From the director…
Welcome to Pipes & Wires #77
… a lot has happened over the last month, with changes of government in both NZ
and the US and a real feeling that the global economic downturn is biting.
Certainly from where I see the world, the downturn seems to have bitten the
energy & utilities sector … regular email bulletins from Forbes seemed to
bear on-going news of declining earnings guidance, with bad news outweighing
good by about 2 to 1 … but with an apparent rebound over the last few days.
This issue of Pipes & Wires
covers a wide spread of deals, some interesting thoughts on regulatory policy
and energy markets, and a few assorted articles on energy policy and industry
structural changes. So until the next issue …. pour yourself a coffee, sit back
and enjoy !!!
About Utility Consultants
Utility Consultants Ltd is a
management consultancy specialising in the following aspects of energy and
infrastructure networks…
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this link.
Regulatory policy
NZ – changes to the Information Disclosure requirements
Introduction
The information disclosure
requirements for electricity lines businesses have been under review for some
time now. In late October 2008 the Commerce
Commission released the Electricity
(Information Disclosure) Requirements 2008. The paragraphs dealing with
asset management plans (AMP) form the subject of this article.
Background
Part 4A of the Commerce Act 1986
sets out the regulatory framework for electricity lines businesses, which
includes inter alia a requirement to
compile and disclose an AMP in what has become an increasingly prescriptive
format.
Changes to AMP disclosure requirements
Para 7 sets out the requirements
for AMP’s, which are broadly as follows…
·
Before the start of each financial year (ie. by 31st
March), a lines business must publicly disclose an AMP that covers a 10 year
planning horizon.
·
The AMP must be prepared in accordance with Chapter 4 of the
Electricity Information Disclosure Handbook.
·
The AMP must be approved by the Board.
·
The AMP must present its’ spend plans in current dollar terms
excluding OpEx, management, administration and overheads. The AM1 report
template in Schedule 12 sets out the cost categories that will need to adopted.
·
A requirement to clearly state all assumptions and the sources of
those assumptions.
·
The requirement to publicly disclose a completed AM1 report within
5 months of the end of the financial year (refer also to Para 18).
·
An increased requirement to report on variances from budgeted
performance.
For help with your 2009 AMP, pick
here
or call Phil on (07) 854-6541.
Disclaimer
Readers should obtain the
Electricity (Information Disclosure) Requirements 2008 and read them in their
entirety. Utility Consultants accepts no liability for actions or failures to
act made on the basis of this article.
UK – update on the 5th electricity price control
Introduction
OFGEM
is currently compiling the price control that will apply to the 14 distribution
licenses in England, Wales and Scotland for the 5 year period starting on 1st
April 2010, known as Distribution Price Control Review #5 (DPCR5). This article
examines a recent letter from OFGEM that sets out some thoughts on a number of
matters.
Background
DPCR5 is the 5th price
control that OFGEM have compiled since privatisation, and embodies a steady
maturing of thought around the whole regulated wires thing. Pipes
& Wires #70 examined OFGEM’s stated objectives (Pipes
& Wires #69 examined OFGEM’s review of the use of RPI-X, but noted that
there would be no fundamental changes to RPI-X for DPCR5).
OFGEM’s latest thoughts
In a letter dated 6th
November, OFGEM set out some further thoughts on DPCR5 as follows…
·
Examining the role of output measures, with a view toward offering
additional regulated revenue in return for sustainable delivery of defined
outputs over and above statutory and license requirements.
·
As part of the bow wave of renewals over DPCR5, incentivising
replacement of dumb assets with smart assets and technologies.
·
Allowing distributors to present cases for increasing CapEx to
reduce distribution losses.
·
In regard to CBD reinforcements, allowing the distributors to
potentially charge only the beneficiaries of reinforcement rather than the
entire customer base.
·
How to build upon the apparent successes of the IQI mechanism.
·
How to mimic the returns on equity with respect to performance
that are available to the competitive sector.
Pipes & Wires will make
further comment as OFGEM’s thoughts develop.
Mergers,
acquisitions & take-overs
NZ – BBI sells 50% of Powerco
Introduction
Staged withdrawals from heavily
leveraged acquisitions are certainly not unknown … the initial wave of US
investments in Australia and the UK certainly went that way. This article
examines Australian merchant bank Babcock
& Brown Infrastructure’s (BBI) sale of a 50% stake in Powerco as part of a planned
de-leveraging.
Background
From humble beginnings as the New
Plymouth MED, Powerco grew to be New Zealand’s second largest electricity and
gas distributor with over 300,000 electricity and 100,000 gas connections
spread across the North Island. When Powerco’s major shareholders decided to
divest their collective 53.6% stake in Powerco in August 2004, Prime
Infrastructure bought the stakes, subsequently mopped up a further 41% stake by
public offer, and then compulsorily acquired the outstanding 5.4% for a
consideration comprising $225m in cash, $135m in bonds, and assumption of $868m
of debt.
The sale
Several months ago BBI announced
that it would sell down 50% stakes in Powerco and WestNet Rail to de-leverage its balance
sheet. This closely followed the sale of Vector’s
Wellington electricity networks to Cheung Kong
Infrastructure (CKI), which made for exciting times in the industry.
After conducting an intensive
market offer for the stakes, BBI announced in early November 2008 that it had
entered into a sale & purchase agreement with Funds managed by QIC for 50% of the
shares in Powerco (which will exclude the Tasmanian gas business). The
transaction is expected to be completed by March 2009, and ascribes a value of
NZ$2.05b to Powerco’s NZ business. BBI expects the nett proceeds of the sale to
be about NZ$400m which will be used to reduce debt and fund organic growth.
The trends
This transaction highlights a
number of interesting trends…
·
The rise of Australian investors widening their portfolios.
Readers may recall that the a consortium including Commonwealth Bank was the successful
bidder for the former NORWEB wires business sold in late 2007 by United Utilities, and that Spark Infrastructure went on
the prowl in the UK about the same time.
·
The cyclic trend from debt-funded acquisitions to equity-funded
(around the time of the Enron collapse in late 2001) back to debt-funded
models, and now back to equity-funded.
·
The sell-down of partial stakes to fund organic growth activities.
This was most obvious in the SP AusNet
and Spark Infrastructure floats in late 2005.
·
The rise of government-owned corporations as investors in infrastructure,
most notably Electricité de France and Singapore Power.
Aus – BG Group pursues Queensland Gas
Introduction
Previous issues of Pipes &
Wires have examined BG Group’s relentless
pursuit of Australian gas producer and retailer Origin Energy to secure gas reserves
for the Asian market which, in the final event, was gazzumped by ConocoPhillips. This article examines
BG’s poke at the Queensland Gas
Company.
Background
As BG’s pursuit of Origin
intensified, it became very apparent that BG wanted access to Australian gas
reserves to feed the export LNG market, and that the other bits of Origin like Contact Energy would be quickly
on-sold. BG made two offers for Origin shares, both of which were sternly
rebuked by Origin who publicly stated that BG’s offer significantly
under-valued the yet-to-be exposed value of Origin’s coal seam gas reserves. In
the end, an independent valuation of Origin following the ConocoPhillips offer
of A$9.6b for 50% of the coal seam gas business suggested that Origin could be
worth as much as $27b or at least double BG’s offer.
BG’s latest moves
In late October news emerged that
BG had made a $5b bid to takeover its partner Queensland Gas and that Australian Gas Light would sell its 24.77% in
QGC into the deal (there was already speculation of a deal involving AGL and
QGC as both had requested trading halts on the ASX).
It was expected that the QGC board would recommend the deal to shareholders in
November.
Pipes & Wires will revisit
this deal as progress emerges as this also links to the article in this issue
on consolidating the Australian upstream gas sector.
Spain – Gas Natural’s bid for Union Fenosa
Introduction
In keeping with Pipes &
Wires’ recent focus on the consolidating French and Spanish energy markets,
this article catches up on Gas Natural’s
bid for Union Fenosa.
Background
Gas Natural has long sought to
lead the consolidation of Spain’s energy sector and has already taken pokes at Iberdrola (back in 2003) and Endesa (in early 2006). As the debt-ridden Grupo ACS sought to sell its 45% stake in
Union Fenosa as part of its joint-bid for Iberdrola, Gas Natural was ready and
waiting to accumulate 100% of Union Fenosa’s shares.
Gas Natural’s initial bid for
Union Fenosa was €18.33 per share, which was a 55% premium on Union’s closing
price. The merger would create a company worth about €30b before any
divestments are made to satisfy regulatory concerns.
Latest moves
The latest moves include…
·
In October Gas Natural received approval from the Federal Competition Commission to takeover
Union’s two combined-cycle power stations in Mexico.
·
As of early November, the latest news was that Gas Natural could expect
merger clearance from the Spanish competition regulator in either late December
or early January, with full completion of the takeover by about May or June
2009.
Pipes & Wires will continue
to follow this deal as progress emerges.
Spain – EDF’s bid for Iberdrola
Introduction
Electricité
De France’s (EDF) various acquisitions seem to be dominating the pages of
Pipes & Wires at the moment. This article follows on articles in Pipes
& Wires #68 and #74 that examine EDF’s bid for Spanish utility Iberdrola in conjunction with Spanish
construction company Grupo ACS.
Background
EDF and ACS launched what was
thought to be a €50b bid for Iberdrola in mid-February 2008. This bid raised a
number of public policy, regulatory and EU competition issues that still don’t
appear to have been answered yet. A key regulatory issue that could emerge is
the breadth and depth of some of these consolidated utilities. If EDF is
successful with the Iberdrola bid, the vertical and horizontal consolidation
will be huge, viz…
·
Vertically, EDF will be on top of a stack three high …. EDF –
Iberdrola – ScottishPower.
·
Horizontally, EDF could own 5 of the 14 UK distribution licenses
and a major generator (still subject to various approvals).
Latest moves
Things seem to be a bit quiet,
although there are rumors that EDF might have gone a bit cold on Iberdrola
after successfully catching British Energy. Pipes & Wires will make further
comment as progress emerges.
Energy policy
Germany – back peddling on the nuclear shut-downs
Introduction
The apparent contradiction
between the shutdown of nuclear power stations and concern over man-made CO2
emissions has received occasional comment in Pipes & Wires. A few recent
thoughts have suggested that concern over emissions is being overtaken by the
threat of severe energy shortages if the planned shutdowns go ahead. This
article examines what appears to be some recent political back-peddling around
shutting down 7 of Germany’s remaining nuclear stations (these stations
generate about 25% of Germany’s electricity).
Background
Back in 2000 the German coalition
government announced its intention to phase out nuclear power. This intention
was subsequently enacted as the Nuclear Exit Law and has already seen plants at
Stade, Obrigheim
and Krummel closed down in November 2003, May 2005 and June 2007 respectively.
In 2005 a new federal government was elected in which Chancellor
Angela Merkel (who has a PhD in quantum chemistry) announced an intention
to re-negotiate the required closures. However her party’s coalition agreement
with the Social
Democrat Party (SPD) saw the closure policy being retained for the time
being.
Recent political manoeverings
Earlier this year Merkel and her
party shifted to an open opposition of the nuclear phase-out and rejected a
compromise by the SPD to postpone further shutdowns in return for a ban on new
nuclear plants. It seems unlikely that any significant policy change will occur
before the next federal election in 2009.
The next round of closures
The 30 year old plus nuclear stations
at Biblis,
Neckarwestheim
and Brunsbüttel
are scheduled for closure in 2010. This will remove about 5,540MW of Germany’s
120,000MW of installed capacity. A quick add up of the capacities of Germany’s
other nuclear stations suggests that a further 14,700MW of capacity could be
shutdown over the subsequent few years. Even if demand growth is slowing,
that’s still over 20,000MW of capacity that needs to be replaced.
The irony of it all
So what are the options going
forward if Germany shuts down 17% of its generation capacity?? There would
appear to be five options…
·
Repeal the closure requirement.
·
Build more coal-fired plants.
·
Import nuclear generated electricity from France.
·
Raise the already-high electricity prices so that demand
contracts.
·
Make a conscious policy decision to operate with a reduced reserve
capacity margin and accept the risk of rolling black-outs and total grid
collapses.
It probably seems a no-brainer to
most of us, but funnier things happen in politics. This could be worth another
look at after the next federal election.
US – the battle for public power in the Bay City
Introduction
Attempts to municipalise private
power utilities are nothing new. Readers may remember from the story of Ezra
Scattergood in Pipes
& Wires #61 that the LADWP became the sole
electricity distributor within the City of Los Angeles around the late 1930’s
by buying the electricity network of the Los Angeles Gas & Electric
Corporation. History also records that this may not have been a mutually agreed
transaction because the Charter of the City Of Los Angeles of 1925 appears to
have given the City a priority right to distribute electricity. It is on that
note that we now look a few hundred miles north to San Francisco where it seems
voters have already rejected moves to municipalise Pacific
Gas & Electric’s networks within the City 11 times over the last
century.
The age old battle of public v’s private power
Supporters of municipalising San
Francisco’s power supply claim that customers of publicly owned utilities pay
significantly lower electric rates than customer of investor-owned utilities
and that customers in San Francisco could pay up to $400 less per year.
Opponents question the estimated cost savings and claim that voting Yes on
Proposition H would allow the City to by-pass a public vote on the specific
issue of either buying PG&E’s network or erecting a competing network.
Prop H, public power and being green
The SF Clean Energy website describes
Proposition H as a measure on the November 4th ballot that would
amend the city and county charter to require the city to transition from
fossil-fuels to clean, non-nuclear, sustainable energy production at affordable
rates. This seems in part to have been prompted by the view that PG&E and
its counterparts will miss the State’s requirement for investor-owned utilities
to generate 20% of their power from renewable sources by 2010.
Another website that ranked high
on Google provides a more thorough description that spells out the objectives
of Prop H just a bit more fully (and addresses issues that SF Clean Energy
failed to disclose)…
·
It would require the California
PUC to evaluate making the City the primary provider of energy within the
City.
·
It would allow the City to issue revenue bonds to fund public
utility activities without any further voter approval (that’s the really spooky
bit … a total lack of accountability to voters).
In short it seems Prop H seems to
be using a clean, green argument to persuade a Yes vote while not telling
voters they will also be giving up any future say on municipalising PG&E’s
business regardless of the cost.
And the votes are in…
By about 60% opposed and only 40%
supporting Prop H, the good folk of San Francisco have rejected the principle
of public power for the 12th time this century. So another
interesting chapter in the on-going ideologically-charged debate of public v’s
private power comes to an end.
Industry structural changes
Aus – consolidating the upstream gas industry
Introduction
Industry consolidations are
typically characterised by sudden flurries of activities interspersed with long
periods of seeming inactivity. The consolidation of the upstream gas industry
in eastern Australia seems to be no exception as this short article examines.
Actual and rumored consolidations
Going back several months there
was general comment that consolidation would occur. Actual and rumored
consolidations to date include…
·
QGC’s planned merger with Sunshine Gas to build an LNG plant at
Curtis Island near Gladstone.
·
Conoco-Phillips
A$9.6b acquisition of 50% of Origin’s
coal seam gas business.
·
A tie-up between Arrow Energy
and Shell.
·
Santos selling 40% of its Gladstone LNG project to
Petronas.
Funnily enough, QGC rejected the
idea that it would be a takeover target. Pipes & Wires will continue to
examine individual deals as they emerge.
CapEx – general interest stuff
Levels of service and their impact on CapEx
This presentation will be made at
the Infrastructure CapEx Summit in November 2008. If you’d like a copy, pick here.
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
·
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.