Special Report on the Electricity Industry: 'Sons of CEGB' set to dominate power delivery: In this two-page Special Report, Mary Fagan examines whether the privatisation experiment has been a success for consumers

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The Independent Online
THE SALE of the electricity industry was one of the most controversial privatisations to date. It sought to turn on its head the idea that electricity companies are natural monopolies, carrying out everything from generation of power to transmission and supply.

Controversy continues to envelop the privatised companies, as they strive to convince customers that this experiment has worked.

Consumers, seeing prices increase and the salaries of electricity executives soar, argue that the benefits have gone to the electricity companies which privatisation created. Critics say that only for the companies and their shareholders has privatisation worked.

For most people, the industry manifests itself in the form of the local electricity supply company. There are 12 of these in England and Wales. All emerged from area boards of the former Central Electricity Generating Board and were sold in 1990. But the electricity sector is a complex web of companies and the regulations that govern their relations with each other and with their customers.

The Government split the old Central Electricity Generating Board (CEGB) into 15 parts to be floated on the stock market. Besides the regional companies, and the National Grid Company, these include the generators, National Power and PowerGen.

The industry in Scotland was simply split into two companies, Scottish Power and HydroElectric, which are also quoted on the stock market. Each company carries out the entire process from generation to supply. In Northern Ireland, the industry is in the process of being split up and sold.

In England and Wales, there have been stumbling blocks along the privatisation path. Originally, National Power was to include the civil nuclear power plants. In the event, the attempt to make nuclear attractive to investors became a nightmare as the huge costs of waste disposal and plant decommissioning emerged.

In an embarassing volte-face, the Government withdrew the nuclear reactors from the privatisation in 1989 and froze plans for a family of new reactors to follow Sizewell B, the pressurised water reactor under construction.

Nuclear thus remains in the public sector in the form of Nuclear Electric, a Government- owned company. Heavily subsidised, it generates 20 per cent of the nation's power. The subsidy is in the form of a levy on electricity generated from fossil fuels such as coal and gas and adds about 11 per cent to electricity bills.

Critics say that without the burden of nuclear, National Power should have been much smaller and that the generating industry should have been split up into several companies. But after the nuclear fiasco, the Government was keen to keep things simple to get the generators sold in early 1991.

Although newcomers can obtain licences to generate power - and many have done so, the 'sons of CEGB' will dominate the market for the forseeable future.

At the other end of the system are the 12 regional companies whose main purpose is to supply electricity in their area. Each has a monopoly over all but the largest customers in this 'franchise area', but that will be reduced in 1994 and abolished in 1998.

National Power, PowerGen and others sell direct to the biggest customers, and the Government's grand plan is to give everyone the freedom to choose their electricity supplier. But it is doubtful that anyone other than the existing regional suppliers will compete for the custom of households.

The final piece of the jigsaw is the nationwide transmission of power by the National Grid Company, owned by the 12 regional companies. There is speculation that they may float off all or part of the NGC on the stock market.

At the heart of the industry's trading system is the mystifying 'pool'. This pool is a theoretical thing into which all electricity generators sell their wares and from which all suppliers must buy.

Each generator quotes prices for power from its plants on a half- hourly basis. The system, run by the NGC, chooses the cheapest first, going up the ladder to the most expensive plant needed to meet demand in a given half-hour. But all the plants chosen, whatever the price quoted by their owners, get the same price - that quoted by the highest bidder.

Volatility in pool prices and their relatively high levels in recent months have angered large customers, yet the generators argue that they are too low and must rise further. The truth, however, is that the prices in the pool do not matter that much. Almost all electricity sold is covered by contracts that protect both buyer and seller against the pool price rising too high or dropping too low.

These contracts exist between the generators and the large firms to whom they sell direct, and between the generators and the regional supply companies. The regional companies negotiate prices with their big customers but have to stick within a regulatory formula for prices paid by domestic consumers and smaller firms.

Prices for domestic consumers rose last year by an average of 10 per cent. However, the regulator, Offer, pressured the companies into keeping price increases from 1 April to less than the maximum allowable, so the average increase this year is 2 per cent.

The regulator is also set to look again at the pricing regime. This is likely to mean that in future, consumers will get a better deal.

(Photograph omitted)

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