From the director…
Welcome
to Pipes & Wires #98. This month starts with a look at a significant shift
in South Africa’s proposed industry consolidation, and then continues to
examine the unfolding trends of electric cars and solar. We also examine 2
regulatory decisions, examine 2 deals and mix in some historical perspectives.
So
... happy reading until next month.
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Industry restructuring
South Africa – RED1 dies an untimely
death
Introduction
Consolidating
South Africa’s highly fragmented electricity distribution sector has been a
lengthy and tortuous process. The introduction of the highly controversial Constitution
17th Amendment Bill 2009 to Parliament provided a glimmer of
hope that the long awaited Regional Electricity Distributors (RED’s) would be
formed, albeit by national government decree rather than provincial
cooperation. This article examines the total collapse of the RED formation
process in late 2010 after 13 years of negotiations.
Previous progress
The
original proposal (Pipes
& Wires #28) was for Eskom’s
distribution activity and 187 municipal distributors to be consolidated into
between 5 and 15 Regional Electricity Distributors (RED’s). RED1 was to be the
pilot for the other RED’s, and was intended to be the distributor in the
Western Cape. In the end the National Electricity Regulator withdrew RED1’s
supply license that had initially been issued on an interim basis on 1st
July 2006 because RED1 had failed to meet the conditions of the license.
The Constitution
17th Amendment Bill 2009 would’ve allowed for an Act of Parliament
to (further) regulate municipal authority where...
· It is necessary to achieve regional efficiencies and
economies of scale in respect of a specific municipal function.
· Municipal boundaries and executive authority negatively
impede those efficiencies and economies of scale.
The latest moves
In
September 2010 the ANC’s national general council resolved that “electricity
distribution should remain in the hands of the municipalities”. This resulted
in a Cabinet decision in December 2010 to immediately cease restructuring of
the industry, leaving RED1 completely dead.
As
part of that decision, Cabinet approved the recommendation that the mandate for
addressing the extensive maintenance backlog (now estimated at R32b) be
transferred from EDI Holdings (which will be wound up) to the Department Of
Energy in conjunction with the Department Of Co-Operative Governance And
Traditional Affairs. A special-purpose authority will be established to take on
this role, whose precise details are likely to be spelt out in a Bill to go
before Parliament.
Pipes
& Wires will make further comment as details emerge.
Energy policy
Global – getting it right with electric
cars
Introduction
Electric
cars are becoming very fashionable, however the thinking of many policy makers
and indeed communities at large shows little insight into just how “green”
electric cars are (or, indeed are not). This article considers a few of the
emerging issues around electric car re-charging, and goes on to talk about
electric trains in a similar context.
The specific concern
The
issue that appears to be very poorly understood is that if an electric car is
recharged at any time other than off-peak it will almost certainly be recharged
using coal, oil or gas-fired generation, which is, of course, emitting CO2.
And unless you happen to live in places like New Zealand, Tasmania,
Scandinavia, and parts of Canada, even that off-peak power is likely to be
emitting CO2.
Developing a suitable recharging regime
Pipes & Wires #93 noted that the Hawaiian Electric Company
(HECo) had introduced a car recharging regime that discounts night-time
recharging and also penalises recharging during the evening peak, and the news
recently noted that Dominion Resources
is seeking approval from the Virginia
State Corporation Commission to introduce a voluntary tariff that
encourages off-peak recharging. It’s not clear whether a flurry of such tariff
applications will follow amongst the rush to install recharging stations (and
presumably retail complexes will be subsidising the installation to attract
specific demographics) in which the critical issue of off-peak recharging gets
no mention.
So
the issues appear to be:
·
Spreading the message that electric
cars are only green if they are recharged with renewable electricity. Given the
rapidly growing electric car industry, this will undoubtedly be an unpopular
message.
·
Understanding the trade-offs that
electric car drivers are willing to make, particularly around what level of
penalty they might endure for the convenience of a quick recharge at the
shopping mall during peak times (one might think that if they drive an electric
car for ideological reasons, they simply wouldn’t recharge at peak times once
they understood the renewables issue). From the electric utilities perspective,
it could be reasoned that the penalty for peak time recharging should be set
just above the identified upper limit of consumer’s willingness to pay.
The next policy – regulatory disconnect
?
The
term “policy – regulatory disconnect” was used a few months back to describe
the outcome of Baltimore Gas & Electric’s
smart metering program (Pipes
& Wires #92, #94).
I sense another 1 of those disconnects emerging, along the following lines....
·
In 1 corner, policy makers will
encourage the uptake of electric cars, and by implication recharging stations
will also be encouraged. Unless understanding of the importance of off-peak
recharging becomes more widespread, it is likely that these recharging stations
will be expected to work at any time (because after all it’s saving the planet).
·
In the middle, electric utilities will
apply to recover the cost of increasing transmission and distribution capacity
caused by any-time recharging.
·
In the other corner, regulators may
well reject those applications and instead argue that utilities should’ve done
a better job of managing demand.
It
would be nice to think that the loop would get closed on this issue and that
regulators would allow full recovery of the efficient costs of meeting policy
makers expectations of recharging availability. So Pipes & Wires will
follow up on the Dominion application as a decision emerges.
US – getting solar power right in
California (hopefully)
Introduction
There
would be little disagreement that solar energy is about the coolest thing
around ... seriously, who could disagree with free energy streaming in at the
rate of about 1kW/m2 for like, uh, 12 hours per day ?? Experience,
however, shows that contemporary policy arrangements (ie. feed-in tariffs) are
providing somewhat perverse incentives and are already being significantly
reduced. This article examines a new approach to solar power in California that
is being developed by the Public Utilities
Commission.
The basis of the California approach
The
California approach is based a reverse auction, and claims to have incorporated
the best of the German approach while omitting the worst....
·
The reverse auction process requires
sellers of solar energy to submit bids to a buyer, with the lowest bidder
winning.
·
Sellers of solar energy will enter 20
year power purchase contracts with a utility, making the solar installation
bankable.
·
Including incentives to inject solar
energy at the most cost-effective points in the utility’s network (presumably
to avoid injection into already-constrained areas).
How is it different to other feed-in
arrangements ?
It
appears that the key difference between California and other jurisdictions is
the use of a market mechanism to set the price, as distinct from a regulated
feed-in tariff that in some cases was 3x the prevailing price of non-solar
energy (as it was in the Australian state of New South Wales). It appears that
the detail of the California scheme may include other differences as well.
Where might this lead ?
A
little thought would suggest that a market mechanism will result in downward
pressure on solar feed-in prices to a level close to the prevailing non-solar
energy price. That is, unless, there is some distortion such as a price floor
or a solar purchasing quota imposed on utilities by a regulator.
Stepping
back along the value chain to the solar panel suppliers, this might also
require a big re-think at their end as those suppliers’ customers find that
solar panels now take much longer to pay back.
Some philosophical musings from the
Editor’s desk
As I
write this watching the sun streaming down from a blue Waikato sky and feeling
a bit bad that another summer has gone by and I still haven’t built a solar hot
water heater, the biggest question that seems to be going unanswered is whether
solar energy should be subsidised. On one hand promoters of renewables are
continually claiming that the oil, gas and nuclear industries have been subsidised
so why shouldn’t renewables, and on the other hand we kept getting told that we
are now in a more enlightened and transparent age in which subsidies are no
longer acceptable. Somehow I get a sense we will steer a course towards the
latter.
Regulatory decisions
US – increasing the wires tariff in New
York
Introduction
Regulators
seem to be under increased pressure to limit tariff increases, despite
compelling evidence that those tariff increases are to fund genuine costs and a
sustainable ROI. This article examines a recent electricity transmission and
distribution tariff decision in New York State, and discusses some of the wider
strategic issues.
The PSC’s decision
National Grid PLC’s subsidiary Niagara
Mohawk Power Corporation had originally sought a $361m tariff increase for
the 2011 year. Key elements of the New
York Public Service Commission’s (PSC) verbal decision are...
·
Approving an increase of only $112.7m.
·
Requiring that increase to be
effectively invisible to consumers by requiring Niagara Mohawk to extend the
previously agreed period for recovery of some classes of costs (notably storm
restoration) ie. act as a bank.
·
Setting an ROE of 9.1% on the
assumption of 52:48 debt-equity ratio.
·
Allowing the 9.1% ROE to be increased
to 9.3% if Niagara Mohawk agrees not to file another tariff case before January
2012.
National
Grid is understandably disappointed with this decision, noting the need to
renew aging assets and to encourage investors. The UK capital markets were also
disappointed and punished National Grid with a 1.7% stock price reduction.
Possible wider implications
In
amongst Pipes & Wires recent analysis of M&A activity, it was noted
that 1 of the underlying drivers is migrating capital from individual state
jurisdictions to the FERC jurisdiction which allows higher ROE’s (typically 12%
as compared to about 9% for the states). The popular media have certainly noted
this issue as being particularly close to National Grid’s heart, although
National Grid has subsequently stated that it has no plans to divest its’ US
assets.
NZ – regulating the national grid
Introduction
Pipes
& Wires #90 and #97
have examined the regulatory instruments that could be applied to New Zealand’s
national grid and noted the need to correctly accommodate lumpy, and at this
stage uncertain, CapEx. This article briefly notes the key features of the
final Individual
Price-Quality Path (IPP) regulation that will apply to Transpower.
Key features of the IPP
Key
features of the IPP that will cover the regulatory control period (RCP1) from 1st
April 2011 to 31st March 2015 include...
· A
maximum allowable revenue (MAR) of $644m for the 1st April 2011 – 31st
March 2012 year (referred to as the transition year).
· A
requirement for Transpower to submit
forecast MAR’s for the remaining 3 years by 21st October 2011.
· A
requirement for the Commerce Commission
to determine forecast MAR’s for the remaining 3 years by 30th
November 2011, based on the information submitted by Transpower.
· A requirement
for Transpower to certify each year that it has complied with the forecast MAR.
· Quality targets for the year ending 30th
June 2012 of...
· A
requirement for Transpower to determine quality targets for the years ending 30th
June 2013, 2014 and 2015 by 30th November 2011.
· A
requirement to annual disclose the MAR, CapEx, Opex and Economic Value Added
(EVA).
This
concludes Pipes & wires coverage of this issue (unless of course something
unusual occurs).
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.
Wendell Willkie battles the PUHCA (part
2 of 2)
Introduction
Long-time
readers may remember an article about Wendell Willkie in Pipes
& Wires #55 (and those who have attended my 2 day electricity training
courses will also have endured a video clip of Willkie espousing his views on
free markets). This 2nd part of a 2 part article looks not so much
at Willkie’s life and work, but about his specific opposition to the Public
Utility Holding Company Act 1935.
The private industry consolidates
By
1932, 73% of investor-owned utilities were controlled by just 8 holding
companies. A brief look around the world reveals that this high penetration of
private ownership was by no means unique to the US, but what was perhaps unique
to the US was the holding company arrangements used to own these utilities.
This included the issuing of non-voting stock which meant that small interests
could effectively control significant chunks of the industry eg. the company
that Willkie was president of, Commonwealth &
Southern Corporation, controlled 165 individual utilities stretching from Michigan
to Florida.
Opposition to consolidation arises
Around
about 1933 a number of factors seemed to converge to the disadvantage of the
large private utility holding companies:
·
Their unwillingness to reticulate rural
areas as those areas were unprofitable.
·
A shift from the pro-business Hoover
administration to the anti-business Roosevelt administration.
·
The relentless lobbying of Senator George W. Norris
of Nebraska against private power.
·
The grips of the worst depression in
living memory.
·
The ability of utilities with
out-of-state registration to avoid price regulation within individual states.
·
Concern over their engagement in
speculative and risky activities that decreased utilities credit ratings and
increased their cost of capital, meaning higher prices for consumers.
·
Consumer expectations of cheap,
plentiful electricity in contrast to the greed of characters such as Sam Insull.
The emergence of the PUHCA
This
outcry reached Washington, and resulted in Secretary of the Interior, Harold L Ickes,
deciding to drastically reduce the power of the utility holding companies. It
appears that Ickes also tried to smear all utilities with the misdeeds of Sam
Insull. Studies commissioned by Ickes concluded that the best approach was to
regulate the holding company arrangements. Ickes work resulted in the Public
Utility Holding Companies Act (PUHCA) which President Roosevelt strongly
supported and signed into law on 26th August 1935. Key features of
the PUCHA include:
·
Limiting the operation of an electric
utility to a single state (thereby forcing it under the jurisdiction of the
individual state regulators), or forcing the divestiture of non-contiguous
distribution utilities.
·
Requiring the separation of regulated
and unregulated businesses (which I think was getting more at speculative or
risky businesses, rather than how we think of unregulated businesses as
“generation and supply”).
·
Requiring the approval of the Securities & Exchange Commission (SEC) to
engage in non-utility businesses.
·
Placing common service companies under
the SEC’s jurisdiction, and allowing each associated utility to only recover
its share of common service costs (an issue that we still seem to be struggling
with today).
·
Prohibiting sale of goods and services
at a profit between holding company affiliates.
·
Forcing divestiture of electric
streetcars to prevent cross-subsidies between the unregulated street car
businesses and the regulated electricity businesses.
Willkie’s opposition to the PUHCA
Even
a quick glance at the above features clearly shows that the PUHCA strikes right
at the heart of the vast electric empires such as Commonwealth & Southern,
and indeed Willkie clearly recognised it as such from the very beginnings.
Willkie recognised that peace between the utilities industry and the federal
government was essential, and had introduced an “objective rate” (pricing
plan). Willkie sought to reverse Roosevelt’s thinking and persuade him to
exclude the Tennessee Valley Authority (refer
to Pipes
& Wires #97) from areas where the objective rate was in place. However,
it was not be as back-room machinations in Washington in late 1934 reversed
Roosevelt’s thinking back to an anti-utility stance and on 22nd
January 1935 the White House announced that there was to be “no quarter with
the utilities”.
Willkie
and his colleagues gave testimony before the Senate committee, but it appears
that some dirty tactics were used by Washington officials to weaken C&S’s
presentations. Despite Willkie’s best efforts, the PUHCA proceeded to enactment
and C&S was dissolved in the late 1940’s.
Closing note
The
PUHCA was repealed on 8th February 2006 pursuant to the Energy Policy
Act 2005.
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 in 15 minute segments 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 4 of 4.
Mergers & acquisitions
Brazil – Iberdrola buys Elektro
Electricidade
Introduction
The
last few issues of Pipes & Wires have examined some of the previous global
trends in acquisitions, so Iberdrola’s
acquisition of Elektro
Electricidade is significant both as a big deal and as a possible new
trend.
A bit about Elektro
Elektro
is a generation, transmission and distribution utility that has its own industrial
and domestic customer base as well as supplying bulk electricity to 228
municipalities in the states of Sao Paulo and Mato Grosso do Sul. Elektro has
annual revenues of about €1.8b and annual post-tax profits of about €212m, but
interestingly enough has been able to trim its operating costs by what appears
to be about €50m per year.
Terms of the deal
Iberdrola
will buy Ashmore Energy
International’s 99.68% stake in Elektro for a consideration of €1.77b.
Given that Elektro has a P:E ratio of 10.4x, Iberdrola seems to have got a good
deal by paying a prima facie 8.3x
annual earnings.
Like
most deals regulatory approval is required, in this case by the ANEEL.
Iberdrola’s strategy
Iberdrola’s
strategy has been largely 2-fold:
·
Diversify its earnings away from the
slowing demand growth in Spain.
·
Become a world leader in wind power.
The
diversification component of the strategy has been manifest firstly in the
acquisition of ScottishPower in
2007 and then EnergyEast in 2008. Elektro
would appear to be a good progression of this strategy as it has the following
characteristics:
·
It supplies an economy that is growing
faster than ever.
·
Earnings have been improved by trimming
operating costs.
·
An acquisition price apparently well
less than what the P:E ratio would suggest.
The global trends
Pipes
& Wires #97 discussed the global trends in utility acquisitions, and
noted that the most recent trend appears to be the exit of European utilities
(with the exception of Electricité de France)
from the US with an associated consolidation of neighboring US utilities. So
how does this fit ? A couple of factors seem to be at work here:
·
Slower than expected earnings growth
due to a sluggish US economy.
·
State-based regulatory decisions that
are determining ROI’s lower than what can be obtained elsewhere.
·
High growth rates in the LatAm economy
with a consequent increase in electricity demand.
·
A view that the Brazilian regulatory
framework is likely to deliver stable, multi-year earnings with a low
likelihood of government interference.
Pipes
& Wires will comment on this as the trends and patterns continue to unfold.
Global – GDF Suez completes International
Power acquisition
Introduction
GDF Suez is a utility that is perhaps less
visible than the other giants, particularly its’ cousin Electricité de France (EDF). However their recent
€1.6b acquisition of International
Power has positioned GDF Suez as the world’s largest independent power
producer (IPP) and amongst the world’s largest generators. This article firstly
examines the acquisitions’ fit with GDF Suez strategy, and then secondly
examines it in the context of Pipes & Wires’ previous analyses to see what
the trends might be.
Background
GDF
Suez was formed in mid-2007 by the merging of the partially-privatised Gaz de France and the listed environmental and
energy utility Suez to form a giant with
annual revenues of about €84b. Long-time readers might remember that some
vicious and seemingly inconsistent political battles were fought against a
back-drop of consolidating “national energy champions” (Pipes
& Wires #60, #61,
#63,
#65
and #92).
The fit with GDF Suez’ strategy
A
key prong of GDF Suez’ strategy is ensuring security of supply. It would appear
that International Power’s backward integration into coal mining and LNG, and
its’ geographically diverse portfolio of generation would support that security
of supply objective.
The global context
Pipes
& Wires #97 noted the following 2 recent trends or “waves”....
·
An emerging pattern of European exit
from the US, with the seemingly anomaly of EDF investing in the US.
·
Neighboring US utilities
consolidating.
It
would seem that this deal has little in common with EDF’s investment in the US,
nor at face value with the consolidation of neighboring US utilities. However,
scratching the consolidation issue a little deeper to unearth possible reasons for
consolidation such as the need to reduce overheads, capture complimentary
markets or diversify operations suggests that the GDF Suez deal might be part
of a wider trend of consolidation. Of course 1 event does not make a trend, so
Pipes & Wires will continue to watch this closely.
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).
Source
material for this story was even rarer than most, however Invercargill is my
home town and the MED was my first job out of university so it does have a fair
bit of personal significance.
Arthur Carman lights up the City of
Light & Water
Early beginnings and personal life
Arthur
Charles Carman was born in Wellington in 1881, the son of Philip & Annie
Carman. Little is recorded about his childhood other than that he attended
Wellington Technical School and scored highly in various examinations. Arthur married
Priscilla Crosbie in 1907 in First Church, Dunedin and soon after a son Philip
and a daughter Isabel were born.
Early work experience
Again,
details of Arthur’s early working life are fairly sparse other than that he was
Third Engineer on the SS Corrina in 1904 during which time he accidently inhaled
ammonia fumes. Philip’s birth in 1907 is recorded as occurring in Wellington
although it is not clear whether the family were actually living in Wellington
at that time.
It
is possible that Arthur was an Inspector of Machinery on the West Coast,
although this is not clear (his father, Philip James Carman, appears to have
been), but it is reasonably certain that Arthur was an engineer with the
Christchurch Tramways Board sometime around 1910.
The move to Invercargill
In
March 1912 Arthur was appointed chief engineer of the powerhouse in
Invercargill which had just commenced operating a coal-fired boiler to generate
electricity for the trams.
Consolidating Invercargill’s
electricity and trams
A
year later in 1913 a Municipal Electricity Department (MED) was established
following several applications to the Council for electricity supply, and in
April 1914 a loan of £10,000 was raised to extend electric lighting supply
throughout the Borough. In May 1920 Arthur was appointed to the dual role of
City Electrical Engineer and Tramways Manager, and load continued to grow until
bulk supply was taken from the hydro station at Monowai in the late 1920’s. Arthur
retired from the MED in 1946 and Eric Jeffs was appointed City Electrical
Engineer (a few blokes that I worked with at the MED were apprentices and
graduates when Eric was the CEE, so there’s my claim to a piece of history).
Later years
After
retiring, it appears that Arthur and Priscilla returned to Wellington. Arthur
passed away in 1969 at the age of 88. He was survived by Priscilla who died in
1978, and was buried with Arthur at the Karori Lawn Cemetery.
Editor’s note
Arthur
Charles Carman is not to be confused with well known Wellington sporting editor
Arthur Herbert Carman who was, incidentally, a member of the Hutt Valley
Electric Power & Gas Board from 1959 to 1982.
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...
·
Fundamentals
of the NZ electricity industry – Auckland, 25th – 26th
May 2011 (note revised date)
·
Fundamentals
of the NZ electricity industry – Wellington, 4th – 5th
May 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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