From the director…
Welcome to Pipes & Wires #68.
This issue looks at some wider energy and public policy issues now that the
golden run of Australian regulatory determinations is coming to an end ...
interestingly enough, many of these articles focus on Spain and Germany
respectively. Some of these articles are brief as detailed information was not readily
available in English.
As always there’s a lot happening
in New Zealand, so be sure to check the “NZ – matters requiring attention”
section below to stay abreast of changes.
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NZ – matters requiring attention
Price threshold re-set
Submissions closed with the
Commerce Commission on Monday 18th February. The Commission expects
to publish a methodology paper, a draft decisions paper and a final decisions
paper in May/June, late September and December respectively. Read the full
article from Pipes & Wires #67.
Review of Information Disclosure Requirements
The Commerce Commission is currently
consulting on the Information Disclosure regime. Submissions close at 5pm
on 22nd February.
Review of Part 4A of the Commerce Act 1986
The conclusions of the review
were released in late November 2007. The broad conclusion was that fully
beneficially owned and governed electricity lines business should not be
subject to a price path threshold regime. Read the full
article from Pipes & Wires #66.
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 Government Policy Statement on Electricity
The GPS on Electricity is being
updated and revised to reflect the NZ Energy Strategy. A draft for consultation
was expected in late January or February.
Section 62 (Obligation to continue supply) review
A cabinet decision was expected
by the end of the 2007 calendar year, with any legislative changes expected to
follow in the 2008 calendar year.
Review of information disclosure regime
The Commerce Commission intended
to issue a consultation package on the information disclosure regime around 14 December
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.
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.
Low Fixed Charge Regulations
The MED has re-opened consultation
on the draft Regulations to give interested parties the opportunity to
comment on how well the draft Reg’s would give effect to the amendments in the
Electricity Act (but not to comment on the merits of the policy decision to
amend the Act). Submissions closed on 25 January 2008.
Review of Government Policy Statement on Gas Governance
The draft
version of the GPS on Gas Governance was released in December, and submissions
closed on 1 February 2008. Read the full article from Pipes & Wires #67.
Public policy
Estonia – import duties on
electricity ??
Introduction
One of
the closely held economic principles of the European Union is the free movement of goods, services and capital, which inter alia requires the removal of
duties or tariffs on imported goods. This article examines Estonia’s thoughts
for a duty on imported cheap Russian electricity.
The emerging issue
If and
when the EU and Russian electricity transmission grids are interconnected, EU
member states like Estonia will have access to cheap Russian electricity.
Recent concerns expressed by the Ministry of the
Economy suggest that such electricity
imports could be cheap enough to totally swamp Estonia’s own power industry
(which in terms of trade liberalisation is certainly nothing new or startling).
Where
this may become problematic is that Russian electricity is likely to be “cheap”
because it will not include EU carbon charges. So the following three issues
emerge, of which the last one would seem to conflict with the first two…
·
Barriers to free movement of goods would be inconsistent with EU
policy.
·
Grid interconnection fits well with established competition theory
that will “put downward pressure on prices”, and would also fit well with the
concept of removing barriers to free movement of goods.
·
Electricity that doesn’t include a carbon charge is unlikely to
sit easily with Brussels.
So it
will be interesting to see how the EU responds to Estonia’s thoughts. Pipes
& Wires will watch this one closely as it represents a clash of some very
deeply held ideals.
Energy markets
Spain & Portugal – progress
on the single gas market
Introduction
The European Union’s goal of a single energy market is gradually coming together as
provincial electricity and gas markets are consolidated into national markets,
and national markets are in turn consolidated into regional markets. This
article examines the formation of a single gas market in the Iberian Peninsula.
Background
Moves
toward a single gas market in Spain and Portugal began in October 2004. Prior
to this it had been noted that issues such as supply and demand balance, limits
to effective competition, transmission capacity and regulatory challenges would
need to be addressed. In late 2007 the Entidade Reguladora
dos Serviços Energeticos (ERSE) and the Comision Nacional de
Energia (CNE) started a public
consultation on the formation of the Mercado
Ibérico de Gás Natural (MIBGAS) which included a specific action plan for 2008.
Key achievements to date
The CNE
and the ERSE have already considered submissions from gas utilities in Spain
and Portugal (and interestingly enough from Gaz De France and the French Energy Regulator CRE), and have published their detailed proposals for the
organisational models and functions. Pipes & Wires will check progress in a
couple of months to see what has emerged.
Mergers,
acquisitions & take-overs
US – the Energy East acquisition
Introduction
Spanish
utility Iberdrola is in the process of acquiring eastern US utility Energy East, which will complement its’ western US business by giving it 3
million customers in the north east of the US. Following the FERC’s approval of the deal in December 2007, this article briefly examines
progress in gaining the approval of the state regulators and a sudden turn of
events in Europe that has prompted the New York Public
Service Commission to consider vetoing the deal.
Approvals to date
To date
the FERC, Massachusetts, New Hampshire, Connecticut and Maine have all
given their approval to the deal. Just by way of comment, the Maine approval
included 60 conditions ranging from balance sheet strength to commitments to
reinvest to what appears to be a commitment to withdraw from the New England
Power Grid which the Maine Public Utilities Commission believes is
fundamentally flawed.
On the
face of it that last condition should perhaps be a cause for concern, if in
fact regulators are making approval of deals conditional on implementing their
public policy preferences (as we caught a sniff of in the TXU privatisation).
Events in Europe
In
mid-February it was announced that Electricite De France and Spanish construction company Grupo ACS were sniffing around Iberdrola. Not surprisingly the Spanish
government is dead against this (and the almost certain spat with the EU over
this will undoubtedly find its way into Pipes & Wires in due course), but
of more relevance to this article is the state of New York’s request that the
Energy East deal be indefinitely blocked over fears that Iberdrola will be carved
up (and presumably the ability of Energy East’s subsidiaries to reinvest in
network assets will be threatened).
So what
seemed to be a reasonably straight forward process of gaining regulatory
approvals may unravel at the 11th hour. Pipes & Wires will continue
its coverage of the Energy East deal and the Iberdrola takeover bid as events
unfold.
Spain – Iberdrola comes under
attack
Introduction
News
emerged in mid-February 2008 that Electricite De France and Spanish construction company Grupo ACS were sniffing around Spanish utility Iberdrola. This article considers a number of issues associated with a
possible deal aside from the possible gazzumping of the Energy East deal in the US discussed in a parallel article in Pipes &
Wires #68.
The proposed deal
The
proposed deal could be worth about €50b, so it’s certainly up there in terms of
size. Grupo ACS already owns 13% of Iberdrola, but perhaps more importantly
also owns 45% of competing utility Union Fenosa. It would therefore come as no surprise that if the takeover was
successful that ACS would want to merge its stakes in Iberdrola and Union
Fenosa (which would no doubt comfort the Spanish government as it licks its
wounds over the failure to create a national energy champion).
Possible counter offer from E.On
Not
surprisingly, rumors of a bid by German utility E.On have also surfaced. Readers will recall that E.On withdrew from
the recent Endesa takeover
after failing to gain Spanish regulatory approval (which was subsequently
declared illegal by the EU). E.On will no doubt continue its’ highly
disciplined approach to acquisitions - given the synergies available to EDF and
ACS it wouldn’t be surprising if E.On decided not to pursue Iberdrola.
Why the interest in Spain ??
The
reasons for the heated interest in Spain are two-fold … it is one of Europe’s
fasted growing energy markets and although it is deregulated it is not as
competitive as markets such as the UK, meaning that margins are higher.
The national energy champion
Readers
will recall that formation of national energy champions was a hot theme in
Europe last year – France got its champion through the GDF – Suez merger,
but poor old Spain seems to have gone backwards with firstly every attempt to
consolidate its utilities and now secondly its efforts to stop its existing
utilities being carved up.
The EU’s likely take on all this
Readers
will recall that Spain is already in hot water with the EU over the conditions
imposed on the Endesa deal, so any efforts by the Spanish government to block
EDF’s advances on Iberdrola are unlikely to improve their standing. My guess is
that this issue alone will make for some interesting analysis and discourse in
the coming months.
The other
issue is potential dominance of the UK distribution industry. If Iberdrola was
carved up and EDF took control of Iberdrola’s stake in ScottishPower, that could lead to some unease over one entity controlling 5 of
the 14 distribution licenses in the UK (EDF Energy out rightly owns London, Eastern and SEEBoard, whilst Iberdrola
owns ScottishPower and MANWEB).
So …
interesting times ahead !!
Competition & regulatory
policy
Europe – Spain breaches the EU Merger
Regulations
Introduction
Accusations
emerged several months ago that Spanish Energy Commission (CNE) violated EU
competition rules during the Endesa
takeover. This article examines those accusations against the background of the
Endesa takeover and the broader (and increasingly well-worn) theme of national
energy champions.
Background
Against a
backdrop of an unsolicited €29.1b bid by E.On for all of Endesa’s share capital, the Spanish Government
developed alternative thoughts along the lines of forming a national energy
champion by preferring a competing bid by SDG Gas Natural. As events played out, a lightning raid on Endesa’s share
register by Italian utility ENEL
eventually gazzumped E.On’s bid and ENEL eventually captured Endesa in
conjunction with Spanish conglomerate Acciona.
The CNE’s takeover conditions
The CNE
imposed the following broad conditions on the Endesa takeover…
·
Giving the CNE the right to intervene if the new owner was not
acting in the best interests of Spanish energy consumers including the right to
block any shareholder decisions that were not in the national interest.
·
An annual requirement for the new owner to advise the CNE of any
aspects of strategy that would impact on Spanish assets, interests or national
security.
·
A requirement to maintain Endesa as a stand-alone business.
·
Limits on Endesa’s debt and dividend payouts.
·
A requirement that Endesa’s generation business purchase specified
minimum quantities of Spanish coal.
The EU’s accusations
The EU
has accused the CNE of breaching Article 21 of the EU Merger Regulation which inter alia promotes free movement of
capital and freedom of establishment of new business enterprises within the EU.
The principal aspect of the EU’s accusation is that the EU (and not individual
member states) has exclusive jurisdiction over mergers affecting competition
across the EU.
It is
noted that the CNE did modify some of its original conditions following both an
appeal by ENEL and Acciona and correspondence with the EU in September and
October 2007, however the EU still considered that the modified conditions
breached EU law. The EU had previously
indicated that it would have little choice but to open an infringement procedure
should the Spanish government not relent.
The EU’s actions
In
accordance with the first step of a three step process the EU has written to
the Spanish Government giving it 15 days to explain why it has not withdrawn
the conditions imposed by the CNE. The last of three steps is for the matter to
be settled by the European Court of Justice, and it seems that Spain has taken a “see you in court” view.
This
matter is unlikely to fade away, so no doubt there will more action for future
issues of Pipes & Wires to examine.
Regulatory
determinations
NZ – draft decisions for not declaring control of Vector
Introduction
The Commerce Commission released its draft decisions
for not declaring control of Vector in
mid-December 2007. This article briefly re-caps Vector’s breach of its price
path threshold and then examines why the Commission has reached a preliminary
decision to not declare control.
Background
Readers may well remember that
the Commission initiated a post-breach inquiry because Vector had breached its
threshold by about $77,000 or about 0.028% of notional revenue. The
Commission’s inquiry revealed the following issues….
·
The prices applying to a majority of Vector’s customers were not
cost reflective.
·
There was insufficient progress being made to address pricing
discrepancies among customer groups.
·
Pricing strategies appeared to favor those customers who were beneficiaries
of Vector’s major shareholder, the Auckland
Energy Consumers’ Trust.
·
That Vector would continue to earn excessive returns.
The Commission subsequently
released its intention to declare control on 9 August 2006. Vector subsequently
submitted an administrative settlement offer which the Commission believed was
consistent in principle with the objectives of the targeted control regime.
Key aspects of Vector’s administrative settlement offer
Vector’s administrative
settlement offer broadly involves the following activities…
·
Adjust prices to rebalance returns from different customers and
regions over the two years to April 2009.
·
These price readjustments will be revenue neutral ie. there is no
intention to reduce overall notional revenue.
·
Continue asset investments as set out in the asset management
plans.
·
Continue to seek efficiency gains noting that a decision on how
these will be allocated between customers and shareholders is yet to be made.
·
Maintain existing supply reliability levels.
Key aspects of the draft decision
One of the key criteria that the
Commission considers in deciding whether to implement control is whether the
objectives of the targeted control regime could be achieved at a lower cost by
accepting an administrative settlement offer. In this instance the Commission
believes that acceptance and implementation of Vector’s offer would fulfill the
objectives at a lesser cost than proceeding to declare control.
Submissions on the draft decision
recently closed, so Pipes & Wires will provide further analysis as the Commission’s
decisions progress.
Aus – final determination for SP AusNet
Introduction
The Australian Energy Regulator (AER) recently released
its final determination for the Victorian electricity transmission grid owned
by SP AusNet for the six year
control period starting on 1 April 2008 and ending on 31 March 2014. This article briefly compares the parameters originally
sought by SP AusNet, the AER’s draft decision, SP AusNet’s revised proposal and
.
Key features of the final decision
Key features of the proposals and
determinations to date include…
|
Parameter |
Originally proposed by SP AusNet |
AER draft decision |
Revised proposal by SP AusNet |
AER final decision |
|
CapEx |
A$855.26m |
A$679.04m |
A$838.8m |
A$771.07m |
|
OpEx |
A$1,034.34m |
A$929.50m |
A$987.3m |
A$979.29m |
|
Nominal vanilla WACC |
8.85% |
8.85% |
8.85% |
9.76% |
|
Expected opening RAB |
A$2,222.93m |
A$2,203.45m |
A$2,190.8m |
A$2,191.2m |
|
X factor |
-3.22% |
-1.52% |
-2.35% |
-12.55%
for Y1, -1.01% thereafter |
|
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 |
A$453.35
in Y1 increasing to A$541.82 in Y6 |
That brings Pipes & Wires coverage of the SP AusNet
transmission price control to a close.
Germany – approving the electricity transmission tariffs
Introduction
The Bundesnetzagentur recently approved
the tariffs that will apply to three of Germany’s four Transmission System
Operators (Vattenfall
Europe Transmission GmbH, RWE
Transportnetz Strom and EnBW
Transportnetz) from 1 January 2008, whilst a decision on allowable tariffs
for the fourth Operator, E.On Netz is
still awaited. This article briefly notes the changing electricity transmission
regulatory framework in Germany and considers the costs disallowed.
Background
Transmission tariffs in Germany,
like many European countries, are set on an annual basis. However these particular
tariffs are of special significance because the approved costs used to compile
these tariffs will form the basis of the new incentive regime.
The tariff approvals
The Bund has disallowed costs
that amount to the following percentages of costs sought by the Operators, as
follows…
|
Transmission operator |
Costs disallowed |
|
Vattenfall Europe Transmission |
15% |
|
RWE Transportnetz Strom |
28% |
|
EnBW Transportnetz |
29% |
The Bund has also stated its
belief that these costs will put downward pressure on tariffs (but notes that
overall end use electricity charges may not decline) but that supply quality
will not be jepodised. Pipes & Wires will make further comment as the
incentive regime develops.
Privatisations
Austria – abandoning the Energie AG float
Introduction
Privatising state-owned utilities
is by its very nature political, so to further emphasise the political
sensitivities is perhaps somewhat trite. This article examines the recently abandoned
float of Austrian utility Energie
AG in which the politics just got too much.
Snapshot of the Energie AG
Energie AG Oberösterreich supplies
electricity, heating, water and sewage services to markets in Upper Austria and
to markets in southern Germany, Hungary, Slovakia and the Czech Republic
through wholly-owned subsidiaries. Energie has total group revenues of €1.1b
and a consolidated net profit of €115m.
Energie is 93.75% owned by the Federal Province
of Upper Austria, and 6.25% owned by Linz AG, the commercial arm of the
city of Linz.
The float that almost was but then wasn’t
Upper Austria had always planned
to retain the 51% stake required by federal law, and expected to sell about 24%
to banks, insurers and other utilities whilst floating the final 25%. After
deciding to abandon the float due to insufficient support in the Upper Austrian
parliament, Upper Austria has decided to retain 60%, Linz will increase its
stake to 10%, a further 15% will be taken by banks and the remaining 15% stake
will be sold to a strategic shareholder.
CapEx – general interest stuff
Getting the CapEx right in the infrastructure sectors
This presentation was made at the
NZIGE Spring Technical Seminar in
September 2007. If you’d like a copy, pick here.
Renewals – (half) the hidden side of CapEx
This presentation was made at the
Electricity Networks Asset Management Summit in November 2007 on the broad
topic of asset renewals. If you’d like a copy, 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.
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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.