Generating profits has not proved equally easy for all the 12 electricity companies.
Although they have been established in the private sector for only under two years, the 12 regional electricity companies seem to be dividing up neatly into what could be termed leaders and laggards.
Analysing the first sets of accounts of the 12 as quoted companies (for the year ending 31 March 1992) it is clear that there is a world of difference between, say, Northern Electricity (a leader) and Eastern (a laggard). Yet the 12 can hardly complain of not operating on level playing fields. They were all set up on the same date to supply the same markets with power bought from the same suppliers. The crucial differences are in their markets, geography and, above all perhaps, in their management.
And what a difference it made to their results, as Dennis Henry of VI Consultants found when ranking the 12 on three key criteria: return on total assets, profit margins and added value per pound of employee pay. These cover the uses of financial, physical and human assets.
Looking at the three in detail, we find that at the laggards' end Eastern Electricity managed a 11.29% figure on return on total assets while Northern Electricity's score of 17.23% was some 53% better. As Henry comments: "Presumably there was some reasonably common base for estimating the value of assets at privatisation and so the difference would seem to lie in the numerator, the profit before tax." Geography may not be a factor here, for South Western Electricity is only slightly better off than Eastern, yet the two serve very different areas. Eastern goes right into London and South Western goes to the Scillies.
In the ranking on profit margin on sales, Eastern again emerges as the laggard according to Henry's figures, with a return of 7.62%, "so it is not only not making money on its assets but is not doing so on its turnover," he says. South Wales Electricity emerges here as the winner with a return of 12.28%, some 60% better than Eastern.
The final element in the Henry equation is added value to pay, which shows what wealth is being created for the money spent on people and what they are contributing for what they take out of the business. Here South Western is the laggard, with a score of £2.01. This means that after deducting every pound of pay, it is left with £1.01 to pay for depreciation, interest, taxation and dividends. By the same calculation, Manweb and Southern, as the leaders, are left with £1.37, which is some 36% more.
For the customers of the 12 electricity companies the pity is that they cannot chose which to use. In time these differing rates of profitability may impinge on service quality.
Leaders and Laggards in the power game.
Values % £ Rankings Total
* ROTA Sales Pay By weightings Weight Rank
Company A B C A B C
Northern 17.23 12.07 2.21 1 2 7 10 1
Norweb 15.74 10.46 2.31 2 6 4 12 2
Yorkshire 15.17 10.57 2.35 5 5 3 13 3
London 15.27 10.58 2.22 4 4 6 14 4
Manweb 13.15 11.35 2.37 10 3 1 14 4
S Wales 15.50 12.28 2.05 3 1 11 15 6
Southern 13.95 9.50 2.37 9 10 2 21 7
E. Midlands 14.06 9.72 2.25 8 9 5 22 8
Midlands 14.89 9.77 2.08 6 8 10 24 9
Seeboard 14.22 8.50 2.08 7 11 9 27 10
S Western 11.83 9.80 2.01 11 7 12 30 11
Eastern 11.29 7.62 2.19 12 12 8 32 12
*ROTA = Return on total assets **PBT/Sales = Pre-tax profits as percentage of turnover ***AV/Pay = Added value per pound of employee pay Source: Annual reports and VI Consultants.