The Electricity Industry in England & Wales Overview - December 1998.

The Electricity Industry in England & Wales

Overview - December 1998

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Industry Structure

• 4 major generators, plus IPP’s.

• 1 national transmission company, also responsible for wholesale market operation.

• 12 distribution companies (REC’s).

• Tending towards vertical integration.

• Transmission & distribution businesses are heavily regulated.

Ownership

• Generators are largely investor owned.

• Magnox Electric still owned by UK government (tax payers will pick up the decommissioning liability).

• REC’s are largely US owned, although some divestment is occurring.

• National Grid is investor owned.

Generation

• Major fossil generators are National Power and PowerGen (41% collective market share).

• British Energy owns AGR nuclear stations, along with 2 Scottish Nuclear stations.

Generation

• Magnox Electric owns magnox stations and takes responsibility for the decommissioning liabilities.

• Inter tie with France provides additional “generation”.

• Emergence of Independent Power Producers (IPP’s) - some REC’s backward integration into gas-fired capacity.

Generation

• PowerGen and National Power agreed to divest 6,000 MW of coal-fired capacity at the Regulator’s request to enhance competition.

• This plant was acquired by the Eastern Group in 1996.

Transmission

• Provided by National Grid Company (NGC) at 400 kV and 275 kV.

• Connects power stations to REC’s and direct-supply customers.

• Strict price controls enforced by OFFER.

Distribution

• Provided by the REC’s at 132 kV or less.

• Extensive use of contracting for all maintenance and operations.

• Extensive use of information systems to maximise performance.

• Strict price controls enforced by OFFER.

Retailing

• Deals mainly with the purchase of bulk energy and resale to customers.

• Includes activities such as meter reading, billing, remittance processing and customer enquiries.

• Highly competitive (refer next slide).

Retailing

• Competition for customers above 1 MW has existed since 1990.

• Competition for customers above 100 kW has existed since 1994.

• Competition for customers below 100 kW will be phased in about late 1998.

Diversification

• NORWEB acquired by North West Water and integrated into an energy, water and waste utility.

• Manweb was acquired by ScottishPower, along with Southern Water.

• Scottish Power emerging as a major player in telecommunications.

Regulation

• Transmission & distribution revenues subject to regulation by OFFER (Office of Electricity Regulation).

• Similar regulators exist in other industries - water, gas, rail, telecomm’s.

• Regulation progressively removed from retailing as competition begins.

Regulation

• Regulation caps revenue to Retail Price Index less a defined percentage ie. RPI-X meaning revenues decline in real terms over time when X > 0.

• Totally different to the “cost-plus” regulation in the US in that UK utilities get to keep efficiency gains made within their revenue base.

Distribution Regulation

• Initial price controls began in 1990, and generally permitted increases in excess of the RPI ie. X < 0.

• Controls were revised in 1995/96 where X was from 11% to 17%, and again in 1996/97 where X was from 10% to 13% respectively.

Distribution Regulation

• This reduced each REC’s revenues by about £100 million in each year.

• For 1997/98, 1998/99 and 1999/00 the control is set to RPI-3%.

• Further controls have been signaled for the period from 1 April 2000.

Transmission Regulation

• Similar regime to distribution ie. RPI-X.

• Initial price control in 1990 set X = 0.

• For the 4 years from 1 April 1993, X = 3%.

• In 1997/98, X = 20%.

• For the 3 years from 1 April 1998, X = 4%.

• Further price controls are likely.

Windfall tax

• One-off tax levied on the “excess profits” of the privatised utilities by the Blair Administration.

• To be paid in two equal installments on 1 December 1997 and 1 December 1998.

• Cost each REC about £100 million.

Key driversof change

• Abundance of cheap gas, under-cutting coal-fired generation.

• Tight revenue restrictions on regulated businesses.

• Increasing competition in retail.• Continued use of contractors for contestable

work.

Key driversof change

• Measurement and communication technology is lowering costs of data acquisition, processing and use.

• Increasing expectations of US owners, who want both high financial returns and experience in deregulated markets.

Future trends

• Possible divesting of REC’s by US owners as US markets deregulate.

• Possibility of large one-off price controls at expiry of present controls, perhaps 12-15% for distribution and 15-20% for transmission.

Future trends

• Possibility of further “wind-fall” taxes.

• Continued investment in supply reliability.

• Retail competition is likely to increase as smart metering reduces customer switching costs.

Future trends

• Increasing diversification into telecomm’s (and related information services), as well as gas.

• Possible amalgamation with water utilities to achieve geographical penetration.

Appendix 1REC ownership

• London Electricity - Electricité de France• SWEB - Southern Company• Southern Electric - independent investors• SEEBoard - Central & South Western Corp.• SWALEC - Hyder plc• Manweb - Scottish Power plc

Appendix 1REC ownership

• NORWEB - North West Water plc• Eastern Electricity - Texas Utilities• Midlands Electricity - Avon Energy (US)• East Midlands Electricity - PowerGen plc• Yorkshire Electricity - Yorkshire Holdings (US)

• Northern Electric - CalEnergy

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