From the director…
Welcome to Pipes & Wires #74.
This issue has a strong focus on
M&A and privatisations in America, Europe and Australia. We also examine
some regulatory decisions in New Zealand, Australia and Ireland, and look at
some regulatory policy and finance issues in Europe. So happy reading until
next month….
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Regulatory
determinations
NZ – decisions not to declare control
Introduction
Early in August 2008 the Commerce Commission released its reasons
for not declaring control of Horizon
Energy and Westpower. This
article follows on from the lengthy article in Pipes
& Wires #72.
Background
The price path thresholds regime
made pursuant to Part 4A of the Commerce Act 1986 set out price and quality
thresholds that had to be complied with for assessment periods ending on 6
September 2003, 31 March 2004, 31 March 2005 and 31 March 2006. Each of the
above lines businesses was assessed as having breached one or more of these
thresholds.
Basis of the decisions
The following table summaries the
Commission’s reasons for not declaring control of each lines business…
|
Business |
Issues that the Commission is not declaring
control in regard to |
|
Horizon |
· The
Commission believes that Horizon’s customer engagement could be improved, but
that further investigation is not warranted. · The
Commission is satisfied that the 2006/07 breach of the price-path threshold
was caused by a Transpower rebate, and that Horizon’s actions of refunding
the full amount plus interest was an appropriate action. · The
Commission is satisfied that the 2004/05 and 2005/06 quality threshold
breaches resulted from extraordinary impacts, and there was no evidence of inadequate
engineering practices. |
|
Westpower |
· The
Commission believes that Westpower’s customer engagement could be improved,
but that further investigation is not warranted. · The
Commission is satisfied that the 2006/07 breach of the price-path threshold was
caused by a Transpower rebate, and that Westpower’s actions of refunding the
full amount plus interest was an appropriate action. · The
Commission is satisfied that the 2003/04, 2004/05 and 2006/07 quality
threshold breaches resulted from extraordinary impacts, and there was no
evidence of inadequate engineering practices. |
Pipes & Wires will make
further comment as the few remaining decisions emerge.
Aus – Victorian water decisions
Introduction
In late June the Essential Services Commission released
the price decisions that will apply to the water and sewage businesses in the
Australian state of Victoria as follows…
·
For the 5 year control period starting on 1 July 2008 for the
regional urban, rural and Melbourne Water (for waterways and drainage charges).
·
For 1 year starting on 1 July 2008 for CityWest Water, South East Water, Yarra Valley Water and Melbourne Water
(for bulk services).
This article examines those decisions.
Background
In October 2007 the water
businesses submitted Water Plans to the ESC. These plans outlined the prices
that each business sought to provide water, sewage and related services over
the control period. In March 2008 the ESC released its draft decisions on the
prices sought by individual businesses, and in June 2008 the final decisions
were released.
Key features of the decisions
Key features of the prices sought
and the draft and final decisions are…
·
Businesses will be allowed a slightly higher WACC than they
proposed – the 5.1% sought in the initial proposals was increased to 6.1% in
the draft decisions and then reduced to 5.8% in the final decisions to reflect
changing financial market conditions.
·
The price increases sought vis-à-vis the previous control period
reflects the increased CapEx required for this period, noting that the
adjustments have been made to reflect the ESC’s assessment of spend efficiency
and project feasibility within the timeframe.
Summary of the decisions
The following table summarises
the equivalent average annual real price increases originally sought, and the
ESC’s draft and final decisions.
|
Business |
Originally sought |
ESC draft |
ESC final |
|
Average |
0.3% to
17.2% |
1.1% to
17.4% |
0.9%
and 14.9% |
|
10.6% |
11.5% |
9.5% |
|
|
11.3% |
10.9% |
10.1% |
|
|
13.1% |
12.8% |
12.8% |
|
|
5.4% |
7.3% |
6.8% |
|
|
6.5% |
7.7% |
10.7% |
|
|
17.2% |
17.8% |
14.9% |
|
|
2.2% |
2.5% |
1.1% |
|
|
5.9% |
8.3% |
7.7% |
|
|
GMW Water |
5.9% |
7.3% |
6.6% |
|
Lower Murray Water (rural) |
0.3% |
1.1% |
0.9% |
|
Lower Murray Water (urban) |
4.1% |
4.8% |
4.3% |
|
8.4% |
8.5% |
9.4% |
|
|
NA |
NA |
6.8% |
|
|
4.3% |
5.9% |
4.9% |
|
|
6.1% |
5.9% |
6.6% |
|
|
10.9% |
10.0% |
8.8% |
|
|
4.7% |
5.6% |
4.9% |
This article concludes Pipes
& Wires coverage of the Victorian water decisions.
Ireland – approving the gas tariffs
Introduction
The Commission
for Energy Regulation (CER) regulates Ireland’s electricity and gas
markets. This article examines the CER’s recent decision on Bord Gais Energy Supply (BGES)
proposed two-part domestic and SME gas tariff increase.
Background
Ireland imports about 90% of its
gas from the UK, which in turn is imported either from Europe or via LNG
terminals. The European gas is generally sold under long-term contracts indexed
to oil prices, so not surprisingly wholesale gas prices in Europe, the UK and
consequently Ireland have been very volatile of late – over the last 10 months
Irish gas prices have increased from 48p / therm to about £1 / therm.
Bord Gais proposal
BGES sought the CER’s approval to
implement a two-phase tariff increase comprising an initial 20% increase from 1st
September 2008 followed by a further increase from 1st January 2009
after reviewing the wholesale gas price movements over the northern autumn. The
expected impact of the initial 20% increase would be about £150 / year for the
average consumer (13,750kWh of gas).
The CER’s response
In a draft decision paper dated
25th July 2008, the CER proposed to approve the two-phase tariff
increase. The CER was accepting submissions on this decision until 5th
August, and at the time of writing this article, no further comment on the
proposed decision or the submissions were available. Pipes & Wires will
make further comment as the CER’s decisions emerge in a couple of months.
Mergers,
acquisitions & take-overs
US – update on the Energy East
acquisition
Introduction
Last time
Pipes & Wires examined Iberdrola’s bid for Energy East, there was one outstanding regulatory approval … that of the New York Public
Service Commission. The PSC’s concern was that
because Iberdrola itself was the subject of a bid by Electricite De France and Grupo ACS, Energy East might end up without a strong parent and be unable
to reinvest in its networks. This matter then moved to the Senate as New York Senator Charles Schumer waded into the matter. This article re-caps those movements, examines
the recent pronouncements and discovers the vexed position of wind farms within
the deal.
Background
Iberdrola’s
€6.4b bid for Energy East would give it 3 million customers in the eastern US,
complimenting its customer base in the western US (ScottishPower subsidiary Pacificorp). To date the FERC, Massachusetts, New Hampshire, Connecticut and Maine have all
given their approval to the deal. In regard to Iberdrola’s commitment to Energy
East subsidiaries Rochester Gas & Electric and New York State Electricity & Gas, Schumer has been particularly vocal. Schumer’s demands included…
·
That Iberdrola set up a $1b trust fund to subsidise consumers.
·
Establishment of a performance assurance plan that provides for
fines for service lapses.
·
That Iberdrola aggressively pursue wind energy in up-state areas.
·
That the Russell Power Plant be re-powered with gas rather than
with coal.
Pipes
& Wires #69 also noted the troubling “implement our public policy
objectives or we will block your deal” approach that seems increasingly
popular.
The latest pronouncements
In
mid-June a New York administrative law judge recommended that the PSC disallow
the bid, claiming that it is not in the public interest (which, interesting
enough, Schumer rubbished because the judge’s analysis excluded the proposed condition
that Iberdrola invest $2b in wind power). Noting that this was only a
recommendation and not a ruling, the PSC could still approve the deal, but
would almost certainly impose conditions such as prohibiting Energy East from
owning generation (ie. wind power) within its network, and offering tariff cuts
worth $650m.
An
industry analyst noted that Iberdrola had reacted negatively when such
conditions were previously proposed, and could abandon the deal. Iberdrola
subsequently publicly stated that it would reconsider the bid if unacceptable
conditions were imposed by the NYPSC. At the time of writing, Iberdrola
remained firm on both its’ willingness to proceed with the deal and its’ resolve
to abandon the deal if unreasonable conditions are imposed.
The vexed position of wind (or
rather the vexed position of embedded wind generation)
One of the
key recommendations is that Energy East be prohibited from owning generation
within its network areas … the classical vertical disaggregation argument.
Funny thing is that Iberdrola is a world leader in wind power, and proposed to
build $2b of wind farms within Energy East’s network area. One would think that
an industry player wanting to contribute to the state’s goal of 25% renewable
energy by 2013 would be welcomed with open arms … but apparently not in this
case !!!
Spain – update on the Iberdrola
takeover
Introduction
In the
midst of Iberdrola’s attempted takeover of Energy East, Iberdrola itself came under attack from Electricite De France (EDF) and Spanish construction company Grupo ACS. This article follows on from the introductory comments in Pipes
& Wires #68.
Background
EDF and
Grupo ACS launched what was thought to be a €50b bid for Iberdrola in
mid-February 2008. The takeover raised several important issues…
·
The possibility of consolidation in the Spanish industry as Grupo
ACS also owns 45% of Iberdrola’s competitor Union Fenosa.
·
This in turn would lead to a strong Spanish energy company, but
one partly owned by the French government (thru’ EDF) … not quite the much
hoped for national energy champion.
·
Would E.On make a
play for Iberdrola (and to date it seems not).
·
It revealed the attractiveness of the Spanish energy markets as
fast growing, and with less competition than other areas in Europe (meaning
higher margins).
·
The heightened tensions between the EU (wanting free movement of
capital) and individual member states (favoring domestic consolidation).
·
The possibility that EDF would control 5 of the 14 distribution
licenses in the UK.
Latest moves
A few of
the latest moves include…
·
Grupo ACS renewing share options to help it maintain control of
Iberdrola.
·
A possible souring of the EDF – Grupo ACS relationship as EDF
tries to limit Grupo ACS’s shareholding and voting rights.
·
A possible waning of EDF’s interest in Iberdrola as it shows
interest in British Energy.
·
The possibility that Grupo ACS will sell its 45% stake in Union
Fenosa (worth about €5b).
So it
seems that the original EDF – Grupo ACS takeover of Iberdrola has been accompanied
by a flurry of interest in Grupo ACS’s stake in Union Fenosa. At the time of
writing, the Spanish stock market regulator has ordered trading halts on Union
Fenosa, Grupo ACS and Gas Natural in anticipation of Gas Natural making a €16.5b bid for 100% of
Union Fenosa.
Spain – Gas Natural’s bid for
Union Fenosa
Introduction
Long-time
readers may remember that Gas Natural has sought a leading role in consolidating Spain’s energy sector
through its bids for Iberdrola (back in 2003) and for Endesa (in early 2006). This article examines Gas Natural’s bid for 100%
of Union
Fenosa as Grupo ACS seeks to sell its
45% stake in Union Fenosa.
Gas Natural’s growth strategy
Gas
Natural is Spain’s largest gas utility. Gas Natural noticed the attractive
growth prospects of the electricity sector and sets itself an aggressive
electricity market share target that could only be achieved through
acquisition. Unfortunately both attempts to date have failed…
·
Back in mid-2003 the Spanish competition regulator (CNMV) expressed concerns that Gas Natural’s proposed divestments of
Iberdrola’s electricity assets would not address the CNMV’s concerns that Gas
Natural would still have a dominant share of the Spanish gas market. It is also
suspected that the Spanish Ministry Of Energy (CNE) rejected the bid over concerns about the merged entity’s ability
to fund much need capital investment.
·
In early 2006 E.On made a
competing bid for Endesa. Then the fun really started when a Madrid court ruled
that Gas Natural’s proposed agreement to on-sell between €7b and €9b of assets
to Iberdrola to avoid anti-trust concerns breached EU rules promoting free
movement of capital.
So Gas
Natural climbs back into the ring for a third go…
Gas Natural’s bid
As part
of Grupo ACS’s manoeverings for Iberdrola, it has put its 45% stake in Union
Fenosa up for sale which seems to have prompted Gas Natural to make a bid (not
surprisingly E.On and Electricite De France are also interested). Gas Natural’s initial bid was €18.33 per
share, a 55% premium on Union’s closing price. This would create a €30b company
(before any regulatory concessions) … so maybe Spain could get its energy
champion at last.
However,
while Gas Natural shareholders La Caixa and Repsol
applauded the move, and Union rose to an unprecedented high on the Madrid
bourse, rating agency Fitch indicated it may downgrade both Gas Natural and Union. Pipes
& Wires will make further comment as the bid proceeds.
Regulatory policy
Europe – splitting lines and
energy
Introduction
EU Competition Commissioner Neelie Kroes has been pushing for separation of lines and energy following a 3
year investigation which concluded that the EU energy markets still contain too
many barriers to effective competition, with vertical integration apparently being
a significant barrier. This article examines several recent moves on this
front.
Back ground
Formation
of a single transparent European energy market has been one of the key
objectives set in place by directive EC1996/92 which was subsequently replaced
by directive EC2003/54. A package of legislative proposals inter alia proposed separation of production (generation) and
supply from networks in one of two approaches…
·
A preferred approach of ownership separation.
·
A less preferable approach of operational separation wherein
utilities can remain vertically integrated but must relinquish all operational
control of networks to an ISO. This approach is favored by several EU member
states, and not surprisingly by the utilities themselves.
Then in
March 2008 news emerged that E.On had
proposed selling its grid subsidiary E.On Netz in return for the EU Competition Commission dropping an
anti-trust investigation. The detail of E.On’s proposal appeared to include
formation of a single entity owning and operating all of Germany’s EHV and UHV
grids. This represented a real breaking of ranks both with competitors EDF, RWE Transportnetz and EnBW, and with the German government which, along with the French
government, vehemently opposed forced unbundling. It’s helpful to note that
countries such as Holland and Denmark that are at the end of the energy value
chain support full ownership unbundling, much the same as countries such as
Germany and France that can influence the value chain oppose ownership unbundling.
Latest moves
Early
July 2008 saw the EU Parliament reject forced unbundling of vertically integrated gas businesses,
siding with many member states. The diluted draft law would require internal separation
… the much applauded “third way” … which represents a significant watering down
of the ISO option.
However
it seems that electricity is going to have a rockier road. On the one hand
individual member states oppose ownership unbundling, whilst the EU seems
determined to have nothing less than full ownership unbundling. In mid-June the
EU Parliament rejected the compromise championed by France and Germany, instead
reiterating its preference for full ownership unbundling. This will require the
EU and individual member states to go round the loop again … Pipes & Wires
will make further comment if and when a final agreement is reached.
Privatisations
Turkey – privatising the grids
Introduction
Privatisation
… like the cost of equity … is a contentious issue with clear battle lines. The
much-trumpeted justification of shifting the investment burden from the public
sector to the private sector has relied on a right-of-center political climate,
and the swing back to the political left over the past 7 or 8 years has reduced
the appetite for what many see as a neo-liberal panacea. This article examines
the much-delayed privatisation of Turkey’s electricity industry which faces an
estimated investment requirement of about US$125b over the next 12 years (even
if this could be funded, would they have the physical resources to spend close
on US$1b per month ??).
What assets will be privatised
The major
electricity generator EUAS is
perhaps the most notable business included, although it is expected to be sold
in parts. EUAS comprises about 9,000MW of thermal and 11,000MW of hydro plant
and generates about 43% of Turkey’s electricity. The 19 distribution networks being
offered for sale include the Baskent Electricity Distribution Corporation (which
supplies the Ankara metro area) and the Sakarya Electricity Distribution
Corporation (which supplies north-west Turkey).
Progress to date
To date
the following privatisations have been completed…
·
Baskent has been sold to a joint venture comprising Hacı Ömer
Sabancı Holding A.Ş., Österreichische
Elektrizitatswirtschafts Aktiengesellschaft (Verbund) and Enerjisa Energy Production Corporation for
US$1.225b.
·
Sakarya has been sold to the Akcez Consortium comprising Akkök Group and Czech utility CEZ for
US$600m.
Offers
for the other distribution networks and for the construction and operation of
two further thermal units at the Afsin-Elbistan power plant are expected soon.
UK – re-privatising British
Energy
Introduction
It seems
nuclear generator British Energy goes in circles from being a government department, to being
privatised, then being nationalised, then to the brink of privatisation a few
more times. This article examines the most recent attempt at privatising which
… not surprisingly … features all the big names.
British Energy’s background
British
Energy started life when the Magnox stations were removed from the old Nuclear
Electric, and the residual PWR and AGR stations were privatised. The energy
market woes a few years ago saw British Energy being partially re-nationalised.
The UK government is now keen to quit its 35% stake to raise an expected £4b.
The most recent attempt to
privatise
Earlier
this year British Energy put itself on the market. After discussions with a
wide range of bidders including Vattenfall, Iberdrola and RWE came to
nothing, Electricite De France (EDF) made an indicative £6.80 per share bid which was rejected
by British Energy. EDF then indicated it could raise its offer to just over
£7.00 which still fell short of a suggested minimum bid of £7.50.
On the
back of high oil prices (which drive up UK gas prices, and hence the spot price
of gas-fired electricity) and rumors of a take-over bid, British Energy shares
had surged to £7.85 (which prompted the suggested minimum bid). However cooling
oil prices then dampened British Energy’s share price somewhat, making EDF’s bid
more attractive, or … perhaps … at least less unattractive. It seems that price
may have been the sticking point as in early August EDF that it would not be
immediately pursuing the matter. Buried rather cryptically in EDF’s statement
was the inference that EDF could adequately participate in the UK’s planned new
generation of nuclear stations without levering off the synergies of existing
stations.
The
British Energy – EDF deal does seem to be a real “on again – off again”
relationship, and at the time of writing this relationship seems to have soured
somewhat but is not totally severed. Pipes & Wires will revisit this issue
when a deal emerges.
Aus – progress on the NSW
privatisation
Introduction
In a
rather (perhaps very) surprising decision late last year the NSW government
announced that its electricity retail and generation businesses would be
privatised. This article recaps Pipes & Wires coverage of this issue and
examines the latest movements.
Background
Late in
2007 the NSW government decided to sell its electricity retail businesses and
lease its generation plant. A key driver of this decision was the Owen Report which concluded that NSW would need additional base load
generation by 2013/14 and that the most efficient way to provide this
generation was to divest both retail and generation. As Pipes & Wires
notes, privatisation is a politically sensitive issue, so it’s not surprising
that the government decided to lease the generation rather than sell it
outright, and also decided not to abolish the retail price caps in 2010 as
recommended in the Owen Report.
In what
appeared to be an about-face on these sensitive issues, the special committee
on privatisation then proposed …
·
Consolidation of the three generators (Eraring Energy, Delta Electricity and Macquarie Generation) into two companies of approximately equal size.
·
Attaching retail customer bases to those companies.
·
Floating the two companies in an IPO.
·
Offering staff up to $10,000 of free shares depending on their
length of service.
The NSW
government is trying to raise the interest of Mum & Dad shareholders to
soften the perception of privatisation, and is also emphasising the need to
shift the impending investment burden away from the public sector.
Latest moves
More
recently, plans have emerged that Energy Australia’s retail business could be
sold by the end of 2008, a merged Integral Energy retail business and Eraring
Energy would be sold during 2009 and the Country Energy retail business,
Macquarie Generation and Delta Electricity could also be sold during 2009. It
is expected that the sale proceeds are more likely to be $10b than the $15b
originally mooted. Out there in the community opposition from the traditional
Labor party supporters seems to be increasing, so one way or another, this
matter is going to sorely test the Iemma government’s resolve to see it thru’.
Finance
Germany – the cost of equity
Introduction
The cost
of equity of a regulated utility has always been a contentious issue, and it
probably always will be. In and around the generally accepted Capital Asset
Pricing Model approach, utilities and regulators find themselves at odds over
the derivation of its various components. This article examines the recent and … at least on the face of it … beautifully
simple conclusions reached by the Bundesnetzagentur for the cost of equity that will apply to all electricity and gas
operators in Germany from 1st January 2009 (coincident with the
start of incentive regulation).
Background
Until
recently the cost of equity implicit in gas and electricity tariffs were set by
Government decree, and were 7.91% for electricity and 9.21% for gas
respectively. However the commencement of incentive regulation from 1st
January 2009 has prompted the Bund to recognise the importance of stable,
low-risk investment climates for utilities.
The Bund conclusions
The Bund
is required to compile the cost of equity from the running yield of
fixed-interest securities and a risk margin. In the Bund’s draft decision the
running yield has been set at 4.23%, whilst the risk margin has been set at
3.59% (based on the experiences of other European utilities) giving a cost of
equity of 7.82%.
In a
rather surprising final decision released in July 2008 (which is a bit similar to
a decision by the CRE last
year in regard to French utility GRTgaz), the Bund decreed a pre-tax cost of equity of 9.29% for new
investments and 7.56% for legacy investments. The Bund has deliberately
introduced a two-tier cost of equity to incentivise new investment, which is
expected to be about €8.6b industry-wide over 3 years.
CapEx – general interest stuff
Upsizing – the other half of the hidden side of CapEx
This presentation was made at the
Electricity Engineer’s Association conference
in June 2008. If you’d like a copy, pick here.
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.
Conferences & events
·
10th
Annual NZ Energy Summit (Wellington, 15th – 16th September
2008)
·
6th
Annual NZ Gas Industry Summit (Wellington, 15th – 16th
September 2008)
·
NZIGE Spring Technical Seminar
(Rotorua, 15th – 16th September 2008)
·
Southern Africa
Energy Efficiency Convention (Gauteng, 6 – 7 November 2008).
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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
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