From the director…
Welcome to Pipes & Wires #76.
This issue examines a wide range of topical matters, from the rugged west coast
of New Zealand’s south island to the searing heat of the California desert and
a whole bunch of places in between. That’s enough from me, so happy reading
until the next Pipes & Wires…
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Energy markets
Germany – consolidating gas market zones
Introduction
Pipes
& Wires #69 examined the Bundesnetzagentur’s
plans to reduce the number of gas market zones in Germany to “something less
than 10” by 1st October 2008 to improve the competition and
liquidity in what was seen as a very fragmented market. This article examines
progress on that consolidation.
Background
The Bund announced that the
following market zones would be formed…
·
Consolidation of the zone supplied by Gaz de France Deutschland, GVS Netz and ENI Gas Transport Deutschland.
·
Elimination of the Gas
Union zone.
·
RWE
·
VNG-Ontras
·
EWE
·
EVG Münster
·
BEB (recently sold to Gasunie)
Around the time of the Bund’s
announcement in early 2008, Bayernets
GmbH and E.On
Gastransport (EGT) announced that they would form a single market zone for
H-Gas stretching from the North Sea coast to the Alps which reduced the number
of gas markets to 11.
Recent progress
It seems that the GDFD – GVS Netz
– ENI didn’t manage to start as a single market on 1st October, but
none-the-less appears to have made good progress.
It also appears that the Bund has
initiated legal action against E.On, RWE, EWE, EVG and Gasunie for allegedly
reneging on their pledge to consolidate their 5 separate low calorific gas
markets into 2 market areas by 1st October 2008. The Bund believes
that the new market areas should be defined by the technical features and the
capacity constraints of the networks rather than by property boundaries, and
asserts that the 5 utilities are clearly disregarding that principle.
Furthermore the Bund now seems to be favoring a single market for low calorific
gas.
Regulatory
determinations
NZ – decision not to declare control of Buller Electricity
Introduction
The decisions not to declare
control of various New Zealand lines businesses in Pipes
& Wires #72 excluded a few lines businesses where the price and quality
breaches could not be obviously attributed to technical breaches (usually
something like an actual Transpower
rebate being more than budgeted, or a big storm). This article examines the Commerce Commission’s decision not to
declare control of Buller Electricity.
The nature of Buller’s breaches
The Commission has identified the
following two price path breaches…
·
A breach of $173,953 (6.84% of notional revenue) for the First
Assessment Date of 6th September 2003. Buller explained that the
primary cause of this breach was an increase in line charges by an average of
9.6% on 1st August 2002.
·
A breach of $3,140 (0.12% of notional revenue) for the Second
Assessment Date of 31st March 2004. In this instance there was no
price increase, and the breach was attributed to actual transmission charges
being less than budgeted.
There no supply quality breaches
for any of the Assessment Dates.
Subsequent actions
Subsequent to the two breaches,
the following actions have occurred
·
In May 2004 the Commission opened a post-breach inquiry to address
Buller’s concerns about viability under its thresholds.
·
Buller argued that the price increases in August 2002 were
necessary to off-set the lack of retailer sales data which prevented it from
calculating losses. Buller’s proposed alternative of moving from ICP billing to
GXP billing would’ve have addressed this inability to calculate losses without
Buller needing to increase line charges, however the incumbent retailer
successfully prevented the proposed move to GXP billing.
·
Accordingly Buller increased its line charges in August 2002
back-dated to November 2001.
·
During the 2004/05 assessment year, Buller returned the amount of
the 2003 price path breach by giving a line charge holiday that it estimates
represented $250,000 in foregone revenue.
Buller’s settlement offers
Buller made three administrative
settlement offers, dated 3rd August 2004, 18th March 2005
and 20th June 2006. The keys aspects of these settlement offers
included…
·
Buller’s proposed line charge increases of about 9% to 10% over the
2006/07, 2007/08 and 2008/09 years to reach the Commission’s target WACC of
7.35%.
·
Rebalancing tariffs to better reflect underlying costs.
·
Continuing its distribution loss reconciliation project (which
Buller noted was likely to cost more than the value of the losses).
The Commission’s conclusions
The Commission has concluded the
following…
·
That Buller did not breach its price thresholds for the 2004/05,
2005/06 and 2006/07 years.
·
That Buller did not implement the line charge increases that it
proposed for 2007/08 and 2008/09 years.
·
By maintaining supply quality Buller has demonstrated a commitment
to complying with the thresholds regime.
·
That the improved returns that are now close to the Commission’s
allowable WACC have been achieved without increasing revenue.
·
Buller has demonstrated its viability under the current price
path.
The Commission has therefore
concluded not to declare control of Buller, and to close the post-breach
inquiry on the following bases…
·
The price breach in 2003 has been adequately explained, and the
amount of that breach has been refunded.
·
The price breach during the 2003/04 year has been adequately
explained by the difference between actual and budgeted transmission charges.
·
There have been price breaches for the Third, Fourth, Fifth or
Sixth Assessments.
·
Buller’s returns are not excessive.
This article is necessarily brief
and is a summary of the Commission’s official statement. That statement should
be read in its entirety before taking any action.
NZ – decisions not to declare control of various lines businesses
Introduction
Pipes
& Wires #72 examined the Commerce
Commission’s decisions not to declare control of a number of lines
businesses in regard to threshold breaches over the period 2003 to 2006. This
article examines the Commission’s recent decision not to declare control of a
number of lines businesses for a further range of price and reliability
breaches.
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, and in a
few cases also notes outstanding issues…
Business |
Issues that the Commission is not declaring control in regard to |
·
The SAIDI and SAIFI breaches were acceptable when the impact of
the snow storm in June 2006 was excluded. ·
The Commission does not believe there is any long-term
deterioration in reliability. ·
A previous review in 2004 determined that management practices
and investment levels were appropriate. |
|
·
The price path breach was caused solely by an interim Transpower
rebate, which was refunded to customers with interest. ·
The SAIFI breach was very minor, and did not represent a
material decline in reliability. |
|
·
The SAIFI breach does not indicate any deterioration in
reliability. |
|
·
The price path breach was caused solely by an interim Transpower
rebate, which was refunded to customers with interest. |
|
·
The SAIDI and SAIFI breaches were attributed to the snow storm
in June 2006, and do not suggest any deterioration in long-term reliability. |
|
·
The price path breach was caused solely by an interim Transpower
rebate, which was refunded to customers with interest. ·
Five year moving average reliability remains below the
thresholds, and does not represent any deterioration in reliability. |
|
·
The exclusion of the snow storm in June 2006 meant that SAIDI
and SAIFI thresholds were not breached, and do not suggest any deterioration
in reliability. |
|
·
The 2005/06 price path breach resulted from actual loss rental
rebates being higher than budgeted. ·
The amount of this breach has been returned to customers by
setting subsequent years’ price at a level lower than the allowable price
path. ·
The 2006/07 breach was caused solely by an interim Transpower
rebate, which was refunded to customers with interest. |
|
·
The price path breach was caused solely by an interim Transpower
rebate, which was refunded to customers with interest. |
|
·
The price path breach was caused solely by an interim Transpower
rebate, which was refunded to customers with interest. ·
Although the raw SAIDI and SAIFI suggest a decline in
reliability, the level of growth on the network is requiring many planned
outages that are likely to continue into the future. The Commission considers
this to be an acceptable explanation. |
|
·
The price path breach was caused solely by an interim Transpower
rebate, which was refunded to customers with interest. ·
The SAIDI and SAIFI breaches were acceptable when the impact of
the snow storm in June 2006 was excluded. ·
The Commission does not believe there is any long-term
deterioration in reliability |
|
·
The price path breach was caused solely by an interim Transpower
rebate, which was refunded to customers with interest. |
|
·
The 2004/05 price path breach was caused by the difference
between actual and budgeted transmission charges, and by a tariff structure
that was not in place for the full 12 months. ·
The 2005/06 price path breach was caused by the difference
between actual and budgeted transmission charges. ·
The full amount of these breaches was returned to customers by
setting prices for subsequent years below the allowable threshold. ·
The 2006/07price path breach was caused solely by an interim
Transpower rebate, which was refunded to customers with interest. |
|
·
The price path breach resulted from the interim Transpower
rebate, differences between actual and budgeted transmission charges and a
lower than expected CPI. The entire amount of the breach was refunded to
customers with interest. |
|
·
The price path breach was caused solely by an interim Transpower
rebate, which was refunded to customers with interest. |
|
·
The price path breach was caused solely by an interim Transpower
rebate, which was refunded to customers with interest. |
|
·
The price path breach was caused solely by an interim Transpower
rebate, which was refunded to customers with interest. |
Pipes & Wires will make
further comment as any further decisions are made public.
Energy policy
US – public v’s private generation
Introduction
Pipes
& Wires #71 examined the energy sector in the US state of Maryland, and
between the political views, noted a report by the Maryland Public Service
Commission that the state could face rolling brown-outs by 2011 as a result
of increasing demand, limited supply, congested transmission and aging
distribution infrastructure. This article follows on by examining where Governor Martin O’Malley’s suggestion of
publicly owned peaking plant as a possible solution has got to over the past
few months.
Background
During the gubernatorial
election of 2006 a proposed electric tariff increase of 72% by Baltimore Gas & Electric led
the other Democrat contender Douglas
M. Duncan to campaign that the state should re-regulate its electricity
industry (and of course everything would then be fine, and the good folk of
Maryland would live happily ever after with cheap, abundant energy). This issue
seemed to really bring things out into the open, and coincided with the PSC
report.
Re-capping O’Malley’s proposal
The core of O’Malley’s proposal
seems to be publicly owned peaking plant that can be used to avoid price spikes
such as on hot summer days. The Baltimore
Metropolitan Council’s reservoirs that supply Baltimore and 5 surrounding
counties seem to have formed the underlying model of O’Malley’s thinking (and
O’Malley presumably got familiar with these reservoirs during his term as Baltimore’s mayor).
The latest thinking
The core of O’Malley’s proposal
doesn’t seem to have got any further, but rather seems to have been
overshadowed by the fight to acquire Constellation
Energy (refer to the article on Electricité De
France in this issue of Pipes & Wires). A quick read of a few blogs
suggests that many in the community see the whole private ownership and
acquisition thing as the sole cause of tariff increases. None of the bloggers
seem to have noted the possibility that coal prices increasing by 50% in the
last year might be a possible cause, nor do they seem to understand the right
of private shareholders being able to sell their shares to the highest bidder.
Anyway, O’Malley recently made a
speech on energy matters to the Maryland Association of
Counties Annual Summer Conference. Down towards the bottom of his speech,
O’Malley noted the drawbacks of re-regulating Maryland’s electricity sector and
how the proposals before both houses in the state
legislature would require something like $20b to buy the generation plants
from the private owners, or about $10b for the state to get into the business
of power generation. Whether that $10b is a vague reference to the reservoir
peak power idea is not clear, but it is encouraging to note a general
acknowledgement that private utilities need to be compensated if their
long-term recovery of costs is curtailed.
UK – could gas fill the generation gap??
Introduction
The dwindling reserve capacity
margins in the UK are no stranger to the pages of Pipes & Wires. This
article presents a few more of my thoughts based on a recent article in The
Economist that suggests the UK’s dependence on imported gas will need to
increase in the short term.
The Economist’s thoughts
The article in The Economist sets
out a number of issues…
·
The view that the UK’s energy policy has been a muddle for the
last few years, but at last seems to be getting a coherent way forward that
acknowledges coal and nuclear.
·
Due to the decline in North Sea gas, the UK is likely to have to
import 80% of its gas by 2020, or about double what it imported last year.
·
Increasing electricity demand and declining generation capacity
are likely to lead to gaps as early as 2012, and the long lead time of both
nuclear and coal stations means that gas stations will be needed to fill the
gap.
·
Although provision has been made to import gas via LNG terminals
and an additional pipeline to Europe, the limited storage (only 14 days) in the
UK means that spot prices must be paid during winter rather than storing cheap
gas over summer.
Some additional thoughts from the editor
My thoughts on all this are…
·
It’s encouraging to see that the UK’s policy seems to be regaining
some balance within the Emission – Security trade-off space, but none-the-less it’s
still very concerning that they’ve come close to learning this the hard (perhaps
even cold, dark) way.
·
It’s concerning that … at least on the face of it … that the UK is
even contemplating depending on imported gas when the emerging picture is that
the world’s major gas suppliers are increasingly hostile to the West.
·
The likely merger of EDF and British Energy provides the
opportunity to build some serious nuclear capacity in the UK. As I’ve said
before, the world’s suppliers of Uranium are mostly Western nations, so it
seems to also make sense from a security of supply point of view as well as
from an emissions point of view.
One way or another, the next few
years are likely to really test the UK’s ability to get its energy policy back
on track and recover from the muddle of the last few years.
US – Michigan’s energy policy
Introduction
Pipes & Wires’ occasionally
examines energy policy in individual US states, either directly or indirectly
as part of another issue. So far the policies of New York, Maryland, Arizona,
California, Ohio, Texas, Connecticut, Montana, Pennsylvania and Massachusetts
have been examined … this article examines the recently signed-off energy
policy in Michigan.
An emphasis on renewables
The key point of the policy
recently signed into law by Governor
Jennifer M. Granholm includes a requirement that 10% of Michigan’s power
come from renewable sources by the end of 2015. Granholm noted that she
would’ve liked to have seen a tougher requirement like 20% by 2020 or 25% by
2025, but acknowledged that 10% is a good start that can be increased later.
Rather more concerning was her comment that “more than half of US states have
such (renewable) goals, causing concern that the state (Michigan) was falling
behind.
Some comments on the policy
So what do we make of a policy
that places such high emphasis on renewables, and perhaps frighteningly seems
to measure itself against what other states are doing rather than what’s right
for Michigan. Just a couple of thoughts…
·
Rightly or wrongly, carbon taxes (call it what you will) are pretty
much a done deal so fossil-fired generation will cost more. Whether
fossil-fired generation ever does cost more than renewables remains to be seen.
And what if the global carbon markets set a price that still makes fossil-fired
generation cheaper than renewables – will the renewable advocates cry “market
failure” and seek intervention?
·
Surely the measure of good policy is whether the policy is good
for Michigan, not how well it compares to the policies of other states.
·
I’m prepared to stand corrected on this one, but my understanding
is that Michigan’s economy relies on a secure supply of electricity. Will
renewables be able to provide the level of security required?
That’s probably enough from me…
Competition policy
UK – merging EDF Energy and British Energy
Introduction
Now that Electricité De France (EDF) has acquired British Energy (although that is still
subject to shareholder and regulatory approval), talk has already emerged of
merging EDF and BE. This article examines the framework within which such a
merger would occur and what the issues might be.
Components of the likely merger
It’s easy to forget that EDF also
owns EDF Energy in the UK, so this is
not just a merger of BE in the UK with EDF in France. In addition to owning the
electricity networks in south-east England, EDF Energy also owns 4,800MW of
generation and sells about 25,000GWh per year. This business would be merged
with BE’s business and would then have about 16,500MW of installed capacity.
The merger framework
Because the merger is between
member states, the relevant framework is the EU
Merger Regulation (EUMR) and the jurisdiction is the EU Competition Office
(EUCO). The EUCO’s approach is likely to be a two staged one, viz…
·
A preliminary review in which agencies such as OFGEM and the Office of Fair Trading (OFT) will be
consulted to form an opinion on whether that merger is consistent with the
EUMR.
·
If it appears that the merger is not consistent with the EUMR, the
EUCO will initiate a more detailed assessment.
The timeframe is very tight … the
EUCO has only 25 days to decide whether to initiate a detailed assessment, and
within those 25 days, agencies such as OFGEM and the OFT must in turn gather
submissions from interested parties.
The key issues
The most obvious issue is likely
to be whether or not a merged EDF - BE will lessen competition in the UK electricity
markets.
The likely market share of the
merged company will be about 25%, a figure that in my mind would not
necessarily be cause for concern. If we were to measure this against the New
Zealand criteria of “substantially lessening competition”, then the merger
almost certainly would be cause for concern. If, however, we measure it against
an alternative criteria of “market dominance” the answer is less clear as 25%
doesn’t feel like a dominant position.
Perhaps a good ending point would
be to also weigh up the merger proposal against the criteria of “here’s a
willing investor that has every intention of strongly contributing to UK energy
policy”. Maybe it would be short-sighted to rigorously apply competition
criteria without considering the long-term policy implications.
Regulatory policy
Aus – AER draft access arrangement
Introduction
The National Gas Law (NGL) and
the National Gas Rules (NGR) form the legal framework for establishing access
to gas transmission and distribution pipelines in Australia. This article
examines the Australian Energy Regulator’s
(AER) draft
access arrangement guideline.
Key aspects of the draft paper
The role of the guideline is to
provide pipeline owners and interested parties with guidance on the content of
access arrangements and the AER’s decision making proposals under the NGL and
the NGR. Key aspects of the draft paper include inter alia the following….
·
Whether a pipeline is covered under the NGL (Table 1 on page 11
provides a useful summary).
·
The process that the AER must follow for assessing full and
limited access arrangement proposals, tender approval pipelines, instances
where a pipeline owner fails to submit an access arrangement, and varying an
access arrangement.
·
How the time limits will be calculated for the decision making
processes.
·
How submissions should be made, how information submitted in
submissions will be treated, and in particular how confidential information
should be labeled and submitted.
·
Obligations of industry participants to comply with AER
information requests.
·
The requirement of an access arrangement proposal to be consistent
with the national gas objective.
·
What tariff (including specific guidance on the building block
components) and non-tariff components must be included in a proposed access
arrangement.
·
The basis for submitting financial information.
·
Circumstances under which the AER can vary or revoke an access
arrangement.
·
The requirement of a full access arrangement to include a
mechanism for varying the reference tariff during the arrangement period.
·
What aspects of a decision can be subject to a Merits Review or a
Judicial Review
Commenting on the draft paper
The AER will accept submissions
on the draft paper until 5pm (AEDT) on 12th December 2008.
US – approving the Devers – Palo Verde #2 transmission line
Introduction
Pipes
& Wires #71 examined the relationship between the FERC and the individual states over inter-state
electricity transmission. That article examined the FERC’s intervention in the
approval of SoCalEd’s proposed Devers – Palo
Verde #2 500kV overhead line between Arizona and California. This article
checks in on the recent progress.
Events up to May 2008
The key event up to May 2008
included…
·
The California PUC (CPUC) approving the DPV#2 in January 2007.
Given the slim security margin during the California summers, it seems
surprising that the CPUC resisted it for so long.
·
Not surprisingly the Arizona
Corporations Commission (ACC) declined to allow what one member of the ACC saw
as plugging a 230 mile long extension cord into Arizona.
So California says “yes”, Arizona
says “no” and many of us are probably asking what basis the FERC might have to
intervene. The FERC’s basis for intervening comes from Title XII, Subtitle B of
the Energy Policy
Act 2005 which grants the Secretary Of Energy the power to designate a seriously
constrained transmission area as a National Interest Electricity Transmission
Corridor (NIETC). The Secretary can also recommend options for relieving
constraints, but must have regard to a number of factors set out in the Act,
including the views of effected states.
A key aspect of Section 1221 of
the Act is the FERC’s power to modify or approve construction of lines in a
NIETC if state regulators have withheld approval for more than a year. We left
that article with the FERC indicating that it may use its powers under Section
216 of the Federal Power Act and Section 1221 of the Energy Policy Act to
approve some version of the DPV#2. The legal issue seems to have focused on
whether the phrase “withheld approval for more than 1 year” could also mean
“deny” (and in 2006 the FERC concluded that “withheld” could include “deny”),
in which case the FERC could step in to approve the DPV#2 because it is in a
NIETC.
Recent progress
Since the last article, the
following events have occurred…
·
In May 2008 SoCalEd asked the FERC to commence pre-filing, which
will include a preliminary environmental assessment and stakeholder and public
input.
·
In late August 2008 the FERC denied both the ACC’s request to stay
the pre-filing process and to allow the ACC to intervene in the process.
·
In September 2008 the ACC discussed its position with respect to
the FERC, and of the pending litigation.
·
In September 2008 yet another study predicting threats
of blackouts in the American West was published, this time by a group led
by generators (the NextGen Energy
Council), which stated that if the West experienced unusually hot
temperatures for prolonged periods in 2009, "the potential for local
brownouts or blackouts is high, with significant risk that local disruptions
could cascade into regional outages that could cost the economy billions of
dollars."
These events have a clear bias
towards SoCalEd and the CPUC. However when these events are considered in the
context of the FERC’s primary objective of promoting strong energy
infrastructure (especially in designated NIETCs), and the potential
inadequacy of generation to meet load in the Southern California area it
becomes clear that to rule against SoCalEd and the CPUC would be inconsistent
with the FERC’s objectives.
Thanks to the team at Spiegel & McDiarmid in Washington, DC
for their help with this article.
Mergers,
acquisitions & take-overs
US – EDF sets it sights on America
Introduction
Readers will be well aware that a
consequence of Electricité De France’s (EDF)
acquisition of Iberdrola will be a stake
in the US utility Energy East (very
recently acquired by Iberdrola). This article examines EDF’s recently revealed plans
to directly strengthen it’s presence in the US.
Background
One of EDF’s strategic goal areas
is to strengthen its position as a global leader in nuclear power – this has
been evidenced by its interest in building the next generation of nuclear
station in the UK and by their £12.5b acquisition of British Energy. The outworking of this
strategy in the US was a joint venture to build nuclear generation plants with Constellation Energy that included a
5% shareholding in Constellation.
Latest moves
The credit crunch had eroded
Constellation’s stock price to the point where EDF doubled its stake in
Constellation to almost 10%. It is understood that this bid is in conjunction
with Kohlberg Kravis & Roberts and Texas Pacific Group (although TPG
has subsequently withdrawn).
In the background, however, Berkshire Hathaway
subsidiary MidAmerican Energy Holdings
had already completed due diligence of Constellation’s retail and wholesale
businesses and is continuing with a cash offer of $26.50 per share in
preference to the EDF-KKR bid of about $35 per share. Things got a bit heated
when Constellation wanted to accept MidAmerican’s significantly lower bid
because it needed to complete a deal quickly to boost its depleted cash
reserves, and because there were fewer perceived regulatory hurdles.
As of early October, EDF were
considering increasing their bid to out-gun MidAmerican, and Constellation’s
stock rose to $26.04, narrowing MidAmerican’s premium. Constellation, however,
still seems to prefer MidAmerican’s bid. Pipes & Wires will return to this
story as the competing bids progress.
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
·
Southern Africa
Energy Efficiency Convention (Gauteng, 6 – 7 November 2008).
·
Infrastructure
CapEx Summit (Auckland, 24 – 25 November 2008).
·
Advanced
Metering Summit (Auckland, 26 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
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.