Ownership of RegionalElectricity Companies

in England & Wales

Issues & strategies

January 1999

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Key Themes

• Industry background

• Strategies behind ownership.

• Changes in the US industry.

• The UK investment climate.

• Likely trends.

• Summary of ownership.

Industry background

• REC’s privatised in late 1980’s along with other electricity industry assets by the Thatcher administration.

• Floatation in 1990.

• Acquired by corporate owners, predominantly US utilities.

• Purchase by US utilities for four key reasons….• Gain experience in deregulated and

rapidly changing markets in preparation for US deregulation.

• Improve returns by investing in less regulated markets.

Strategies behindownership

Strategies behindownership

• Shift to viewing markets as global, and not merely local (pre-deregulation markets in the US were only local).

• Regulation of lines business profits was mature and stable, and limiting profits.

• Purchase by UK utilities for three key reasons….• Improve economies of scale by

geographical penetration.• Capture markets with a higher growth

rate and profit potential.• Improve efficiencies by vertical

integration.

Strategies behindownership

Changes in the US industry

• Deregulation advancing rapidly in most states….• Reduces the need to experiment with

previously deregulated markets.• Redefines the US market as national

rather than local.• Improves the profit potential of energy

business (lines business still regulated).

UK investment climate

• Climate becoming unfavorable….• Windfall tax in 1997 cost most of the

REC’s about M£100 each.• Further pricing controls signaled for the

period beginning 1 April 2000 - possibility that X could be 12% to 15%.

• Better returns may be possible elsewhere.

Likely trends

• US utilities will divest UK utilities and invest in areas of higher return such as deregulated US markets.

• UK utilities will be purchased either by overseas utilities seeking experience in deregulated markets or good investments, or other UK utilities seeking consolidation.

Likely trends

• Emerging trend of generators vertically integrating into energy retailing (similar to NZ).

• Possible that US utilities that are strong on upstream and energy may divest lines businesses if further price controls and wind-fall taxes eventuate.

• Initially owned by Entergy, probably to exploit transition periods of deregulation and investment in both markets.

• Divested as part of Entergy’s refocus on domestic growth in mid-1998.

• Acquired by Electricité de France for B$3.185 in late 1998.

• Integrated into the Eastern Group plc, a combined gas, electricity and telecomm’s utility.

• Acquired by Texas Utilities.

• Entry to the UK market by TU at this late stage suggests a long-haul investment into a well positioned player rather than a transient investment.

• Acquired by Central & South Western in January 1996.

• Appears that CSW’s strategy is to learn about deregulated markets, so SEEBoard may be divested in the near future.

• AEP’s recent acquisition of CSW may lead to a renewed focus on the US market.

• Independently owned, with 67% of shares held by nominee companies.

• Became the only independently-owned REC in 1997 when Yorkshire Electricity was acquired by NCE and AEP.

• Owned by Southern Company and PP&L Global Inc (majority of shares held by Southern).

• Southern strategy is to grow earnings from global businesses, but long-term ownership of SWEB will still depend on how the UK investment climate varies in relation to other markets.

• Owned by Hyder, an integrated infrastructure owner and operator.

• Includes ownership of Welsh Water plc and gas interests.

• Hyder will most probably be a long-term owner focused on consolidating a geographical presence.

• Owned by Avon Energy Partners, a consortium between GPU and Cinergy.

• Sale of energy supply business to National Power plc.

• Acquisition of energy business by National Power is seen as a long-term move.

• Previously acquired by Dominion Resources in late 1996.

• DR strategy of low-cost generation and growing US earnings suggests a short-term “experimental” investment.

• Recently acquired by PowerGen plc for B£1.9, (possibly not wanting to be left out of National Power’s entry into energy supply).

• Acquired by ScottishPower plc, along with Southern Water plc.

• Ownership is part of ScottishPower’s strategy to become a broad-based national multi-utility.

• Management team will be streamlined.• ScottishPower is seen as a long-term

investor, and not merely skimming profits from a transition period.

• Norweb merged with North West Water plc and now trading as United Utilities plc.

• Strategy of geographical penetration leading to economies of scale.

• United Utilities will be a long-term player.

• Consolidation of water, waste, gas, telecomm’s & electricity.

• Acquired by CalEnergy in December 1996.

• CalEnergy recognised the better returns outside of the US at the time of purchase, and the skills within NE that will be crucial to competing in deregulated markets.

• Probable that NE will be sold as the various investment climates reshuffle.

• Acquired by New Century Energies (50%) and AEP (50%).

• Given the partners late entry at the point of total UK deregulation, it is possible that this is a short-term investment.

• AEP is expanding in the US by acquisition (CSW), which is likely to a more long-term move.

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