Utility users lose power

Spanish utility company Iberdrola’s bid to buy ScottishPower for £11.6bn has met with a mixed reaction.

Spain’s second-largest power company joins a throng of Iberian companies that have bought up British brands, such as Telefonica’s acquisition of mobile phone operator O2 and Abbey’s sale to Banco Santander Central Hispano. Iberdrola appears to have beaten Eon to take the Scottish utility, and many observers believe it is profiting from this “great British sell-off”.

The Scottish National Party has called on the European Commission to block the Spanish takeover, saying it should be put on hold pending an investigation into alleged Spanish government tax concessions for businesses taking over foreign companies. Last week, SNP deputy leader Nicola Sturgeon claimed the tax concession in the case of Iberdrola is worth £1bn. Meanwhile, Scotland’s First Minister, Jack McConnell, says the move would be “of concern” to customers and employees.

Geoff Slaughter, commercial manager for home services at uSwitch, shares similar reservations: “The two Scottish power companies [ScottishPower and Scottish & Southern Energy] rank highest in terms of customer service. Apart from Centrica-owned British Gas, they are the only utility companies that remain in UK ownership, and those that are under foreign ownership suffer from the worst customer-satisfaction levels.

“The prospective parent company wants to drive through millions of pounds’ worth of cost savings and I wouldn’t want to see those costs passed on to consumers.

“It’s crucial that ScottishPower’s consistent performance in customer service and its competitive pricing will not play second fiddle to the financial priorities of the parent company.

“USwitch.com wants Ofgem to keep a close eye on this acquisition and ensure that not only are consumer needs met, but also the necessary investment in the UK infrastructure is continued and supported by Iberdrola. We don’t want to see consumers footing the investment bill.”

Meanwhile, Richard Greenwood, a consultant at Datamonitor, says that lower costs have stood SP and SSE in good stead – they were, after all, among the last to impose price rises on their consumers.

“It has been a tricky time for utilities, with pressure from the wholesale market, where prices have risen and been passed on to the retail sector. But SP has achieved some organic growth outside its heartland because of low prices.”

Price and customer service have proved to be the driving forces behind switching energy provider, says Slaughter. “The challenge [for SP] will be to maintain its competitive offering,” he adds.

Greenwood says that in terms of market share, ScottishPower is the UK’s fifth-biggest supplier of residential energy in its total number of accounts. The three largest are Centrica, Eon and SSE. He adds, however, that there are clear synergies between SP and Iberdrola.

“Iberdrola is very big in wind energy, so that might be an area it will look to extend and accentuate,” he says.

The Spanish utility is the world’s largest generator of electricity from wind, and SP has embarked on an ambitious programme of wind farm development – Scotland is the windiest country in Europe. If the takeover gets the green light, Iberdrola would increase its renewable-power capacity by 48% and secure a tenth of the UK energy market in the UK.

SP was formed in 1990 in preparation for the privatisation of the previously state-owned electricity industry in 1991. It was mainly created from the larger of the two Scottish electricity boards, the South of Scotland Electricity Board, while the North of Scotland Hydro Board eventually became part of the Scottish & Southern Energy group.

In 1995, SP bought English power supplier Manweb and the following year moved into water with the acquisition of Southern Water. It also moved into telecoms, setting up ScottishTelecom, which was rebranded Thus. SP decided to hive off Scottish Water and its final 20% in Thus in 2002.

In recent times, SP had been faring well. While the likes of British Gas were criticised for price hikes, SP’s reputation among consumers remained strong. But that appears to have changed.

Last year, the company announced job cuts across the UK, including 70 posts in sales and marketing (MW October 13, 2005). Earlier this year, it was lambasted over nearly £11m worth of severance payments to four directors who lost their jobs, which the SNP branded “obscene”. Just last month, Scottish Power announced a 77% hike in half-year profits. Consumer groups were quick to condemn the news.

In the week that Energywatch renewed calls for an inquiry into domestic gas prices – wholesale gas prices have fallen by 40% since March, while consumers have experienced rises of 30% in the past six months – SP will need to keep a close eye on its customers, according to observers.

Slaughter concludes: “UK energy companies risk alienating their UK customers, who are becoming frustrated that foreign ownership of businesses can mean their needs are low on the list of priorities.”

It will become apparent soon enough how well SP’s customers are served by the Iberdrola acquisition

• ScottishPower
1990 ScottishPower formed mainly from the South of Scotland Electricity Board. The North of Scotland Hydro Board eventually became part of the Scottish & Southern Energy group
1995 Bought Manweb, the electricity supplier to Merseyside and North Wales
1996 Bought Southern Water and moved into telecoms, setting up Scottish Telecom, which was rebranded Thus 2002 Sold Southern Water and its final 20% stake in Thus
2006 5.2 million customers. In March, it raised gas prices by 15%, and electricity prices by 8% in the six months to 30 September. It made £483m in profits, a rise of 77%, but refuses to divulge its revenues