Anyone who used to shudder at the sight of the gas bill lying on the. doormat should feel a warm glow at the thought of liberalisation in the utilities industries. By next summer, all business and domestic customers should be able to choose the electricity or gas supplier which offers them the best service, or the lowest cost. So how do business customers make the choice, and what further developments are likely in these newly opened-up markets?
Choice for some business customers is nothing new. Businesses which used the equivalent of 50 electric bar fires have been able to switch electricity supplier since 1994. Large business customers were able to do so back in 1990.
It is only small businesses, along with domestic customers, that have had to wait until this September, and some are having to wait somewhat longer. Establishing the systems to enable switching between supplier has been an enormous IT exercise, so liberalisation is being organised through a phased roll-out based on post codes.
‘All suppliers for electricity and gas have to have a common system so they can transfer customer data easily,’ says Kevin Simmons, partner in energy and natural resources at KPMG. ‘It is these systems that have to come live before you can open up the franchise area of a particular regional electricity company. If they aren’t ready, they are not in a position to transfer customers to another supplier, so customers can’t choose.’
Some RECs have missed their start dates for opening up their areas to competition, but everyone should be able to exercise their right to choose by June 1999. There is no maximum number of suppliers entitled to supply an area. ‘It’s limitless.
You or I could set up if we wanted to,’ says James Saunders, partner in solicitor Shepherd & Wedderburn, legal adviser on utility licensing agreements.
Can of therms
Similarly, the liberalisation of the gas supply market has taken place over a period of years, with industrial and commercial suppliers using over 2,500 therms a year (equivalent to a #1,000 gas bill) benefiting in 1992. All other customers, including small businesses and domestic customers, could choose their supplier from May this year.
The Office of Gas Supply says there are now 92 suppliers to industrial and commercial customers. Even so, British Gas Trading (Centrica’s trading name) has a large slice of the market, supplying 37% of the small company market and 21% of the large company market.
The liberal democrats
Once liberalisation is complete in both energy sectors, market forces can really get to work. ‘This does provide more choice for the business customer,’ says Saunders. ‘The possibility is now there to look for different suppliers to offer competitive deals.’ Changing supplier should be easy.
‘It’s still the same electricity. It’s just the badge that switches,’ Saunders explains.
How much supplier switching will actually occur is hard to guess. In November, the Office of Electricity Regulation said over one million domestic and small business customers had signed up to change their electricity supplier. Even so, experts have predicted less supplier switching in the electricity than in the gas market. ‘There are bigger margins in gas supply than electricity supply, so the scope for discounting is greater,’ says Simmons. OFGAS says the average price of industrial gas in real terms is 63% lower now than it was at privatisation.
If a business is thinking of switching, how easy is it to compare services and prices? ‘With any new competitive market, it can be easy to be duped by what can seem attractive savings when they appear in advertising campaigns,’ says David Bell, Deloitte & Touche partner in assurance and advisory services, global utilities.
‘But it requires a lot of careful research when considering changing suppliers. It is not just a question of price. Customers are asked to sign a contract and all terms need to be considered. Each company has to look carefully at its own situation and make sure it is comparing like-for-like.’
Price is a good place to start, however. ‘When comparing tariffs, keep to the basic unit of supply,’ advises Saunders. ‘Look at price per unit. Then compare the standing charge as well. If there is not much difference in price, look at add-ons, such as the availability of free advice on energy conservation.
More and more companies will be offering extras.’
Suppliers are increasingly looking to broaden their service offerings.
‘There are large fixed costs associated with being a supplier,’ says Simmons.
For example, suppliers need a back office, a customer call centre and a detailed billing system. ‘They can all be expensive. So the more products and services you can spread the cost over, the better your unit margin.’
Merrill Lynch analyst Simon Flowers agrees. ‘The trick for suppliers going forward is to try to sell more products to create more revenue without materially increasing the cost,’ he says. ‘The difficulty is finding the right product.’
So far, companies have tried offering products such as insurance, financial services, security and alarm systems and plumbing services. ‘It is not clear which of these may catch on,’ says Flowers. ‘Telecoms and Internet services are rapidly becoming part of the package you can buy from utilities companies.’ United Utilities, for example, is a leading player in this area in England & Wales, as is Scottish Power.
Despite these other attractions, business users should not forget to check important aspects of the service delivery. OFFER publishes a series of factsheets for business users considering a change of supplier. It recommends that when businesses compare services, they ask about a number of issues: are different charges made at different times of the day or year? Is there a discount for prompt payment or penalties for late payment? What payment options are there? Is there a fee for ending the contract early? How often will meters be read?
Size does matter
Another issue to consider is the length of the contract. ‘You don’t want to be overly locked in,’ says Saunders. ‘Typically contracts last for a year or more.’ Getting stuck on a tariff and then seeing lower rates offered elsewhere would be frustrating, although there may be some benefits from signing up for longer periods with one supplier.
‘The tariff being offered on a long contract may be more attractive than the tariff on a shorter one,’ says Saunders. The good news for small businesses is that they are unlikely to get trapped in an electricity contract.
Suppliers have to follow rules established by OFFER to provide certain safeguards for smaller business customers, known as designated customers, including the requirement that suppliers must allow them to terminate contracts by giving 28 days’ notice.
Having found a supplier who appears to offer a better deal, businesses could consider asking their existing supplier to match it. ‘It could give leverage over your supplier to provide more competitive pricing to you,’ says Saunders. Suppliers won’t want to lose good business. ‘The cost of acquiring a new customer is very high, so companies want to keep their customers,’ agrees Simmons.
When two become one
A development to watch out for is the provision of ‘dual fuel’ deals – the supplying of gas and electricity from the same company. Utility companies offering both may be able to cut their costs, given the savings they should be able to make from using common service facilities, one call centre, for example. ‘Considering that margins in gas are higher, if you are supplying both gas and electricity, you can spread that discount across electricity as well,’ says Simmons.
One final change likely to occur is a reduction in the number of utilities companies in the market, particularly given the wafer-thin margins made by the electricity suppliers. Industry experts expect to see consolidation of the supply business. In other words, customers need to accept their newly chosen supplier may not be around in five years’ time.
Liberalisation in energy markets is not confined to the UK. In December 1996, the Council of the European Union agreed a directive on the liberalisation of the electricity market to encourage competition in generation and supply.
A similar gas directive has also been working its way through the EU pipeline. The idea is that member states will be forced to enable a common energy market. ‘This amounts to an enormous change on the continent, but it is still a bit of a compromise,’ says Kevin Simmons, partner in energy and natural resources at KPMG. ‘The liberalisation it requires will only take place over a long period. Some countries are deregulating quicker than required, others more slowly.’ Either way, the liberalisation of electricity markets across Europe is unlikely to have a major impact on UK business customers. ‘There are unlikely to be opportunities to buy from European suppliers,’ says Simmons. Foreign suppliers can set up in the UK, but the electricity would be coming out of the same pool as that sold by UK suppliers. Most opportunities arising out of European deregulation will arise for UK electricity and gas suppliers.
‘UK suppliers have a head start over continental suppliers because they have been liberalised quicker,’ says Merrill Lynch analyst Simon Flowers.
‘The pace of change will be slow, however.’ He believes that, for the foreseeable future, most opportunity on the continent will lie at the top end of the industry, in electricity generation rather than in selling electricity to individual customers. Simmons also believes that both UK gas and electricity suppliers will have opportunities abroad. ‘Our companies should be quite well-placed to establish themselves,’ he says. ‘The UK is about ten years ahead of Europe.’
Sarah Perrin is a freelance journalist
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