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
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
Introductory remarks
Content is veryacademic, for which no
apology is made !!
Draw onexamples from other
pipes & wires industries,and from the powergeneration industry
Introductory remarks
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
Re-regulation15 months
5 years
75 years
Argentine telecomm’s
Nationalisation
Commercialisation
Corporatisation
Deregulation
Privatisation
Re-regulation18 months
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
Characteristics of each phase
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
Characteristics of each phase
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
Characteristics of each phase
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
Characteristics of each phase
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
Characteristics of each phase
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
Previous water reforms in detail
Industry structurereforms
Amalgamationof former Borough,
City & CountyCouncils in 1989
Consolidationof environmental &
regulatory bodies intoRegional Councils
Previous water reforms in detail
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).
Post-election proposed reforms
Industry itself isstarting to recognise that
achieving further efficiencygains will require some form
of regional cooperation
Post-election proposed reforms
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 !!!
Where could these drivers lead ??
Define 3time frames
Immediateterm - within
1 governmentterm
Mediumterm - within
2 or 3 governmentterms
Longterm - within
5 governmentterms +
Where could these drivers lead ??
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
Where could these drivers lead ??
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
Where could these drivers lead ??
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
Where could these drivers lead ??
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
Industry structure issues
Each industrystructure issue will be
different during each phaseof the reform cycle
Following gridindicates how therelative strengths
of these issuesmight vary
Industry structure issues
Scale & scope
Convergence
Competition
Separation
Stranding
Regulation
Nat. Corp. Comm. Dereg. Prvt. Rereg.
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
Nat. Corp. Comm. Dereg. Prvt. Rereg.
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
Corporatisation to Privatisation
Likely tobe rapid, and maybe
done by vendors
Likely to bebased on
modularity
Assetpurchasing willbe performance
based
Design
Corporatisation to Privatisation
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
Corporatisation to Privatisation
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 ??