October 28, 1999
In Germany, Radical Power Deregulation Benefits Households
Map
Germany from Microsoft Encarta Concise Encyclopedia
By EDMUND L. ANDREWS
RANKFURT -- Until last
month, Michael Loebl greeted his
monthly electricity bill in much the
same way as his taxes: too high, yet
beyond his control.
Not anymore. After being bombarded by television commercials and billboards from aspiring competitors, he
dropped Frankfurt's long-time electric
monopoly, Mainova A.G., and signed up
with an upstart, Yello Strom. He expects the annual power bill for his modest row house to drop from about $860
to less than $700.
But that is peanuts compared with
the possible savings at his sporting
goods store, Sport Loebl, in downtown
Frankfurt. Hamburg's city-owned utility, as part of a direct attack on rivals
in Frankfurt and other cities, is promising to slash the store's annual bill by
around 40 percent, from $18,000 to
$11,000.
Germany is not the first country to
open its electricity market to competition. But nowhere has the deregulation
been as radical or the resulting price
wars as fierce as here.
A number of American states, including California and New York, have deregulated electric power in ways that
primarily benefit big corporate customers, but competition for residential
customers remains minimal.
And while most countries that have
opened their markets have done so
gradually, Germany abolished all its
restrictions in a single move, in February.
"This is by far the most brutal and
maybe chaotic development in the marketplace I have ever seen," said Heinz
Dieter Waffel, a managing director at
Preussen Elektra, a unit of Veba A.G.
and Germany's second-largest utility.
The impact has been staggering.
Wholesale electricity prices -- the
prices that local utilities pay for power
-- have plunged as much as 60 percent
in the last year. Corporate customers
are getting reductions of 30 percent and
more, often without even switching providers. But the most surprising competition has been for ordinary household
consumers like Loebl. Electric companies
are marketing electricity in department
stores, on television and over the Internet.
The turmoil is all the more unusual because
Germany has been known for rigid regulation.
To be sure, prices here had a long way to
fall. Before the price cuts began, electricity in
Germany was more than twice as expensive
as in the United States and more costly than in
any other European country except Italy.
The price wars have been compounded by
other factors. For one thing, Germany is
awash in excess generating capacity. And its
central location in Europe has made it a
magnet for imports of cheap power from
France, Scandinavia and Central Europe.
"Germany is like a copper plate -- electricity flows in all directions, and there are no
bottlenecks," said Lynn Reinhardt, an energy
analyst at Merrill Lynch in Frankfurt.
Though customers receive electricity over
only one set of electric lines, they can order
their power from more than a dozen companies, which pay transmission fees to various
electrical grids and deliver it from their generating plants to specific customers.
The competition in Germany has already
ignited several huge mergers, and more are
on the way. Veba is merging with Viag of
Bavaria, the nation's third-largest utility, in a
$14 billion deal. RWE, Germany's biggest
power company, is negotiating to acquire a
big regional provider, VEW. Both Veba and
RWE are on the prowl for more acquisitions in
Germany and elsewhere.
The shockwaves are reverberating across
Europe. Électricité de France, owned by the
French Government, is aggressively exporting electricity to Germany from its low-cost
nuclear plants and is seeking to acquire German utilities.
Germany's big power producers are returning the favor. Desperate to offset steep price
declines with higher exports, they are setting
up shop in neighboring countries and hunting
for foreign companies to buy.
Industry analysts predict a painful shakeout.
"It is ruinous competition," said Ms. Reinhardt of Merrill Lynch. "They are all talking
about increasing revenues and market share,
but market share is irrelevant to shareholders. What matters to shareholders are profits."
The turmoil will almost certainly force utilities to shut some of their unneeded power
plants, and labor union leaders have warned
that as many as 40,000 jobs could be eliminated.
The competition may also accelerate a shift
from coal-fired plants to natural gas and other
sources. German coal, still protected by subsidies, is more expensive than many other resources.
One particular problem is eastern Germany, where the Government prodded western
German utilities to build huge ultra-clean
coal-fired power plants after the fall of the
Berlin wall in 1989. But those plants are being
financed in part by higher electricity prices,
which are now unsustainable. In a compromise reached this week, the big western German utilities pledged to buy up excess eastern
electricity while the eastern plants pledged to
cut costs and workers.
The competition also complicates the country's desire to abandon nuclear energy. Although the Government has vowed to shut
down nuclear plants at some point, the deregulation appears to have been a bonanza for
imports of cheap electricity from French nuclear plants.
Even Germany's biggest power companies
are scrambling.
RWE predicts that its prices will decline 10
percent next year; that translates into a $1
billion reduction in revenue. Just to make up
lost revenue on the household side of the
business, analysts estimate, RWE would have
to add six million customers.
"There is overcapacity in the German market of about 30 percent," said Michael Zerr,
chief executive of Yello Strom, a new consumer-marketing subsidiary formed by Energie
Baden-Württemberg, the nation's fourth-largest power company. "At that level, you have
two possibilities: you can hold on as long as
possible with higher prices and just let the
business decline, or you could be proactive."
Smaller utilities are worried that they will
be forced out of business. Many have already
urged both the courts and the government to
shield them -- so far without success.
At a street protest in Duisburg last month,
utility workers donned skeleton masks to
dramatize their fears.
The big producers have been worrying, too.
Aghast that rivals were wooing some of its
biggest industrial customers, RWE offered all
its midsize customers an automatic price reduction of 30 percent in July.
Industry executives and analysts say Germany's deregulation was more radical than
that in any other country.
Though American consumers have far lower rates than their German counterparts,
prices in states proceeding with deregulation
continue to be inflated by surcharges demanded by state regulators. The surcharges, which
have been applied in most other countries, too,
are intended to let utilities recover "stranded
costs" -- the costs of power plants built when
prices were regulated that could not operate
profitably in an open market. By contrast,
German officials did not bother, deciding instead to let all utilities sink or swim on their
own.
The German utilities' first big battle was
for big industrial customers, much like what
had occurred in the United States, Britain and
Scandinavia.
But then something very different took
place: an outbreak of competition for ordinary household consumers as bloody as the
battle in the United States for long-distance
telephone customers.
RWE, based in Essen, introduced the first
nationwide sales campaign for household consumers on Aug. 1, offering a flat rate of 22.3
pfennigs (12.1 cents) a kilowatt hour for those
willing to pay a monthly fee of 9.97 marks
($5.42). This was a small reduction for RWE,
but well below the going rates for some of the
new territories it hoped to enter.
Zerr, who had quietly begun organizing
Yello Strom in April, fired back a few days
later, offering a rate of 19 pfennigs a kilowatt
hour with a 19-mark monthly fee.
Zerr also started an eye-catching advertising blitz proclaiming that the "color" of
electricity was yellow. Playing off the English
word "yellow," Zerr promoted Yello's
image as a bright, quirky upstart that would
also deliver a good deal.
RWE responded with advertisements contending that the color of electricity was blue --
the color of its logo.
The German word for blue -- "blau" -- is
also slang for "drunk," however, and Yello
gleefully responded with ads that essentially
said: "I know the color of electricity is yellow.
I'm not yet drunk."
Since August, other utilities have dropped
their prices and started rival offers that
quickly became as confusing as the claims of
American long-distance companies.
Several companies are offering "green"
electricity, which costs more but is supposed
to come exclusively from renewable energy
sources like hydroelectricity and windmills.
Mainova, which serves Frankfurt, is among
those offering a "green plan"; it also has a
"classic" plan for light users and a "plus"
plan for heavier users. Elektra Direkt, a new
retailing arm of Preussen Elektra, offers both
a "family" plan and a "single" plan.
Early evidence suggests that only a small
percentage of household and commercial customers are switching electric companies. But
that is partly because of the pre-emptive price
cuts.
"No one can tell where the money will be
made -- in households, industrial or commercial establishments," Waffel of Preussen
said. But "to optimize your portfolio, you have
to be present in all those segments."
Several American companies have taken an
active interest in all this. One is the Enron
Corporation, a big wholesale trader of electricity in Europe that helps procure power for
industrial customers and utilities.
"Those who have really taken advantage of
the choice in the market have seen prices fall
by well over 30 percent and frequently as
much as 50 percent," said John P. Thompson,
Enron's general manager in Frankfurt. "Everybody, even us, has been surprised by how
swiftly this market has moved."
So, in the search for salvation through expansion into other markets, the fierce race is
on among big German companies to buy up
private and state-owned utilities, both inside
and outside the country. And the rush is on to
set up sales offices in countries like Poland,
Italy and the Netherlands.
A major source of tension is France, which
actively exports inexpensive electricity but
has so far defied a directive from the European Union to open its own market to competition.
That is not likely to last long. Most analysts
expect that cross-border competition in electricity will only increase.
"This is not just a
German issue," Thompson of Enron said.
"This is now very much a European picture."
