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Energy Policy 31 (2003) 393–403 The Seven Brothers Public Service International Research Unit, School of Computing and Mathematics, University of Greenwich, 30 Park Row, London SE10 9LS, UK in 2002 to form the sixth largest company. There is thena drop in size to the Italian company, ENI and the In 1975, Anthony Sampson wrote a book, ‘The Seven Spanish company, Repsol. As in 1975, the top three Sisters', which documented how seven huge oil compa- companies are in a different league to the others.
nies had come to dominate the world oil market(Sampson, 1975). Before long, a follow-up book mightrecount the rise of ‘The Seven Brothers', seven majorcorporations, all based in mainland Europe, that will 3. Who will the Seven Brothers be? dominate world markets for network-delivered services,mainly electricity, but also perhaps gas and water.
It would probably have been inconceivable a decade Ironically, the trigger that is allowing this new ‘club' to ago that the world's anti-trust authorities would have emerge is the European Union Directives on electricity allowed the recent wave of oil company mergers, but of 1996 (and the similar Gas Directive of 1998), the new tolerance for highly concentrated markets may measures designed to break up monopolies and create have been one of the factors that opened the way for the competitive markets. The emergence of Seven Brothers Seven Brothers. Unless the European Union develops an raises a number of issues: appetite to take on corporate interests, these companieswill soon dominate European and perhaps world How did these companies achieve this position? markets for network-supplied energy services. Unlike Why are no US or British companies in the list? the Seven Sisters, which were controlled mainly by Can these European companies penetrate markets Anglo-American interests, the Seven Brothers are more outside Europe? and likely to be based on the European mainland (see What are the dangers of this level of concentration? Tables 2 and 3).
There are still many battles to be fought before the final identity of these leviathans is clear, but as with the 2. The Seven Sisters Seven Sisters, there is already an elite selection of threecompanies at the top of the table. Electricite de France The Seven Sisters were Exxon, Shell, BP, Gulf, (EDF) is state owned and is the world's largest utility by Texaco, Mobil and Chevron. Mergers and takeovers, any measure. It was an early mover in expanding outside particularly from 1998 to 2001 strengthened the grip of its home territory and has already made important these companies so that the ‘Seven' became the ‘Four'.
acquisitions in the UK, Germany, Italy and Sweden as The first of the Sisters to fall was Gulf, taken over by well as outside Europe, especially in Brazil. RWE and Chevron in 1984. Exxon and Mobil merged in 1998 to E.ON of Germany were much later into the fray and are become the largest oil company, with Shell in second only now beginning to make acquisitions in electricity place (see Table 1). BP took over three other important outside Germany, but their ambitions are now clear and oil companies, Amoco, Arco and Burmah-Castrol in their vast resources are more than adequate to fund 1998–2000 to take third place, while Chevron and these ambitions.
Texaco merged in 2001 to become the number four Vattenfall of Sweden is publicly owned and is the company. A new European grouping created from the largest utility in the Nordic region. It is a surprising merger of two French oil companies, Total and Elf, and candidate given its relatively small size, but its acquisi- the Belgian company, Fina, created a fifth world power.
tions in Germany in the past year or two put it in the top Two large US companies, Conoco and Phillips merged league. Endesa of Spain, formerly state owned but nowprivatised, was an early mover outside Europe and asSouthern European companies come up for sale, it will *Tel.: +44-208-331-9056; fax: +44-208-331-8665.
E-mail address: [email protected] (S. Thomas).
be astrong bidder.
0301-4215/03/$ - see front matter r 2002 Elsevier Science Ltd. All rights reserved.
PII: S 0 3 0 1 - 4 2 1 5 ( 0 2 ) 0 0 1 3 5 - 0 S. Thomas / Energy Policy 31 (2003) 393–403 Table 1The world's major oil companies Turnover 2001 ($bn) Refinery cap (MBPD) Royal Dutch Shell Source: Annual Reports and Accounts and ‘ConocoPhillips: A new international major' Presentation by ConocoPhillips Notes: (1) BBOE=billion barrels of oil equivalent, MMBOED=million barrels of oil equivalent per day, MBPD=million barrels per day. (2)Turnover figures for TotalFinaElf, ENI and Repsol are converted at an exchange rate of $1=h1.1.
Table 2Presence of the brothers in the electricity markets of the European Union Hidrocantabrico (33) Eastern (dist)4.8 GW generation Espoon Sakho (34) HEW (99)VEAG (81) Hidrocantabrico (38) Notes: (1) In France, Ireland, Greece, Belgium, Portugal, Luxembourg, and Denmark, there has been limited international entry so far. (2) EDF'sholdings in Hidrocantabrico and Italenergia are through its subsidiary, EnBW. A subsidiary of Italenergia, Edipower, led the consortium that boughtEurogen. (3) Iberdrola has yet to make any major acquisitions in the European Union countries. (4) Companies' activities in their home markets(marked X) are not listed. Figures in brackets represent percentage ownership for companies not wholly owned.
The other contenders, either intact or as part of a new privatised UK utilities, regulatory action to reduce its combination are ENEL of Italy, Tractebel (formerly market power in its home market may mean that it is Belgian but now part of the French-owned Suez), not able to capitalise on its current strong position. Suez Fortum (Finland, formerly IVO but now merged with has the financial resources, already being a major force the national oil company Neste), Statkraft (Norway), in water industries worldwide, but its electricity base in Iberdrola (Spain), EDP (Portugal) and the Verbund European, the Belgian market where Electrabel, which it (Austria). ENEL is amongst the largest of the world's controls through its ownership of 42 per cent of the utilities but it is being privatised and it is not clear yet stock, has a near monopoly, may be vulnerable if the how much further it will be broken up. Its strategic Belgian authorities choose to adopt an aggressive stance position does not yet seem coherent and, like the on competition. The other companies may not have the S. Thomas / Energy Policy 31 (2003) 393–403 Table 3Summary of activities of the large electricity companies in 2000 Elec sales revenue Global elec sales a EDF's only substantial activity is in the electricity sector.
b RWE does not publish a separate figure for its electricity workforce. The figure shown is for the energy division which includes their gas business.
c Endesa does not publish separate sales revenue and employment figures for its electricity activities, but other activities represent only a small proportion of its total sales.
d In 2000, ENEL's only substantial activity was in electricity.
e The bracketed figures for Vattenfall represent estimates for the group if its German acquisitions had been included. Separate figures for electricity revenue and employment are not produced.
f Iberdrola does not produce electricity output, sales figures that include its foreign activities, nor does it produce figures for the electricity sector alone, although this represents it main activity.
g In the Suez accounts, the Tractebel Energy division figures cover electricity and gas. Suez does not publish figures of employment in its energy division, nor does it publish figures on its electricity sales and output.
Source: Annual Report and Accounts.
scale or resources to compete yet, but mergers or industry was controlled by the nine companies that alliances could yet take them into the top division. For dominated generation, and owned and operated the example, Iberdrola has had alliances with EDP, Repsol, high voltage transmission system for their franchise the Spanish oil company, ENI, the Italian oil company region. Of these nine, RWE and PreussenElektra (part and Gas Natural, the Spanish gas company. In April of the VEBA group) were by far the largest with 2002, it was rumoured that Fortum and Statkraft would Bayernwerk (part of the VIAG group) also a strong merge. If such alliances were made, the resulting group presence. In the monopoly situation, these companies could have the strength to compete in global markets.
could all peacefully co-exist making comfortable profits.
Within this elite group, a range of strategies are being Any expansion outside their franchise areas by taking followed. At one extreme, EDF (because of legal over existing companies in Germany was politically restrictions) is still a pure electricity company at least contentious (although not impossible), while the pro- in France, although it is examining ways to enter the gas spects of moving outside Germany in electricity were market. At the other extreme, RWE, Suez and E.ON appear to be targeting the full range of network services.
The German utilities fought the imposition of the In between, the other companies are beginning to move Electricity Directive, but they received less support from into gas as well as electricity.
the federal government than they expected and had toaccept its imposition, albeit in a weakened form. Theyhave so far been allowed to retain control over their 4. Changes in Germany transmission networks and no sector-specific regulatorhas yet been appointed. Regulation is currently carried The recent structural changes to the electricity out by self-regulation, overseen by the Federal Cartel industry in Germany illustrate the changes graphically.
Office (FCO), an organisation with only a handful of In the past, the structure of the German electricity sector staff specialising in electricity, with some oversight by has seemed mind-bogglingly complicated. More than the authorities in the L.ander.
1000 companies were involved in the electricity industry, The prospect of liberalisation through introduction of some electricity-generation-only companies, some only competition in generation and retail supply was a distributors of electricity and some vertically integrated challenge and an opportunity to the companies.
from generation to retail supply. Some companies were Competition threatened to disrupt their cosy position, locally owned, such as the ‘Stadtwerke', while others but the abolition of local monopolies meant that they were privately owned. However, the reality was that the could contemplate expanding outside their region and S. Thomas / Energy Policy 31 (2003) 393–403 outside Germany. The FCO was thought to be unhappy RWE and E.ON are now also diversifying geogra- at the prospect of having to regulate the large number of phically and into other services to buttress their companies that existed then and was prepared to position. RWE has been active in the gas and water tolerate consolidation of the sector into four main sector. In gas, it took a dominant position in the Czech companies to make its job manageable. Things moved market in 2002 and in water, it has taken over Thames rapidly. In the 2 years from autumn 1999 the nine Water (UK) in 2000 to become the third largest companies (with three dominant ones) were transformed international water company. Its first major interna- into four companies, two huge ones (E.ON and RWE) tional acquisition in electricity was Innogy (the de- and two other companies (EnBW and Vattenfall merged UK operation of National Power) in March Europe) competing on a national scale.
2002. E.ON has taken over the main German gas PreussenElektra, the second largest company, led the company, Ruhrgas, and has bought major electricity charge when its parent, VEBA, took over VIAG, parent companies in the UK and the Netherlands.
of the third largest company, Bayernwerk to formE.ON. RWE, the largest, followed with its merger with 5. What is the ElectricityDirective trying to achieve? another of the big nine, VEW. Two more companies,Badenwerk and EVS had merged in 1997 and are now Despite the theoretical advantages of a monopoly controlled by the French nationally owned electric system for the electricity industry and its excellent utility, EDF. The three remaining companies, BEWAG record since World War 2 in providing reliable and (Berlin), HEW (Hamburg) and VEAG (most of the affordable electricity supplies, there was increasing former GDR) are now controlled by the Swedish criticism of the old system in the 1980s (see Table 4).
nationally owned utility, Vattenfall. In January 2002, The Electricity Directive attempted to address these Vattenfall consolidated these four companies into criticisms and is based on the structure Britain tried to Vattenfall Europe.
implement in 1990 when it reformed its electricity Beneath the top layer of companies, there has also industry. The main elements of the ‘British Model' were: been considerable merger and acquisition activity by thebig four. A particular target has been the Stadtwerke Creation of a wholesale electricity market; that distribute to final consumers. Acquiring such allowing final consumers to choose their retail companies will allow the big four to integrate from supplier of electricity; and generation to retail supply, a strategy that will opening up the network to third party access (TPA) insulate them from having to compete in wholesale so that all retail and wholesale electricity suppliers competed on equal terms.
Table 4Models of electricity systems Economies of scale minimise costs Lack of control over costs with consumers left to foot thebill Avoidance of wasteful duplication of facilities Over-investment to minimise any risk of power shortages Ability to achieve wider environmental, social and Social and economic measures became fossilised and cease to serve useful purposes. Disruptive governmentinterference Public accountability Technical dominance of utilities makes it difficult fortheir judgements to be questioned Competitive model De-integration and atomistic competition in wholesale Vertically integrated oligopolies give an illusion of and retail markets forces prices down to the long-run competition. Creating markets require huge investment marginal cost. Competition is a ‘free good' by consumers in software and high running costs Supply and demand balance because over-investment ‘Hog cycles' of over- and under-investment lead to avoided as a result of market discipline wasted investment and mean security of supply is put atrisk Investment risk borne by investors, not consumers Oligopoly powers mean extra costs still land onconsumers Shareholders exert financial discipline Shareholder profits come before public service Indigenous fuel and equipment industries are forced to Indigenous capabilities are lost, and fuel and equipment become competitive are supplied by a handful of multinational companies Social and environment policy objectives are decided by Poor consumers are discriminated against by suppliers central government, not utilities and paid for by and meeting environmental objectives becomes difficult taxpayers not consumers S. Thomas / Energy Policy 31 (2003) 393–403 Implicit in these basic elements are three further markets has cost consumers dear. Developing the systems to allow retail competition for small consumerscost them about d730m (Offer, 1997), while the newly To ensure that there is fair access to the networks, redesigned wholesale market (NETA) is rumoured to they should be owned by companies that do not have cost in excess of d600m. Running costs are also compete in retail or wholesale electricity markets; high, the Balancing Market element of NETA alone to prevent abuse of their monopoly position, the costs d80m per year to run (Power UK, 2002b).
charges levied by the network companies should be So while British experience is frequently held up as an set by an independent sector regulator; and example to the rest of the world, the British Model has to ensure the wholesale electricity market is the not been implemented in Britain, let alone been proven.
primary factor in the setting of wholesale electricity One response from countries trying to implement the prices, vertical integration of generation and retail British Model would be to simply try harder to make it supply should be minimised.
work. Disallow vertical integration of generation andsupply, force the companies to buy most of their power In practice, the system implemented in Britain has on half-hourly markets and step up pressure on never conformed with this model. The one area where consumers to shop around. But this sounds dangerously there has been unequivocal success is in separating close to describing the California Model that failed so network activities from competitive activities and disastrously in 2001.
ensuring access to the network has not been an issue.
This raises the question, is a wholesale electricity The National Grid Company (that owns the transmis- market sustainable and if it is, is it preferable to a sion system) is fully independent, while the owners of the regulated monopoly? If a wholesale electricity market local distribution networks are now required to make a cannot be implemented, the other reforms make little rigorous separation of network activities from commer- sense. In today's pro-competition climate, many advo- cial activities.
cates of liberalisation will not even acknowledge these as The wholesale electricity market has consistently legitimate questions. For them, if a market is apparently proved problematic and half-hourly markets have never technically feasible, it will inevitably be preferable to a been the primary price-setting mechanism in the way regulated monopoly.
that was envisaged. For the first 8 years, this was largely In the short term, a wholesale electricity system that is because wholesale electricity prices were set by long- not a monopoly is feasible, as has been demonstrated by term confidential contracts imposed by government.
the NordPool, which covers Norway, Sweden, Finland Now, it is the trend to vertical integration of generation and Denmark, and by Britain. However, in California and retail supply that is thwarting this objective. Of the and Brazil, serious under-investment in new capacity led 14 retail supply businesses that were privatised in Britain to a near collapse of their electricity systems, raising in 1990, are all now in the hands of a generation doubts about the sustainability of markets. It will do no company. This form of vertical integration makes good service to consumers if liberalisation creates a market business sense reducing generators' exposure to an that is competitive in the short term, but is too risky to unpredictable wholesale electricity market, but it means justify investment in new generating capacity being that the wholesale electricity market will tend to be undertaken. NordPool has been able to survive so far bypassed with generators generating power to supply to with little new generation investment because of a their own final consumers. In other countries that have combination of low demand growth and a surplus of copied the British Model, such as Argentina and capacity before liberalisation. In Britain, there has been Colombia, this form of vertical integration is illegal.
over-investment, largely because the market has failed Introducing retail competition has been equally so far to force prices down to their long-run marginal problematic. Large consumers have so far done well using their resources and negotiating skills to get a good The idea that a market, even if it is sustainable, might deal from retail competition. However, small consu- not be preferable to a regulated monopoly is an even mers, who have been able to choose supplier since 1998, more heretical proposition. Advocates of competition are confronted with bewildering packages of services seem to implicitly assume that competition is either a and lack the resources or interest to exploit the market.
free good, or the costs are so small as to be inevitably As a result, the differential between the prices paid by swamped by the benefits of competition. Blatantly, small and large consumers is widening significantly.
competition is not afree good in this sector. In Britain, Between January 1999 and January 2002, the price paid consumers have paid well over d1.5bn to create whole- by residential consumers for the unregulated part of sale and retail markets. There are other less obvious their bill rose by 5 per cent. In the same period, the price costs. The inevitable consequence of competition is risk paid by large industrial consumers fell by nearly 20 per to investment and that translates into significantly cent (Power UK, 2002a). Creating wholesale and retail increased required rates of return on capital. The S. Thomas / Energy Policy 31 (2003) 393–403 National Grid Company in Britain survives on an dominant players in their home countries. Iberdrola was allowed real rate of return on investment of about 6 per the number two company in Spain. RWE and E.ON cent, because its investments are seen as low risk.
were the strongest companies in Germany, while Suez However, investments in new power stations in Britain, achieved much of its strength in the electricity sector because they are high-risk, are expected to make a real taking a controlling stake in Electrabel, the dominant rate of return of 15 per cent, whereas in a regulated company in Belgium. Most of the countries of the monopoly, 6 per cent would presumably be adequate. In European Union did not actively seek to create a a capital-intensive industry like electricity, such a national electricity market. Only for the UK, Portugal, discrepancy is bound to impose an additional cost on Sweden, Finland and perhaps the Netherlands could it consumers. Whether the benefits of competition forcing be argued that the governments enthusiastically pushed down prices will be sufficient to pay the high costs of for the implementation of the EU Electricity Directive.
introducing competition is far from clear. If it is not The other governments simply followed the letter of the proven that a competitive electricity industry is both Directive and had no real commitment to creating a sustainable and desirable, policies to force the emer- competitive electricity market.
gence of a European market would be misguided.
Politicians in European Union countries were also From the consumers' perspective, what may emerge if perhaps aware of experience in Britain following competition is pursued and no action is taken to prevent privatisation there. Throughout the British privatisation over-concentration in electricity, is an industry with a programme, there had always been a tension between cosmetic veneer of competition, but strong suspicions those that wanted privatisation to create strong British that, like the oil industry, all is not as competitive as it companies that could compete in world markets, and seems. If wholesale markets fail to deliver reliable cheap those that wanted to create competitive markets for electricity, governments will be obliged to step in to utility services in Britain. Reconciling these two aims reduce the riskiness of investment in new capacity, was always going to be a difficult and probably transferring risk back to consumers. As the companies impossible balancing act and those that favoured develop their strategic skills, regulators will find it competition seem to have won. It would be hard to increasingly difficult to see behind the veneer of argue that any of the privatised British companies has competition to determine whether the industry is as become a major world player. British Gas and British competitive as it should be. One advantage to con- Telecom have not become powerful international forces.
sumers of an integrated pseudo-competitive model In electricity, the companies that have done best were those that were shielded from the market by monopoly companies will have an incentive to invest in sufficient (or pseudo-monopoly) powers, such as National Grid capacity to ensure their own consumers are not cut Company and Scottish Power. Ironically, the smashing up of the powerful players in Britain, like NationalPower, Powergen and British Gas, has arguably failed toproduce a market that is competitive enough to benefit 6. How did the Seven Brothers achieve this position? either gas or electricity consumers. In most otherEuropean countries, when the choice between a compe- There are two sides to this question. Why did the titive national electricity market and nurturing a political authorities, who at the same time were national champion became clear, the priority seems to implementing measures aimed at promoting competi- have been protecting national champions. Only the tion, allow this concentration to happen? And where did Netherlands has conspicuously followed the British the companies get the resources to indulge in this example of making competition the priority, with the result that much of its electricity industry quickly fellinto foreign hands.
6.1. Political factors 6.1.1. National Governments The stance of the EC is harder to explain. When the The first question needs to be divided into the Directive was passed in 1996, it might have still been attitudes of the national governments and the attitude possible for EC officials to foresee a Europe-wide of the European Commission (EC). For the national electricity market based on an untarnished version of governments, the key factor is that the companies the British Model. Power would be bought and sold generally had dominant positions in their home coun- through highly competitive wholesale markets, all tries and were seen as future ‘national champions'. EDF, consumers would force prices down by shopping ENEL and EDP were nationally owned companies that around for the cheapest deal and a large field of were effective national monopolies. Endesa, Vattenfall competing companies would replace local or national and Fortum were also nationally owned and were the S. Thomas / Energy Policy 31 (2003) 393–403 This now appears na.ıve nonsense. The industry not enjoyed such support from central government nor is concentrating down to a handful of players and does it have access to the Swedish nuclear decommis- wholesale markets are being bypassed by vertical sioning funds. It had to sell bonds to finance its German integration of generation and retail supply. While owning the infrastructure is a crude but effective way Like EDF, E.ON and RWE are allowed to use funds to keep out competition, as British experience has collected from consumers to decommission their nuclear shown, companies with enough market power do not power plants to pay for their acquisitions. Endesa and need such aprop to dominate the industry. EDF, RWE Iberdrola claimed large amounts of money from public and E.ON will probably cling on to ownership of their funds for decisions related to their nuclear plants. In networks for as long as possible, but taking away the 1995, they were compensated for the government network from them will not by itself remove their decision of 1984 to abandon work on several nuclear market power. It is also becoming blatantly obvious that power plants. With the implementation of the Electricity if other important policy objectives are to be met, such Directive, they claimed that their nuclear power as environmental, social and strategic security objec- plants would be ‘stranded' (they would not make the tives, market mechanisms will have to be further profit expected) by the introduction of competition and compromised. So why is the EC behaving as if all is they should be compensated for the lost profits. For the going well and what is needed is one last push to open 1995 decision, because the income was backed by retail markets to competition and open networks to government guarantees, the income they would receive over a period of several years could be capitalised as a There are a number of factors that help explain the lump sum of billions of dollars by selling bonds. This gave them ample resources for a shopping spree, muchof which took place in Latin America. The ‘stranded There are those whose belief in markets is so strong assets' decision will yield them a substantial flow of that no amount of empirical evidence will convince income. Endesa and Iberdrola do not have access to them a market solution is not the answer; Spanish decommissioning funds.
the EC enjoys the kudos it receives from ‘breaking upmonopolies', ‘removing trade barriers' and ‘givingconsumers choice': empty phrases, but they have 7. Whyare no US or British companies in the Seven? good public relations value; and a long-standing desire to break the power of Economic theory, the advantage of the ‘early mover', nationally owned monopolies, which it sees as would suggest that British companies should have been bastions of restrictive practices.
able to use their early experience of markets to give them However, the most worrying factor is that some EC an advantage as the European markets opened up.
officials acknowledge that the electricity industry is Equally, most would expect that the sheer economic moving rapidly to a structure dominated by a handful of power of giant US corporations would be difficult to giants. They believe that they have the resources, the skills and the political power to control the situation and As argued above, the electricity companies in Britain ensure that the industry, despite its concentration, does were victims of the political and regulatory desire to be behave competitively. Where is the evidence to back this seen to be creating a competitive industry. In all, 17 companies, two generators, one transmission company,12 distribution companies and two integrated Scottish 6.2. Financial factors companies were privatised in 1990. All were protectedfrom takeover by government Golden Shares, although The source of the funds used for acquisitions varies the protection for the 12 regional distribution companies between companies, but it would be hard to argue that ran out in 1995. The distribution companies were their strength came because they had out-competed the probably individually too small to have had an impact opposition. EDF was one of the first movers, making outside the UK and as soon as government protection acquisitions in Latin America and Sweden in the mid- from takeover was removed, the only question was how 90s. Since 1992, when EDF International was created to quickly they would be taken over. The two more likely expand its businesses, government has sanctioned candidates to become world players were National borrowing on the international market to finance Power and Powergen, the two privatised generation international acquisitions. It can also use the vast companies, which in 1990 had between them a market provisions made by French consumers for the decom- share of about 80 per cent in power generation. As a missioning of its nuclear power plants. These provisions result of regulatory policies to strip them of their market are not segregated from the rest of the company's power, by 1998, these two companies were shadows of business and EDF is free to invest them. Vattenfall has the companies created a decade before, their market S. Thomas / Energy Policy 31 (2003) 393–403 share being about a third of what it had been in 1990.
profit. Some tried to move into Europe and Latin By 2001, National Power had had to split itself into a America but quickly found life was not as simple as they UK company (Innogy) and an international company thought. Reliant was one of the first foreign investors in (IPG) just to survive and Powergen was taken over Brazil, buying a distribution company, Light, in by E.ON. In March 2002, Innogy was taken over by consortium with EDF and AES. In 1999, it decided to sell its Latin American interests to concentrate on the The main buyers of the distribution companies were US and European markets and bought one of the three US companies who at one point owned seven of main Dutch generation companies, UNA in 1999. By them. At the time, their move into Britain was seen by December 2001, disillusioned by low prices, it was some as the harbinger for a global expansion. However, looking for a buyer for UNA at a substantial discount to the fear that these companies represented the electrical the price it had paid 2 years before. The Southern equivalent of Nike or Coca Cola was misplaced.
Company took a stake in the Berlin utility BEWAG in The American buyers can be divided into two groups: 1997 but was out-manoeuvred by Vattenfall and its successor, Mirant, withdrew completely from the Ger- base in the USA (the companies that bought six out of man market in 2001. In 2002, NRG announced that it seven of the British distribution companies were in this was putting its investments in Europe, Latin America category), and new companies set up mainly in the and Asia-Pacific up for sale.
Most of the traditional utilities have sold their Traditional US utilities are much smaller than most interests in Britain or are concentrating on monopoly people would expect. Since the 1930s, US electric network activities. For example, Mirant has sold its utilities have been heavily restricted by law in where retail electricity supply business in Britain and now they were allowed to operate. Most could operate in operates two of the regional distribution networks. Like only one state while a handful of holding companies the British companies in the 1990s, traditional US were licensed that could operate in several states but utilities are finding that the immediate priority is to were hamstrung by severe financial reporting require- defend their home markets from the impact of competi- ments. These measures were introduced in the 1935 tion and also from the fallout from the Enron collapse.
Public Utilities Holding Company Act (PUHCA) to Californian utilities such as Pacific Gas & Electric and prevent arecurrence of the situation in the 1930s when Southern Californian Edison, which were brought to the the electricity industry came close to financial collapse point of bankruptcy by the opening up of the market because of its domination by a handful of holding there, can testify that this is not a task that should be companies that siphoned profits from the holding neglected. There are interesting parallels with the waste companies to the parent company. These restrictions management industry where US companies expanded were eased in the 1992 Energy Policy Act and the rapidly in the 1990s, but have now largely retreated back utilities began to investigate moving into new markets.
to the USA, leaving European groups to dominate the So when the UK regional distribution companies came up for sale in 1995, US utilities were at the head of the New companies, such as AES, Calpine, Dynegy and queue. Many changed their names to give them a Enron were more innovative in their thinking. For them, modern feel. Mid-South Utilities became Entergy, there was no need for the ‘comfort blanket' of owning Houston Power & Light became Reliant, and Public large networks. The name of the game was arbitrage and Service of Colorado became New Centuries Energy and commodities trading sometimes through ownership of merged with Northern States Power to become the power plants (e.g. AES) and sometimes just from NRG division of Xcel Energy. Southern Company trading in markets (e.g. Enron).1 Some of the traditional spun off its businesses in non-franchise markets as utilities, such as TXU and AEP have also begun to Mirant in April 2001, and Southern California Edison follow this path, selling their network assets in order to operates as Mission Edison outside California. But concentrate on trading, but the results are far from beneath these cosmetic changes, these companies' convincing yet. The collapse of Enron has left a taint on understanding of electricity liberalisation and how to all these companies and raises the possibility that while do business outside the USA often seems to have been there might be money to be made in the short run, their businesses lack the solid base of low-risk business that In many cases, the US utilities were little bigger than the traditional utilities have to make this option a viable the companies they took over and, from their actions, it long-term choice.
seems they had few other objectives than to make quickeasy money exploiting the still immature British 1 Enron was not always consistent in its strategy of not buying regulatory system. Whatever else their failings, they infrastructure and bought the UK water company, Wessex Water, as a seem to have been successful in achieving this, making basis for a global water company, Azurix. The Azurix business had good profits and selling the companies at a handsome little success.
S. Thomas / Energy Policy 31 (2003) 393–403 8. Can the European companies succeed outside Western Eastern Europe is also problematic due to a combination of limited demand growth and a need forheavy investment to reduce the environmental impact of While the Seven Brothers seem to be on course to generation. The larger Pacific Rim countries have been dominate Western Europe, they will only emulate the slow to privatise their large utilities and most foreign Seven Sisters if they can control markets outside investment has been channelled into new independent Europe. At present, North America, a market bigger power producers (IPPs) to meet growing demand. The than the whole of Western Europe, must be the obvious 1997 collapse of East Asian economies was a graphic target, with Latin America, Eastern Europe and the warning of the risks of doing business in that region.
Asia-Pacific as additional options. The trailblazers in There has been speculation that oil companies would North Americawere the British companies, Powergen, move into the electricity sector and downstream in gas.
Scottish Power, British Energy and National Grid. In They have benefited strongly from liberalisation, which 1999, Scottish Power took over the large Western utility, has resulted in a massive switch in power station fuel Pacificorp, itself weakened by a failed take-over attempt away from coal and nuclear to gas, providing a in Britain. This was a bold move that, at first, was profitable new market for a commodity that in the past successful, but the fallout from the California power has not always been easy to sell. However, so far, they problems has cost Pacificorp dear. Powergen tried to have restricted themselves to acquiring a few power negotiate a merger with Houston Industries in 1998 but plants and to selling gas directly to large final this broke down and in 2000, it took over LG&E, a consumers. In the gas sector, Shell and Exxon were medium-size US utility based in Kentucky. It may be willing to sell their share of the dominant German gas that E.ON saw Powergen's ownership of LG&E as its company, Ruhrgas, to E.ON and it may be that the oil entry card to the USA. British Energy formed a joint companies will judge that the skills needed, the risks venture with PECO (which later merged with Common- inherent and the profits on offer are not sufficient, at wealth Edison to became Exelon) to buy and operate old least at this stage, to justify moving into closer contact nuclear power plants in North America. After initial with small consumers.
success acquiring three plants, the market in the USAdried up and British Energy has its hands full trying tostay afloat in the British market. National Grid has 9. Does this level of concentration matter? made a series of acquisitions in New England and it isnow the main transmission operator in Massachusetts, The process of concentration in the European Rhode Island and New Hampshire.
electricity industry is far from over. In the next year or However, the test will come if and when the larger two, the Seven Brothers are likely to make important European companies begin to expand into the USA.
new acquisitions. In Spain, the proposed merger Will it be politically acceptable for the US government between Endesaand Iberdrola, shelved in 2000, could to allow the takeover of a significant proportion of the re-emerge or Iberdrolacould be bought by another of US electricity industry, previously always seen as a key the Brothers and there is frequent speculation about a strategic industry, by foreign investors? Opposition will takeover of Union Fenosa, the third largest company. In be strong from the US utilities who will point to the Italy, the third of the generation companies spun off barriers for them to invest in countries such as from ENEL, Interpower, is scheduled to be sold in 2002, France and Germany. The publicly owned companies, while ENEL will be desperate to start making foreign EDF and Vattenfall, will find it particularly difficult to acquisitions. In the UK, Seeboard (one of the 12 avoid the accusation that their operations in the USA privatised distribution companies) was sold in June would be unfairly supported by their national govern- 2002 to EDF. In the Netherlands, the US utility, Reliant is expected to sell its recently acquired UNA generation In Latin America, Endesa, Iberdrola, EDP and EDF business. The remaining smaller companies will inevi- have led the way. However, the combination of power tably make mistakes on occasions and these will leave shortages in Brazil and the financial collapse of them vulnerable to takeover by the dominant groups.
Argentina in December 2001 has illustrated the risks The vision behind the Electricity Directive was the inherent in operating in such markets. In Brazil, the creation of a single European electricity market. The power shortages of 2001 may lead to a return to a more argument from governments reluctant to break up their regulated, centrally planned system restricting profits national champions is that Europe must increasingly be and ending further privatisation. The collapse of the seen as one market and the relevant measure is not how Argentine Peso and economic recession there will also many companies are active in their national market, but make it difficult to maintain profits and may ‘infect' how many companies are active in the European other Latin American economies such as Chile, where market. If seven companies were competing against Endesa in particular is heavily exposed.
each other in a single European electricity market, even S. Thomas / Energy Policy 31 (2003) 393–403 if the model was structure was not pure British Model, control them. In some cases, such as aircraft manufac- they would argue that that is ample to ensure that compe- ture, there are plausible arguments that the need for tition is vigorous and that consumers will get real choice.
special skills, huge investments in product development However, at present what is emerging is a Europe and scale economies necessitate such market concentra- divided into three main strata, North, Central and tion. However, in others, such as fast food and clothing, South each dominated by vertically integrated oligopo- market concentration seems to be the result simply of lies made up of the three or four existing dominant the marketing power of the large players. The liberal- companies. The Central stratum includes France and isation of the electricity industry has opened up the Germany and is the centre of gravity of the European possibility that the electricity industry will become electricity business. It is dominated by the three similarly concentrated. While the electricity industry is strongest companies, EDF, RWE and E.ON. The not as technologically simple as making burgers, it German and French governments show little sign of certainly does not require ‘rocket science'. Most taking the measures necessary to force these companies countries in the world had developed the technical to face real competition in their home markets. No capability to operate a reliable electricity system doubt there will be token new entrants in the national provided they were well managed and given sufficient markets, but, for example, EDF will know that it will make little sense for it to start a price war in Germany.
The newly emerging electricity giants speak frequently In Northern Europe, there is already one interna- of critical mass and, for example, the need to supply at tional market, but the three ‘national champions' least 5 million consumers to achieve scale economies.
Vattenfall, Fortum and Statkraft, are strengthening, They also justify their moves into gas and water as not weakening their positions and if two of these exploiting synergies. However, there is little analytical companies merged, it would provide a stronger base evidence that synergies and scale economies are large from which to expand outside the region. In the South, enough to have much impact on consumer bills. The the main markets will be the separate Italian and more plausible, but less respectable explanation is that Spanish markets, the latter incorporating Portugal.
the larger the companies become, the less competitive Endesa, EDP, ENEL and Iberdrola will continue to the market will be and this is what drives mergers and dominate these markets and, as in the Central Strata, will have no incentive to compete hard against each However, the electric utilities are still immature other. In all three regions, the ‘Brothers' are taking over companies in terms of their commercial expertise. In local retail supply companies to minimise their exposure many cases, their strategic policy seems so far to have to the wholesale electricity market. Regulatory pressure been based on little more than bidding for what was to break up monopolies in, for example, Italy and Spain, available. Apart from their technical skills, two of the seems to be resulting in little more than asset exchanges.
strengths of the oil companies, honed over many decades, Endesabought Elettrogen from ENEL in Ita are their abilities to deal with risk and to operate in ENEL bought Viesgo from Endesain Spain. The Big difficult political environments. The oil majors are Three, EDF, RWE and E.ON are beginning to move probably no less prone to error than other types of North and South and have the resources to swallow one company, but when they do make errors, there are or more of the dominant players in those regions if they seldom significant long-term repercussions on the profit- get the chance.
ability of the company as a whole. The electricity In this grander scheme of things, the rest of Western companies, which until recently had no need for such Europe is something of asideshow. Brita skills, do not have them yet. However, if they are allowed significant size market and companies can be bought to continue to expand in Europe and they retain their and sold far more easily than in mainland Europe, but privileged position in home markets, they will acquire its island status means that a presence in Britain has these skills, and will try to use them as the springboard limited strategic value. The Benelux countries might for awider domination of the world's electricity markets.
prove anice niche for Suez, exploiting the scope for In theory, the public monopoly model and the trade between the Nordic and Central markets, while the competitive model both have strong advantages (see Verbund could exploit a similar niche between Eastern Table 4). The reality may prove to be that realising the and Western Europe.
theoretical advantages of the competitive model will beat least as difficult as realising those of the publicmonopoly model. History may judge that we would have been better advised trying to address the problemswith the existing model, which despite its faults did The laissez faire attitude to company mergers and deliver a reliable supply of electricity at affordable prices takeovers has led to concentration in many global to all consumers. There is still time for policy makers to markets so that only a handful of significant players prevent an unhealthy domination of world or European S. Thomas / Energy Policy 31 (2003) 393–403 electricity industries by Seven (or perhaps only Three) Brothers. This will require a less romanticised assess-ment of what competition can achieve. Turning the Offer, 1997. Supply price restraint proposals. Offer Press Release R44/ clock back to the days of national and regional 97, 16 October 1997.
Power UK, 2002a. Prices fall for some but stay the same for others.
monopolies is not an option for most countries now.
Power UK, March 2002, pp. 27–28.
The challenge will be to develop a new organisational Power UK, 2002b. One year on—has NETA been a success? Power model for the industry that has the advantages of UK, March 2002, p. 16.
control that the old centralised systems had, but that Sampson, A., 1975. The Seven Sisters: the great oil companies and the does not suffer from its stifling inflexibilities.
world they made. Viking Press, New York.

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