From the director…
Welcome to Pipes & Wires #80.
This issue examines some very recent regulatory and policy moves in New Zealand
(1 of which is a 2 part series), and then flicks to Europe to examine some
strategy and deals. We also examine some energy policy and tax issues in the US
that make for interesting reading.
About Utility Consultants
Utility Consultants Ltd is a
management consultancy specialising in the following aspects of energy and
infrastructure networks…
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To be sent a detailed profile of
recent projects, pick
this link.
Regulatory
policy
NZ – regulating electricity lines over the next year
Introduction
Pipes &
Wires has been closely following the review
of Part 4A of the Commerce Act 1986 which set out the regulatory framework
for electricity lines businesses. This article takes a quick look at how some
of the detail will work out.
Background
The Minister of Commerce
announced in May 2006 that Parts 4 and 5 of the Act would be reviewed. In
September 2006 Cabinet agreed to a recommendation to include Part 4A in the
review as well in order to keep Part 4A consistent with the provisions of Parts
4 and 5. The Bill was granted Royal Ascent on 16th September 2008.
In the specific context of
electricity lines the Bill proposed to rewrite the existing Parts 4 and 4A of
the Commerce Act 1986 which broadly sets out the price and quality regulatory
framework for electricity lines businesses. A key thrust of the Bill was to inter alia encourage investment in
essential infrastructure.
The regulatory regime for the year ending 31st March
2010
The regulatory regime for the
year ending 31st March 2010 is set out in Subpart
9 of Part 4 of the Commerce Amendment Act 2008, which is broadly as
follows…
·
The Act makes a clear distinction between lines businesses that
are consumer-owned and those that are not (s54D).
·
All lines businesses will be subject to information disclosure
(s54F).
·
Lines businesses that are not consumer-owned will be
subject to default/customised price-quality regulation (s54G).
·
For lines businesses that will be subject to
default/customised price-quality regulation from 1st April 2009, the
current thresholds will roll over for a period of 12 months (s54J).
·
For the period from 1st April 2010, the Commission must
re-set the default/customised price-quality paths according to the process set
out in s53P (s54K).
Next steps
For assistance with interpreting
the Act, or in developing your business’ response, phone Phil on (07) 854-6541
or pick here.
Disclaimer
This article is by necessity
brief and does not purport to be a comprehensive legal analysis. Utility
Consultants accepts no liability whatsoever for any action or inaction taken on
the basis of this article.
Aus – setting the Cost Allocation Method
Introduction
Businesses that include regulated
and unregulated activities are usually required to allocate costs between those
activities in a prescribed manner, principally to ensure that monopoly
customers do not subsidise competitive activities. As part of Pipes &
Wires on-going coverage of the Australian wires re-sets, this article
examines the Australian Energy Regulator’s
(AER) recent approval of the Cost Allocation Method (CAM) that will be used by
Queensland distributors Energex and Ergon Energy to allocate their costs for
the 2010-2015 control period.
Legal basis for the CAM
Paragraph 6.15.4 of the National Electricity Rules (NER)
requires each distributor to submit its CAM to the AER for approval. The CAM
must be consistent with, and give effect to, the AER’s Cost Allocation
Guidelines (CAG).
What will the CAM be used for ?
The CAM will be used for inter alia ...
·
Compiling OpEx and CapEx forecasts pursuant to paragraphs 6.5.6
and 6.5.7 of the NER.
·
Pricing negotiated distribution services.
·
Preparing annual statements.
·
Estimating the CapEx that will be rolled into the RAB.
The AER’s approval of the CAM’s
The AER has to assess the CAM
against the following criteria…
·
Directly attributable costs must align with a category of
distribution services.
·
Shared costs must be allocated consistently and transparently
between regulated and unregulated activities.
·
Compliance with the cost allocation principles in the NER.
·
Compliance with the CAG.
Both CAM’s were assessed as
compliant, and the AER gave its approval of both CAM’s in February 2009.
NZ – examining the “Ministers’ List”
Introduction
S54D(3)
of the Commerce Amendment Act 2008 requires the Minister to publish in the
Gazette the names of all electricity lines businesses that are consumer-owned.
This article examines the first publication of the Minister’s List in March
2009 (which is noted in the Act as having no legal effect).
Background
One of the key thrusts of the
Commerce Amendment Act 2008 was that consumer-owned lines businesses would be
(in broad terms) freed from price-quality regulation if the governance
mechanisms met a prescribed level of accountability to consumers. This was
recognised as a huge break through for common sense, so one can only imagine
the head scratching when the Ministers’ List included only 8 of the 15 lines
businesses that would practically be recognised as consumer-owned.
The Ministers’ List
The indicative list (noting that
this was taken from a Commission
consultation paper) includes only the following lines businesses…
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· Electra |
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Examining the basis for inclusion in the Ministers’ List
A closer look at s54D(1) of the
Act reveals paragraphs (a) and (b) to be pivotal as follows…
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Criteria |
Eliminates |
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The lines business must be 100%
consumer owned. |
Alpine Energy, Aurora Energy, Electricity Invercargill, Horizon Energy, MainPower, Nelson Electricity, Orion, OtagoNet, Powerco, Vector and Wellington Electricity. |
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Trustees (or directors of a
co-op) must be elected solely by consumers. |
Centralines, Eastland Network, Electricity Ashburton, The Lines Company and Top Energy. |
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At least 90% of consumers must
be eligible to vote in Trust elections |
Those remaining from the above
analysis are Buller Electricity, Counties Power, Electra, Marlborough Lines,
Network Tasman, Network Waitaki, Northpower, ScanPower, The Power Company,
Waipa Networks, WEL Networks and Westpower. So it begs the question why Counties Power, Network Tasman, ScanPower and Waipa Networks have been
indicatively deemed to not be consumer-owned.
It appears that their Deeds
contain 1 or more of these potentially offending provisions…
·
If the number of candidates standing for election is less than the
number of vacant seats on the Trust, any vacant seats may be filled by the
remaining Trustees appointing a Trustee.
·
If a seat is vacated (through death, resignation or becoming
ineligible), the remaining Trustees may appoint a Trustee to fill the vacant
seat (usually for the remainder of the vacating Trustee’s term).
At paragraph 10 of its’
Consultation Paper the Commerce Commission
notes that appointment of Trustees other than by direct election (ie. inclusion
of either of the above provisions) would breach s54D(1)b. In the strictest
sense of the law that is true, but the practical reality is that these clauses
tend to be rarely invoked and even if they are does it really ignore the “will
of the people”.
Next steps
The Commission will receive
submissions on this issue until 5pm on Friday, 3rd April 2009.
Business strategy
Europe – examining Vattenfall’s strategy
Introduction
Readers might remember that Pipes &
Wires #23 and #48 examined E.On’s “On
Top” strategy. This article examines the strategy of another emerging European
giant, Swedish utility Vattenfall.
Some comments on strategy
Most of us appreciate that any
organisation’s strategy is ultimately revealed by its portfolio of fixed
assets, and electric utilities are no exception. Pipes & Wires regularly
discusses the mergers & acquisitions that are consolidating the European
energy sector (along with the various commercial and regulatory drivers that
are creating opportunities) and broadly speaking, most utilities strategies are
to increase their market share. However not everyone can increase their market
share ... there must be losers in there somewhere as well as winners !!!
Vattenfall’s strategy
Just within the last few months
Vattenfall emerged as an unsuccessful bidder for Dutch utility Essent, and is currently stitching up a deal
for 100% of Essent’s rival, Nuon (refer to
separate article in this issue). So that tells us that Vattenfall has a
strategy of acquisitions in continental Europe … that’s consistent with its
existing operations in Germany, Poland, Holland and the UK, and certainly
consistent with its stated mission of being a leading European energy company
... but is that all it tells us ? Vattenfall does have 5
clearly stated strategic ambitions…
·
To be #1 for the environment.
·
To be #1 for the customer.
·
To be the employer of choice.
·
To be the benchmark of the industry.
·
To continue profitable growth.
If it stopped there it would be
pretty throw-away. However, reading from the extract
from Vattenfall’s annual report, each of the ambitions includes a statement
of the challenges and opportunities, a series of strategies to address those
challenges and opportunities, and a statement of FY2007 progress towards each
ambition (way more than can be reasonably described in a brief article). The
strategy pages are worth taking the time to read … its only 12 pages of very
readable stuff.
Europe – EDF feels the heat whilst E.On powers on
Introduction
Most of us are feeling the
squeeze of the global economic slowdown, with even those in markets considered
to be reasonably price inelastic starting to squeal a bit. This article
examines some recent news reports presenting the diverging fortunes of 2 of Pipes
& Wires common subjects, Electricité De France
(EDF) and E.On.
A bit of background
Both EDF and E.On have been
obviously acquisitive over recent years, as evidenced by their ever-expanding
footprint across Europe and the UK. In some ways that’s where the similarity
ends, as E.On has used its massive cash reserves to fund acquisitions whilst
EDF seems to have debt-funded its acquisitions.
So what’s going on ?
Whilst EDF’s debt seems to have
increased by about €9b over the last year, leaving it with some of the highest
debt levels in the industry, industry commentators are not seeing warning
lights (yet). Despite this, EDF has indicated that it will look forward to
off-loading about €5b of assets (which will no doubt become part of someone
else’s growth strategy). Meanwhile, E.On has been recommended by leading
brokerages, has successfully refinanced €4.5b of debt at low interest rates and
reported an EBIT increase of 7.8% for the quarter over the same quarter last
year.
What does the way forward look like ?
Well, it does seem that EDF and
E.On will tread 2 increasingly divergent paths…
·
EDF is likely to sell €5b of assets to ease its debt level, and
seems to be hovering just short of the danger zone for investor confidence.
·
E.On has reiterated its guidance for full year EBIT growth of
between 5% and 10%, and restated its 2010 EBIT target of €12.4b. E.On also
intends to spend about €4b over the next 3 years to diversify its gas supplies.
Both businesses are obviously
very complex, but it seems that the key difference between EDF and E.On is
their use of debt, and it certainly seems to support the wisdom of controlling
debt levels.
Industry governance
NZ – reviewing electricity sector governance
Introduction
It wouldn’t be unfair to say that
electricity sector governance in NZ has had a long and tough journey over the
past 5 or 6 years. This article is the first in a 2 part series which examines
likely changes to the governance arrangements under the new National government.
Background
The current governance
arrangement of an Electricity
Commission was established by the previous Labor Government when the
electricity industry failed to agree on a self-regulation model. Perhaps the
single aspect of the Commission’s work that is most in the public eye is its
rejection of several of Transpower’s
major grid investment plans. However in all fairness to the Commission, the
popular media hasn’t tended to make a big deal about the investment plans that have
been approved.
The Minister’s recent pronouncement
At the National Power Conference in
February 2009, the Minister
of Energy & Resources, the Hon. Gerry Brownlee, expressed the belief
that disentangling the regulatory overlap between Transpower, the Electricity
Commission and the Commerce Commission
is desirable.
This was reported in the National
Business Review as signaling a serious challenge to the Electricity
Commission’s continued existence, which seems to correlate well with National’s
election policy that noted disestablishment of the Electricity Commission as a
possible option.
The revised draft Government Policy Statement
On the 2nd of March,
Brownlee released a revised
draft Government Policy Statement (GPS) for consultation. Part 2 of this
article will provide an analysis of the revised draft GPS.
Energy policy
US – taxing new power lines
Introduction
A Bill was recently introduced into the West Virginia legislature by Governor Joe Manchin that
would extend state business taxes to cover electric transmission lines
operating at more than 450kV that cover more than 50 miles in the state. Pipes &
Wires examines whether this Bill has a sound basis or whether it is just a
convenient means of boosting the states’ coffers.
The
proposed transmission lines
The proposed tax would target 2 very
significant transmission lines…
·
Allegheny Energy Inc proposes to
erect a $1.3b, 240 mile long 500kV line between Washington County, Pennsylvania
and Loudoun County, Virginia to deliver extra electricity to 13 eastern states.
The line would pass through 6 counties in West Virginia and would be known as
the Trans-Allegheny Interstate
Line (TrAIL).
·
American Electric Power and Allegheny Energy propose
to erect a 285 mile long 765kV line from the John Amos power station near St
Albans. This line would be known as the Potomac Appalachian Transmission
Highline (PATH).
Manchin’s
Bill
Manchin floated the idea of a tax on
transmission lines in May 2008 and again in August 2008 after the West Virginia Public Service Commission
approved the TrAIL. The proposal was introduced as both House
Bill 3000 and Senate Bill SB505.
The precise calculation of the annual tax
appears to be [voltage] x [length] x [$750]. On this basis TrAIL would pay
about $45m and PATH would pay about $90m. It appears that the tax proceeds
would be equally split 3 ways … between the 6 affected counties, the state’s
infrastructure fund and the PSC (who will use their share to refund customers
exposed to price increases).
The
utilities views on the proposed tax
Allegheny endorsed the principle of a tax
when Manchin first proposed it last year. AEP has also not opposed Manchin’s
Bill, stating that “we respect the right of the state to tax various
properties”.
So
does the tax have a sound basis ?
In making this judgment, some suitable
criteria need to be identified. These should probably include issues such as
the philosophical basis for the tax, the analytical basis for deciding on the
amount of the tax, and what the proceeds will be used for.
·
Philosophically
it does seem that new transmission lines are being seen as a convenient target
for raising funds (perhaps even more cynically, knowing that the tax can probably
be treated as a pass through cost and the utilities will take the public heat
because everyone’s bills increase).
·
Analytically,
the figure of $750 seems a bit arbitrary, almost as though it has been set with
an end in mind.
·
In
terms of the proceeds, the 1/3 that goes to the 6 counties seems like a bit of
lolly scramble, as there is no obvious mention that this will be used to compensate
affected property owners, whilst the 1/3 that goes to the PSC to offset price
increases seems like a redistribution of wealth (why not leave that money in
those customers pockets to start with).
So, all in all, it’s hard to see
a sound basis for this tax.
US – overseeing the electricity super highway
Introduction
The rest of the world seems to be
waking up to what the electrical community has known all long – that increased
renewables (usually always interpreted as wind) needs increased transmission
capacity. This article examines the Bill recently introduced by Senate Majority Leader Harry Reid (D-Nev)
that would give the FERC backstop authority
to approve new transmission lines if states delayed approval, and also asks
what it will do that the Energy Policy Act 2005
won’t do.
The Bill
Simply put, Reid’s Clean
Renewable Energy And Economic Development Act will make it easier to build
long inter-state transmission lines from rural areas into dense metro areas
because historically, states had vetoed such lines because there was no benefit
derived from simply being someone else’ transmission corridor. Key aspects of
Reid’s Bill include…
·
Section 403 will require transmission for renewable energy to be
considered on an integrated national basis rather than the currently fragmented
West-East-Texas basis.
·
Section 404 will allow developers of transmission for renewables
to apply to the FERC for corridor location as an alternative to dealing with
individual states along the proposed route.
·
Section 405 allows the Department Of Energy to make grants to
individual states for a wide range of renewable initiatives.
But doesn’t the Energy Policy Act 2005 already give the FERC these
powers ?
Readers might remember from Pipes
& Wires #71 that Title XII, Subtitle B of the Energy Policy Act 2005 provides
for the Secretary
of Energy to conduct a study of transmission congestion every 3 years and
to designate any geographical area experiencing serious constraints as a National
Interest Electricity Transmission Corridor (NIETC). Buried a bit further down Title
XII is a broad provision for the FERC to grant approval to modify or construct
transmission lines in a NIETC if State regulators have withheld approval for
more than 1 year after the filing of an application. So it seems reasonable to
ask what the need for Reid’s Bill is if the FERC already has broad powers to
override state-based siting decisions.
Last month (February 2008) the
FERC’s power’s were somewhat chastened when the Fourth
Circuit Court Of Appeals in Virginia ruled that the FERC could only permit
transmission lines if a state had withheld its decision for more than 12
months, but that the FERC could not overturn state decisions. It appears that
the FERC had interpreted the phrase “withheld” as including “denied” as well as
“delayed”. By a 2 out of 3 majority, the Court ruled that making a clear
decision to deny a permit for the line was different to delaying a decision,
and therefore Title XII did not give the FERC the authority to overturn a clear
decision made within 12 months.
A practical example of Title XII at work
A pertinent practical example is
the New York Regional Interconnect,
which is proposing a 200 mile HVDC transmission line from upstate to the
power-hungry south-eastern metro areas. This line is currently under
consideration by the Public
Service Commission of New York, and here’s where the Court’s ruling is
important !!! If the PSC denies the application by 7th August
2009, the FERC will not have the power to overturn that denial. If, however,
the PSC fails to make a decision (either approval or denial) by 7th
August 2009, the FERC’s jurisdiction can be invoked.
Pipes & Wires will revisit
this issue later in the year to see how this matter has been settled.
Mergers,
acquisitions & take-overs
NZ – clinching the Powerco sell-down
Introduction
Pipes
& Wires #77 examined Australian merchant bank Babcock & Brown Infrastructure’s
(BBI) sale of a 50% stake in Powerco as
part of a planned deleveraging of its balance sheet. This article briefly notes
the final closing of the sale of this 50% stake to Funds managed by QIC that ended up
being a 58% stake.
Background
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 excluded the Tasmanian gas business). The
transaction was expected to be completed by March 2009, and ascribed a value of
NZ$2.05b to Powerco’s NZ business. BBI expected the nett proceeds of the sale
to be about NZ$400m which was to be used to reduce debt and fund organic
growth.
The final deal
In a media
release in late February 2009, BBI announced that closure of the deal
required the consideration to be restructured so that Fund managed by QIC would
take a 58% stake in Powerco for a consideration of NZ$423. Associated with the
sale of the increased stake were several undertakings made by BBI to its
lenders.
Europe – Vattenfall catches Nuon
Introduction
Pipes
& Wires #79 examined the possible sale of Dutch utility Nuon to Swedish utility Vattenfall. This article examines
Vattenfall’s recently announced deal to acquire Nuon.
Background
There are a heap of different
background issues to be considered, but just briefly some of the issues are…
·
Vattenfall’s strategy (examined in a separate article in this
issue).
·
Nuon’s failed merger with fellow Dutch utility Essent, and Essent’s subsequent acquisition by
RWE.
·
The on-going background presence of acquisitive giants such as E.On and Electricité
De France.
·
The huge acquisition opportunities created by E.On’s anti-trust
settlement with the EU.
The deal is closed !!!
Vattenfall will pay €8.5b cash
for 100% of Nuon in a deal that will see Vattenfall initially own 49% of Nuon,
and increase its stake to 100% of the next 6 years. It appears that Vattenfall
will dip into its war chest (thought to contain between €7b and €10b) to fund
the acquisition. Industry comment suggests that this will be the last of the
flurry of large European mergers as the financial markets get a bit jittery.
The strategy behind the merger
The separate article in this
issue of Pipes & Wires on Vattenfall’s strategy notes that one of the
strategic ambitions (To Continue Profitable Growth) includes various tactics of
growth by acquisition and levering off geographically close markets. So presumably
the first step of integrating the merger will be to extract the synergies from
Vattenfall and Nuon’s various businesses.
A bit of light reading…
Book review – “Connecting The Country”
Helen Reilly’s latest book
“Connecting The Country” is a history of NZ’s national grid from 1886 to 2007
that interestingly enough splits into the development of the AC and DC systems.
Filled with photos, anecdotes and witty stories this is a really worthwhile
read.
Order your copy from Transpower’s web site … cost
is $60 incl. GST.
Wanted – old electricity history books
If anyone has an old copy of the
following books (or any similar books) they no longer want I’d be happy to give
them a good home…
·
White Diamonds North.
·
Northwards March The Pylons.
·
A Jubilee History Of The Auckland Electric Power Board (1972).
CapEx – general interest stuff
Levels of service and their impact on CapEx
This presentation was 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
With an RMA overhaul, local body governance
reform, and increased funding for critical projects all in the pipeline, the
stark reality is that the national infrastructure landscape is set to evolve
rapidly under the new Government. The question is - how will you adapt to these changes?
Conferenz’s Fast-tracking National
Infrastructure Summit will outline
all of the changes and their likely effects on your organization…
· The
need for cross-industry co-ordination in infrastructure policy
· Planning
for the new fast-tracked RMA consultation process
· Prospects
for local body governance
· Defining
the criteria for “projects of critical national importance”
· Examining
different funding mechanisms - how will PPPs fit in under the new Government?
Make the investment
and get ahead of the curve. Register now by phoning Conferenz on (09) 912 3616,
Email register@conferenz.co.nz or Register Online at www.conferenz.co.nz
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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.