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Reforming the pipes & wires industries - what could it mean for asset management in the water sector ?? Phil Caffyn, Utility Consultants Ltd

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Presentation on theme: "Reforming the pipes & wires industries - what could it mean for asset management in the water sector ?? Phil Caffyn, Utility Consultants Ltd"— Presentation transcript:

1 Reforming the pipes & wires industries - what could it mean for asset management in the water sector ?? Phil Caffyn, Utility Consultants Ltd

2 Discussion topic map Introductory remarks Industry reform processes Possible directions for the NZ water sector Implications for asset management Why should industry reform make any difference ?? Emerging trends & industry structures

3 Introductory remarks

4 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

6 Introductory remarks Fairly obvious even at this early stage that the biggest implications will be for active assets that are susceptible to cyclic fatigue

7 Why should industry reform make any difference ??

8 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)

9 Asset management drivers Functional requirements Assets Industry structure Price & performance

10 Functional requirements Functional requirements Increasing quality of supply Increasing quality of service Lower prices Unwilling to take “no” for an answer

11 Industry structure Industry structure Increasing cost consciousness Possible regulatory attention Pressure to improve performance Increasing commercialisation

12 Price & performance Price & performance Pressure to reduce prices to end-use customers Pressure to improve operational performance

13 Comparison of public & private PublicPrivate 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

14 Definite implications for asset management, both for existing assets and for future assets !!

15 Pipes & wires reform processes

16 Why reform ?? Don’t fix what ain’t broke !!

17 Why reform ?? Key reasons for reform Political ideology Economic sustainability Operational performance

18 Why reform ?? Political ideology Right-wing governments prefer industries with free market and private sector characteristics Left-wing governments prefer industries with centrally planned and state owned characteristics

19 Why reform ?? Economic sustainability Convenient way to raise cash and off-load debt if the privatisation path is chosen

20 Why reform ?? Operational performance Fundamental to under-pinning economic growth

21 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

22 Case studies UK water Victorian electricity Argentine telecomm’s 3 case studies

23 UK water Nationalisation Commercialisation Corporatisation Deregulation Privatisation Re-regulation 18 months 8 years 2 years 45 years

24 Victorian electricity Nationalisation Commercialisation Corporatisation Deregulation Privatisation Re-regulation 15 months 5 years 75 years

25 Argentine telecomm’s Nationalisation Commercialisation Corporatisation Deregulation Privatisation Re-regulation 18 months 58 years 10 years 44 years

26 Characteristics of each phase Construction of assets to meet (usually) high growth Nationalisation Employment policies usually very paternal Focus on technical and process excellence Little concern for operating efficiencies High level of ad-hoc political intervention

27 Characteristics of each phase Construction of assets usually slows down Commercialisation Entry of private sector skills Focus begins to change to customers Emerging emphasis on asset utilisation and efficiencies Still some ad-hoc political intervention

28 Characteristics of each phase Focus on assets shifts from construction to management Corporatisation Down-sizing of legacy skills & experience Lip service paid to competition (behavior still monopolistic) Increasing emphasis on asset utilisation and efficiencies Political intervention may increase as objectives conflict

29 Characteristics of each phase Focus on assets usually emphasise management Deregulation Maybe more down-sizing of legacy skills & experience 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

30 Characteristics of each phase Focus on improving scope & scale as well as efficiency Privatisation Down-sizing likely to be driven by cost savings Full recognition of the need to compete for market share Emphasis on growing beyond legacy business Likely to see capital restructuring

31 Characteristics of each phase Focus is almost totally on regulatory compliance Re-regulation Abrupt cost-cutting and capital restructuring Desire to divest regulated assets if buyers can be found Divestment of unregulated activities to raise cash Management attention shifts from customers to regulators

32 Comment Obvious implications for asset management processes !!! Reforms can go along way round the loop in only 10 or 12 years !!!

33 Emerging trends & industry structures

34 Emerging trends Emerging pipes & wires industry trends Convergence Separation Stranding Regulation Supply quality Technology Customer data

35 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

36 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

37 Change in core structure Degree of horizontal integration Degree of vertical integration Lo Hi Legacy position Emerging position UK NZ

38 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

39 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

40 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

41 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

42 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

43 Customer data Management of customer data is critical if core customer services are to be maintained Acquisition of customer data is therefore seen as critical in diversifying regulatory risk Customer data tends to be attached to the commodity rather than the network, hence it is unregulated

44 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 !!)

45 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

46 Emerging structures Three types of utility companies emerging, broadly defined by their competencies Owners of network infrastructure - strong skills in managing regulated assets Owners of retail commodities - strong skills in matching demand with low-cost inputs Owners of customer information - strong skills in managing data

47 Separation of these skills Managing the delivery infrastructure Supplying the commodity Managing the customer data

48 Possible directions for the NZ water sector

49 Where has NZ come from ?? Electricity Gas Telecomm’s Water Rail Roading Nat.Corp.Comm.Dereg.Prvt.Rereg.

50 Previous water reforms in detail Local govt. reforms Industry structure reforms Internal process reforms

51 Previous water reforms in detail Industry structure reforms Amalgamation of former Borough, City & County Councils in 1989 Consolidation of environmental & regulatory bodies into Regional Councils

52 Previous water reforms in detail Internal process reforms Requirement to adopt robust asset management methodologies Requirement to move to more private- sector accounting principles Pressure to out-source contestable activities

53 Recent water reforms Recent water reforms Pre-election Post-election

54 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

55 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).

56 Post-election proposed reforms Industry itself is starting to recognise that achieving further efficiency gains will require some form of regional cooperation

57 Post-election proposed reforms Two issues are emerging…. Driving out the next plateau of cost efficiencies Guarding the assets against privatisation

58 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

59 Where could these drivers lead ?? Industry drivers Industry boundaries Emergent industry structure Government policy !!!

60 Where could these drivers lead ?? Define 3 time frames Immediate term - within 1 government term Medium term - within 2 or 3 government terms Long term - within 5 government terms +

61 Where could these drivers lead ?? Immediate term Regulations introduced to improve water quality Possible increase in water prices to reflect quality improvements Definite preference for increased environmental sustainability May possibly be a few regional amalgamations

62 Where could these drivers lead ?? Medium term Increased charges to fund capital replacement Possible leveling off of customer benefits Increased charges to fund environmental sustainability Possible widening of the boundaries to allow some private sector equity

63 Where could these drivers lead ?? Long term Amalgamation of operations or management may be the norm Customers may be offered choice of service level & price Environmental sustainability may place barriers around the industry Widening of the boundaries will depend on the state of the industry

64 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

65 Implications for asset management

66 Asset management drivers Functional requirements Assets Industry structure Price & performance

67 Industry structure issues Industry structure issues Economy of scale & scope Convergence Competition Separation Stranding Regulation

68 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

69 Industry structure issues Scale & scope Convergence Competition Separation Stranding Regulation Nat.Corp.Comm.Dereg.Prvt.Rereg.

70 Asset life cycle Implications for each phase in an asset’s life cycle Planning Design Construction Operation Maintenance End of life

71 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

72 Asset life cycle Planning Design Construction Operation Maintenance End of life Nat.Corp.Comm.Dereg.Prvt.Rereg.

73 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)

74 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

75 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 !!

76 Discuss 3 phases Discuss asset management implications in 3 phases Nationalisation (public ownership) Corporatisation to Privatisation Re-regulation

77 Nationalisation Likely to include social policy issues Market focus likely to be secondary Subject to political whims Planning

78 Nationalisation Very long, drawn out process Included geo-political considerations Performed by centralised organisation Design

79 Nationalisation Inefficient, subject to labor disputes Emphasis on social factors and skill retention Little concern for cost over-runs Construction

80 Nationalisation Little concern for maximising asset utilisation On-going inefficiencies were just accepted Dominated by engineering influence Operation

81 Nationalisation Assets were generally over- maintained Little thought given to loss of asset availability Didn’t seek “the better way” Maintenance

82 Nationalisation Assets probably operated past their economic life Likely to be abandoned with little clean-up Unlikely to be re-deployed End of life

83 Corporatisation to Privatisation Strong market focus hinging on key parameters Wide array of stakeholders involved Some political intervention may still occur Planning

84 Corporatisation to Privatisation Likely to be rapid, and maybe done by vendors Likely to be based on modularity Asset purchasing will be performance based Design

85 Corporatisation to Privatisation Likely to be rapid, and specified in detail Vendors may be required to share performance risks Penalties for late completion likely to be enforced Construction

86 Corporatisation to Privatisation Emphasis on matching availability to market opportunities Willingness to invest capital to improve performance Continual search for “the better way” Operation

87 Corporatisation to Privatisation Likely to be condition based and strictly justified Likely to have to fit in a tightly specified window Findings will be analysed to better target future work Maintenance

88 Corporatisation to Privatisation Strict criteria for defining end of life Probable that components will be re-deployed Extensive site rehabilitation will be required End of life

89 Re-regulation Focus may shift from market to regulator Unlikely that new assets would be planned Probable that existing assets could be sold Planning

90 Re-regulation Unlikely that new assets would be designed Design

91 Re-regulation Unlikely that new assets would be built Construction

92 Re-regulation Extensive cost cutting to survive Service levels likely to decline to the minimum Management interest will decline Operation

93 Re-regulation Likely that budgets will be cut Investment in efficiency is very unlikely Minor problems will probably be left Maintenance

94 Re-regulation End of life may be advanced or delayed Rehabilitation is likely to be low budget Possibility of plant being moth balled for future use End of life

95 Extreme example - planning Luggate keeping the workforce intact Otahuhu B capturing market opportunities

96 Extreme example - planning Marsden B keeping the workforce intact Marsden B supporting an upstream industry

97 Extreme example - construction Clyde years behind schedule, and way over budget Otahuhu B largely on schedule, damages enforced

98 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

99 Extreme example - maintenance Huntly as a Govt. department, overhauls sometimes took months Huntly as an SOE, overhauls were shortened to about 7 weeks

100 Conclusions

101 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

102 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

103 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

104 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

105 Acknowledgements

106 David Barnes from LGNZ, Wellington Chris Adam from Cardno MBK, Brisbane Hazelwood Power, Contact Energy and Genesis Power for allowing photos to be included

107 For further information !!!

108 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

109 Questions ??

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