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

Reforming the pipes & wires industries - what could it mean for

asset management in the water sector ??

Phil Caffyn,

Utility Consultants Ltdwww.utilityconsultants.co.nz

Discussion topic map

Introductoryremarks

Industry reformprocesses

Possibledirections for theNZ water sector

Implicationsfor asset

management

Why shouldindustry reform

make anydifference ??

Emergingtrends & industry

structures

Introductory remarks


Objective is toindicate how possibleindustry reforms could

impact on assetmanagement

processes

Particularly wantto look at the implications

for assets designed under apublic ownership structure

which then becomescommercialised


Content is veryacademic, for which no

apology is made !!

Draw onexamples from other

pipes & wires industries,and from the powergeneration industry


Fairly obviouseven at this early stage thatthe biggest implications will

be for active assets thatare susceptible to

cyclic fatigue

Why should industry reform make any

difference ??

Why should it...

Why shouldreforming the industry

structure make anydifference to asset

management ??

Afterall, the lightsmust stay on (or

whatever the waterequivalent is)

Asset management drivers

Functionalrequirements Assets

Industrystructure

Price &performance

Functional requirements

Functionalrequirements

Increasingquality of supply

Increasingquality of service

Lower prices

Unwilling to take“no” for an answer

Industry structure

Industrystructure

Increasingcost consciousness

Possibleregulatory attention

Pressure toimprove performance

Increasingcommercialisation

Price & performance

Price &performance

Pressure to reduceprices to end-use

customers

Pressure to improveoperational performance

Comparison of public & private

Public Private

Concern for costs

Concern for service

Activity emphasis

Little concern for operational costs,

but tight with capital

Tight control of costs, but will invest capital

Little concern for service, take it or leave it attitude

Service is paramount and is seen as a point

of differentiation

Emphasis on process and

technical excellence

Emphasis on market-driven

outcomes

Definite implications

Definite implicationsfor asset management,both for existing assetsand for future assets !!

Pipes & wires reform processes

Why reform ??

Why reform ?? Don’t fix whatain’t broke !!

Why reform ??

Key reasonsfor reform

Politicalideology

Economicsustainability

Operationalperformance

Why reform ??

Politicalideology

Right-winggovernments prefer

industries with free marketand private sector

characteristics

Left-winggovernments prefer

industries with centrallyplanned and state owned

characteristics

Why reform ??

Economicsustainability

Convenient wayto raise cash and

off-load debt if theprivatisation path

is chosen

Why reform ??

Operationalperformance

Fundamentalto under-pinningeconomic growth

Reform cycles

Nationalisation

Commercialisation

Corporatisation

Deregulation

Privatisation

Re-regulation

Can be quick

Usually takes a few years at least

Depends on regulatory pressure

Generally takes a long time

Case studies

UK water

Victorianelectricity

Argentinetelecomm’s

3 case studies

UK water

Nationalisation

Commercialisation

Corporatisation

Deregulation

Privatisation

Re-regulation18 months

8 years

2 years

45 years

Victorian electricity

Nationalisation

Commercialisation

Corporatisation

Deregulation

Privatisation


5 years

75 years

Argentine telecomm’s

Nationalisation

Commercialisation

Corporatisation

Deregulation

Privatisation


58 years

10 years

44 years

Characteristics of each phase

Construction of assets tomeet (usually) high growth

Nationalisation

Employment policiesusually very paternal

Focus on technical andprocess excellence

Little concern foroperating efficiencies

High level of ad-hocpolitical intervention


Construction of assetsusually slows down

Commercialisation

Entry of private sector skills

Focus begins to changeto customers

Emerging emphasis on assetutilisation and efficiencies

Still some ad-hocpolitical intervention


Focus on assets shifts fromconstruction to management

Corporatisation

Down-sizing of legacyskills & experience

Lip service paid to competition(behavior still monopolistic)

Increasing emphasis on assetutilisation and efficiencies

Political intervention mayincrease as objectives conflict


Focus on assets usuallyemphasise management

Deregulation

Maybe more down-sizing oflegacy skills & experience

Abrupt recognition of the needto consolidate market position

Emphasis on matching assetcapabilities to market demand

Politicians generallyrecognise the need to let go


Focus on improving scope &scale as well as efficiency

Privatisation

Down-sizing likely to bedriven by cost savings

Full recognition of the needto compete for market share

Emphasis on growingbeyond legacy business

Likely to see capitalrestructuring


Focus is almost totally onregulatory compliance

Re-regulation

Abrupt cost-cutting andcapital restructuring

Desire to divest regulated assetsif buyers can be found

Divestment of unregulatedactivities to raise cash

Management attention shiftsfrom customers to regulators

Comment

Obvious implicationsfor asset management

processes !!!

Reforms cango along way roundthe loop in only 10

or 12 years !!!

Emerging trends & industry structures

Emerging trends

Emergingpipes & wires

industry trends

Convergence

Separation

Stranding

Regulation

Supply quality

Technology

Customer data

Convergence

Amalgamation ofelectricity, gas, water& telecomms to form

multi-utilities

Key strategy isusually to grow scope

rather than scale

Operateswithin converging

markets and multipleregulatory

jurisdictions

Separation (ring fencing)

Functional separationof monopolistic and

competitive activities

Compellingcommercial and

regulatory reasonsfor separation

High level ofseparation may

fundamentally alterthe industry

structure

Change in core structure

Degree of horizontal integration

Degree of vertical

integration

Lo

Lo

Hi

HiLegacy position

Emerging position

UK

NZ

StrandingStranding is

where operationalchanges leave an asset

under-utilised ortotally un-used

Technology isa key factor in the

stranding of legacyassets

Regionalamalgamation can also

lead to stranding eg.Australian power

generation

RegulationThird party

intervention on behalfof customers interests -considers performance,

profit & price

Complex subjectthat is being argued in

many jurisdictions -seems very hard

to get right

In it’s mostextreme form it actually

works against customersbest interests eg.

UK water

Supply qualitySupply quality

is emerging as theprimary concern of

some customers(not price)

May includefactors such as flow,

quality, pressure, clarity,leakage etc.

Probablysubject to maximum &minimum criteria set

by variousagencies

TechnologyInformation

technology is providingmany “bolt-on” goodies

that can improveperformance.

Technologiesthat reduce the scale

required for efficiency &cost effectiveness eg.

fuel cells.

Thesetechnologies may welllead to the stranding

that we discussedbefore

Technology (cont…)

Advancingtechnologies may well

lead to a dynamicconflict

Incrementaltechnologies as SCADA willenhance the performance of

pipes & wires assets thatwill improve key customer

expectations

Disruptivetechnologies (such as fuelcells) will eventually strand

pipes & wires assets,probably starting in

remote areas

Customer data

Management ofcustomer data is critical

if core customer servicesare to be maintained

Acquisition ofcustomer data is

therefore seen as criticalin diversifyingregulatory risk

Customer datatends to be attached tothe commodity rather

than the network, henceit is unregulated

Academic theory ??

Is all this justacademic theory

about stuff happeninghalf a world away ??

All seemsvery removed from the

wonderful world of assetmanagement (and

engineering !!)

Case study - PennonPennon sought

to raise about £150m byselling their supplybusiness to offsetheavy regulation

Potential buyersof the SW Water brand

include TXU, PowerGen,Innogy and EdF (allpower companies)

All of thesepotential buyers see

the value in customerdata management, and

in bundling supply

Emerging structures

Three types ofutility companiesemerging, broadly

defined by theircompetencies

Owners ofnetwork infrastructure - strong

skills in managing regulatedassets

Owners ofretail commodities - strongskills in matching demand

with low-cost inputs

Owners ofcustomer information - strong

skills in managing data

Separation of these skills

Managing the delivery infrastructure

Supplying the commodity

Managing the customer data

Possible directions for the NZ water

sector

Where has NZ come from ??

Electricity

Gas

Telecomm’s

Water

Rail

Roading

Nat. Corp. Comm. Dereg. Prvt. Rereg.

Previous water reforms in detail

Local govt.reforms

Industry structurereforms

Internal processreforms


Industry structurereforms

Amalgamationof former Borough,

City & CountyCouncils in 1989

Consolidationof environmental &

regulatory bodies intoRegional Councils


Internal processreforms

Requirementto adopt robust

asset managementmethodologies

Requirement tomove to more private-

sector accountingprinciples

Pressureto out-sourcecontestable

activities

Recent water reforms

Recent waterreforms

Pre-election

Post-election

Pre-election proposed reforms

Former govt.proposed a more

commercialstructure

Recognisedthat privatisation

would be politicallysuicidal, and wasn’t

an option

Probably wouldhave catalysed

structural changeto the industry

Post-election proposed reforms

Present govt.is proposing micro-reforms,dealing with issues such asquality of supply, customerservice, environment etc.

Emphasis is onissues that the former govt.’sproposed reforms would havelet the market deal with (in factthe UK market has dealt with

these issues very well).


Industry itself isstarting to recognise that

achieving further efficiencygains will require some form

of regional cooperation


Two issuesare emerging….

Driving outthe next plateau ofcost efficiencies

Guarding theassets againstprivatisation

Drivers for NZ water industry

Quality ofdelivered waterand of disposed

waste

Environmentalsustainability of

both sourcing anddisposal

Cost structureof both treatment

and deliveryprocesses

Managementof infrastructure

Where could these drivers lead ??

Industrydrivers

Industryboundaries

Emergentindustrystructure

Governmentpolicy !!!


Define 3time frames

Immediateterm - within

1 governmentterm

Mediumterm - within

2 or 3 governmentterms

Longterm - within

5 governmentterms +


Immediateterm

Regulationsintroduced to improve water

quality

Possible increasein water prices to reflect quality

improvements

Definite preferencefor increased environmental

sustainability

May possibly be a fewregional amalgamations


Mediumterm

Increased charges to fundcapital replacement

Possible leveling offof customer benefits

Increased charges to fundenvironmental sustainability

Possible widening of theboundaries to allow some

private sector equity


Longterm

Amalgamation ofoperations or management

may be the norm

Customers may be offeredchoice of service level & price

Environmentalsustainability may place barriers

around the industry

Widening of theboundaries will depend on the

state of the industry


Increasedcapital andoperational

costs

Somereductions inindustry cost

structure

Decliningability to fundfrom revenue

Preferenceagainst funding

from privateequity

Implications for asset management

Asset management drivers

Functionalrequirements Assets

Industrystructure

Price &performance

Industry structure issues

Industrystructure

issues

Economy ofscale & scope

Convergence

Competition

Separation

Stranding

Regulation


Each industrystructure issue will be

different during each phaseof the reform cycle

Following gridindicates how therelative strengths

of these issuesmight vary


Scale & scope

Convergence

Competition

Separation

Stranding

Regulation


Asset life cycle

Implications foreach phase in anasset’s life cycle

Planning

Design

Construction

Operation

Maintenance

End of life

Asset life cycle

Asset lifecycle could takefrom 40 to 100

years !!!Reform

cycle can go alongway in this period -

might even go roundagain !!!

Followinggrid illustrates

the implications ofreform over an

assets life

Asset life cycle

Planning

Design

Construction

Operation

Maintenance

End of life


Implications of reform

Extremeimplications of

horizontal orangebar on previous

slide !!

Implicationswill be greater for

active assets (especiallyif cyclic fatigue

is an issue)

Example of implications

Good exampleis steam turbine plantdesigned to stay hot

for years at astretch

Changingmarket roles requireload following, which

leads to thermalcycling and

cracking

Implications for asset management

Could boreyou all with 36

slides correspondingto each cell on the

grid !!

Only going tobore you with 18 slidesby merging the middle

4 stages of reforminto 1 stage !!

Discuss 3 phases

Discussasset management

implications in3 phases

Nationalisation(public ownership)

Corporatisationto

Privatisation

Re-regulation

Nationalisation

Likely to includesocial policy issues

Market focuslikely to besecondary

Subject topolitical whims

Planning

Nationalisation

Very long,drawn outprocess

Includedgeo-political

considerations

Performed bycentralised

organisation

Design

Nationalisation

Inefficient,subject to labor

disputes

Emphasis onsocial factors and

skill retention

Littleconcern for

cost over-runs

Construction

Nationalisation

Little concernfor maximisingasset utilisation

On-goinginefficiencies

were justaccepted

Dominatedby engineering

influence

Operation

Nationalisation

Assets weregenerally over-

maintained

Little thoughtgiven to loss of

asset availability

Didn’t seek“the better way”

Maintenance

Nationalisation

Assets probablyoperated past their

economic life

Likely to beabandoned with

little clean-up

Unlikely tobe re-deployed

End of life

Corporatisation to Privatisation

Strong marketfocus hinging onkey parameters

Wide array ofstakeholders

involved

Somepolitical intervention

may still occur

Planning


Likely tobe rapid, and maybe

done by vendors

Likely to bebased on

modularity

Assetpurchasing willbe performance

based

Design


Likely to berapid, and specified

in detail

Vendors maybe required to shareperformance risks

Penalties forlate completion

likely to be enforced

Construction

Corporatisation to PrivatisationEmphasis on

matching availabilityto market

opportunities

Willingnessto invest capital

to improveperformance

Continualsearch for

“the better way”

Operation

Corporatisation to PrivatisationLikely to

be condition basedand strictly

justified

Likely tohave to fit in a

tightly specifiedwindow

Findings willbe analysed tobetter targetfuture work

Maintenance


Strict criteriafor definingend of life

Probablethat components will

be re-deployed

Extensivesite rehabilitationwill be required

End of life

Re-regulationFocus

may shift frommarket toregulator

Unlikelythat new assets

would beplanned

Probablethat existing assets

could be sold

Planning

Re-regulation

Unlikelythat new assets

would bedesigned

Design

Re-regulation

Unlikely thatnew assets would

be builtConstruction

Re-regulation

Extensivecost cutting to

survive

Servicelevels likely todecline to the

minimum

Managementinterest will

decline

Operation

Re-regulation

Likely thatbudgets will

be cut

Investmentin efficiency isvery unlikely

Minorproblems willprobably be

left

Maintenance

Re-regulation

End of lifemay be advanced

or delayed

Rehabilitationis likely to below budget

Possibilityof plant being moth

balled for futureuse

End of life

Extreme example - planning

Luggate

keeping theworkforce intact

Otahuhu B

capturing marketopportunities

Extreme example - planning

Marsden B

keeping theworkforce intact

Marsden B

supporting anupstream industry

Extreme example - construction

Clyde

years behindschedule, and way

over budget

Otahuhu B

largely on schedule,damages enforced

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

Extreme example - maintenance

Huntly

as a Govt. department,overhauls sometimes

took months

Huntly

as an SOE, overhaulswere shortened to

about 7 weeks

Conclusions

Conclusions

Biggestimplications of industry

reform on asset managementare likely to be on assets

(components) susceptibleto cyclic fatigue

Functionalrequirements of assetsare changing, generallyabsorbing the generous

design margins ofbygone days

Conclusions

Industryreform cycles cango along way in a

short time

Globaltrend in asset

ownership is away fromvertical integration toward

horizontal integration

Conclusions

Technologyin particular will be

a key driver of assetstranding

Utility management skillsare likely to diverge sharply,

contrasting asset managementwith customer management

Conclusions

Immediate termis likely to see emphasis

on water quality andenvironmental issues

Longer termmay see structural

changes, although someregional amalgamations mayoccur within the medium term

as the benefits arerecognised

Acknowledgements

Acknowledgements

David Barnesfrom LGNZ,Wellington

Chris Adamfrom Cardno MBK,

Brisbane

HazelwoodPower, Contact Energyand Genesis Power forallowing photos to be

included

For further information !!!

For further information

Utility Consultantsclient newsletter “Pipes

& Wires” regularly reviewsissues effecting the gas,

electricity and waterindustries

Availableto all industry participantsby contacting us - email,phone or see Phil during

the conference

Questions ??

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

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