Phil Caffyn, Utility Consultants Ltd utilityconsultants

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

2. 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

3. 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

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

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

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

13. 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

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

15. Pipes & wires reform processes

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

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

18. 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

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

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

21. 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

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

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

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

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

26. 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

27. 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

28. 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

29. 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

30. 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

31. 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

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 Convergence Separation Stranding Emerging pipes & wires industry trends 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 Legacy position Hi UK Degree of vertical integration Lo Emerging position NZ Lo Hi Degree of horizontal integration

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 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…) 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

43. 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

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 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

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

48. Possible directions for the NZ water sector

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

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