Phil Cox: 16 countries, 38 power stations, 27 million customers and one pounding headache

The chief executive of International Power tells Tim Webb why the force is still with him despite a US nightmare and regulatory confusion
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The Independent Online

Phil Cox is in charge of 38 power stations supplying around 27 million people in 16 countries on five continents. Isn't it hard to keep track of what's going on? "No - we don't forget where we are," says the chief executive of International Power. But there aren't even any clocks on the wall of his office in the City of London, showing what time it is in each region. So how does he do it?

Every Monday, from the group's headquarters, Cox explains, he holds a worldwide conference call with 20 people in the UK and a couple of local power station managers on each of the five continents. "Someone from the Middle East would hear what is happening in Australia," he says. "We share experiences and the lessons learnt from each region."

Created in 2000 when it was demerged from National Power, IP has learnt a lot in its brief history - most of it the hard way. Like why it is not a good idea to build new power stations without fixing long-term supply contracts with customers first. In the 90s, National Power identified the US as its main growth market. It decided to spend £1.4bn on increasing capacity in America fivefold - to almost half the group's total.

So when American electricity prices nosedived in 2001 and 2002 - in some regions to as little as one fifth - IP got burnt. In 2003 alone, its US operations lost £400m after it wrote off the value of its plants, prompting a profit warning. Prices in the US have yet to recover and the losses - though smaller - continue.

As if to underline the severity of the problem, not one but two chief executives have paid the price. Peter Giller, the charismatic German who was IP's first boss, quit in January 2003 - followed by his successor less than a year later. Cox was promoted from chief financial officer in December 2003. With shares hitting a three-year high this month, and the company re-entering the FTSE 100 earlier this year, he should be able to claim the distinction of being the longest-serving IP chief executive; he just has to hang on to the job for another nine months.

Cox admits management got it wrong by exposing IP to the volatile power sector in the US. "None of us were satisfied with our earnings profile. It was clearly heading in the wrong direction," he says - boss-speak for "we must do something quick, we're losing pots of money".

In "merchant markets" such as those in the US - where electricity is traded as a commodity on an open market rather than on fixed, long- term contracts - standalone generators such as IP are particularly vulnerable. Integrated energy groups like RWE can protect themselves against low wholesale electricity prices by charging their customers more (and reducing their charges if the situation improves), but IP does not have this option.

Cox points the finger not at his predecessors at IP, but at National Power, which began to build the US power plants prior to the demerger. "Too much capital was sucked in and too much plant was built. It hit every merchant generator. It was something that National Power had started in the mid-1990s. That is one of the lessons learnt and why we would never build something new in a merchant market."

His solution has been to enter into more long-term deals with electricity suppliers to reduce IP's exposure to the kind of price fluctuations that hammered it in the US. At the beginning of last year, he says, around a quarter of all the power it generated was sold on fixed contracts. Now the proportion is close to 40 per cent.

The UK has been difficult for IP too, and not just because it is also a merchant power market where prices fell in 2002. New environmental legislation has increased operating costs for generators; but far worse, says Cox, is the uncertainty over the next raft of rules and when, how and even whether they will be implemented.

In January, the European Union's carbon emissions trading scheme was launched. This first phase - which was months late as each plant and installation's carbon allocation was finalised - lasts for only three years. The second phase begins at the start of 2008, but as Mr Cox points out, no one knows what companies like his will be able to emit, or when they will find out. "All we can say is that allocations will probably be tighter for phase two," he says. As a result of the uncertainty, no company is prepared to build new power plants.

"It's all about clarity. These are long-term investments which need to be in place for a long time to get the payback. Not knowing is a big barrier to investment decisions." (This, though, did not stop Cox buying the 1,200MW Saltend station near Hull from US company Calpine last month for £500m.)

One of the biggest question marks hangs over IP's 1,000MW power plant in Rugeley, Staffordshire. Being coal-fired, it must comply with the EU Large Combustion Plant Directive, which also comes into force at the start of 2008 and restricts how much sulphur can be emitted. The industry has been waiting a year for approval from the EU on a revised version for the UK, and the deadline is the end of this month. If the EU does approve it, Cox will have to decide whether it is worth investing £80m to fit pollution filters at Rugeley. But the delay has not helped, and makes it more likely the plant will be closed.

Despite the pitfalls, Cox insists that IP is not about to abandon the UK. The Saltend acquisition is evidence of his belief that the UK market is finally starting to improve for generators as capacity falls. That said, and despite IP's UK roots, he has no emotional or business attachment to operating here. "We are an international generator. We don't have to be anywhere."

Bankers keen to stir up trouble (and no doubt to try to win some mandate fees from a hoped-for break-up of the group) argue that if IP did not exist, it would not be created. If its business model of an international power-generating conglomerate is so great, they ask, why isn't anyone else imitating it?

Cox says the answer is simple: no one else can. "The barriers to entry are high because it's very capital and skill intensive. These aren't skills you can put together readily. IP had a very good inheritance."

This is, presumably, excluding the US, which is going to require a lot of conference calls.

BIOGRAPHY

Born: 22 September 1951

Education: Bishop Vesey's Grammar School, Sutton Coldfield; Queens' College, Cambridge (MA in geography)

Career

1973-77: Price Waterhouse

1977-81: Lucas Industries

1981-88: Worked for a number of small engineering and marketing companies

1989-99: Chief financial officer, Siebe

1999: Senior vice-president of operational planning, Invensys

2000: Chief financial officer, International Power

2003: Chief executive, IP

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