Who owns Britain’s energy networks and does it matter?

Steve Thomas

February 2014

Contents

1.	Introduction	2

2.	Energy networks	2

3.	Electricity networks	2

3.1	Distribution	2

3.2	Transmission	4

4.	Gas networks	4

Introduction

The extreme weather conditions that prevailed in Britain in the period December 2013 to February 2014, including huge rainfall and continual storms with high winds have placed considerable strain on the electricity network with large numbers of customers losing their electricity supply for days at a time. Once the immediate crisis has passed, it is important that a thorough and independent review should take place to determine whether the electricity network performed as well as it should have done. One element of this should be to examine how, if at all, changes in ownership have impacted on the resilience of the networks. Being underground, the gas network was not affected by the extreme weather to any significant extent but the changes in ownership of the gas network have paralleled those in the electricity industry and problems revealed in the electricity sector may also be present in the gas sector.

This review covers only Great Britain (England, Wales and Scotland), not Northern Ireland, which has a very different system to that of Great Britain.

Energy networks

A central element in the privatisation of the gas and electricity industries was the transformation of these services from monopolies to competitive markets, involving the creation of wholesale markets and choice of supplier to final consumers. However, the networks are seen as a natural monopoly with little scope for competition and so will remain a regulated monopoly with prices set by the energy regulatory body, since 2002, the Office of Gas and Electricity Markets (Ofgem).

For both gas and electricity, the networks are divided into a transmission network and a distribution network. For electricity, transmission includes the high-voltage cables (normally over-ground) that take power from power plants to centres of consumption, while distribution includes the low voltage network that takes power to final consumers, some of which is over-ground, some underground. For gas, the transmission network is the high voltage underground pipes that take gas from where it is landed – from North Sea fields, from import pipelines or from liquefied natural gas terminals – to centres of demand, while the distribution network delivers the gas to final consumers.

Up to privatisation, the electricity and gas industries were entirely in the hands of state-owned enterprises. Since the privatisation of the gas industry in 1987 and the electricity industry in 1990, the networks that bring the energy from the production source (for electricity) or the landing point (for gas) to final consumers have seen significant changes of ownership. This has been driven in part by a regulatory requirement that use of the networks should be open to all energy suppliers and retailers on equal terms. If the networks were owned by companies competing to buy or sell energy in the same market, there would be concerns that these companies would use their ownership of the networks unfair advantages over their competitors.

Electricity networks

3.1	Distribution

Up to privatisation, electricity distribution in England & Wales was carried out by 12 regional ‘Area Boards’, who bought their power from the Central Electricity Generating Board (CEGB), the monopoly generating company. The Area Boards had a dual function of distribution and retail (purchasing power, reading meters and billing). Scotland was divided into two parts up to privatisation with the South supplied by a single company, the South of Scotland Electricity Board (SSEB), and the North by another company, the North of Scotland Hydro-Electricity Board (NoSHEB). SSEB and NoSHEB were fully integrated companies carrying out all parts of the electricity supply chain including generation, transmission, distribution and retail.

The Area Boards were privatised intact as independent Regional Electricity Companies (RECs) but with an accounting distinction between their monopoly distribution businesses and progressively more competitive retail businesses. The government took a ‘Golden Share’ in these that prevented them being taken over without explicit government approval, which expired in 1996. When this Share expired, the 12 RECs were quickly taken over, mostly by American electric utilities.

SSEB and NoSHEB were also privatised intact as independent companies Scottish Power and Scottish Hydro but with much less scope for competition. Scottish Power took over one of the RECs (MANWEB) in 1995, while Scottish Hydro merged with one of the RECs, Southern Electric in 1998 to form Scottish & Southern Energy (S&SE).

In 2002, the US companies almost all sold up and the rules on the separation of retail and distribution were strengthened to require ‘legal’ separation. The buyers this time were large European utilities such as EDF (France) and E.ON and RWE (Germany), and the two large generation companies spun off from the CEGB and privatised in 1990, National Power and Powergen. Both National Power and Powergen experienced significant financial problems and were bought, including their REC businesses in 2003 by RWE and E.ON respectively. Scottish Power was taken over by the Spanish company, Iberdrola, in 2005.

In short, legal separation meant that distribution and retail companies could have common owners but they had to be separate companies. This meant there was little incentive to keep distribution and retail in common ownership. There are no technical synergies between the businesses and regulation meant that it was impossible to use ownership of the network to give advantages to retail businesses. Since then the two parts of most of the REC businesses have gone into separate hands and by 2011, only 4 regions had common owners for distribution and retail (see Table 1). South Scotland and Manchester & North Wales (MANWEB) are owned by Scottish Power/Iberdrola, while Southern and North Scotland are owned by S&SE.

The largest of the new owners is UK Power Networks, which bought three distribution networks from EDF in 2010. UK Power Networks is mainly owned by Cheung Kong Infrastructure (40%), a Hong Kong based company which also owns the other large owner Power Assets (40%). The third owner is Li Ka Shin Foundation, a charitable enterprise. Li Ka Sin is the Chairman of Cheung Kong Holdings, the overall company and a multi-billionaire.

Western Power Distribution includes four distribution regions. Its roots are in the South West REC (SWEB), which was jointly owned by PPL (based in Pennsylvania) and Southern Company. In 1999, it sold the SWEB retail business to EDF. In 2000, it acquired the South Wales REC (Hyder, by then a water and energy multi-utility) distribution business and in 2002, PPL acquired Southern’s 49% stake (held through its Mirant subsidiary). In 2011, it bought Central Networks, the distribution businesses for East Midlands and Midlands from its previous owner, E.ON.

Northern Power Grids, which owns the networks in two regions, Northern and Yorkshire, is owned by MidAmerican Energy Holdings, a company majority (89.8%) owned by Berkshire Hathaway, Warren Buffet’s company. There have been a number of changes of ownership since 1996 when the Yorkshire REC was bought by CalEnergy, part of MidAmerican Energy Holdings and Yorkshire REC by American Electric Power (AEP). In 2005, MidAmerican swapped its Northern retail electricity business for the Yorkshire distribution business, by then owned by a UK company, Innogy, now part of E.ON.

Table 1	Ownership of British electricity distribution networks

Owner	Parent companies	Region	Acquired
UK Power Networks	Cheung Kong Infrastructure (40%), Power Assets Holding (40%, Hong Kong Electric)), Li Ka Shing Foundation	London, South East, Eastern	2010
Scottish & Southern Distribution	Scottish & Southern Energy (S&SE)	Southern, North Scotland	1998
Electricity North West	Commonwealth Bank of Australia, IIF International Holding (J P Morgan)	North West	2007
Scottish Power Networks	Iberdrola	South Scotland, MANWEB	1995
Northern Power Grid	MidAmerican Energy Holdings (Buffet)	North, Yorkshire	1996, 2005
Western Power Distribution	PPL WEM (Pennsylvania)	Midlands, South Wales, South West, East Midlands	2003, 2011

Source: Author’s research

Electricity North West, the distribution business for the NORWEB REC business, was owned by United Utilities, a water and energy multi-utility. The distribution network was sold to a consortium of Commonwealth Bank of Australia and JP Morgan's infrastructure fund in 2007.

3.2	Transmission

Up to privatisation, electricity transmission was carried out by a part of the monopoly generation companies. For England and Wales (the vast majority of the system), this was the Central Electricity Generating Board (CEGB), for the South of Scotland, the South of Scotland Electricity Board (SSEB) and for the North of Scotland, the North of Scotland Hydro-Electricity Board (NoSHEB). For England & Wales, the transmission division was spun off as a separate company, initially owned jointly by the 12 RECs but from 1995, independently owned. The South and Central Scottish transmission network remains in the hands of Scottish power through its Scottish Power Transmission Limited (SPTL) subsidiary, while the North of Scotland transmission network remains in the hands of S&SE as Scottish Hydro Electric Transmission Limited (SHETL).

Gas networks

British gas was privatised intact in 1987, owning the gas production and acquisition function, transmission, distribution and retail. In 1997, the retail business was spun off as Centrica although it continues to operate under the brand name, British Gas. The parent group, BG, comprising UK gas production, worldwide gas activities and the distribution and transmission business. In 2000, the network business was spun off as Lattice, which merged with National Grid in 2002. By then, distribution was subdivided into 8 regions (see Table 2). In 2005, Ofgem required National Grid to sell four of these eight networks. Two (Scotland and South) were sold to a consortium, Scotia Gas Networks, led by S&SE. North of England was sold to a consortium led by Cheung Kong and Wales and West was sold to a consortium led by the Australian venture capital company, MacQuarie. This was bought by Cheung Kong in 2012. National Grid retains ownership of most of the distribution sector through four regions, West Midlands, London, Eastern England and North Western England. Transmission remains in the ownership of National Grid.

Table 2	Ownership of British gas distribution networks

Owner	Parent companies	Region	Acquired
Scotia Gas Networks	S&SE (50%), Borealis Infrastructure Management (25%, Canadian pension fund), Ontario Teachers’ Pension Fund (25%)	Scotland, South	2005
National Grid	National Grid	West Midlands, London, North Western, Eastern	2005
Northern Gas Networks	Cheung Kong, Power Assets, SAS Trustee (Australian pension fund)	North	2005
Wales & West Utilities	Cheung Kong	Wales & South West	2012

Source: Author’s research