They have also faced - or are about to face - severe price cuts. The entire sector is in a period of wholesale and widespread change. Many of the traditional operators have either transformed themselves into completely new businesses or been taken over. An international dimension has now developed in what was traditionally a wholly UK-owned marketplace. US companies have also made a major impact on the electricity industry and French businesses have carved out a niche for themselves. When the old utility boards were dissolved, monopoly provision remained. In recent years competition has arrived while liberalisation has promoted diversity. The regulation of the industry has had a major impact on the shape and form of the component parts of the sector. The drive by regulators to improve efficiencies and promote price cuts has led to consolidation and to a more flexible industry. The ending of the electricity wholesale pool, for example, was seen as favouring rigidity and inefficiency. It is being scrapped and will be replaced by an entirely different model that removes protection for the high-cost supplier. In recent months the concept of the multi-utility providing several services under one banner is a major industry talking point. The first steps towards the multi-utility have been taken. Electricity companies are providing gas services and gas operators are providing electricity. Scottish Power also has a small telecoms utility. The emergence of the Americans and French has also encouraged UK players to consider their own international futures. Eastern Group, BG and Severn Trent are among those players that have international offices and European ambitions. The track record of BT is also inviting. What was once a solely UK company is now one of the few truly global businesses in the market. Utility companies are predominately national in orientation and certainly the industry is national in mindset. But the beating heart of economic regionalisation and globalisation will not leave the industry untouched. The electricity-supply sector is a good example. Profit margins have always been low and are getting lower. The environmental compliance burden on companies is high, and demands for investment in new services squeeze margins still further. Around 20 companies operate in the supply arena but only four or five appear likely to stay the course. Merger, takeover and consolidation have long been rumoured but now seem almost inevitable. UK electricity distribution businesses recently took a price-cut hit of up to 40% in the 1999 pricing review by the regulator. Consolidation is the only way out for many of the hardest hit. There are a dozen or so operators in the distribution business - some are efficient, others remnants of a previous era. The arrival of external operators, the demands for greater flexibility and efficiency and the move to pan-European utility companies must oblige some of the less efficient to seek a new destiny. Eastern Group, which is a vertically integrated company with interests throughout the utilities sector, took the price cut on the chin. The regulator named Eastern as one of the most efficient businesses in the sector. Dr John Curran, technical development manager at Eastern, says the new wave of competition requires companies to be more efficient and ambitious. 'We operate at a series of levels in the industry. Eastern Group is also exploring opportunities in the rest of Europe because deregulation and liberalisation will mean the opening up of commercial potential.' He adds that those UK companies that have learned to deliver a high-quality, low-cost, value-added service will be in the vanguard of the utility companies that make a dent in Europe. 'They also have to be opportunistic in character,' he says. In the UK, the newly competitive edge of gas and electricity companies has been handled badly by some operators. And leading players have taken stick from the regulator for the manner in which they have been selling the new services. Operators have been reported to the industry regulators for a range of unusual sales practices. The environment is playing an increasing role in the operations of energy companies. Anglian Water won last year's ACCA UK Environmental Reporting Awards and came runner-up in the European competition. Eastern Group was runner-up in the UK event in 1998. Rachel Jackson, ACCA's social and environmental affairs developmental manager, says: 'Most of the UK utilities are active environmental reporters. The UK water sector has made a great impression by clear and informative reporting. The electricity and gas companies also make a contribution to the development of environmental reporting.' Academics and external specialists have praised the water companies for their contribution to improving the environment. The sector's magazine, Utility Week, recently compared UK water companies very favourably with their Canadian counterparts. The electricity and gas companies have bigger fish to fry. The climate accord from the Kyoto global environmental conference could have a measurable impact on businesses, requiring cleaner production and dissemination of energy. Carbon dioxide emissions are a key issue for the industry, as are the penalties for pollution or failing to hit efficiency targets. Another major issue for the water industry is the end of November price-setting round with industry regulator Ofwat. Director-general Ian Byatt is calling for an across-the-board price cut to customers of 14%. The industry is appalled. Steve Hodgson, a spokesman for Severn Trent, says: 'We have tabled a proposed 5% cut and we will talk to Ian Byatt to see if we can find a way to accommodate his wishes without making budget cuts. If we were to impose a 14% price cut we would lose half a billion pounds from our investment budget over the next five years.' Periodically all the utilities have pricing arguments with their regulators. The regulator wants to see major price cuts and extensive performance improvements. Companies and regulators mutter darkly in the press. The companies traditionally complain that the regulator's proposals will inhibit investment. The regulator looks for better value for the consumer. 'We were the last of the utilities to be privatised and investment prior to 1989 was very stop-go. Since then investment has been continuous. We want to be able to go forward with this process. We agreed last time to a one-off price cut and we believe that we should be allowed to proceed with our investment strategy.' Severn Trent is making no comment on the nature of the cuts it would make in the event of being forced to comply with Ian Byatt's pricing review. But it is suggesting that the pace and scope of improvements would reduce. The other dominant issue for the water industry is competition. As the last utility to move to privatisation, it has had less time than telecoms, gas, and electricity to adapt to the commercial market. Now the water industry faces competition from both outside the sector and from current operators. The multi-utility is one of the most talked about phenomena in the sector. The combination of gas and electricity is already familiar to consumers. Also, existing gas and electricity companies have set up new businesses to add another utility to their service provision. The water companies argue that they are in a strong position to weather the competition from electricity and gas businesses. The water companies say that there are not the obvious synergies as there are between electricity and gas. The business of water provision is technically different from other utilities. Steven Hodgson says that Severn Trent is aware of the threat but it is confident that its technical expertise and high performance levels will deter serious competition. More serious is the prospect that other water companies will try to poach its blue-chip customers. The liberalisation of the market works both ways. Companies that are poaching can also be poached from. Severn Trent's view is that since it was named by the Drinking Water Directorate as the standard-setter for the industry, it has a good market position. The water companies are also moving into providing advice to industry. Environmental guidance is among the most sought-after services on offer. The substantial market opportunities that remain in the water sector will almost certainly deter the existing operators from moving into new pastures. Consolidation and takeovers will probably start to grow as they have elsewhere in the utilities industry. Tim Arnold of Arnold Broadcast, who advises a group of eight companies in the water and railways sector, says that the current pricing model for the water industry is the most sophisticated the utilities sector has seen. 'It was the first monopoly industry to be turned over to the private sector which is unlikely to face true competition (unlike telecoms where a domestic customer is likely to have the option of BT, a cable phone, or Cable & Wireless.) The water regulator's latest blueprint, known as K3, is likely to be followed by other regulators in different industries, for example, railways.' The agenda for utility companies in the next year or so, is market-driven. Liberalisation here and emerging liberalisation in the rest of Europe will create major opportunities for low-cost, high-quality operators. Price cuts, competition from here and overseas and regulatory pressures will shape an industry of fewer but greater-value players. - David Harvey is secretary of ACCA's small business committee.
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