Homes plug in for power competition
News Analysis: Domestic electricity consumers will be able to shop around for a supplier from today
Monday 14 September 1998
This morning, Britain's domestic electricity market opens up to competition with 750,000 households in four regions of the country free to switch supplier for the first time.
It will be a slow start with only 10,000 customers expected to desert their local supplier, tempted by price reductions averaging 10 per cent.
But by Christmas, competition will be established in every area of the country and by next June the process will be complete. All of Britain's 26 million domestic and small business electricity consumers will be able to shop around for a supplier of their choice.
It has been an exercise of unparalleled size, complexity and cost, dwarfing even the logistical nightmare of liberalising the gas market. The 12 regional electricity companies in England and Wales, the two Scottish suppliers and the Electricity Pool have spent well over pounds 1bn preparing for today.
Even with eight years' notice of the impending liberalisation, the industry still contrived to miss its original deadline by six months and as a result has incurred fines of pounds 50m.
The great unknown is whether it has been worth the wait. There are three question- marks hanging over the exercise.
First, will the computer systems stand the strain? Second, will the industry avoid the marketing chaos that followed the opening of the gas market?
And third, and most crucially, will it prove a damp squib? Will customers embrace the new era of competition with gusto or will they vote with their feet and stay with the supplier they know, if not love, through the sheer power of inertia?
The energy minister John Battle, the electricity regulator Professor Stephen Littlechild, and the industry itself are as confident as they can be that the transition to a competitive market will go smoothly. It is one reason why the start date was put back six months while armies of software consultants crawled over the computer systems in supply companies the length and breadth of the country, checking, testing and retesting.
John Roberts, President of the Electricity Association and chief executive of SWALEC, says that one important measure of the programme's success will be to demonstrate that it actually works.
"We have tested exhaustively and, though it would be wrong to say there won't be any mistakes, human nature being what it is, those mistakes will be kept to the absolute minimum and rectified as quickly as possible," he said.
Others within the industry are not so sanguine. One electricity executive said: "We have calculated that to change a customer from one supplier to another requires seventeen separate administrative tasks. That leaves vast scope for cock-ups along the way."
The early days of gas liberalisation saw householders plagued either with the wrong bills, or legions of doorstep salesmen preying on vulnerable customers such as the elderly. The electricity suppliers, many of whom were involved in that debacle, believe they have learnt from bitter experience.
The Association of Energy Suppliers, a body to which all the leading electricity and gas firms belong, has drawn up a code of practice on marketing.
Derek Baggs, the administrator of the code, says: "Some regrettable instances of bad practice by some doorstep salespersons have drawn the attention of the media, but in a market now covering 19 million gas customers there have in fact been fewer than 2,000 complaints about marketing activity."
The code bars suppliers from calling late at night or early in the morning, trying to sell to anyone under-age and persisting when it is plain the householder is not interested. It also requires doorstep sellers to provide proper like-for-like comparisons of how their prices compare with those of the existing supplier.
A number of companies, such as Midlands Electricity, have got rid of outside contractors and now employ their doorstep sales teams direct.
Roger Murray, Midlands' managing director of energy services, says that over the next six months it is trebling the size of its doorstep selling team to 600 - of whom 400 will be dedicated to defending its local franchise and 200 to capturing new customers from other suppliers.
Mr Murray says Midlands' worst case scenario would be a net loss of 10 per cent of its customer base over five years. But he adds: "We would be mortified if the loss was anywhere near that figure."
Whether competition works and how many customers switch will depend, crucially, on how far bills fall. Margins are low in electricity supply and swapping suppliers is expected to yield savings of about 10 per cent on the average domestic bill of pounds 254 a year.
Based on this, Swalec's Mr Roberts believes that about 10 per cent of households will change supplier compared with a figure of 27 per cent in the gas market.
"Competition between the suppliers won't be anything other than real but the numbers switching will be lower because of inertia and the level of savings available," he says.
This is a view disputed by Centrica, which trades as British Gas and is one of only two non-electricity companies to have applied for a supply licence.
Centrica has already signed up 440,000 customers, has expressions of interest from a further 1.5 million and has set its sights on capturing 15-20 per cent of the market, which would give it well over four million new customers.
"If 30 per cent of gas customers have switched, then why shouldn't the same apply with electricity?" asks Centrica's chief executive Roy Gardner.
Electricity executives say this will not happen because the savings will be much lower. Mr Gardner disputes this arguing that the savings will be virtually identical, making Centrica's "dual fuel" offer every bit as attractive as those of the electricity companies.
As ever, there is a lot of hype and propaganda surrounding the exercise. Although Centrica has signed 440,000 customers, only 15,000-20,000 will switch on day one.
Likewise Eastern, one of the regions in the first wave of liberalisation, has signed 200,000 customers outside its area. But only a fraction of those will go live today since only three other areas of the country - Manweb, Yorkshire and Scottish Power - are now open to limited competition.
John Geoghegan, director of utilities at the consultancy and IT services group Cap Gemini, is sceptical about the whole exercise arguing that the industry's outdated cost structure will weaken competition, keeping prices artificially high and service levels low.
He says it costs pounds 40 to acquire each new customer but since they yield a net profit of only pounds 3-pounds 5 a year it could take 13 years to achieve a payback. "What is needed is a reduction in energy costs via a more competitive generation market, further consolidation of the supply industry to reduce overheads and marketing costs and a streamlining of customer service costs.
Many in the industry would say amen to all that and indeed the Government and regulators are making moves in those directions.
But whether they will come rapidly enough to justify all the expense and angst that has gone into delivering competition in electricity is anyone's guess.
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