Reforming the pipes

1
Reforming the pipes wires industries - what
could it mean for asset management in the water
sector ??

• Phil Caffyn,
• Utility Consultants Ltd
• www.utilityconsultants.co.nz

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Discussion topic map
Why should industry reform make any difference ??
Industry reform processes
Introductory remarks
Emerging trends industry structures
Implications for asset management
Possible directions for the NZ water sector
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Introductory remarks
4
Introductory remarks
Objective is to indicate how possible industry
reforms could impact on asset management processes
Particularly want to look at the implications for
assets designed under a public ownership
structure which then becomes commercialised
5
Introductory remarks
Content is very academic, for which no apology is
made !!
Draw on examples from other pipes wires
industries, and from the power generation industry
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Introductory remarks
Fairly obvious even at this early stage that the
biggest implications will be for active assets
that are susceptible to cyclic fatigue
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Why should industry reform make any difference ??
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Why should it...
Why should reforming the industry structure make
any difference to asset management ??
Afterall, the lights must stay on (or whatever
the water equivalent is)
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Asset management drivers
Functional requirements
Assets
Industry structure
Price performance
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Functional requirements
Increasing quality of supply
Increasing quality of service
Functional requirements
Lower prices
Unwilling to take no for an answer
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Industry structure
Increasing cost consciousness
Possible regulatory attention
Industry structure
Pressure to improve performance
Increasing commercialisation
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Price performance
Pressure to reduce prices to end-use customers
Price performance
Pressure to improve operational performance
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Comparison of public private
Public
Private
Little concern for operational costs, but tight
with capital
Tight control of costs, but will invest capital
Concern for costs
Little concern for service, take it or leave it
attitude
Service is paramount and is seen as a point of
differentiation
Concern for service
Emphasis on process and technical excellence
Emphasis on market-driven outcomes
Activity emphasis
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Definite implications
Definite implications for asset management, both
for existing assets and for future assets !!
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Pipes wires reform processes
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Why reform ??
Why reform ??
Dont fix what aint broke !!
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Why reform ??
Political ideology
Key reasons for reform
Economic sustainability
Operational performance
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Why reform ??
Right-wing governments prefer industries with
free market and private sector characteristics
Political ideology
Left-wing governments prefer industries with
centrally planned and state owned characteristics
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Why reform ??
Convenient way to raise cash and off-load debt if
the privatisation path is chosen
Economic sustainability
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Why reform ??
Fundamental to under-pinning economic growth
Operational performance
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Reform cycles
Nationalisation
Generally takes a long time
Commercialisation
Depends on regulatory pressure
Corporatisation
Can be quick
Re-regulation
Deregulation
Usually takes a few years at least
Privatisation
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Case studies
UK water
Victorian electricity
3 case studies
Argentine telecomms
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UK water
Nationalisation
45 years
Commercialisation
Corporatisation
2 years
Re-regulation
18 months
Deregulation
8 years
Privatisation
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Victorian electricity
Nationalisation
75 years
Commercialisation
Corporatisation
Re-regulation
15 months
Deregulation
5 years
Privatisation
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Argentine telecomms
Nationalisation
44 years
Commercialisation
10 years
Corporatisation
Re-regulation
18 months
Deregulation
58 years
Privatisation
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Characteristics of each phase
Construction of assets to meet (usually) high
growth
Employment policies usually very paternal
Nationalisation
Focus on technical and process excellence
Little concern for operating efficiencies
High level of ad-hoc political intervention
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Characteristics of each phase
Construction of assets usually slows down
Entry of private sector skills
Commercialisation
Focus begins to change to customers
Emerging emphasis on asset utilisation and
efficiencies
Still some ad-hoc political intervention
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Characteristics of each phase
Focus on assets shifts from construction to
management
Down-sizing of legacy skills experience
Corporatisation
Lip service paid to competition (behavior still
monopolistic)
Increasing emphasis on asset utilisation and
efficiencies
Political intervention may increase as objectives
conflict
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Characteristics of each phase
Focus on assets usually emphasise management
Maybe more down-sizing of legacy skills
experience
Deregulation
Abrupt recognition of the need to consolidate
market position
Emphasis on matching asset capabilities to market
demand
Politicians generally recognise the need to let go
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Characteristics of each phase
Focus on improving scope scale as well as
efficiency
Down-sizing likely to be driven by cost savings
Privatisation
Full recognition of the need to compete for
market share
Emphasis on growing beyond legacy business
Likely to see capital restructuring
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Characteristics of each phase
Focus is almost totally on regulatory compliance
Abrupt cost-cutting and capital restructuring
Re-regulation
Desire to divest regulated assets if buyers can
be found
Divestment of unregulated activities to raise cash
Management attention shifts from customers to
regulators
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Comment
Obvious implications for asset management processe
s !!!
Reforms can go along way round the loop in only
10 or 12 years !!!
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Emerging trends industry structures
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Emerging trends
Convergence
Separation
Stranding
Emerging pipes wires industry trends
Regulation
Supply quality
Technology
Customer data
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Convergence
Amalgamation of electricity, gas, water
telecomms to form multi-utilities
Key strategy is usually to grow scope rather than
scale
Operates within converging markets and
multiple regulatory jurisdictions
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Separation (ring fencing)
Functional separation of monopolistic
and competitive activities
Compelling commercial and regulatory reasons for
separation
High level of separation may fundamentally
alter the industry structure
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Change in core structure
Legacy position
Hi
UK
Degree of vertical integration
Lo
Emerging position
NZ
Lo
Hi
Degree of horizontal integration
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Stranding
Stranding is where operational changes leave an
asset under-utilised or totally un-used
Technology is a key factor in the stranding of
legacy assets
Regional amalgamation can also lead to stranding
eg. Australian power generation
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Regulation
Third party intervention on behalf of customers
interests - considers performance, profit price
Complex subject that is being argued in many
jurisdictions - seems very hard to get right
In its most extreme form it actually works
against customers best interests eg. UK water
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Supply quality
Supply quality is emerging as the primary concern
of some customers (not price)
May include factors such as flow, quality,
pressure, clarity, leakage etc.
Probably subject to maximum minimum criteria
set by various agencies
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Technology
Information technology is providing many
bolt-on goodies that can improve performance.
Technologies that reduce the scale required for
efficiency cost effectiveness eg. fuel cells.
These technologies may well lead to the
stranding that we discussed before
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Technology (cont)
Incremental technologies as SCADA will enhance
the performance of pipes wires assets that will
improve key customer expectations
Advancing technologies may well lead to a
dynamic conflict
Disruptive technologies (such as fuel cells) will
eventually strand pipes wires assets, probably
starting in remote areas
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Customer data
Management of customer data is critical if core
customer services are to be maintained
Customer data tends to be attached to the
commodity rather than the network, hence it is
unregulated
Acquisition of customer data is therefore seen as
critical in diversifying regulatory risk
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Academic theory ??
Is all this just academic theory about stuff
happening half a world away ??
All seems very removed from the wonderful world
of asset management (and engineering !!)
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Case study - Pennon
Pennon sought to raise about 150m by selling
their supply business to offset heavy regulation
Potential buyers of the SW Water brand include
TXU, PowerGen, Innogy and EdF (all power
companies)
All of these potential buyers see the value in
customer data management, and in bundling supply
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Emerging structures
Owners of network infrastructure - strong skills
in managing regulated assets
Three types of utility companies emerging,
broadly defined by their competencies
Owners of retail commodities - strong skills in
matching demand with low-cost inputs
Owners of customer information - strong skills in
managing data
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Separation of these skills
Managing the delivery infrastructure
Supplying the commodity
Managing the customer data
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Possible directions for the NZ water sector
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Where has NZ come from ??
Nat.
Corp.
Comm.
Dereg.
Prvt.
Rereg.
Electricity
Gas
Telecomms
Water
Rail
Roading
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Previous water reforms in detail
Industry structure reforms
Local govt. reforms
Internal process reforms
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Previous water reforms in detail
Amalgamation of former Borough, City
County Councils in 1989
Industry structure reforms
Consolidation of environmental regulatory
bodies into Regional Councils
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Previous water reforms in detail
Requirement to adopt robust asset
management methodologies
Internal process reforms
Requirement to move to more private- sector
accounting principles
Pressure to out-source contestable activities
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Recent water reforms
Pre-election
Recent water reforms
Post-election
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Pre-election proposed reforms
Former govt. proposed a more commercial structure
Recognised that privatisation would be
politically suicidal, and wasnt an option
Probably would have catalysed structural
change to the industry
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Post-election proposed reforms
Present govt. is proposing micro-reforms, dealing
with issues such as quality of supply,
customer service, environment etc.
Emphasis is on issues that the former
govt.s proposed reforms would have let the
market deal with (in fact the UK market has dealt
with these issues very well).
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Post-election proposed reforms
Industry itself is starting to recognise
that achieving further efficiency gains will
require some form of regional cooperation
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Post-election proposed reforms
Driving out the next plateau of cost efficiencies
Two issues are emerging.
Guarding the assets against privatisation
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Drivers for NZ water industry
Environmental sustainability of both sourcing
and disposal
Quality of delivered water and of disposed waste
Cost structure of both treatment and
delivery processes
Management of infrastructure
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Where could these drivers lead ??
Industry drivers
Emergent industry structure
Government policy !!!
Industry boundaries
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Where could these drivers lead ??
Immediate term - within 1 government term
Define 3 time frames
Medium term - within 2 or 3 government terms
Long term - within 5 government terms
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Where could these drivers lead ??
Regulations introduced to improve water quality
Possible increase in water prices to reflect
quality improvements
Immediate term
Definite preference for increased
environmental sustainability
May possibly be a few regional amalgamations
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Where could these drivers lead ??
Possible leveling off of customer benefits
Increased charges to fund capital replacement
Medium term
Increased charges to fund environmental
sustainability
Possible widening of the boundaries to allow
some private sector equity
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Where could these drivers lead ??
Customers may be offered choice of service level
price
Amalgamation of operations or management may be
the norm
Long term
Environmental sustainability may place
barriers around the industry
Widening of the boundaries will depend on
the state of the industry
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Where could these drivers lead ??
Increased capital and operational costs
Some reductions in industry cost structure
Declining ability to fund from revenue
Preference against funding from private equity
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Implications for asset management
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Asset management drivers
Functional requirements
Assets
Industry structure
Price performance
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Industry structure issues
Economy of scale scope
Convergence
Industry structure issues
Competition
Separation
Stranding
Regulation
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Industry structure issues
Each industry structure issue will be different
during each phase of the reform cycle
Following grid indicates how the relative
strengths of these issues might vary
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Industry structure issues
Nat.
Corp.
Comm.
Dereg.
Prvt.
Rereg.
Scale scope
Convergence
Competition
Separation
Stranding
Regulation
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Asset life cycle
Planning
Design
Implications for each phase in an assets life
cycle
Construction
Operation
Maintenance
End of life
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Asset life cycle
Asset life cycle could take from 40 to 100 years
!!!
Reform cycle can go along way in this period
- might even go round again !!!
Following grid illustrates the implications
of reform over an assets life
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Asset life cycle
Nat.
Corp.
Comm.
Dereg.
Prvt.
Rereg.
Planning
Design
Construction
Operation
Maintenance
End of life
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Implications of reform
Extreme implications of horizontal orange bar on
previous slide !!
Implications will be greater for active assets
(especially if cyclic fatigue is an issue)
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Example of implications
Good example is steam turbine plant designed to
stay hot for years at a stretch
Changing market roles require load following,
which leads to thermal cycling and cracking
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Implications for asset management
Could bore you all with 36 slides
corresponding to each cell on the grid !!
Only going to bore you with 18 slides by merging
the middle 4 stages of reform into 1 stage !!
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Discuss 3 phases
Nationalisation (public ownership)
Discuss asset management implications in 3 phases
Corporatisation to Privatisation
Re-regulation
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Nationalisation
Likely to include social policy issues
Market focus likely to be secondary
Planning
Subject to political whims
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Nationalisation
Very long, drawn out process
Included geo-political considerations
Design
Performed by centralised organisation
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Nationalisation
Inefficient, subject to labor disputes
Emphasis on social factors and skill retention
Construction
Little concern for cost over-runs
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Nationalisation
Little concern for maximising asset utilisation
On-going inefficiencies were just accepted
Operation
Dominated by engineering influence
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Nationalisation
Assets were generally over- maintained
Little thought given to loss of asset availability
Maintenance
Didnt seek the better way
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Nationalisation
Assets probably operated past their economic life
Likely to be abandoned with little clean-up
End of life
Unlikely to be re-deployed
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Corporatisation to Privatisation
Strong market focus hinging on key parameters
Wide array of stakeholders involved
Planning
Some political intervention may still occur
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Corporatisation to Privatisation
Likely to be rapid, and maybe done by vendors
Likely to be based on modularity
Design
Asset purchasing will be performance based
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Corporatisation to Privatisation
Likely to be rapid, and specified in detail
Vendors may be required to share performance risks
Construction
Penalties for late completion likely to be
enforced
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Corporatisation to Privatisation
Emphasis on matching availability to
market opportunities
Willingness to invest capital to
improve performance
Operation
Continual search for the better way
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Corporatisation to Privatisation
Likely to be condition based and
strictly justified
Likely to have to fit in a tightly
specified window
Maintenance
Findings will be analysed to better target future
work
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Corporatisation to Privatisation
Strict criteria for defining end of life
Probable that components will be re-deployed
End of life
Extensive site rehabilitation will be required
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Re-regulation
Focus may shift from market to regulator
Unlikely that new assets would be planned
Planning
Probable that existing assets could be sold
90
Re-regulation
Unlikely that new assets would be designed
Design
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Re-regulation
Unlikely that new assets would be built
Construction
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Re-regulation
Extensive cost cutting to survive
Service levels likely to decline to the minimum
Operation
Management interest will decline
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Re-regulation
Likely that budgets will be cut
Investment in efficiency is very unlikely
Maintenance
Minor problems will probably be left
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Re-regulation
End of life may be advanced or delayed
Rehabilitation is likely to be low budget
End of life
Possibility of plant being moth balled for
future use
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Extreme example - planning
Luggate keeping the workforce intact
Otahuhu B capturing market opportunities
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Extreme example - planning
Marsden B keeping the workforce intact
Marsden B supporting an upstream industry
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Extreme example - construction
Clyde years behind schedule, and way over budget
Otahuhu B largely on schedule, damages enforced
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Extreme example - operation
Hazelwood under Govt. ownership, all 8 units ran
for about 1 hour in 25 years
Hazelwood under private ownership, all 8 units
run most of the time
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Extreme example - maintenance
Huntly as a Govt. department, overhauls
sometimes took months
Huntly as an SOE, overhauls were shortened
to about 7 weeks
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Conclusions
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Conclusions
Biggest implications of industry reform on asset
management are likely to be on assets (components)
susceptible to cyclic fatigue
Functional requirements of assets are changing,
generally absorbing the generous design margins
of bygone days
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Conclusions
Industry reform cycles can go along way in
a short time
Global trend in asset ownership is away
from vertical integration toward horizontal
integration
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Conclusions
Technology in particular will be a key driver of
asset stranding
Utility management skills are likely to diverge
sharply, contrasting asset management with
customer management
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Conclusions
Immediate term is likely to see emphasis on water
quality and environmental issues
Longer term may see structural changes, although
some regional amalgamations may occur within the
medium term as the benefits are recognised
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Acknowledgements
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Acknowledgements
David Barnes from LGNZ, Wellington
Chris Adam from Cardno MBK, Brisbane
Hazelwood Power, Contact Energy and Genesis Power
for allowing photos to be included
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For further information !!!
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For further information
Utility Consultants client newsletter Pipes
Wires regularly reviews issues effecting the
gas, electricity and water industries
Available to all industry participants by
contacting us - email, phone or see Phil
during the conference
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Questions ??