From the
director…
Welcome
to Pipes & Wires #96, the final issue for 2010. This issue examines 2
mergers in the US and 2 regulatory decisions in Australia as well as a few
policy shifts in other places and some general interest stuff.
It
looks like we’re heading for a scorching dry summer in the top half of the
North Island, so I’d take this opportunity to wish you and your families a
Merry Christmas and a Happy New Year.
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avoid being intercepted by your server as spam, please arrange to have phil.caffyn@utilityconsultants.co.nz
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Pipes & Wires on the web
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Mergers & acquisitions
US – Northeast makes a bid for NStar
Introduction
M&A
activity in the US has started to increase, as Pipes & Wires has recently
examined First Energy’s
bid for Allegheny, PPL’s bid for E.On
US, and EDF’s bid for Constellation.
This article examines Northeast Utilities recent
$4.17b bid for NStar.
Background
NStar
(formerly Boston Edison and Commonwealth Energy) is the largest investor-owned
utility in Massachusetts, supplying 1,100,000 electric and 300,000 gas
customers. Northeast Utilities, meanwhile, supplies 1,890,000 electric
customers and 205,000 gas customers in Connecticut, Massachusetts and New
Hampshire. Northeast has a clear strategy of growing its regulated businesses.
Defining the strategy
As
noted above, Northeast has a clear strategy of growing its regulated electric
and gas businesses, so acquisition of NStar and integration of proximate
service territories makes good sense. The merger will also help achieve
Northeast and NStar’s recent joint agreement to build $1.1b of transmission
lines to bring hydro electricity from Quebec to New England.
The deal so far
As
of late October 2010, the boards of both companies have approved a merger
agreement. The basis of the deal is that NStar shareholders will receive 1.312
common Northeast shares for each NStar share they own so that NStar
shareholders will eventually hold 44% of the equity in the enlarged company
that will have annual revenues of about $8.4b.
Next
steps in the deal include approval of two-thirds of the shareholders, along
with approvals from the FERC, the Federal Communications Commission, the Nuclear Regulatory Commission, the SEC, and each state regulator.
Pipes
& Wires will make further comment as this deal proceeds.
US –
PPL completes the E.On US purchase
Introduction
Pipes
& Wires #92,
#93
and #94)
has been closely following PPL’s
acquisition of E.On’s US businesses (LG&E
and Kentucky Utilities Co).
This short article notes the final completion of this deal following all
regulatory approvals and the final payment, and sets out a few details.
The final deal
In the final closing of the deal, PPL paid
$6.83b in cash and assumed $764m in debt. The cash component of the
consideration was raised by issuing new shares and equity units.
The enlarged PPL
As
well as PPL’s original 1,400,000 customers in Pennsylvania (along with
2,600,000 customers in the UK), PPL will now also be supplying 943,000 electric
customers in Kentucky, Virginia and Tennessee and 321,000 gas customers in
Kentucky.
Historical interest
UK – the secret life of the national
grid
BBC
4 recently screened three 1-hour documentaries about the history
of the UK’s national grid (which is a timely follow on from the article
entitled “Battle Of The Currents” in Pipes
& Wires #95). The link to BBC 4 may not work for readers outside of the
UK, so fortunately its’ been broken into smaller segments and uploaded to You
Tube as follows (if anyone can find the links to the segments not underlined
that would be really cool)....
·
Episode 2 segment 1 of 4.
·
Episode 3 segment 1 of 4.
·
Episode 3 segment 2 of 4.
·
Episode 3 segment 3 of 4.
·
Episode 3 segment 4 of 4.
Readers
should note that such apparently modern occurrences as protests, celebrity endorsement
of causes, visual pollution, state interventionism and flue gas
de-sulfurisation are nothing new !!! Thanks to Phil
West from Western Power Distribution (UK) for telling us about this
documentary.
Regulatory decisions
Aus – the South Australian gas
distribution reset
Introduction
Envestra recently submitted its proposed
Access Arrangement for its’ South Australian gas distribution networks for the
period 1st July 2011 to 30th June 2016 to the Australian Energy Regulator (AER) for
approval under the National
Gas Rules. This article examines the key features of Envestra’s proposal
and sets some context for analysis as the draft and final decisions emerge.
Who exactly is Envestra
?
Envestra
is an ASX-listed company based in Adelaide which supplies gas to over 1,000,000
customers in the eastern and central states of Australia. Envestra started off
as a merger of the former South Australian Gas Company (SAGASCO), the Gas
Corporation Of Queensland and Centre Gas (Northern Territories) and then went
on to acquire Stratus Networks in Victoria. Envestra’s major shareholders
include the APA Group and Cheung Kong Infrastructure.
Legal framework for the Access
Arrangement approval
The
broad legal framework is the National
Gas Law (NGL) and within that, details are set out in the National Gas Rules (NGR).
Key aspects of the proposed Access
Arrangement
Key
aspects of the proposed Access Arrangement are set out in the following table
(which will be filled in as the draft decision, revised proposal and final
decision progress)
|
Parameter |
Proposed AA |
Draft decision |
Revised AA |
Final decision |
|
Total
OpEx |
$335.69m (real 08/09) |
|
|
|
|
Total
CapEx |
$506.9m (real 08/09) |
|
|
|
|
Opening
capital base |
$1,030m (nominal) |
|
|
|
|
Closing
capital base |
$1,595.4m (nominal) |
|
|
|
|
Depreciation |
$180.6m (nominal) |
|
|
|
|
Rate
of return |
10.64% (nominal post-tax) |
|
|
|
|
Debt
risk premium |
3.39% |
|
|
|
|
Revenue
requirement |
$1,165m |
|
|
|
Pipes
& Wires will make further comment as the draft decision emerges.
UK – the Bristol Water appeal
Introduction
Most
of us have at least some awareness of the options available to a regulated
pipes & wires business that receives an unfavorable price reset. This
article uses a recent OXERA
analysis as a starting point to comment on Bristol Water’s appeal to the Competition Commission in
regard to the price reset determined by OFWAT
for the 2011 – 2015 period.
Key features of the Bristol Water price
reset
OFWAT’s
final decision significantly pruned what Bristol had sought in 3 areas...
·
A reduction in average annual price
increase from 6% to 1.7%.
·
A reduction in vanilla WACC from 6.7%
to 5.5%.
·
A reduction in nett CapEx (after the
Capital Incentive Scheme) from £319.1m to £244.3m.
The Commission’s final decision
In
the final decision, the Commission award Bristol an increased average annual
price increase and nett CapEx, but decided to further reduce OFWAT’s finally
decided WACC of 5.5% to 5.0%. The WACC discussion in the OXERA paper is of
particular interest as it examines some critical assumptions around systematic
risk and gearing, but perhaps more importantly serves to emphasise the inherent
risk that an appeal might result in further (binding) reductions rather than
what might be expected to be gains.
Thanks
to OXERA for their permission to quote their analysis.
Aus – the Queensland gas distribution
reset
Introduction
APT
Allgas recently submitted its proposed Access Arrangement for its’
Queensland gas network (which also crosses into NSW) for the period 1st
July 2011 to 30th June 2016 to the Australian
Energy Regulator (AER) for approval under the National
Gas Rules. This article examines the key features of Allgas’ proposal and
sets some context for analysis as the draft and final decisions emerge. For
completeness, this article does not discuss Envestra’s Queensland network.
Who exactly is Allgas
?
APT
Allgas Energy Pty Ltd is a wholly-owned subsidiary of the APA Group and supplies about 82,000 gas
customers in south-east Queensland (for comparison, Envestra’s Queensland
network is of a similar size).
Legal framework for the Access
Arrangement approval
The
broad legal framework is the National
Gas Law (NGL) and within that, details are set out in the National Gas Rules (NGR).
Key aspects of the proposed Access
Arrangement
Key
aspects of the proposed Access Arrangement are set out in the following table
(which will be filled in as the draft decision, revised proposal and final
decision progress)
|
Parameter |
Proposed AA |
Draft decision |
Revised AA |
Final decision |
|
Total
OpEx |
$110.12m (nominal) |
|
|
|
|
Total
CapEx |
$139.05m (nominal) |
|
|
|
|
Opening
capital base |
$421.6m (nominal) |
|
|
|
|
Closing
capital base |
$559.9m (nominal) |
|
|
|
|
Rate
of return |
10.3% (post-tax nominal vanilla) |
|
|
|
|
Debt
risk premium |
3.85% |
|
|
|
|
Revenue
requirement |
$372.1m (nominal) |
|
|
|
Pipes
& Wires will make further comment as the draft decision emerges
People in power
A
couple of years ago Pipes & Wires featured the life stories of some blokes
born in the late 1800’s who shaped the electric power industry as we now know
it. Researching and writing those articles was a lot
of fun, so I’m going to write a few more (and if anyone wants an electrical
pioneer to be researched and included, pick here
to contact me).
Lloyd Mandeno wires up most of New
Zealand
Growing up in Te Awamutu
Lloyd
Mandeno was born on 3rd October 1888 at Rangiaowhia (just
east of Te Awamutu, on the road to Cambridge) in the Waikato area of New
Zealand. Lloyd was the son of William and Mary, however little is recorded of
his early life other than that he attended the local school before being sent to
St John’s Collegiate School in Auckland.
Study and practical work
After
St John’s, Lloyd enrolled at the Auckland
University College (as it then was) in 1905 to study for a B.Sc in
electrical engineering but after his first year he transferred to Canterbury College (as it was then).
Lloyd graduated in 1912 but it appears he packed in a few very interesting
projects for his practical work requirements, including a lot of work on
thermal power stations in Auckland and Gisborne and the hydro station at Hora
Hora.
Working life
Around
the time Lloyd began his working life, the New Zealand government started a
long period of large hydro power station construction (starting with Coleridge,
then Mangahao, then Tuai, then Arapuni). However, much of Lloyd’s work was with
small local authority hydro’s which were the flip-side
of these large government-owned stations. In 1915 Lloyd became the Tauranga
Borough Engineer where he vigorously promoted the electricity from the local
Omanawa Falls hydro station. This involved promotion of electric stoves,
constructing the first electric water heater, and persuading a local builder to
construct an all-electric house.
After
some allegations of conflicts of interest around setting up the Tauranga
Electric Power Board were directed at Lloyd in 1926, he moved to Auckland to
establish a consulting business that became Mandeno, Chitty & Bell (which
eventually merged with Worley Consultants, which in turn became part of AECOM).
As a consultant he sketched out many mining projects in both the north and
south islands and was also heavily involved in establishing the Bay Of Islands
Electric Power Board in 1937. However it appears that one of Lloyd’s first
loves was dam building, and stories abound of him using a fleet of hired
bulldozers to form the dam across the Kuratau River for the King Country
Electric Power Board in 1960 (bearing in mind he was 72 years old !!).
Key achievements
Lloyd’s
key achievements include...
·
Lloyd Mandeno power station near
Tauranga (completed 3 years after his death).
·
Kuratau power station on the
south-western shores of Lake Taupo.
·
The development of single wire, earth
return (SWER) including modifications to reduce telephone interference.
·
Many innovative commercial heating
arrangements using high-pressure hot water and storage heating.
Personal life
Lloyd
married Constance Woodward in Mangere (south Auckland) on 18th June
1913, and went on to have 3 sons with her. During his time in Auckland, he was
an elected member of the Onehunga Borough Council from 1931 to 1956 including
12 years as deputy mayor. He was pre-deceased by
Constance on 18th October 1970 and then passed away on 30th
December 1973 at the age of 85.
Energy policy
UK – negotiating the policy shifts to
achieve energy security
Introduction
The
UK’s energy policy has been an on-going topic for Pipes & Wires. This
article examines the UK governments’ recent rejection of 2 proposed sites for
new nuclear stations.
Snap-shot of the energy policy status
I
don’t think it would be unfair to say that the UK has a rather limited range of
policy options for securing its electricity supplies. A couple of the key
issues are...
·
One way or another, coal would seem to have
a very limited future. The decline of the UK coal industry from the mid-1980’s
onwards, the EU
Directive on Large Combustion Plants (in its various forms), and the prima facie view that coal-fired
electricity is inconsistent with a low-carbon future would appear to make coal
a non-starter.
·
Gas supplies to the UK are politically
risky. Since the depletion of the North Sea fields, the UK has become
increasingly dependent on gas from Russia and Iran transported through the
Ukraine.
·
The shifting view of wind. It would
seem that the once quiet, dissenting voice that wind power would save the
planet has increased to a loud shout as a more moderate view of the correct
role of wind amongst a diverse portfolio of generation seems to be gaining
traction.
·
Increasing unease with the subsidies
being paid to the renewable sector, in particular the recent significant
re-thinks on feed-in tariffs for solar panels in various jurisdictions.
·
The rapidly consolidating opposition to
smart meters from both consumers and regulators.
·
The increasing recognition that nuclear
will have a role to play, even if that role is emissions reduction rather than
for its’ own technical merits.
The recent National Policy Statement
This
increasing recognition of the role of nuclear began with the Blair
Administration’s famous White Paper (refer to Pipes & Wires #37, #47 and #67)
and culminated in some serious plans for new nuclear stations by 2025. So
although it was encouraging to see broad acceptance for new nuclear generation
at existing sites, it was none-the-less disappointing to note that the revised
draft National Policy Statement (NPS) had concluded that the sites at
Braystones and Kirksanton in Cumbria identified by German utility RWE would be unsuitable for nuclear development
by 2025.
RWE
were very measured in expressing their disappointment, and continue to believe
that both sites represent fantastic options for new nuclear stations. For its’
part, Electricité de France seemed to take at
least some confidence in the increased certainty that the NPS provides while it
is not yet apparent what other players such as E.On
and Centrica think.
As
this is a fairly pivotal issue to the UK, Pipes & Wires will be following
this issue closely
Aus – re-thinking the feed-in tariffs
in NSW
Introduction
Pipes
& Wires #95 examined some recent trends with feed-in tariffs and noted that
feed-in tariffs were under downward pressure in many jurisdictions as
governments realise that a lot of up-take is for the wrong reasons. This
article examines the recent re-think of the Solar
Bonus Scheme in the Australian state of New South Wales (NSW).
What exactly is the Solar Bonus Scheme ?
The
Scheme credits customers with a “gross feed-in tariff” of 60c / kWh from
eligible solar (PV) and wind turbines that are connected to the local
distribution network, are rated at less than 10kW, and have gross meters fitted
(as distinct from nett
meters). The Scheme commenced on 1st January 2010 and was
intended to operate for 7 years with a review in either 2012 or when the
eligible connected capacity reached 50MW.
What changes have occurred to the Scheme ?
Late
last month (October 2010) the NSW government announced that from midnight on 27th
October 2010 new connections would receive only 20c / kWh. This is due to such
large numbers of people signing up for the Scheme that the 50MW trigger point
for the planned review was reached (presumably a lot earlier than the
government thought it would be).
It
is not completely clear why the feed-in tariff was so dramatically reduced from
60c / kWh to 20c / kWh (Canberra is 50c / kWh, Brisbane, Adelaide and Melbourne
are 44c / kWh, Darwin is 18c / kWh and Perth is only 16c / kWh), however
concern around the high level of subsidies that are effectively being paid for
renewable energy in general appears to be consolidating to the point where it’s
voice is rising above that of the climate change lobby.
Possible implications of these changes
For
a while there it seemed that the level of subsidies for renewable generation
and smart metering meant that a fundamental reshaping of conventional
generation and grids was inevitable. Now that the honeymoon is over for those
fine sounding policies and the objection to the resulting subsidies
consolidates, maybe that shift won’t be so fast or extreme after all.
Important notes for this article
For
completeness, the following details of the re-think of the Scheme are noted...
·
People already participating in the
Scheme will continue to receive 60c / kWh.
·
People who bought an eligible system by
midnight would still be eligible for the 60c / kWh but would have to lodge
their application to join the program within 21 days.
US – power shift on Capitol Hill
Introduction
Pipes
& Wires #95 noted that the mid-term elections in the US could play a
significant role in how the US’ energy policy continues to evolve. This article
examines the recent shift to the right both on Capitol Hill and in the state
capitals, and sets out some thoughts on where that might re-direct energy
policy to.
The power shifts
The
mid-term elections saw the following power shifts...
·
The House Of
Representatives (lower house) had a swing of 61 seats away from the Democrats,
resulting in the Republicans holding 240 seats and the Democrats holding 190
seats.
·
The Senate (upper house) had a swing of
6 seats away from the Democrats, resulting in the Republicans holding 47 seats
and the Democrats holding 53 seats.
·
Individual states. Of the 39 elections
(37 states and 2 territories) held, the Democrats lost 7 governorships leaving
29 states with Republican governors.
Source
- Reuters
What could this mean for energy policy ?
Most
of us have a general sense that Democrats are more likely to embrace man-made
global warming, view renewables as being so essential that the cost-benefit
needn’t stack up, and consider nuclear as an option only because it will reduce
CO2 emissions. These election results mean that federal global
warming responses will face difficulty getting through the House and that
responses in some states are less likely to get the governor’s sign off.
Possible policy directions
The
web is already starting to fill up with people’s various views on how energy
policy will shift. At a more philosophical level, the following shifts are
likely...
·
The supposedly settled science behind
global warming will be increasing questioned (in contrast to the view that it is
undisputed fact).
·
An increasing recognition that a modern
(and growing) economy requires a secure electricity
supply which is difficult to achieve with a high penetration of renewables.
·
The financial drag of emissions trading
will be increasingly considered (in contrast to the view that cost is no
object).
At a
detailed level this could well mean...
·
A possible end to the advocacy of
nuclear power solely because it will reduce CO2 emissions, with a
likely shift to promoting nuclear for its own benefits. (the
expected new chairman of the Energy &
Commerce Committee, Rep. Fred Upton of
Michigan, is a big supporter of nuclear power).
·
A likely decline in the crusade-like
promotion of smart metering towards an approach that considers the likely technical
benefits in a more balanced sense (and Pipes & Wires has already examined 2
such cases).
·
A need to more strongly justify new EHV
transmission lines than with a simple “will support connection of renewable
generation”.
·
An increasing recognition that electric
cars are only green if they are recharged with renewable electricity.
·
The possibility of future wind farms
having to pay a greater share of the costs they impose on communities.
·
A likely axing of the tax breaks for
renewables.
·
A possible resurgence of coal-fired
generation.
·
A possible declining interest in
technologies such as carbon capture & storage as their underlying raison
d’être diminishes.
·
Significant reductions in feed-in
tariffs for solar panels.
·
Some serious re-thinks on the renewable
energy targets set by individual states, especially some of the rust-belt
states that have suffered heavy job losses.
Pipes
& wires will make further comment as the policy makers get into gear.
Famous power struggles
The
electrical history of many cities and countries includes bitter struggles
either between public and private interests seeking exclusive rights to
distribute and sell electricity, or between competing private interests. This
historical interest series examines some of those struggles.
City versus suburbs (Wanganui, 1920’s)
Early supply in Wanganui
Wanganui
Borough built its first power station in 1908, which supplied DC at 600V for
the trams and for the Durie Hill
elevator. The original Tangye gas engines
became troublesome and were replaced shortly thereafter in 1912, and that
station was in turn replaced in 1923 as load grew to a staggering 1,650kW.
Meanwhile,
outside of the Borough, the Wanganui-Rangitikei Electric Power Board had been
gazetted on 1st December 1921 (although it did not commence supply
until 1924).
The first clash
The
Board had originally planned to include the Wanganui Borough within its supply area, however the Borough Council was not fussed on that
idea. A wider reading of history will reveal that the government’s thinking was
to use established urban areas as “inner areas” of electric power boards so
that subsequent rural reticulation could then be funded from revenue rather
than by predominantly rural boards having to debt-fund reticulation from the
start. A bit more reading will reveal that many urban areas strongly resented
this underlying principle of urban-to-rural subsidy, and this formed the basis
of at least 1 other spectacular clash (refer to Pipes
& Wires #94).
The second clash
Although
the first clash was apparently mild, the second clash made it to the Supreme
Court. Having got over the Board’s plans to include Wanganui (Borough) in its’
supply area, the Borough subsequently got very heated over the Board’s plans to
include the neighboring borough’s of Gonville and Castlecliff in its’ supply
area. One can only conclude that the Borough wanted to extend its’ supply into
the Gonville and Castlecliff boroughs, presumably to build load for their new
power station and to improve their scale.
In
line with the government’s stated preference for electric power boards rather
than small municipal supplies, the court ruled that Wanganui Borough could not
extend its supply area into Gonville or Castlecliff.
Meanwhile, outside the courtroom
While
the lawyers slugged it out in court, the Board’s engineers were busily erecting
poles around Gonville and Castlecliff effectively making it unviable for the
Wanganui Borough to extend supply (history also records that a similar race to
erect poles occurred between the Auckland
and Franklin Electric Power Boards
in the streets of Papakura).
The end-game plays out fairly quickly
The
status of the game so far is therefore that Wanganui was restricted to
supplying within it’s own borough, whilst the Board
was able to supply Gonville and Castlecliff. What is rather surprising is that
the end game played out very quickly and more so that it was financial rather
than legal, as the Borough’s fancy new power station (which was only 1 year old
by that stage) proved to be a loser instead of the money spinner they figured
it would be.
In
October 1924 the Board purchased the Borough’s electricity business including a
provision of £25,000 for the power station losses, which brings this story to a
convenient close.
A bit of light reading…
Book review – “Switching On The King Country”
Helen Reilly’s latest
book examines electricity in the King Country area of New Zealand’s north
island from the beginnings of electric light in 1911 through to the present era
(2008). In 220 pages jammed packed with stories, anecdotes, interviews,
photo’s, maps and drawings the book chronicles the development of the Waitomo,
Wairere and King Country Electric Power Boards and the Taumarunui, Ohakune and
Raetihi Borough electricity departments and the eventual formation of The Lines Company and King Country Energy. The chapter headings
include....
·
From candlelight to electric light 1911
– 1924.
·
Power in the borough is in short supply
1924 – 1939.
·
Rural communities are eventually
electrified 1939 – 1958.
·
Consolidation and expansion 1959 –
1969.
·
Upgrades, amalgamations and reforms
1970 – 1989.
·
A decade of government reforms and
company development 1989 – 1999.
·
Coming to grips with separation 1999 –
2007.
·
New challenges for rural electricity
companies 2008 -
For
those (like me) that enjoy history this book is a must have. Order yours for
the exceptionally low price of $39.95 (includes NZ postage and packaging) from
the King Country Electric Power Trust by picking here.
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.
·
Marlborough Will Shine Through.
·
Two Per Mile.
·
Live Lines (the old ESAA journal)
Conferences & training courses
The following
training courses will be run by Conferenz...
·
Offshore
safety & risk management for the oil industry – New Plymouth, 21st
– 22nd February 2011.
·
Marine
drilling for the oil & gas industry – New Plymouth, 23rd –
25th February 2011.
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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.
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Consultants Ltd accepts no liability for action or inaction based on the
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