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

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5. 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.

6. 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.

7. 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.

8. 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.

9. 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.

10. 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.

11. 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.

12. 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).

13. 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.

14. 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.

15. 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.

16. 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.

17. 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.

18. 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.

19. 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.

20. 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.

21. Key drivers of 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.

22. Key drivers of 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.

23. 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.

24. 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.

25. Future trends Increasing diversification into telecomm’s (and related information services), as well as gas. Possible amalgamation with water utilities to achieve geographical penetration.

26. Appendix 1 REC 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

27. Appendix 1 REC 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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