Transcript Reforming the pipes & wires 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 Ltd
www.utilityconsultants.co.nz
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
Introductory remarks
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
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
Introductory remarks
Fairly obvious
even at this early stage that
the biggest implications will
be for active assets that
are susceptible to
cyclic fatigue
Why should industry
reform make any
difference ??
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)
Asset management drivers
Functional
requirements
Assets
Price &
performance
Industry
structure
Functional requirements
Increasing
quality of supply
Increasing
quality of service
Functional
requirements
Lower prices
Unwilling to take
“no” for an answer
Industry structure
Increasing
cost consciousness
Possible
regulatory attention
Industry
structure
Pressure to
improve performance
Increasing
commercialisation
Price & performance
Pressure to reduce
prices to end-use
customers
Price &
performance
Pressure to improve
operational performance
Comparison of public & private
Public
Concern for costs
Concern for service
Activity emphasis
Little concern for
operational costs,
but tight with capital
Little concern for
service, take it or
leave it attitude
Emphasis on
process and
technical excellence
Private
Tight control of
costs, but will
invest capital
Service is paramount
and is seen as a point
of differentiation
Emphasis on
market-driven
outcomes
Definite implications
Definite implications
for asset management,
both for existing assets
and for future assets !!
Pipes & wires
reform processes
Why reform ??
Why reform ??
Don’t fix what
ain’t broke !!
Why reform ??
Political
ideology
Key reasons
for reform
Economic
sustainability
Operational
performance
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
Why reform ??
Economic
sustainability
Convenient way
to raise cash and
off-load debt if the
privatisation path
is chosen
Why reform ??
Operational
performance
Fundamental
to under-pinning
economic growth
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
Case studies
UK water
3 case studies
Victorian
electricity
Argentine
telecomm’s
UK water
45 years
Nationalisation
Commercialisation
2 years
Corporatisation
Re-regulation
18 months
Deregulation
8 years
Privatisation
Victorian electricity
75 years
Nationalisation
Commercialisation
Corporatisation
Re-regulation
15 months
Deregulation
5 years
Privatisation
Argentine telecomm’s
44 years
Nationalisation
Commercialisation
10 years
Corporatisation
Re-regulation
18 months
Deregulation
58 years
Privatisation
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
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
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
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
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
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
Comment
Obvious implications
for asset management
processes !!!
Reforms can
go along way round
the loop in only 10
or 12 years !!!
Emerging trends &
industry structures
Emerging trends
Convergence
Separation
Stranding
Emerging
pipes & wires
industry trends
Regulation
Supply quality
Technology
Customer data
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
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
Change in core structure
Hi
Legacy
position
UK
Degree of
vertical
integration
Lo
NZ
Lo
Emerging
position
Hi
Degree of horizontal integration
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
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 it’s most
extreme form it actually
works against customers
best interests eg.
UK water
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
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
Technology (cont…)
Advancing
technologies may well
lead to a dynamic
conflict
Incremental
technologies as SCADA will
enhance the performance of
pipes & wires assets that
will improve key customer
expectations
Disruptive
technologies (such as fuel
cells) will eventually strand
pipes & wires assets,
probably starting in
remote areas
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
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 !!)
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
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
Separation of these skills
Supplying the
commodity
Managing the delivery
infrastructure
Managing the
customer data
Possible directions
for the NZ water
sector
Where has NZ come from ??
Nat.
Electricity
Gas
Telecomm’s
Water
Rail
Roading
Corp.
Comm.
Dereg.
Prvt.
Rereg.
Previous water reforms in detail
Industry structure
reforms
Local govt.
reforms
Internal process
reforms
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
Previous water reforms in detail
Requirement
to adopt robust
asset management
methodologies
Internal process
reforms
Requirement to
move to more privatesector accounting
principles
Pressure
to out-source
contestable
activities
Recent water reforms
Pre-election
Recent water
reforms
Post-election
Pre-election proposed reforms
Former govt.
proposed a more
commercial
structure
Recognised
that privatisation
would be politically
suicidal, and wasn’t
an option
Probably would
have catalysed
structural change
to the industry
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).
Post-election proposed reforms
Industry itself is
starting to recognise that
achieving further efficiency
gains will require some form
of regional cooperation
Post-election proposed reforms
Driving out
the next plateau of
cost efficiencies
Two issues
are emerging….
Guarding the
assets against
privatisation
Drivers for NZ water industry
Quality of
delivered water
and of disposed
waste
Environmental
sustainability of
both sourcing and
disposal
Cost structure
of both treatment
and delivery
processes
Management
of infrastructure
Where could these drivers lead ??
Industry
drivers
Emergent
industry
structure
Government
policy !!!
Industry
boundaries
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 +
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
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
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
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
Implications for
asset management
Asset management drivers
Functional
requirements
Assets
Price &
performance
Industry
structure
Industry structure issues
Economy of
scale & scope
Convergence
Industry
structure
issues
Competition
Separation
Stranding
Regulation
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
Industry structure issues
Nat.
Scale & scope
Convergence
Competition
Separation
Stranding
Regulation
Corp.
Comm.
Dereg.
Prvt.
Rereg.
Asset life cycle
Planning
Design
Implications for
each phase in an
asset’s life cycle
Construction
Operation
Maintenance
End of life
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
Asset life cycle
Nat.
Planning
Design
Construction
Operation
Maintenance
End of life
Corp.
Comm.
Dereg.
Prvt.
Rereg.
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)
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
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 !!
Discuss 3 phases
Nationalisation
(public ownership)
Discuss
asset management
implications in
3 phases
Corporatisation
to
Privatisation
Re-regulation
Nationalisation
Likely to include
social policy issues
Planning
Market focus
likely to be
secondary
Subject to
political whims
Nationalisation
Very long,
drawn out
process
Design
Included
geo-political
considerations
Performed by
centralised
organisation
Nationalisation
Inefficient,
subject to labor
disputes
Construction
Emphasis on
social factors and
skill retention
Little
concern for
cost over-runs
Nationalisation
Little concern
for maximising
asset utilisation
Operation
On-going
inefficiencies
were just
accepted
Dominated
by engineering
influence
Nationalisation
Assets were
generally overmaintained
Maintenance
Little thought
given to loss of
asset availability
Didn’t seek
“the better way”
Nationalisation
Assets probably
operated past their
economic life
End of life
Likely to be
abandoned with
little clean-up
Unlikely to
be re-deployed
Corporatisation to Privatisation
Strong market
focus hinging on
key parameters
Planning
Wide array of
stakeholders
involved
Some
political intervention
may still occur
Corporatisation to Privatisation
Likely to
be rapid, and maybe
done by vendors
Design
Likely to be
based on
modularity
Asset
purchasing will
be performance
based
Corporatisation to Privatisation
Likely to be
rapid, and specified
in detail
Construction
Vendors may
be required to share
performance risks
Penalties for
late completion
likely to be
enforced
Corporatisation to Privatisation
Emphasis on
matching availability
to market
opportunities
Operation
Willingness
to invest capital
to improve
performance
Continual
search for
“the better way”
Corporatisation to Privatisation
Likely to
be condition based
and strictly
justified
Maintenance
Likely to
have to fit in a
tightly specified
window
Findings will
be analysed to
better target
future work
Corporatisation to Privatisation
Strict criteria
for defining
end of life
End of life
Probable
that components will
be re-deployed
Extensive
site rehabilitation
will be required
Re-regulation
Focus
may shift from
market to
regulator
Planning
Unlikely
that new assets
would be
planned
Probable
that existing assets
could be sold
Re-regulation
Design
Unlikely
that new assets
would be
designed
Re-regulation
Construction
Unlikely that
new assets would
be built
Re-regulation
Extensive
cost cutting to
survive
Operation
Service
levels likely to
decline to the
minimum
Management
interest will
decline
Re-regulation
Likely that
budgets will
be cut
Maintenance
Investment
in efficiency is
very unlikely
Minor
problems will
probably be
left
Re-regulation
End of life
may be advanced
or delayed
End of life
Rehabilitation
is likely to be
low budget
Possibility
of plant being moth
balled for future
use
Extreme example - planning
Luggate
keeping the
workforce intact
Otahuhu B
capturing market
opportunities
Extreme example - planning
Marsden B
keeping the
workforce intact
Marsden B
supporting an
upstream industry
Extreme example - construction
Clyde
years behind
schedule, and way
over budget
Otahuhu B
largely on schedule,
damages enforced
Extreme example - operation
Hazelwood
Hazelwood
under Govt. ownership,
all 8 units ran for about
1 hour in 25 years
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, overhauls
were shortened to
about 7 weeks
Conclusions
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
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
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
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
Acknowledgements
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
For further
information !!!
For further information
Utility Consultants
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& Wires” regularly reviews
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electricity and water
industries
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