From the director…
Welcome to Pipes & Wires #87.
This month we cover a fairly wide range of global matters including regulatory
decisions, policy shifts and a possible re-start to some M&A activity in
Europe. As usual, comments are welcome.
Join Pipes & Wires at Linked In
Pipes & Wires now has an on-line group for readers
to keep in touch on a more regular basis, bounce ideas around or raise issues
and concerns. Pick here
to visit my Linked In profile and add me
to your connections.
About Utility Consultants
Utility Consultants Ltd is a
management consultancy specialising in pretty much all aspects of energy and
infrastructure networks – pick here to see more, or
to be sent a detailed profile of recent projects, pick
here.
Regulatory policy
NZ – safety management systems set to become law
Introduction
Pipes
& Wires #62 examined recent amendments to the Electricity Act 1992 (and
to the Gas Act 1992) that will require an increased emphasis on public safety. The
draft Electrical
(Safety) Regulations 2009 made pursuant to the amended Acts were recently
released for consultation by the Ministry of Economic Development. This article
reviews the amended Acts and the draft Regulations and sets out some steps for
meeting obligations.
Legal framework
The Energy
Safety Review Bill was introduced to Parliament
in 2005 to implement the recommendations made by the EnergySafe
Working Party in 2001. The Bill had a two-fold
purpose…
·
To improve the electricity and gas safety regimes to effectively
protect the public and property.
·
To improve the occupational regulation of electrical workers, gas
fitters, plumbers and drain-layers. A key aspect of this purpose is
competency-based licensing.
As
the legislative process proceeded, the Bill was split and was eventually passed
into law as 4 separate Acts...
·
Electricity
Amendment Act 2006.
·
Health
& Safety in Employment Amendment Act 2006.
·
Ministry
Of Energy (Abolition) Amendment Act 2006.
The
Electricity Amendment Act 2006 modified the Electricity Act 1992 as follows...
·
Section
12 of the Electricity Amendment Act 2006 inserted a new Section
61A into the Electricity Act 1992. The insertion simply says “Electricity
generators and electricity distributors must have safety management systems”.
·
Section
27 of the Electricity Amendment Act 2006 inserted new Sections
169A and 169B
into the Electricity Act 1992. Section 169A sets out the matters that any
Regulations must include and may include, whilst Section 169B
sets out two miscellaneous provisions.
As of early September 2009, the Electricity
Amendment Act 2006 was not yet in force, and will be bought into force in
parallel with the Electricity (Safety) Regulations 2009 (provisionally timed
for 1st January 2010).
The draft Regulations
The draft Regulations cover many safety
related issues (which readers should examine for themselves), however a key
focus is in Part 3 of the draft Regulations which addresses safety of works and
sets out the matters a Safety Management System must address. It is very
process based, and broadly includes the need to systematically identify, assess
and eliminate hazards.
Next steps
It is likely that some changes
will be made to the draft Regulations as a result of the recent consultation
process. Notwithstanding any timing requirements resulting from any changes,
the draft Regulations were expected to come into force on 1st
January 2010. The requirements of the draft Regulations are to have an SMS
implemented and audited by 31st December 2011.
Disclaimer
This article is not intended as
specific legal or consulting advice, and of necessity summarises matters into a
flowing, narrative style. Neither Utility Consultants Ltd nor its’ directors or
shareholders accepts any liability for any action or failure to act based on
this article.
Regulatory determinations
NZ – final approval for the 400kV grid
Introduction
After what seems forever - Pipes
& Wires coverage started in May 2005 - the final go-ahead for the so-called
400kV grid (more correctly known as the North Island Grid Upgrade
Project) was given last month. This article recaps the scope of the grid
and examines the final process steps.
A short (very short) history of the NIGUP
The proposed 400kV grid was
already controversial when the interim
route decision was released 4½ years ago. Amongst the more bizarre aspects
of the approval process was the Electricity Commission’s rejection of the basic
400kV proposal whilst the Minister of Energy instructed Transpower to proceed
with detailed planning.
In June 2007 the Electricity Commission
gave its final
approval to an amended version of the original 400kV proposal. Anti-pylon
group New Era Energy sought a judicial review of that decision, claiming inter alia that the Commission had
pre-determined its approval. This process drew on throughout the first half of
2009, with the High Court declining New Era’s application and New Era’s
subsequent decision to appeal the High Court’s decision (which brings us to
about now).
On a parallel path to the
investment approval issue was the equally torturous environmental approval. As
the line route crossed so many councils, the then Minister for the Environment
used the call-in powers of the Resource Management Act 1991 to have the matter
heard by a Board Of Enquiry.
The final approval
In September 2009 the Board Of
Enquiry released its decision to approve the NIGUP after having previously
released its draft decision in May 2009. So at last Transpower can get stuck in
build what will New Zealand’s biggest infrastructure project since the HVDC
Pole 2 replacement in 1991.
The story at length
Interested readers can follow the
story across Pipes & Wires #40, #45, #47, #51, #82
and #83.
Aus – the NSW gas pipes draft decision
Introduction
Jemena
Gas Networks recently submitted its proposed access arrangement for its NSW
gas networks for the 5 year period beginning on 1st July 2010 to the
Australian Energy Regulator (AER). This
article examines the proposal to provide some context for future analysis as
draft and final decisions are made.
Assets covered by the proposal
The assets covered by the
proposal include 24,000km of gas pipelines serving just over 1,000,000
customers in the Australian state of New South Wales. These assets were
formerly owned by Australian Gas Light
which sold them to Alinta which in turn
sold them to a consortium led by Singapore
Power and Babcock & Brown.
Key elements of the proposal
The proposal sets out several
tables of unit charges under the heading of Initial Reference Tariffs which
unfortunately do not lend themselves to easy comparison between draft and final
proposals and decisions as other access decisions have been examined. The
classes of charges include...
·
Demand capacity rates.
·
Demand throughput rates.
·
Provision of basic metering.
·
Volume throughput.
·
Fixed charges.
·
Minimum aggregate charge.
·
Meter reading charges.
·
Ancillary services
Pipes & Wires will make
further comment around February 2010 as the draft decision emerges.
UK – progress on the 5th electricity price control
Introduction
OFGEM
is currently working on the 5th
electricity distribution price control review (DPCR5) which runs for the 5
years starting on 1st April 2010. This article updates progress on
DPCR5 to set the scene for some final analysis and comment.
Progress on DPCR5
Progress to date on DPCR5
includes...
·
Release of OFGEM’s initial consultation paper in March 2008, with
consultation until June 2008.
·
Working with distributors over the period July to November 2008 to
finalise expected costs.
·
Release of further thoughts on how desirable policy outcomes might
be incentivised.
·
Release of a policy paper in December 2008 setting out OFGEM’s 3
key policy objectives for DPCR5.
·
Publication of the methodology and initial results in May 2009.
·
Release of various papers discussing how various classes of costs
would be treated.
·
Compilation of initial proposals.
Next steps
The next steps will include
responses to initial submissions, compilation of final submissions, and final
decisions. Pipes & Wires will examine the final submissions and OFGEM’s
final decisions probably about March 2010 which will conclude coverage of
DPCR5.
Energy policy
Bulgaria – examining the nuclear policy
Introduction
This month Pipes & Wires
examines Bulgaria’s nuclear policy, a country that most of us probably know very
little about. Bulgaria generates about 12,000 GWh of its annual 38,000 GWh from
nuclear, with most of the balance being coal-fired.
Bulgaria’s entry to the nuclear age
Bulgaria’s only nuclear power
station is near the Danube River town of Kozloduy, near the Romanian border. Construction
began at Kozloduy
in 1967 and the station entered commercial operation in 1974. The station
comprised 6 units as follows, which at its peak would’ve generated about 3,760
MW...
·
Units 1 to 4 were VVER
440/230 reactors. Units 1 and 2 were decommissioned at the end of 2003 as
part of a 1993 agreement between the European Bank for Reconstruction and
Development and the Bulgarian government. Units 3 and 4 were shutdown in 2006,
just hours prior to Bulgaria’s accession to the EU (despite being originally
licensed to operate to 2011 and 2013 respectively, and being certified as fit
to operate beyond those dates).
·
Units 5 and 6 are VVER 1000 reactors, commissioned in 1988 and
1993 respectively.
The VVER reactors are the Soviet
equivalent of the western PWR
reactors, and were operationally safer than the graphite-moderated RBMK reactors used at Chernobyl
(although this was simply because the RBMK’s were built without containment
structures to reduce costs).
The EU accession issue
As a prelude to Bulgaria’s
accession to the EU, Bulgaria had previously agreed in 1993 to decommission the
4 VVER 440 reactors at Kozloduy which had been deemed unsafe, but subsequently
failed to abide by that agreement. In 1999 the EU required Bulgaria to commit
to the closures before accession talks could begin, and so in 2002 Bulgaria
agreed to close the 4 reactors, which in the final event occurred only hours
before Bulgaria’s accession. The closure is still highly controversial, and the
Bulgarian government is seeking to have them reopened on the basis of remedial
work that was done well prior to closure and approved by the International Atomic Energy Agency.
Recent (pre-election) nuclear policy
Until recently Bulgaria’s policy was
to embrace nuclear power, and accordingly in 2008 a start (or more like a
re-start) was made on a new nuclear station near Belene in
northern Bulgaria. Belene will comprise 2 third-generation AES 92 VVER reactors
supplied by Atomstroyexport,
Areva and Siemens
with commissioning expected at the end of 2013 and 2014 respectively. Key
policy drivers included the need to substitute for the closure of the 4 VVER
440 reactors at Kozloduy, and the need to reduce dependence on imported Russian
gas.
Current (post-election) policy
The new conservative government
that was elected in July 2009 has agreed to review the Belene contracts in
conjunction with the Russian contractors. Officials from the new government
claim that Bulgaria has no need for Belene, and options include scrapping the
project and reducing the Bulgarian governments 51% stake to around 22%. In an
interesting twist, we see a shift from a socialist government embracing nuclear
power to a conservative government questioning the need for nuclear power.
Germany – forming the nuclear policy post-election
Introduction
Pipes & Wires has been
examining the nuclear energy policies of various European countries, and
previously noted that it would be worthwhile re-visiting Germany’s policy after
the September
2009 federal election. This article provides some analysis and comment
following the election.
Background
Pipes
& Wires #77 noted a shift in thinking by Germany’s ruling party to
actively embracing nuclear power, but also noted that any formal policy shifts
would be unlikely before the Federal election of September 2009. Pipes
& Wires #85 provided a quick summary of the key parties positions and
indicated that if Angela Merkel’s Christian
Democratic Party (CDU) could form a coalition with the Liberal
Democratic Party (LDP) it would reverse the Nuclear Exit Law 2000.
The election results
As pre-election polls suggested
would happen, the Social
Democrat Party (SPD) took a pasting at the ballot box, losing 76 seats. The
CDU (and its sister party the Christian
Social Union) gained 13 seats but suffered a slight loss in overall share
of the popular vote, whilst the Free
Democratic Party (FDP) gained 32 seats. The CDU/CSU and the FDP have
announced their intention to form a center-right coalition led by Merkel whilst
the SPD conceded defeat. Interestingly enough, both the Left and the Greens won
large gains in the popular vote (but no sufficient to gain any significant
representation).
Shaping the nuclear policy
Little time was lost in
reaffirming the coalition government’s taste for nuclear energy, with a formal
statement emerging from the CDU that Germany needed nuclear energy as a bridge
until renewable are able to fill the gap - key issues cited were dwindling
primary energy sources, high oil prices and global warming. Meanwhile the head
of the Greens said opposing any change to the nuclear phase out would be her
top priority.
Aus – lifting the retail electricity price caps
Introduction
A key feature of energy sector
reforms is the shift from regulated energy prices (or price caps) to allowing
the market to set energy prices. This article examines the findings of the
Productivity Commission’s Annual
Review of Regulatory Burdens on Business which urges the completion of the
energy sector reforms that began 15 years.
The role of the Productivity Commission
The Commission is the Australian Government’s key
advisor on economic, social and environmental issues. As the name suggests, the
emphasis of the Commission’s work is to life the economic productivity and
hence standard of living of all Australians.
The review’s findings
Chapter 5 of the Review addresses
electricity, gas, water and sewage. The second point in the chapter summary
concludes that...
·
Retail price regulation is distorting consumption and investment
decisions.
·
Those caps should be abolished by individual states and
territories as soon as effective competition has been demonstrated.
·
Until the caps are abolished, retail prices should allow for pass
thru’ of any carbon tax costs.
·
The Energy Markets Agreement should be strengthened to ensure
stronger and clearer commitments to competition reviews.
Interestingly enough, the first
point in the chapter summary recommends that the Australian Energy Regulator
investigate ways of reducing the cost and complexity of network access reviews.
Abolishing the retail caps
The review notes that the Australian Energy Market Commission has
completed competition reviews for Victoria and SA, and had scheduled reviews
for NSW in 2009 and the ACT in 2010. However the NSW review has been deferred
until 2011 due to the possible privatisation of the generation companies.
The Victorian review concluded
that competition is effective in both electricity and gas, and as a result
retail price caps were abolished in January 2009. Similarly the SA review found
that there is effective competition (although more so in electricity than gas)
and that retail price caps should be abolished no later than December 2010 for
electricity and June 2011 for gas. However the SA Minister for Energy rejected
the AEMC’s recommendation for the time being – given the unending political
sensitivity of energy prices, it’s perhaps not surprising.
Asset strategy
Managing the CapEx
Introduction
Asset management as a discipline has matured
over the last 15 or years or so, from a backroom amalgam of engineering and
finance to a globally recognised discipline in its own right. This article is a
re-print from Local Government magazine and presents my views as an asset and
regulatory strategist that the next (and possibly the first) really big
challenge will be managing the huge wave of CapEx over the next 10 years or so
… it is generally recognised that the global cost will run into trillions of
dollars !!!
What’s
this huge wave of CapEx ??
This huge wave of CapEx is the Renewal and
Upsizing of assets that are either…
·
nearing
the end of their useful engineering lives, or
·
are
not big enough for the job at hand.
This wave goes by various names such as “the
bow-wave” or in the electricity sector “the wall of wire”. Although there are
some pockets of unbelief, the reality of a bow-wave … call it what you will …
of Renewals and in some cases Upsizing is imminent.
How
can we manage this huge wave of CapEx ??
The short answer is through organisation-wide
structures, systems and processes. Although the actual physical work of digging
holes, pouring concrete and bolting together steel might seem at most to
require some sharp project management (which it undoubtedly will) the sheer
amount of work needing to be done will require additional structures, systems
and processes.
So
what are these structures, systems and processes ??
My view (and I’m happy to debate this one) is
that the bow-wave of CapEx is just so big and so all-embracing that it require
organisations to jump out of their asset management loop and have a dedicated
CapEx function … we’re already seeing some of the more forward-thinking infrastructure
owners establishing a CapEx project delivery function reporting directly to the
CEO. Underpinning this delivery structure is the need for a well defined CapEx
Governance process that defines objectives, accountabilities and processes for
the entire CapEx process, from the initial thoughts through to analysis,
justification and approval, and on through design and construction.
Many of your organisations will be doing most
of these things, some to a high degree of sophistication with extensive
analytical tools whilst others with more limited resources may be forced to use
less sophisticated means such as the back of fag packet. What will be important
going forward is the need to get demonstrable continuity and connection between
all these various clusters of processes and potentially prove to an external
regulator that oodles of rate-payers money is being used wisely.
To learn more about the disciplines of asset
management and CapEx visit www.utilityconsultants.co.nz
or www.capex.cjb.net or call Phil on
(07) 854-6541.
Mergers & acquisitions
UK – EDF looks to sell the UK wires
Introduction
News emerged a while ago that Electricité De France (EDF) is looking to sell
its UK electricity distribution business, EDF
Energy. This article examines the background to the deal, the likely deal
value, and what (if anything) we can discern from EDF’s strategy.
Background
EDF has made strong moves to
expand its international presence - readers will recall that Pipes & Wires
has covered EDF’s acquisition of British
Energy and its moves on Constellation
Energy in the US. A while back some analysts began asking whether maybe EDF
had bitten off more than it could comfortably chew, and is now having to sell
assets in a rather sluggish M&A environment to retire what is thought to be
about €5b debt.
The likely deal value
EDF Energy has a regulated value
(RAV) of around £3.5b, and is thought to be going on to the block for about
£4b. Likely bidders are thought to include....
·
Abu Dhabi Investment
Authority.
·
Cheung Kong
Infrastructure (which already owns a stake in Northern Gas Networks).
·
Ontario Teachers’
Pension Plan
·
Morgan
Stanley Infrastructure
·
Global Infrastructure
Partners
·
RREEF (Deutsche
Bank)
It might be rather surprising
that E.On doesn’t appear amongst the list, unless
their appetite for further regulated businesses in the UK has dampened.
What can we discern about EDF’s strategy ?
Any organisation’s strategy is
ultimately manifest in fixed assets, so reshuffling portfolios of assets on
such a grand scale should give some insights into EDF’s strategy. Two
possibilities come to mind...
·
The preference for selling the UK wires business, keeping the UK
energy business and continuing with the Constellation bid in the US could
suggest an “unregulated” strategy ahead of the likely unbundling in the EU zone.
·
Maybe the need to raise as much cash as quickly as possible to
keep the parent company afloat is more pressing, and selling the regulated
business was seen as a more lucrative move – a bit of an arbitrage strategy.
No doubt all will be revealed in
time, and Pipes & wires will make further comment as news emerges.
Energy markets
France – gas under pressure
Introduction
The EU’s crusade against alleged
collusion in energy markets continues. Following an examination of the fines
levied on E.On and GDF Suez in Pipes
& Wires #86, this article looks at the EU’s investigation that Gaz De France’s practice of reserving LNG import
capacity amounts to abusing a dominant market position.
The EU’s concerns
The core of the EU’s concern is
that GDF Suez practice of long-term reservations of LNG regasification and
pipeline capacity constitutes abuse of a dominant market position (I guess
their reasoning is that an operator subject to competition would not be able to
do that).
GDF Suez’ commitments
GDF Suez has made the following
commitments to the EU...
·
To sell up to 3.1 BCM of entry capacity per year from 1st
October 2010 to third parties across various entry nodes, increasing to 4.175
BCM per year from October 2011.
·
To sell upstream transport capacity to third parties until 30th
September 2027 at Waidhaus
and Medelsheim, and until 30th September 2025 at Zeebrugge and
Blaregnies.
·
If requested by buyers, sell capacity until 30th
September 2018 at NBP and Zeebrugge IZT.
·
To sell LNG terminal capacity of 1 BCM per year at Montoir de
Bretagne from 1st October 2010 and 2.175 BCM per year at Fos Cavaou
from 1st January 2011.
·
To limit the reserved share of long-term entry capacity to less
than 50% of available capacity from 1st October 2014 to 1st
October 2024.
Obviously GDF Suez has had to put
a lot of thought into developing these commitments.
The editor comments
Cases such as this increasingly
highlight the tension between the incentive to fairly and reasonably recover
long-term investment and the need to limit market dominance. Where this becomes
really tricky is when an asset owner has the offer of a long-term contract but
must forego that contract to meet anti-trust requirements.
To add another twist to this,
economic regulators are beginning to require transmission pipeline owners to demonstrate
customer demand signals to justify new capacity. I would’ve thought that the
offer of a long-term contract would be one of the strongest demand signals
available.
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).
Conferences & events
·
The
Energy Roundtable (20th October, Wellington) - the time
has never been better for the energy sector to converge together to network,
learn, do business, debate and drive growth.
Leading the way this event brings leaders and thinkers to connect and
collaborate over one day of candid discussion on the future of energy supply
& demand, and the business and political implications of both. In Conferenz signature style, you will hear
just frank talk and ideas.
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.
Opt out from Pipes & Wires
Pick this link
to opt out from Pipes & Wires. Please ensure that you send from the email
address we send Pipes & Wires to.
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.