Southern Electric Plc Business Information, Profile, and History

History of Southern Electric Plc

Southern Electric PLC was the second-largest regional electricity company in England and Wales, serving 2.5 million domestic, commercial, and industrial customers. Its 16,900-square-kilometer region extended from London in the east to Somerset in the west, and from Oxfordshire in the north to the Isle of Wight in the south. Originating in the public sector as the Southern Electricity Board, Southern Electric was privatized, along with the whole of Britain's electricity industry, in 1989. Since then the company has increasingly become involved in separate but related business opportunities. By 1995, Southern Electric's subsidiary interests included utility contracting, investments in power generation projects, environmental engineering, electrical retailing, and supplies of natural gas. In addition, as the electricity industry became increasingly deregulated, Southern Electric began competing directly with other distributors to capture a wider customer base. Southern Electric's principal activity remained, however, its core business of marketing and distributing electricity to central southern England.

Electricity was first harnessed for practical use in the United Kingdom in the late nineteenth century, with the introduction of street lighting in 1881. By 1921 over 480 authorized but independent electricity suppliers had arisen throughout England and Wales, resulting in a rather haphazard system operating at different voltages and frequencies. In recognition of the need for a more coherent, interlocking system, the Electricity (Supply) Act of 1926 created a central authority to encourage and facilitate a national transmission system. This objective of a national grid was achieved by the mid-1930s.

The state consolidated its control of the utility with the Electricity Act of 1947, which collapsed the distribution and supply activities of 505 separate bodies into 12 regional area boards, at the same time assigning generating assets and liabilities to one government-controlled authority. A further Electricity Act, in 1957, created a statutory body, the Central Electricity Generating Board (CEGB), which dominated the whole of the electricity system in England and Wales. As generator of virtually all the electricity in the two countries as well as owner and operator of the transmission grid, CEGB supplied electricity to the area boards, which they in turn distributed and sold within their regions.

Such was the situation for 30 years, until the government raised the idea of privatizing the electricity industry in 1987. The proposal was enshrined in the Electricity Act of 1989, and a new organizational scheme was unveiled. The CEGB was splintered into four divisions, destined to become successor companies: National Power, PowerGen, Nuclear Electric, and the National Grid Company (NGC). The generators National Power and PowerGen were to share between them England and Wales's fossil-fueled power stations; Nuclear Electric was to take over nuclear power stations; and the NGC was to be awarded control of the national electricity distribution system. The 12 area boards, Southern Electric among them, were converted virtually unchanged into 12 regional electricity companies (RECs), and these were given joint ownership of the NGC. Southern Electric was incorporated as a private company in 1989, and its shares, along with those of the other RECs, were the first to be sold to the public, at the end of 1990.

The provision of electricity consists of four components: generation, transmission, distribution, and supply. In England and Wales, generation is the province of National Power, PowerGen, and Nuclear Electric. Transmission is the transfer of electricity via the national grid, through overhead lines, underground cables, and NGC substations. Distribution is the delivery of electricity from the national grid to local distribution systems operated by the RECs. Supply, a term distinct from distribution in the industry, refers to the transaction whereby electricity is purchased from the generators and transmitted to customers. Under the terms of their licenses, the generators may supply electricity directly to consumers, but that right is comparatively little exercised; their usual customers are the RECs, who in turn sell the electricity to the end users.

A new trading market was devised with the privatization scheme for bulk sales of electricity from generators to distributors--the pool. A rather complicated pricing procedure exists in the pool, according to which each generating station offers a quote for each half-hour of the day, based on an elaborate set of criteria including the operating costs of that particular plant, the time of day, the expected demand for electricity, and the available capacity of the station. The NGC arranges these quotes in a merit order and makes the decisions regarding which plant to call into operation when. The pool system is not relied upon exclusively, however, as the generators and distributors frequently make contractual arrangements for a specified period of time as a means of mutual protection against fluctuations in the pool price. Southern Electric's contracts with the generators were arranged for periods of anywhere from one to 15 years.

The privatized Southern Electric took as its core business that of the former Southern Electricity Board, in which fully 60 percent of its staff was employed--supplying electricity from the National Grid to its 2.5 million customers via 71,000 kilometers of cables, both above and below ground, and about 51,000 substations. All in all, the company dealt with over 5,000 megawatts of electricity per year. This immense and complex network cost the company about £100 million each year in development and maintenance costs. About 40 percent of Southern Electric's customers were private homes, 35 percent offices and shops, and 25 percent factories and farms.

The deregulation of the electricity industry changed the face of the business. Under the state-controlled system, customers and suppliers were matched on a purely geographical basis. Beginning in 1991, however, consumers with larger electricity requirements of over one megawatt, including hospitals, industrial sites, and ports, were free to choose their own suppliers. From 1994, customers demanding more than 100 kilowatts, such as superstores and office buildings, had a similar freedom of choice, and come 1998 a completely free market would be in operation. In this new environment Southern Electric had to compete not only with the other RECs but also with suppliers of other forms of energy, such as British Gas.

In the light of the new competitive era, Southern Electric targeted three key areas in its marketing strategies--industrial, commercial, and domestic--offering free specialist advice to each sector to attract customers. Industrial applications of electricity were myriad and could be refined to suit individual needs with an eye to energy efficiency and cost savings. Southern Electric's clients in this sector included such varied corporations as Parrs Quality Confectionery Ltd., Westinghouse Brakes Ltd., and BICC-Vero Electronics Ltd.

In its bid for commercial clients, Southern Electric offered a range of specialist advisory services, including its Building Energy Appraisal Service (BEAS) and Energy Efficient Design (EED). The company also advised on such applications of electricity as space heating, water heating, ventilation and air conditioning, catering, and lighting. Southern Electric won clients in commercial fields as diverse as education, retailing, leisure, and health care. In the domestic sphere, Southern Electric concentrated on providing information and advice to woo customers to electricity in preference to other energy sources where choice was possible, as in cooking, heating, and water heating.

Privatization and increased competition also allowed Southern Electric to move beyond its core business and expand into other, related ventures. Southern Electric Contracting Ltd., which began as a branch of Southern Electric PLC, moved to subsidiary status in 1992. Its business ran the gamut of electrical design and installation work, encompassing everything from domestic needs--such as insulation, fitted kitchens, replacement doors and windows, and rewiring&mdashø complex and often dangerous work for the petrochemical industry. The subsidiary also boasted a public lighting division that was the largest contractor of its kind for local authorities' street lighting, a security systems area, and a datacom division. Operating not only in Southern Electric's traditional region but in Edinburgh, Leeds, Birmingham, and Middlesbrough as well, the subsidiary's clients included public utilities, government departments, universities, and health authorities.

M. P. Burke PLC was a post-privatization acquisition. The company was established in 1983 in Yorkshire as a general civil engineering firm, but over the years it became a specialist in utility contracting for the water, gas, electricity, telecommunications, and cable TV industries. Southern Electric Power Generation Ltd., formed in 1992, was Southern Electric's entry into the field of energy generation. During its short existence the subsidiary has invested, as full or part owner, in four combined cycle gas turbine (CCGT) or combined heat and power (CHP) projects. Thermal Transfer Ltd., which was established in 1972 and was later added to Southern Electric's stable, was an environmental engineering company serving the heating, ventilation, and air conditioning markets. The company also served the pharmaceutical, biotechnology, microelectronics, and food industries with design and installation of sterile facilities and mechanical and electrical services. It counted among its clients Bass Brewers, British Aerospace, and Motorola.

In a 1992 joint venture with Phillips Petroleum Company United Kingdom Ltd., Southern Electric formed Southern and Phillips Gas Ltd. Phillips, with its history of oil and gas exploration and production in North Sea fields, provided the gas, while Southern Electric controlled the service, sales, and marketing end of the business. The alliance enabled Southern Electric to offer its customers a choice of energy supply. Clients included Oxford University, Toys 'R' Us, bookseller W. H. Smith, and local government authorities.

Southern Electric also owned, in conjunction with fellow RECs Eastern Electricity and Midlands Electricity, the appliance retailing operation Powerhouse. Formed as a partnership between Southern and Eastern in 1992 and originally known as E & S Retail Ltd., the company had more than 300 outlets in the South, the Midlands, and East Anglia. Powerhouse was the third-largest electrical retail group in the U.K., but nonetheless was the most disappointing performer in Southern Electric's portfolio, consistently making losses.

On the whole, however, Southern Electric had fared well since privatization: in 1994 its profits were the highest of all the RECs. This success was due in part to the company's own efforts. Like virtually all privatized companies in Britain, Southern Electric instituted a rigorous program of cost-cutting and efficiency improvement after leaving the public sector. Procedures were streamlined, management structures pared, and fully one quarter of its staff was cut--with more jobs likely to be eliminated in the future.

Another cause of Southern Electric's consistently rising profits was the straightforward expedient of higher prices charged to customers--a sensitive issue for all connected with the industry. Because electricity is an essential utility in the modern world, the privatized industry remains subject to governmental control through the Office of Electricity Regulation (Offer). Offer's task is to ensure that the electricity companies provide a fair deal to customers while at the same time not unduly depressing profits to the detriment of shareholders. Offer's role in maintaining this balance is a highly controversial subject. For example, many observers maintain that the RECs have enjoyed a very easy ride since privatization. Some 80-95 percent of the RECs' profits derive from the distribution side of their core business. Since privatization, the companies have been permitted to raise their distribution prices by an average of 1.1 percent over inflation every year. This situation, commented the Independent, "has proved a virtual license to print money."

Offer's first post-privatization review of the industry came in August 1994. The stock market was wary, and the RECs' share prices fluctuated, but in the end Offer was extremely lenient with the RECs, allowing them a significantly higher price cap than had been anticipated. Indeed, many consumer groups and some politicians were outraged by the decision, believing that Offer had weighted the balance too far in favor of the profit motive. Offer was apparently not impervious to this criticism, because some months later, in the spring of 1995, the regulator unexpectedly announced that it would re-review the electricity companies with the intention of tightening price controls. A decision date was not announced. The prolonged suspense returned the stock market to a state of uncertainty.

In one possible scenario, much favored by consumer groups, Offer would limit pricing to four percent below inflation as well as insist that the RECs provide cash rebates to customers, although at least one REC publicly questioned the legality of this proposal. If Offer and the RECs should find themselves unable to reach an agreement, the Monopolies and Mergers Commission would have to step in to arbitrate--resulting in a long, drawn-out process to no one's advantage. Already the uncertainty has delayed indefinitely the proposed privatization of the National Grid, jointly owned by the 12 RECs.

The extent to which Southern Electric would suffer if Offer chose to take a hard line was unknown, though it was clear that the company had prospered since privatization and possessed healthy cash reserves. Curbed profits in the company's core business were more than likely; serious damage to Southern Electric's financial well-being was not. In any event, financial analysts agree that the way forward for the privatized utilities will be largely through the growth of their non-regulated activities, and here Southern Electric appeared well positioned, with its newer ventures increasingly contributing to the company's profits. M. P. Burke and the company's contracting business were performing particularly well. Southern Electric was virtually certain to achieve its stated aim of generating 15 percent of its profits from its non-core businesses by the year 2000. Thus, although Southern Electric's traditional role of providing electricity to central southern England would remain the company's mainstay for the foreseeable future, its penetration into new markets and its diversification in the ever more competitive energy industry should afford Southern Electric new opportunities for corporate growth.

Principal Subsidiaries: M. P. Burke PLC (70 percent); National Grid Holding PLC (11 percent); Powerhouse Retail Ltd. (36 percent); Southern and Phillips Gas Ltd. (50 percent); Southern Electric Contracting Ltd.; Southern Electric Power Generation Ltd.; Thermal Transfer (Holdings) Ltd.