Their territorial monopoly weakened, the regional electricity companies are on the move in pursuit of the newly liberated customer.
It all used to be so simple. Your business used electricity, your local electricity company sent you a bill, you paid it. No longer. In the brave, new post-privatisation world of electricity supply the customer - or, rather, the customer with a maximum demand of over 100 kilowatts (kW) of power - has a choice. The old, territorially-defined monopoly of the regional electricity companies (RECs) has disappeared, replaced by a market in which the prospective supplier must compete with 11 other RECs and five generators for the custom of some 45,000 newly-liberated consumers.
As a result, since the beginning of April this year, the electricity supply map of the UK has steadily changed. A new geography has emerged. Yorkshire Electricity now powers London's Great Ormond Street Hospital, Scottish Hydro-Electric sells directly to Reuter's Fleet Street headquarters, and Midlands Electricity - in the form of Powerline, its energy trading subsidiary - now illuminates Harrods. Like the moving pylons in National Power's early television campaign, the RECs - at least the more adventurous ones - have uprooted themselves and started to tread on each other's turf.
The RECs and generators are no strangers to competition. The electricity supply market was first liberalised in April 1990, when the RECs - together with the generators National Power, PowerGen, Scottish Power and Scottish Hydro-Electric - were theoretically freed to compete for the business of any customer with a demand greater than one megawatt (MW). In the event, only around half of those eligible - Northern Electric and National Power being among the most successful - pursued the 5,000 large, industrial non-franchise customers with any great vigour.
Many of those who passed up the opportunity cited practical reasons - the difficulties of servicing a distant account, together with the need to establish entirely new billing operations. Others demurred due to the perceived strength of the customer's position, the volatility of the market, the low margins and the consequent prospect of slight reward. 'You are typically dealing with a very professional buyer in a very price sensitive market with a high level of contract turnover,' explains Jeff Percival, marketing director of Midlands' Powerline, a notable non-participant. 'And if you have an annual electricity bill of something over £100,000 you're bound to look at it very hard each time it comes up for renewal.' For the majority of suppliers, the attractions of the 100kW market were somewhat greater - or, viewed in another light, given the sheer number of customers involved, the implications of not actively seeking that new business were potentially more severe. Faced with the possible erosion of a whole swathe of their customer base, some greeted the loss of franchise with considerable nervousness. London Electricity, with the highest concentration of 100 kW sites in the country, has perhaps the most to lose, and was (and still is) readily targeted by the more aggressive outsiders. Others, like South Western Electricity, with a supply price well above the national average, has similar cause to feel uneasy.
The generators, meanwhile, though having formally expressed interest in seeking 100kW business, are relatively inactive. Whereas National Power, for example, signalled its interest in the one-megawatt market through setting up a trading subsidiary, Energy Direct, to handle sales, here it has kept a relatively low profile. Given a potential profit stream that is negligible compared with its more mainstream activities, it is perhaps hardly surprising.
On the other side, Eastern, Midlands, Northern and Yorkshire, seemingly having decided against the validity of a residual captive market, have taken the lead in seeking out-of-area contracts. In order to compete they have also had to learn a new set of skills. Electricity is perhaps the ultimate commodity and trading in it is, like all commodities, a straightforward matter of arbitrage. Hence RECs have had to adapt to the role of broker, of buying short and selling long, where the management of risk is now the key - as illustrated by the entrance of commodity trader Marc Rich to the supply market. Others with the appetite for low margins might well follow.
Like most fledgling markets, the introduction of competition in 100kW supply has been anything but smooth. It was not helped by last September's decision by Offer, the electricity watchdog, to introduce competition in metering. Hence, not only did a customer seeking to source electricity from outside its area need a connection agreement with its existing REC and its new supplier, it now also needed to seek and appoint a third-party meter operator. Some, inevitably, were highly critical of the timing of the decision.
'Changing your electricity supplier is enough of a leap for most people,' claims Percival. 'To do that and appoint a meter operator at the same time has put off an awful lot of customers - particularly the smaller ones at the bottom end of the market. Within a wider ethos that seeks competition, the issue of metering is really quite minor. It's got in the way of the much bigger prize of competitive supply'.
Then, in mid-February, after deciding against referring PowerGen and National Power to the Monopolies and Mergers Commission, Offer announced that it was to set a temporary cap on the wholesale - or pool - price of electricity. Faced with this unexpected curb, the RECs were obliged to pass part of the 7% reduction on to consumers - at a stage where most deals had already been finalised. As a result all 100kW contracts had to be renegotiated.
The fiercest competition in supply to date has been at the upper reaches of the market, for group customers in the 500kW-1MW band who typically employ professional energy buyers and have a large number of separate sites - high street retailers, water companies and local authorities, for example. Between them they are estimated to account for around half of the total 100kW market. At the other end of the scale are the small, single site customers - around 30% of the total - which have an annual electricity bill upwards of £12,000. At this level, as Nigel Hawkins, Hoare Govett's utilities analyst, points out, there is something of a double bind at work. 'The smaller customer is usually less well informed of the available contracts. At the same time the electricity companies are less inclined to seek that business out.' As a result there is a distinct lack of mobility. 'People will generally move because of price and stay because of uncertainty - and it is the small customer in particular that needs a very good price to move,' says Percival. 'On that basis they'll move for 10-15%, but not for 1-2% a year later. You have to catch them the first time round.' Catching them in itself is quite an obstacle - just knowing where the customers are is perhaps half the battle.
Most RECs have sought to stave off the rigours of the market and retain their existing customers by offering them an annual fixed price contract at anything up to a 10% discount on the previous published tariffs. Yet as the tariffs are based on broad averages, many of the reductions passed on to the customer through switching to a contract have been purely as a result of more accurate pricing. 'The inevitable consequence of a tariff is that by definition some customers are being undercharged for their usage and some are overcharged,' explains Graham McKenzie, head of sales and marketing at Eastern Electricity. 'A contract, however, can take account of a customer's specific load requirements.' Some have sought to lure business through adding an element of service - providing advice on how to cut bills, for example. To this end Eastern provides its customers with a software package that enables them to compare contract offers from rival suppliers.
According to Offer, around 37% of eligible customers in the 1MW market - or about 57% by volume - chose to take electricity from a supplier other than their local company in the year 1993-4. The equivalent figure for the 100kW market in April was 25%, with registrations expected to rise to 30% by the end of the year. For some customers, however, the freedom to choose seems to have appeared all too daunting. Selecting a new supplier is often perceived as complex and time-consuming by those inexperienced in utilities purchasing. And besides, as Peter Rost, chairman of the Major Energy User's Council, points out, the savings offered by switching supplies - say, between 10-12% - are not often that much greater than those offered by the existing local supplier for switching from a tariff to a fixed-price contract. It is hence difficult to gauge whether the 75% of 100kW users who have not changed supplier have done so through either apathy or being offered a more favourable deal. The willingness of the industrial user to entertain the notion of competition in supply will be further tested if there is a further reduction in the franchise threshold to between 60-80kW in 1996 as a prelude to complete liberalisation in 1998.
Yet whatever the individual RECs success in gaining new business, the contribution that supply makes to their overall profitability is ultimately slight. Attention in the industry is instead currently focused on the long-heralded regulatory review of distribution - the delivery of electricity over local networks, from which 85% of a REC's profits are typically derived - that is expected from Stephen Littlechild, the director general of Offer, at the end of this month. The initial signs are of severe restraints, potentially the harshest introduced in the five years since privatisation. Some analysts are predicting a cap in distribution profits of around 20%, which - if the industrial consumer's hopes are justified - could in turn feed through to a further sizeable fall in pre-tax electricity prices.