Scottish Power plc

views updated

Scottish Power plc

1 Atlantic Quay
Glasgow G2 8SP
United Kingdom
Telephone: (44) 141-248-8200
Fax: (44) 141-248-8300
Web site: http://www.scottishpower.plc.uk

Public Company
Incorporated: 1989
Employees: 21,981
Sales: $9.0 billion (2001)
Stock Exchanges: London New York
Ticker Symbols: SPW (London); SPI (New York)
NAIC: 212111 Bituminous Coal and Lignite Surface Mining; 221111 Hydroelectric Power Generation (pt); 221112 Fossil Fuel Electric Power Generation (pt); 221119 Other Electric Power Generation (pt); 221121 Electric Bulk Power Transmission and Control (pt); 221122 Electric Power Distribution (pt); 221210 Natural Gas Distribution; 221320 Sewage Treatment Facilities; 234920 Power and Communication Transmission Line Construction; 562119 Other Waste Collection

Scottish Power plc (ScottishPower) is one of the leading utility companies in the United Kingdom, with more than five million customers in England, Wales, and Scotland. The company operates generating plants, sells electricity and gas, and provides water and wastewater services throughout the United Kingdom. The largest utility company in the country, Scottish-Power is the parent company of Manweb, which sells electricity to customers in Merseyside, Cheshire, and North Wales, and Southern Water, which provides water and wastewater services to customers in Kent, Sussex, Hampshire, and the Isle of Wight, along with designing and installing wastewater treatment plants. In 1999 ScottishPower became the first foreign utility to establish itself in the lucrative American electricity market when it acquired PacifiCorp, which provides electricity to eight states in the western United States.

The Privatization of the Scottish Utilities Industry in the 1980s

ScottishPower was formed in 1989 because of the reorganization of the Scottish electricity industry. The company is the direct successor to all of the nonnuclear operations and activities of the South of Scotland Electricity Board (SSEB). The South of Scotland Electricity Board had been founded in 1955 by the legislation of the Electricity Reorganization Act of 1954, which had merged the two previous boards that provided electricity to customers in the area after nationalization of the industry in 1948.

Prior to the formation of ScottishPower, the Scottish electrical industry consisted of the South of Scotland Electricity Board and the North of Scotland Hydro-Electric Board (NSHEB). Both of these boards, or companies, were operating as vertically integrated monopolies, engaged in such activities as the generation, transmission, distribution, and supply of electrical energy. During this time, all of the expenditures associated with generating and transmitting electricity were shared, and each company’s requirements were met according to the determination of the respective boards.

When the British government decided to reorganize the Scottish electrical industry, it summarily rejected the proposal that a single company cover all of the electrical requirements of Scotland. Consequently, when both ScottishPower and Hydro Electric went public in 1991, the British government made the determination that it was best for each of the companies to operate as vertically integrated electrical utility firms, which was in keeping with the tradition established in their earlier history.

One of the most interesting features of the Scottish electrical industry is its large surplus of generating capacity. When the reorganization of the industry took place in Scotland, it was expected that ScottishPower and Hydro Electric would use some of this surplus capacity for export to England and Wales. A large part of the surplus was initially derived from Scotland’s nuclear power plants, which existed in a much higher proportion than in any other country in Europe, except for France and Belgium. In fact, at the time of the reorganization, the Scottish nuclear power plants were capable of meeting half of the demand for electricity in the country. Once again, it was determined by the British government that ScottishPower should supervise and operate 74.9 percent of the commercial business of Scottish Nuclear, Ltd., while Hydro Electric took a 25.1 percent interest in the operations of the company.

ScottishPower inherited the entire region previously run by the South of Scotland Electricity Board, an area of 22,950 km that covered the part of Scotland south between the estuaries of the River Tay and River Clyde and encompassed a large area of Northumberland. This land included a significant portion of Scotland’s industrial base and was characterized by densely populated urban areas, but also extended to the more rural regions of the Borders and Galloway. The initial customer base was approximately 1.7 million people.

Growth and Expansion in the Early 1990s

Although its main role has always been to supply electricity to the southern part of Scotland, ScottishPower has been in the electrical retail business from its inception. Inheriting 73 retail stores from the South of Scotland Electricity Board, the company sold such items as radios, alarm clocks, and a host of other electrical products, much like the other utility companies across the United Kingdom. When most of the regional electrical companies in England, Wales, and Scotland, including its northern neighbor Hydro Electric, decided to divest all retailing operations, however, management at ScottishPower made the commitment to retain and even expand its network of retail stores, but only on the condition of increasing profitability.

One of the reasons management decided not to abandon retailing operations was that customers who paid their electricity bills in the stores would have been extremely upset. Many people in southern Scotland had grown accustomed to paying their bills while visiting the company’s retail stores, and management was well aware of the fact. Consequently, to strengthen its market position, in 1992 ScottishPower acquired a total of 17 units from Rumbelows chain of electrical retail stores owned by Thorn EMI and eight superstores from Atlantis Group, and soon thereafter purchased 50 superstores from the Clydesdale Group, another electrical product retailer with stores in northern England and the Midlands. Having lost £5 million on sales of £32 million in 1990, ScottishPower Retailing Division reported an operating profit of £10 million on sales of £200 million by the end of 1994.

In 1993, ScottishPower was granted a license to enter into the public telecommunications industry, and it immediately installed fibre-optic links within its already existing network of communications between Glasgow and Edinburgh. Carried along its own high-voltage power lines, ScottishPower was soon able to provide extremely high-quality telecommunications services such as the fast transfer of voices, data, and pictures to Scotland’s major businesses, including a number of companies in the insurance and banking industries, not to mention engineering firms and universities. Christened “Scot-tishTelecom,” it was one of the fastest growing segments of ScottishPower’s business.

Although ScottishPower operated six power generating plants composed of coal, gas, and hydro power, including Longannet at Kincardine on Forth, Cockenzie, Methil, Cruachan, Stonebyres and Bonnington, and Galloway Hydro Scheme, the company was not averse to engaging in more experimental forms of generating energy. In the early 1990s, ScottishPower constructed its first wind farm, located at Penrhyddlan and Llidarty waun in Wales, a unique joint venture between ScottishPower, SeaWest of California, and the Toman Corporation of Japan. The largest such wind farm in Europe, it had a generating capacity of 31 megawatts. Not long afterward, the company established new wind farms in Northern Ireland, Lanarkshire, Cornwall, and Lancashire. By the mid-1990s, ScottishPower had become the largest wind farm operator in the United Kingdom.

Strategic Acquisitions in the Mid-1990s

As opportunities for more customers and increased sales for electricity became limited in Scotland, management at Scottish-Power embarked on a strategic acquisitions policy that extended the company’s operations into other areas of the United Kingdom. The initial acquisition was Manweb plc, a regional electrical company that provided service to more than 1.3 million commercial, industrial, and residential customers in Mersey-side, Cheshire, and rural North Wales. Purchased at a price of £1.1 billion, the transaction was a milestone, since it represented the first merger between two electricity companies in the United Kingdom.

Company Perspectives

We shall deliver quality and value for money services which meet and influence our customers ’ needs.

We will: Satisfy our customers ’ basic requirements and innovate and adapt our range of products to meet their changing needs; keep alert in the marketplace to ensure that we outperform our competitors; make the most of the relationships that we have across the ScottishPower group and with external customers and suppliers.

We will not: Forget that we are all ultimately dependent upon the customer; promise what cannot be delivered; set performance targets ignoring customers’ needs.

The merger was an efficient move by ScottishPower, since common functions between Manweb and its parent firm were easily integrated, resulting in lower costs to customers and, at the same time, enabling Manweb to focus on developing its electricity distribution and supply network. With a Scottish-Power investment of £300 million to improve and enhance Manweb’s power system, the new acquisition was able to limit its supply interruptions significantly, reroute electricity supplies to alternative circuits when necessary, and provide better service to sparsely populated countryside in western England and northern Wales. Manweb was also at the forefront of innovations within the electricity industry. The company developed a “live line” technique, by which repairmen are able to carry out maintenance and repairs on overhead distribution lines without needing to interrupt the supply of electricity to customers in the local area. In one of the most original developments in which Manweb was involved, the company conducted experiments with “trenchless technology,” which allowed the laying of cable without having to excavate pavements and streets.

In August 1996, ScottishPower acquired Southern Water plc, a water supply and wastewater services company with nearly two million customers in Kent, Sussex, Hampshire, and the Isle of Wight, for £1.67 billion. Supplying approximately 644 million liters of drinking water per day, through an extensive system of pipes that totaled 13,000 kilometers, and treating more than 1,300 liters of sewerage per day, Southern Water at the time of the acquisition was one of the leaders in the water supply and wastewater treatment industry. Over the years, Southern Water had garnered a stellar reputation in the United Kingdom. The company had dramatically improved the quality of drinking water to the geographical region it served and had successfully cleaned up the pollution along an extensive part of the coastline in southern Britain. Southern Water also had cleaned up the rivers within its operating region so that 94 percent of them supported healthy fish stock and allowed for natural breeding.

Under ScottishPower leadership, Southern Water invested £18 million to build a pipeline to transport water from the River Medway in Kent to Bewl Reservoir on the Kent/Sussex boundary. Since very dry summers bordering on drought had plagued that part of Britain during the mid-1990s, ScottishPower and Southern Water were committed to enhancing the region’s water resource management. New and improved wastewater treatment plants were also planned by Southern Water, to be built during the late 1990s to comply with the European Union’s Urban Wastewater Directive. Perhaps the most important and far-reaching effect of ScottishPower’s acquisition of Southern Water was the decrease in prices for all customers in the new subsidiary’s region. Consumer prices would be reduced 1 percent in 1997 and 2 percent in 1998 and 1999.

One of the fastest growing segments of ScottishPower’s business at the time was its consultancy services. This segment’s ever increasing list of customers included, among others, British Petroleum, British Steel, Motorola, and the British Energy Group. The company’s consultancy services encompassed a wide variety of activities, such as the design and construction of power plant buildings, the development of control systems and monitoring devices, the hands-on installation and maintenance of boilers, turbines, and other large power plant equipment, the analysis of plant components and water samples, and assistance with environmental management. The design, construction, and project management of new power stations, like Scotland’s nuclear generating stations at Hunterston and Torness, were two examples of the company’s consultancy activities in the mid-1990s.

In addition, ScottishPower formed a contracting services business during this time, which carried out a full range of electrical contracting services in the areas of security systems, large-scale power plant installations, high- and low-voltage installations, installing electric heating systems, testing and maintaining electrical systems, and facilities management. In the mid-1990s, clients included hospitals, universities, prisons, supermarket chains, and a host of blue-chip corporations such as NEC, Motorola, Coca-Cola, and Vauxhall.

Through its strategic acquisitions, astute management of a growing retail operation, cultivation of new service-oriented consulting businesses, and provision of reliable and inexpensive electricity to its customers, ScottishPower had earned the reputation as one of the best utility companies in the world.

International Expansion: 1997–2002

By the late 1990s ScottishPower was beginning to question the long-term business sense of some of its recent noncore acquisitions. True, the diversity of its holdings provided the company with a foothold in a number of rapidly emerging businesses, and the possibility of high profits made many opportunities too tempting to ignore. Still intent on gaining a dominant position in the lucrative telecommunications industry, the company acquired Demon Internet, the largest service provider in the United Kingdom, in April 1998. The deal, worth £66 million, instantly vaulted Scottish Power into the top tier of European Internet service providers, and added more than two billion minutes of annual traffic to its existing network. During this time the company also began exploring ways to make an entry into the newly privatized British gas industry. In February 1998 it reached an agreement to convert an empty gas field in Yorkshire into a storage facility capable of supplying gas to 250,000 homes. With price controls on transmission and distribution set to expire by 2000, the company was well positioned to reap huge rewards in a fully deregulated market.

These ventures, however, though extremely promising, also threatened to hinder the growth of the company’s core electric utilities holdings. By decade’s end, expansion of its power transmission and distribution capabilities had become Scottish-Power’s principal ambition. With this goal in mind, in April 1997 the company undertook a restructuring program, with the aim of selling off 14 of Southern Water’s noncore businesses within one year. At the same time ScottishPower began looking for ways to significantly increase its electrical generating capacity in England, which until the late 1990s had been limited to the production from a single 50-megawatt plant. To remedy the situation, the company entered into a joint venture with Seeboard, an electric company operating in southeast England, in October 1997, to build a 500-megawatt generating plant in Sussex. Also in October, the company applied for the right to construct a 1,125-megawatt plant in Leicestershire. This flurry of activity soon paid off, and by November 1998 the company could claim to provide utilities to one-fifth of all homes in the United Kingdom, and was increasing its customer base by 12,000 every week.

Key Dates

1955:: South of Scotland Electricity Board is formed.
1989:: Reorganization of electricity industry in Scotland leads to formation of Scottish Power plc (Scottish-Power).
1993:: ScottishPower obtains a license to enter the telecommunications business.
1995:: ScottishPower acquires Manweb.
1996:: ScottishPower acquires Southern Water plc.
1999:: ScottishPower acquires PacifiCorp.

ScottishPower’s biggest ambition, however, was to gain a foothold in the $230 billion U.S. electricity industry. After failed attempts to purchase two other U.S. utilities—Cinergy, a major supplier of gas and electricity to customers in Kentucky, Indiana, and Ohio, and Florida Progress—ScottishPower became the first foreign company to enter the American market in December 1998, when it reached an agreement to acquire PacifiCorp for $7 billion. Whereas the company was excited by the prospect of blazing a trail into the United States, with the hope of gaining a serious strategic advantage as more and more utilities went up for sale, some analysts regarded the move as a significant risk, primarily because the future course of the deregulated U.S. utilities industry remained uncertain. To be sure, ScottishPower’s initial experience running a utility in the United States was far from promising. After spending the majority of 1999 jumping through regulatory hoops, the company immediately implemented cost-cutting measures at PacifiCorp, with the hope of reducing expenses by 22 percent by 2004. Steep rises in U.S. wholesale electricity prices in early 2001, however, exacerbated by the California energy crisis of the following summer, rendered these savings insignificant, while a power plant failure in Utah during this same period cost the company more than $160 million. In order to help maintain its expansion course in its electricity business, ScottishPower began to scale back its telecom interests, and in March 2002 it sold Southern Water. Although the ultimate wisdom of the PacifiCorp acquisition was still uncertain at the beginning of the 21st century, ScottishPower clearly was determined to make its new venture a resounding success.