER draft decision |
CapEx |
A$855.26M |
A$679.04m |
OpEx |
A$1,034.34 |
A$929.50m |
Nominal vanilla WACC |
8.85% |
8.85% |
Expected opening RAB |
A$2,222.93m |
A$2,203.45m |
X factor |
-3.22% |
-1.52% |
Revenue |
A$419.53m
in Y1 increasing to A$570.36 in Y6 |
A$410.56
in Y1 increasing to A$513.25 in Y6 |
Pipes & Wires will make further comment
when the AER releases its final determination.
CapEx – general interest stuff
Getting the CapEx right in the infrastructure sectors
This presentation was made at the
NZIGE Spring Technical Seminar earlier
this month. If you’d like a copy, pick here.
Renewals – (half) the hidden side of CapEx
I’m expecting to present this paper
at the Electricity
Network Asset Management Summit in November on
the broad topic of asset renewals. To pre-order a copy of this paper (to be
delivered after the event) pick here.
PAS 55 – the emerging standard for asset management
To find out more about improving
your asset management activities through adopting the emerging global standard
for asset management PAS 55-1:2004 pick here
or call Phil on +64-7-8546541, or to request a Slide Show on implementing PAS
55-1 pick here.
Website promoting best practice CapEx
Utility Consultants is pleased to
announce the release of a specialist website
dedicated to promoting best practice CapEx policies, processes and planning in
the infrastructure sectors.
US – the TXU sale proceeds
Introduction
Pipes
& Wires #57 and #58
briefly examined Kohlberg Kravis Roberts and Texas Pacific Group’s bid to
privatise TXU. Earlier this month over 95% of
TXU shareholders voted in favor of the sale proceeding. This article briefly examines
the terms of the deal and some of the surrounding issues.
The deal
KKR and TPG will pay US$69.25 per
share for TXU comprising a total of US$32m in cash and assumption of US$13 in
debt.
Industry and public policy issues
Unlike the big deals going on in
Europe, the TXU sale will not of itself consolidate the industry so there are
no obvious competition concerns. However the FERC
was still required under s203 of the Federal Power Act to confirm that the
transaction is “in the public interest” (refer table below). The following two public
policy issues also emerged…
·
Consumer lobby group concerns that a private owner would increase
electric rates, and that a previous commitment to reduce tariffs by 10% was
insufficient.
·
Environmental lobby group concerns that led KKR and TPG to propose
abandoning 8 of the 11 planned new coal-fired stations. This in turn led to
state government concern about meeting demand.
The regulatory and legislative approvals
The required regulatory and
legislative approvals were as follows….
Issue |
Agency |
Specific requirements |
Status |
Nuclear safety |
Approve transfer of operating
license for Comanche Peak power station from TXU to new holding company. |
Completed. |
|
Assurances that interstate
aspects of transaction wouldn’t harm competition |
Confirm that transfer of
ownership of interstate assets will not harm competition, tariffs or
regulation, result in cross-subsidisation of any non-utility associates, or
breach any pledges of encumbrance. |
Completed. |
|
Proposal to abandon 8 proposed coal-fired
plants |
Requested assurance that
abandoning proposed coal-fired plants wouldn’t drive up gas prices and leave
Texas with an unacceptably low capacity margin. |
Appears he did not get this
assurance. |
|
More scrutiny at state level |
Senate plans to force the sale
to be examined in more detail by the TPUC. |
Passed by Senate, not completed
by end of House session. |
|
Senate proposal to force TXU to
sell generation plants |
Sen. Fisher |
Bill passed by the Texas Senate
would prohibit any one company from owning more than 25% of the generation in
any one region. |
Not completed by end of Senate
session. |
Approval of the sale |
Under Texas law approval of the
TPUC was not required, however the Senate wanted the TPUC to have the right
of veto. |
Failed. |
|
Anti-trust clearance |
Review mergers and acquisitions
pursuant to the Hart Scott Rodino Act |
Granted early termination. |
The tightening credit markets
Fortunately the KKR and TPG consortium
managed to lock in its financing early this year before the credit crunch
happened. Many commentators including existing TXU shareholder Franklin
Resources have remarked that this credit crunch makes a better offer very
unlikely and that shareholders should accept the offer. It is understood that
some of the large banks may be having trouble capturing the interest of retail
investors, although official comment from TXU denies this. Hence there is still
a small possibility that KKR and TPG may not be able to obtain finance.
Thanks to the team at Spiegel & McDiarmid in Washington DC
for their help in compiling this article.
UK – water under pressure
Introduction
Earlier this year Southern Water’s owners, the Royal Bank of Scotland’s private equity
division, engaged Deutsche Bank to advise on a
possible sale of Southern, with first round bidding closing at the end of last
month. This article examines some of the bids that were received, and also
looks at the regulatory framework.
The bidders
It appears that the following
parties submitted bids, thought to be in the region of £4b…
·
JP Morgan Asset Management
in conjunction with Macquarie Bank
(although it is understood that Macquarie is acting primarily as an advisor).
·
Goldman Sachs in
conjunction with GE Capital and Prudential’s investment division Infracapital
Partners.
·
Deutsche Bank’s infrastructure group RREEF.
Regulatory discomfort with private equity
It seems that the possible
increased involvement of private equity is causing some regulatory discomfort….
·
It is thought Macquarie’s involvement in Southern could trigger
regulatory concern in regard to their existing stake in Thames Water, as concern over
investment in more than 1 water utility has been expressed in the past (refer
to Pipes
& Wires #11 and #16
in which concern was expressed about any mergers that would reduce the number
of comparators available to regulators). The determining factor may well prove
to be whether Macquarie only plays an advisory role or whether there is some
equity participation.
·
Long-time readers may recall that OFWAT expressed concern about increasing
ownership of water utilities by banks (both in regard to Southern Water and Dwr Cymru Welsh Water) and required a
minimum number of non-executive directors on the board of any water utility
owned by a bank
Pipes & Wires will make
further comment as the sale process progresses.
US – Iberdrola takes a tilt at Energy
East
Introduction
News emerged recently that
Spanish utility Iberdrola will buy US
utility Energy East for €3.4b in a
cash plus debt assumption deal. This article examines Iberdrola’s recent past,
the recent formation of national energy champions in Europe, and what this
particular deal might represent in terms of waves of global investment.
Iberdrola’s recent past
Iberdrola first came on to the global
utility stage around March 2003 when SDG
Gas Natural unveiled
its unsolicited bid for 100% of Iberdrola’s share capital. Readers may recall
that the stock markets judged this deal very harshly and Gas Natural abandoned
the bid after the National Energy Commission (CNE) declined approval to proceed.
More recently in
early 2007 Iberdrola successfully acquired ScottishPower to become the third
largest utility in Europe.
An energy champion for Spain ??
The formation of national energy
champions has been a recent theme in Pipes & Wires. We have seen how
Germany got its national energy champion when E.On
acquired Ruhr Gas, and how France got its
energy champion with the GDF – Suez merger. Spain’s national energy champion
is perhaps less clear on two dimensions…
·
There is no obviously dominant Spanish energy giant that can give
effect to national energy security objectives to the same extent that say GDF
Suez or E.On can.
·
Iberdrola’s influence will be diluted across the UK and possibly
in the US rather than consolidated in a concentrated home patch.
So even if the Energy East deal
is successful it’s probably stretching it to say Spain now has its national
energy champion.
The global waves of investment
Global utility investments to
date have fallen into five identifiable waves as follows…
Wave |
Timing |
Direction |
Predominant strategy |
1st |
Late 1980’s |
European and US utilities
investing in Latin America. |
Positional, investigative |
2nd |
Early 1990’s |
US utilities investing in the
UK and in Victoria, Australia. |
Investigative, traditional,
transformational |
3rd |
Late 1990’s |
US utilities began to withdraw
from the UK and from Victoria, Hong Kong and Singaporean utilities invest in
Victoria, European utilities begin to merge. |
Positional, investigative,
Traditional |
4th |
Early 2000’s |
US withdrawal from New Zealand
and the UK, European investment in the UK and the US. |
Positional, traditional |
5th |
Mid 2000’s |
Continued consolidation of
European utilities through mergers, some backward integration into Russian
gas suppliers |
Positional, transformational |
Certainly the 4th and
5th waves are not as clear cut as the 1st and 2nd
waves (which were driven by privatisations), so maybe Iberdrola’s move into the
US is a continuation of the 4th wave – its hard to identify a
pattern from so few data points.
Anyway Pipes & Wires will
make further comment as this deal proceeds.
Tom Overton, rural power pioneer
This article continues our examination of the
lives of people born in the late 1800’s who have significantly shaped the
electricity industry that we know today. The subject of this article, Tom
Overton, seems to have been one of about 4 or 5 larger than life characters
that fundamentally shaped the way electricity is distributed in rural New
Zealand over his 45 years in the industry.
Tom’s
early years and formal education
Thomas Richard Overton was born in 1886 in
the small town of Henley near Dunedin and later attended the King Edward
Technical College (now Otago Polytech) and the Otago School of Mines (since incorporated
into the University of Auckland). It is likely that Tom may have attended Tech
and the School of Mines on a part-time basis whilst working, which was not
uncommon back then.
Life
before electricity
Tom started his working life in 1900 at the age
of 14 and spent six years in the engineering department of the New Zealand
Railways. He then spent one year with the Dunedin City Council drainage
department.
Tom
enters the world of electricity
With seven years of engineering experience
under his belt Tom joined the Dunedin MED around 1907. He spent five years
working his way up to assistant engineer, and apart from fighting in WW1 with
the Maori Battalion and the Royal Engineers, he stayed with the MED until 1920.
Tom then spread his wings for the north island and notched up the following
impressive record of service…
·
Dunedin
MED (1907 – 1920).
·
Central
Waikato Electric Power Board (1920 – 1924).
·
Horowhenua
Electric Power Board (1924 – 1926).
·
Franklin
Electric Power Board (1926 – 1930).
·
South
Taranaki Electric Power Board (1930 – 1936).
·
North
Auckland Electric Power Board (1936 – 1952).
Whilst Tom was at South Taranaki in the early
1930’s he convened a meeting of local electricians which led to the formation
of the NZ Institute of Electricians. He also appears to have played a leading
role in designing and building a small hydro station at Dawson Falls on the
southern slopes of Mouth Egmont.
Little is recorded of Tom’s later life other
than his death in 1959 at the age of 73.
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
·
iPAD Central Africa – 9th
to 12th October 2007 (Kinshasa).
·
1st Annual Metering, Billing
& CRM Conference – 16th to 18th October 2007 (New
Delhi).
·
Electricity
Network Asset Management Summit – 20th to 21st
November 2007 (Wellington).
·
Inaugural
Advanced Metering Summit – 27th November 2007 (Auckland).
Any old books in your library ??
I’m looking for old books and
magazine articles on electricity industry and borough council history,
especially books like jubilee celebrations of utilities or back copies of the
old “Live Lines”. If you’ve got any old books like this that you don’t wish to keep
please send them to me.
Tell me how good this issue was…
Please pick one of the links
below to tell me what you think of this issue of Pipes & Wires…
·
Good
·
Average
·
Poor
If you get this is a hard-copy,
your comments can be emailed to issue#63@utilityconsultants.co.nz
If you receive this second-hand by email, you can receive Pipes & Wires
directly by picking here.
Opt out from Pipes & Wires
Pick this link
to opt out from Pipes & Wires. Please ensure that you send from the email
address we send Pipes & Wires to.
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.