From the director…
Welcome to Pipes & Wires #65.
This is the second edition in a new format that will hopefully make it easier
to find your areas of specific interest. This issue examines…
·
Electricity transmission determinations in Australia and Ireland.
·
Wider regulatory policy issues in Australia and Germany.
·
The sale of Southern Water and likely on-sales arising from the
GDF Suez merger.
·
Facilitating transmission for renewable energy in New Zealand
·
Lifting of the retail electricity and gas tariff caps in
Australia.
·
The drivers that are likely to influence the reshaping of the
European energy sector.
So until next issue, happy
reading….
About Utility Consultants
Utility Consultants Ltd is a
management consultancy specialising in the following aspects of energy and
infrastructure networks…
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NZ – matters requiring attention
Review of information disclosure regime
The Commerce Commission intends to
issue a consultation package on the information disclosure regime in late
November 2007 in anticipation of the revised Requirements being available in
late March 2008. Read
the full notice.
Proposed change to ODV disclosure date
The Commerce Commission does not
intend requiring electricity lines businesses to undertake a full ODV update as
at 31st March 2008, but proposes instead that this be deferred until
31st March 2009. Read
the full notice.
Requirement to facilitate connection of distributed generation
The Electricity
Governance (Connection of Distributed Generation) Regulations 2007 came
into force on 30 August 2007. For more information or
just to chat about how your company can comply, pick here.
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. If you
would like further information or simply to chat about how a PSMS might work
for you, pick here.
Review of Part 4A of the Commerce Act 1986
A cabinet decision is expected by
the end of this calendar year. Any legislative changes will follow in the 2008
calendar year.
Section 62 (Obligation to continue supply) review
A cabinet decision is expected by
the end of this calendar year. Any legislative changes will follow in the 2008
calendar year.
Transmission for renewables
Following the introduction of a
target of 90% of electricity being generated by renewables by 2025, the
Electricity Commission has embarked on a Transmission
to Enable Renewables program that will include an explanation of how Part F
of the Electricity Governance Rules might work, and a renewables map that will
feed into the next Statement Of Opportunities.
Aus – SP AusNet presents revised proposal
Introduction
Pipes
& Wires #63 examined the Australian
Energy Regulator’s 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 examines the changes in key parameters in the revised revenue proposal submitted
by SP AusNet in October 2007 in response to the draft determination.
Key features of the revised proposal
Key features of the proposals and determinations
to date include…
|
Parameter |
Originally proposed by SP AusNet |
AER draft decision |
Revised proposal by SP AusNet |
|
CapEx |
A$855.26m |
A$679.04m |
A$838.8m |
|
OpEx |
A$1,034.34m |
A$929.50m |
A$987.3m |
|
Nominal vanilla WACC |
8.85% |
8.85% |
8.85% |
|
Expected opening RAB |
A$2,222.93m |
A$2,203.45m |
A$2,190.8m |
|
X factor |
-3.22% |
-1.52% |
-2.35% |
|
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 |
A$414.0m
in Y1 increasing to A$539.6m in Y6 |
The AER has consulted on this
revised proposal. Pipes & Wires will make further comment once the AER’s
final determination emerges.
Ireland – electricity transmission determination
Introduction
Electricity transmission in
Ireland is currently subject to a five year price control over the period 2006
to 2010. The Commission for Energy Regulation’s
recent transmission determination has set out three components within this
overall control period…
·
The ex-post allowed revenue for 2006.
·
The revised forecast for 2007.
·
The ex-ante allowed revenue for 2008.
This allowed revenue is allocated
between EirGrid as the Transmission System
Operator and ESB Networks as the Transmission
Asset Owner.
Legal framework
The legal framework is the
Electricity Regulation Act 1999. Section 35 provides for the CER to determine
transmission revenues and tariffs.
Key components of the determination
Key components of the
determination are as follows…
|
|
Allowed in initial five year determination |
Revised amount sought |
CER determination |
|
Ex-post 2006 EirGrid revenue |
€124.73m |
€140.05m |
€139.15m |
|
Over-recovery of 2007 revenue |
|
|
€40.5m |
|
Ex-ante 2008 EirGrid revenue |
€134.52m |
€93.97m |
€91.07m |
There are a number of issues that
have required tariffs to be revised, two of which are the formation of the
Single Electricity Market (SEM) in November 2007 and the introduction of
harmonized all-island generator connection tariffs in January 2008.
Regulatory & competition policy
Aus – Moomba - Adelaide pipeline coverage revoked
Introduction
In March 2005 the National Competition Council received an
application from Epic Energy to revoke
coverage of the Moomba – Adelaide Pipeline System (MAPS) pursuant to Sections
1.24 and 1.25 of the National
Third Party Gas Access Code. In September 2007 the South Australian
Minister for Energy, the Hon. Patrick Conlon, granted the requested revocation
which took effect on 30 September. This article examines what coverage is, why
it might be revoked in a general sense, and why the MAPS coverage was revoked.
What exactly is a covered pipeline ??
A covered pipeline is essentially
a pipeline for which the terms and pricing for access are regulated because
that pipeline exhibits monopoly characteristics. A covered pipeline will be
included in Schedule A to the National Third Party Gas Access Code which inter alia requires the pipeline owner
to do two key things…
·
Submit an access arrangement to the jurisdictional regulator for
approval.
·
Allow third party access to its pipeline on terms approved by that
regulator.
If that coverage is revoked the
pipeline owner does not have to submit an access arrangement for approval, and
perhaps more importantly, can provide third party access on a negotiated basis.
Why would coverage be revoked ??
Section 1.9 of the Gas Code sets
out four criteria for coverage of a pipeline of which any one must be met….
·
That access (or increased access) to services provided by the
pipeline in question would promote competition in at least one market other
than the market for services provided by the pipeline in question.
·
That it would be uneconomic for anyone else to develop a pipeline
to provide the services provided by the pipeline in question.
·
That access (or increased access) to the services provided by
means of the pipeline in question can be provided without undue risk to human
health and safety.
·
That access (or increased access) to services provided by the
pipeline in question would not be contrary to the public interest.
Section 1.31 of the Gas Code
prohibits the National Competition Council from recommending revocation unless
it considers that the pipeline does not meet any of these four criteria.
Revocation of the MAPS coverage
The NCC concluded that while Epic
might have a monopoly between Moomba and Adelaide, its ability to exploit that
monopoly is limited by a number of factors including access to the Victorian
gas fields via the SEA Gas
pipeline, the counter-veiling power of its customers (both size and
information), the ability of gas retailers in Adelaide to use swaps to bypass
the MAPS and the development of the QSN pipeline by Australian Gas Light. The Minister
subsequently endorsed the NCC’s conclusions.
Europe – the Volkswagen law
Introduction
In late October the European Court of Justice ruled that a
German law dating from 1960 shielding Volkswagen
from hostile takeovers breached the EU’s founding treaty that provides for free
movement of capital and goods. This article considers the implications of that ruling
in regard to the formation of national energy champions.
Background
The formation of national energy
champions to strengthen national security of energy supply has been a dominant
theme in Pipes & Wires over the last year or so. The approaches used by
both the French and Spanish governments (and seemingly also by the German
government in regard to E.On’s takeover of Ruhr Gas about 4 years ago) include requiring
high-level government approval of such takeovers, or requiring the deals to
contribute to national energy policy objectives. Some of the deals where such
protectionist policies may have been used include…
·
The Spanish government’s blocking of E.On’s takeover of Endesa.
·
The French government’s blocking of ENEL’s
takeover of Gaz de France.
·
The German government’s preference for Ruhr Gas to be acquired by
a German company.
The implications of the court ruling
A key implication of the ruling
is the requirement for governments to relinquish ownership stakes or structures
that in particular give them voting rights disproportionate to their shareholdings.
In particular this requires Spain to give up its special rights in Endesa and
Italy to give up its golden shares in ENEL. At this stage it does not appear
that any retrospective sanctions will be applied such as fines or ordering any
deals to be unwound.
Depending on exactly how the EU
requirements to unbundle lines and energy shape up, this ruling could prove
very timely.
Aus – transmission pricing methodology guidelines
Introduction
The basis on which a transmission
grid operator gathers revenue from individual connected customers will usually
always be a contentious issue. This article examines the Australian Energy Regulator’s (AER) final
transmission pricing methodology guidelines that were released in late October
and will apply to all transmission businesses from 29 October 2007.
Legal basis for establishing the methodology
The prevailing legal framework is
the National Electricity Rules.
In particular Rule 6A.25.1(a) requires the AER to prepare guidelines for
transmission pricing methodologies. The guidelines inter alia address the following….
·
The pricing structures that can be used to recover the locational
component of providing prescribed transmission services.
·
The permitted postage stamp pricing structures for prescribed
common services.
·
The recovery of the adjusted non-locational component of providing
prescribed transmission services.
·
The types of system assets that are directly attributable to each
category of prescribed transmissions services.
Requirements of a pricing methodology
Some of the more salient
requirements of a compliant pricing methodology are…
·
Details of the annual total revenue requirement, including details
of how O&M costs are derived.
·
How the costs of prescribed transmission services will be
allocated amongst users.
·
How the costs of prescribed entry services and exit services will
be allocated to connection points, especially where there may be multiple
users.
·
Prices for recovering the locational components of prescribed
transmission services must be based on the demand at the time of greatest
utilisation.
Any methodology seeking approval
must also outline how its various components will comply with the guidelines and
how its overall methodology is consistent with the pricing principles set out
in the Rules.
Disclaimer
This article is by necessity a
summary of the AER’s guidelines document. Reference to the full document on the
AER’s website must be made before making any decisions on this matter.
Mergers,
acquisitions & take-overs
UK – the Southern Water sale
Introduction
Pipes
& Wires #63 examined the Royal Bank of
Scotland’s plans to sell Southern
Water. This article examines the completion of the sale to a consortium of
investment funds led by JP Morgan for
£4.2b and then goes to examine why Southern Water was considered such a good
buy.
Details of the deal
The deal includes the assumption
of £2.8b in debt whilst key equity participants include JP Morgan (£380m), Challenger
Infrastructure Fund (£300m) and UBS
(£200m). This sale price of £4.2b represents a doubling of RBS’s investment of
£2b in 2003 when it bought Southern Water from the French environmental
services company Veolia.
Competing bids were led by Goldman Sachs and by Morgan Stanley.
Southern Water’s investment characteristics
The sale price represents 1.35x
Southern Water’s regulatory asset value (RAV), which is a slight premium over
the 1.2x to 1.3x that Thames Water
sold for last year and a considerable premium over the 1.1x that Severn Trent Water has traded at. So why
is Southern Water so obviously sought after ??
Part of the reason seems to be
the growing population in the south-east of England which gives Southern good
growth prospects. In addition Southern is perceived as a well managed business,
among regulated utility industries which are seen as fairly safe as Britain emerges
from the credit crunch.
The UK water industry’s investment characteristics
As mentioned above, the water
sector is increasingly seen as a safe investment after the credit crunch for
all the infrastructure money looking for a home but also because there are
still a few years left of the present control period (which effectively locks
in returns). It is thought that Northumbrian,
Severn Trent, Pennon
and Yorkshire Water’s owner Kelda might also be subject to take-over
bids, so Pipes & Wires will make further comment if and when these happen.
Europe – the spoils of the GDF Suez merger
Introduction
Most large scale mergers require
at least some assets to be on-sold to ensure an acceptable level of competition
remains in the enlarged market(s). This article examines
the likely on-sale of assets from the recent GDF Suez merger.
Background
After
much political wrangling under the broad theme of creating a national energy
champion, the formation of GDF Suez has created the world’s third largest utility.
GDF Suez has a market cap of about €90b, annual revenues of about €72b, an
EBITDA of about €11b and is 35% owned by the French government.
Which assets will be on-sold ??
A review
by EU competition investigators concluded that the merger would have anti-competitive
effects in the following markets…
·
Wholesale and retail gas markets in Belgium.
·
Wholesale and retail electricity markets in Belgium.
·
Gas markets in France.
The major
concessions offered by both companies include…
·
Suez selling its 57.25% stake in Belgian gas utility Distrigas which
has annual revenues of about €4.6b and sells about 200,000 GWh of gas annually.
·
GDF selling (actually already sold) its 25.5% stake in Belgian
electricity supplier SPE to investment partner Centrica which already
holds 25.5%. SPE has annual revenues of about €2b.
·
Suez relinquishing control of its 57.25% stake in Belgian gas
transmission network operator Fluxys which has annual revenues of about €430m.
Possible buyers for these assets
Those
rumored to be lining up to bid for these assets shouldn’t come as any surprise
– E.On, RWE, EDF, ENEL, Iberdrola and Centrica (which
has already swooped on a 25.5% stake in SPE). As and when the deals unfold
Pipes & Wires will make further comment.
Public policy
NZ – transmission issues and wind farms
Introduction
The recent announcements of
several large wind farms comes as good news in the context that New Zealand has
committed itself to a new world economy in which carbon emissions have a price.
The announcement by the Electricity
Commission that it is undertaking a formal study into the transmission
requirements for large wind farms will no doubt come as a relief to many of us
who couldn’t help but wonder that such an important issue didn’t seem to be
being coherently addressed at a policy level.
Background
From the first very modest
installation of 3.85MW about a decade ago, wind farms in New Zealand have now
grown to (planned) installations of several hundred MW comprising up to 200 turbines
spread over several hundred square kilometers. Installations of this size
obviously require grid connection, but more importantly the remote location of
many planned farms could mean that some grid exit points (GXP’s) will become
injection points rather than loads. Now I’m certainly no expert in power flow
analysis but it’s not hard to spot that reverse power flows of several hundred
MW are going to have a big impact on grid operations and stability.
The Electricity Commission’s study
The study, entitled “Transmission
To Enable Renewable” (sic) will involve two key work blocks…
·
Developing an up-to-date map of wind, hydro and geothermal
locations and approximate sizes that will feed into the next Statement Of
Opportunities.
·
Examines how Part F of the Electricity
Governance Rules can be utilised to encourage transmission investment to
support renewable generation.
The Commission expects to publish
further information in December 2007 and also run a workshop.
Energy markets
Aus – lifting the retail price caps
Introduction
In early October the Australian Energy Markets Commission (AEMC)
released its first draft report on the effectiveness of retail electricity and
gas competition in Victoria. This article examines the reports conclusions and
recommendations.
Background
Under an agreement between the Ministerial Council on Energy (MCE) ministers
signed in June 2006 it was agreed that the AEMC would be requested to review
the effectiveness of retail competition in the gas and electricity markets in
all jurisdictions except Western Australia (where the Economic Regulation Authority would be
requested to undertake the review). A formal request from the MCE ministers to
the AEMC to undertake a review of Victoria was made in May 2007, and following
the issue of various papers and two public consultations, the Victorian first
draft report emerged.
Criteria for assessing effectiveness of competition
The criteria that the AEMC was
requested to assess the competition on were…
·
The level of independent rivalry within in the market.
·
The ability of suppliers to enter he market.
·
The exercise of market choice by customers.
·
Differentiation of products and services.
·
Prices and profit margins.
·
Customer switching behavior.
Conclusions and recommendations of the first draft report
The AEMC’s preliminary conclusion
is that competition in Victoria is effective. Evidence of this is as follows…
·
Consumers are exercising choice, both between product offerings
and between competing retailers.
·
There is strong rivalry between competing retailers.
·
There appear to be few entry barriers, and no shortage of either
established out-of-state retailers or start-up retailers.
·
Margins appear to be sufficient to attract and sustain new
entrants.
·
Although competition in electricity is more effective than gas,
gas is nonetheless very competitive as retailers seek to offer new gas products
including bundling with electricity.
The AEMC has also indicated that
if its final conclusion is similar to these draft conclusions it will be
required to examine ways of phasing out the current retail price regulation
arrangements. Pipes & Wires will make further comment when the AEMC’s final
report emerges.
Europe – the converging drivers
Introduction
The ownership structure of the
European energy sector seems to be continually reshuffling. This article
briefly examines some of the key drivers of that reshuffling to tie up the ends
of many previous articles and also hopefully shape some context for future
analyses.
The drivers
The key drivers would appear to
be…
·
The scramble to increase scale and scope by acquiring the few
remaining widely-held utilities.
·
The desire to form national energy champions to strengthen
national security of supply.
·
The EC’s likely unbundling requirement.
The unbundling requirement is
likely to be the next really big driver to emerge, and will almost certainly
prompt a flurry of deals as the big players decide whether to be energy
businesses or lines businesses.
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 will be presenting this paper
at the Electricity Networks 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.
Assorted 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
·
West Africa Power Industry Conference
– 19th – 21st November 2007 (Abuja).
·
Electricity
Network Asset Management Summit – 20th to 21st
November 2007 (Wellington).
·
Inaugural
Advanced Metering Summit – 27th November 2007 (Auckland).
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Disclaimer
These articles are of a general nature and
are not intended as specific legal, consulting or investment advice, and are
correct at the time of writing. In particular Pipes & Wires may make
forward looking or speculative statements, projections or estimates of such
matters as industry structural changes, merger outcomes or regulatory
determinations.
Utility Consultants Ltd accepts no liability
for action or inaction based on the contents of Pipes & Wires including any
loss, damage or exposure to offensive material from linking to any websites
contained herein.