ELECTRIC SHOCK FOR GAS SUPPLIERS

Gas companies are finding the gas gold rush more elusive than expected and are trying to move into electricity supply. But they will have to conquer the might of giants like British Gas and ScottishPower which threaten to dominate the dual fue

Independent gas supplier Calortex is looking for a partner. It wants to link up with a regional electricity company, and admits it is talking to a number of them about putting together a deal. It needs to do one soon.

One of those parties was Northern Electric. But the talks have stalled, and according to some sources collapsed completely. At the same time, the US company Amerada Hess has struck a deal to take over Sweb Gas – illustrating consolidation in the market but also putting added pressure on Calortex to do a deal.

Last week, Southern Electric struck a deal with Argos which will see its electricity sold through the company’s catalogue. And also last week Amerada Hess, YE Gas and Northern Energy, owned by Energy Supplies UK, all applied to the regulator Ofgas to extend their licences.

It all points to an acceleration in a market which at the moment is geographically limited to just two trials in the South-west and South-east of England. And also highlights the fact that none of the independent gas companies is yet in a position to make money.

The outcome of the Calortex talks could have a dramatic effect on the rest of the annual 6.6bn gas market. Calortex, a 50/50 joint venture between Calor and Texaco, has ambitions to be the UK’s number one gas supplier after British Gas, but that is a little difficult to believe when its current ownership structure is close to falling apart.

The Dutch owner of Calor, SHV, is looking to offload part of its stake, to concentrate instead on selling liquid petroleum gas to developing countries.

Some observers believe Calor’s decision to drop out of the venture could undermine confidence in the market. Why is the Dutch company dropping out when others believe the market is going to be another new gold rush?

The joint venture is trying to kill two birds with one stone and find an equity partner that offers a way into the electricity market. It wants to have a tie-up with an electricity specialist so it can market both services at once.

The move has an inevitable logic. Free competition in gas supply has been tested in the South of England since April 1996, and is to be introduced to Scotland and the North-East in November. It will be rolled out to the rest of the country next year.

So far in the South, 2 million customers have been offered the chance to switch from British Gas to an independent supplier, tempted by possible savings of 20 per cent on their gas bills. According to Ofgas, just under a quarter have already done so – 480,000. Calortex is supplying gas to some 25 per cent of these, or 125,000 homes. Sales in the independent market are currently valued at 168m, but Calortex wants to secure a ten per cent share of the future market, estimated at some 665m.

But doubts have been raised about how much it is costing. Calortex to recruit new customers and also the techniques it has been adopting. Calortex, along with rival Eastern Gas, has had more complaints made against it for poor standards of service. It was criticised for its doorstep techniques in the tria areas. The complaints were revealed in a Gas Consumers Council survey (MW August 21).

Its refusal to join the self-regulatory body the Association of Energy Suppliers, which is drawing up a code of conduct for the industry to prevent pressure selling, has added to concerns about its operation.

Of the 15 companies marketing gas in the South, all but Calortex, Amerada Hess and British Fuels Gas are owned by regional electricity companies (RECs).

According to confidential figures from the trade association, the Electricity Association, the biggest suppliers are Scottish Power, which boasts a similar number of contracts to Calortex. Beacon is in third position, and Eastern, which while claiming to have 250,000 customers, is only in fourth place in the Association’s rankings.

Just as the introduction of competition into the gas market is completed by spring next year, a similar process will begin with electricity supply. The RECs are worried that their electricity customers could fall prey to a new breed of “dual fuel” operators.

In this scenario, players such as British Gas, ScottishPower and Eastern Group will move into their local areas, offering both electricity and gas, which they may eventually be able to combine in single billing. Once they establish themselves as gas suppliers, it will then be easier for these operators to eat into the RECs’ core local electricity customers. The RECs are involved in a defensive game. Many have launched their own domestic gas supply companies to protect themselves from the encroachments of the super utilities.

It was for this reason that Northern Electric held talks with Calortex about entering a partnership. The REC, which supplies electricity to 1.4 million customers in the North-East, has tried its own hand as a gas supplier, and claims it has signed up 30,000 customers in the two test areas of gas deregulation in the South of England.

But it would benefit from having a player of the stature of Calortex in its bid for gas customers. Calortex has invested millions of pounds in marketing its name in the test areas, and has committed a further 12m over three years to the development of a loyalty campaign through Wunderman Cato Johnson.

All of the companies have been marketing in the trial areas. Calortex launched a television campaign through IMP, and other advertising contributions include work for Sterling through BST.BDDP. Eastern has been using Payne Stracey.

However, industry observers insist doorstep selling is by far the most effective form of marketing.

A tie-up with Calortex would have enabled Northern to work with one of the largest independent gas suppliers, and protect its local area from encroachments by other “dual fuel” operators.

However, the talks appear to have broken down. When asked whether the talks are still continuing, a spokesman for Northern says: “We explore many business opportunities with other partners, but not all of them come to fruition.”

One observer suggests that Northern Electric was just too small for Calortex, with only two thirds of the electricity customers of other operators such as Southern Electric – an estimated 2.6 million people.

Some industry pundits say Calortex has invested heavily in capturing its customers and succeeded only in attracting a disproportionate number of low spenders. According to industry sources it has failed to attract the more profitable direct debit customers who are cheaper to process and require smaller investment.

One industry estimate suggests Calortex has spent up to 500 to win over each of its 125,000 new domestic supply contracts. Given that the average gas bill is 350 a year, with a profit margin of just 10, it would take Calortex 15 years to make any profit from such a consumer.

The company furiously denies that it has cost it 500 to sign up each customer, but refuses to give its own figure. Commercial director Neil Lambert says: “The figure is nothing like that. We are within budget.” He says Calortex’ cost per new customer is in fact lower than other industry players, arguing that as it has signed a lot of customers, the costs are spread.

Calortex admits that it has a high proportion of “pre-payment” customers – people who switch accounts, even though they owe money to British Gas. They may pay through a key meter, with the first 30 per cent of the payment going to pay off their debts. These methods of payment are expensive to service, and the lower spending customers offer smaller margins.

Calortex says that all this is evidence that it is living up to the conditions of its Ofgas licence. The licence stipulates that the independent suppliers must not “cherry-pick” higher spending customers, – they are obliged to take on customers irrespective of how they pay or how much gas they use.

Lambert says the company is staying within the licence condition, rather than cynically finding ways round it: “Some of them (other gas operators) are tantamount to being in breach of the licence condition by discriminating against customers. Some make it difficult to take on pre-payment customers, some refuse to take them on.”

However, Ofgas says that it is unaware of a problem with cherry-picking.

While many industry observers say there is not enough business for 15 players, most of the gas suppliers seem committed to the market and have shown little sign of wanting to get out. However, in the coming two years, the 15 companies are expected to be slimmed down to five or six through a process of merger and acquisition.

Last week saw Amerada Hess take over Sweb Gas, although Sweb, which gains long term access to gas supplies from the deal, will for the time being keep its name and continue its marketing programme. “The Sweb Gas brand is now better positioned for future growth than in any time in its history,” says the company’s director of customer service, Derek Lickorish.

But it seems unlikely in the long term that the two will be able to market themselves in competition, so we could see Amerada handling gas supply while Sweb retrenches into just supplying electricity.

The survivors will forge partnerships with brand owners in an effort to instill some brand values into the commodities of electricity and gas.

At the end of August, the AA began to send out details of its tie-up with ScottishPower. AA customers get free home insurance when they sign up for gas or electricity with ScottishPower.

The latest deal, announced last week, was the inclusion of Southern Electric on the Argos Premier Points scheme. Customers signing up with Southern will earn points to redeem on products in the Argos catalogue. This opens the way for Argos to market Southern Electric’s gas and electricity products through the catalogue. It also opens the way for another Argos partner, the supermarket group Somerfield, to market Southern Electric and to use its scanning systems so customers can pay for their gas or electricity with barcoded bills.

People want all their utilities paid for with a single bill. Consumers see gas and electricity as commodities, and want to spend as little time thinking about them as possible. The marketers have therefore been charged with making utilities interesting, which they plan to do by “bundling” their offers with other related products, such as AA home insurance.

In particular, Calortex wants to be the country’s number one gas supplier, but could find its chances damaged if it fails to stitch together a deal with an electricity supplier. Inevitably potential partners will wonder why SHV is seeking to off-load its share in a company less than two years old if there is such great potential for the joint-venture in the long-run.

Or perhaps the truth is that the rush, eagerly anticipated by those who argued for break up the gas market, is for fools’ gold.

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