NE Finance & Economics

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1 Ref: Business trends in the European power industry - consequences of liberalisation... NE Finance & Economics...

2 The Union of the Electricity Industry - EURELECTRIC, formed as a result of a merger in December 1999 of the twin Electricity Industry Associations, UNIPEDE 1 and EURELECTRIC 2, is the sector association representing the common interests of the European Electricity Industry and its worldwide affiliates and associates. Its mission is to contribute to the development and competitiveness of the Electricity Industry and to promote the role of electricity in the advancement of society. As a centre of strategic expertise, the Union of the Electricity Industry - EURELECTRIC will identify and represent the common interests of its members and assist them in formulating common solutions to be implemented and in coordinating and carrying out the necessary actions. To that end it will also act in liaison with other international associations and organisations, respecting the specific missions and responsibilities of these organisations. The Union of the Electricity Industry - EURELECTRIC is also the association of the Electricity Industry within the European Union representing it in public affairs, in particular in relation to the institutions of the EU and other international organisations, in order to promote the interests of its members at a political level and to create awareness of its policies. The reports published by EURELECTRIC are the result of the work of its structure of expertise: they represent one of the most direct methods of circulating knowledge and information throughout the sector, on subjects of common interest. They are intended for wide circulation both within the electricity supply industry and outside it. Please do not hesitate to ask for the latest available printed EURELECTRIC publications catalogue (with summaries of EURELECTRIC reports) from: Union of the Electricity Industry EURELECTRIC Documentation 66 Boulevard de l'impératrice BE-1000 Brussels BELGIUM Tel: Fax: cpalermo@eurelectric.org You can also use the EURELECTRIC Internet Web site, which provides the following information: - EURELECTRIC general information - EURELECTRIC positions and statements - Events & Conferences - Publications Catalogue 1 International Union of Producers and Distributors of Electrical Energy 2 European Grouping of Electricity Undertakings The Union of the Electricity Industry EURELECTRIC has been formed through a merger of the two associations and

3 Business trends in the European power industry - consequences of liberalisation... NE Finance & Economics... Paper prepared by: G. Hermo Blanco (ES) (Co-ordinator), M. Badurek (PL), V. Beckers (DE), S. Damian (RO), H. Davies (GB), C. de Groof (BE), J. Dvir (IL), M. Gredig (CH), S. Heiman (FI), M. Laengle (AT), H. Lee (KR), E. Mauer (LU), I. Miroslav (SK), B. Murphy (IE), A. Nemmar (DZ), S. Pighini (IT), A. Reviczky (HU), H. Skudal (NO), M. Vakil (PT) Copyright Union of the Electricity Industry EURELECTRIC 2000 All rights reserved Printed in Brussels (Belgium)

4 TABLE OF CONTENTS EXECUTIVE SUMMARY 1 INTRODUCTION 2 IMPACT ON ELECTRICITY PRICES 2 IMPACT ON THE FINANCIAL STATEMENTS OF THE ELECTRIC UTILITIES 9 STRATEGIES ADOPTED IN RESPONSE TO DEREGULATION 12 ANNEX 1 : METHODOLOGICAL ANNEX 17 ANNEX 2 : REFERENCES MADE AND DOCUMENTATION UTILISED 18

5 EXECUTIVE SUMMARY Among the several economic and social aims of liberalisation, the provision of full incentives to minimise costs and the transmission of these cost savings to final prices are probably the most evident ones. Hence, electricity prices are expected to go down after deregulation. However, the relationship between liberalisation and price decline is not direct. Electricity markets have their own particular dynamics in which several aspects are interwoven, being the supply/demand balance and the market structure the pre-conditions influencing the remaining factors. However dubious the nature of the relationship between deregulation and price decline may be, the fact is that electricity prices have declined in Europe, though this price reduction may be explained either by the emergence of competition or by the intervention of regulatory authorities. Whatever the origin of electricity price decrease, there is no doubt that it has had a strong effect on the financial performance of the electric utilities. Most companies have had to deal with a reduction in electricity sales and the effect on operating profit (EBIT) has been even more negative as a result of the increase in fuel prices that took place last year. Regarding the evolution of profitability, the relationship between Return on Invested Capital and Weighted Average Cost of Capital has been analysed. The comparison between the situation in 1997 and the situation at 2000 permits us to conclude that for a significant number of electric utilities the financial situation has deteriorated during this period. At the end of the year 2000 there are more companies among those included in the sample with a ROIC below their WACC. Moreover, for those companies with ROIC above WACC the value created, measured as the difference between both indicators, has diminished. The stringent cost-cutting programmes implemented by the companies have helped to lessen the impact on operating results but the positive effect of cutting costs is necessarily limited. Consequently, electric utilities have had to put in practice new strategies to keep on delivering value in a new liberalised environment. They have chosen different strategic alternatives depending on their institutional restrictions and their distinctive capabilities and intangibles. In general, the less proximate the strategy to their core skills and their domestic institutional framework, the riskier although more potentially profitable. A common tendency seems to try to leverage the customer base, exploiting its value potential by widening the range of products and services offered. Nevertheless, some companies are not so biased towards the retail segment of the market, but turning themselves into merchant energy operators or focusing on asset management with the purpose of becoming providers of infrastructure and network services

6 INTRODUCTION In this report we analyse the impact on the European Power Industry of the deregulation process that has taken place in the second half of the nineties 1. The completion of an internal electricity market, together with a higher degree of free competition was expected to lead to a less expensive and efficient electricity supply without losses either in quality of service or in quality of environment. This report will deal with the effect of the deregulation process on electricity prices, on the economic performance of the electricity companies and on the different strategic approaches adopted by them. IMPACT ON ELECTRICITY PRICES As a result of a deregulation process, prices are usually expected to fall for three main reasons: In a regulated environment, tariffs are based on information provided by regulated companies, sometimes biased so as to set prices above efficiency levels. In a free market context, investment decisions are more adjusted to the actual demand of the good or service supplied. The deregulation process may lead to the substitution of old expensive technologies for new more efficient ones. Market dynamics However, the renovation of the institutional framework may not be sufficient for producing a general price decline as markets have their own dynamics. For understanding market dynamics and predicting electricity price evolution, it is necessary to consider: The degree of fragmentation of the market. The degree of over-capacity of the market, The behaviour of electricity demand and The relationship between new entrant and marginal costs, that, in turn, depends mainly on fuel price evolution. 1 As a matter of fact, this deregulation process started before in several countries, such as Norway and the UK, but we have marked the second half of the decade as a reference due to the enactment of the Directive concerning common rules for the internal market in electricity

7 Market dynamics: market structure. Regarding the first of the aspects mentioned, the extent to which the market is fragmented, it must be borne in mind that concentration measures, widely used to diagnose the potential for exploiting such fragmentation, are not very informative when applied in electricity markets 2. The electricity market, due to the non-storable nature of electricity, is a real-time market and in such a market, even producers with a modest market share can drive up prices under certain conditions. In this regard, an interesting additional line of enquiry that the Network might explore in the future is the effect (if any) of the type of market mechanism on wholesale prices. The accuracy of the idea that the higher number of players in the market the more pressure for reducing prices is not so evident. For instance, Ireland is currently undergoing a deregulation process, where prices are expected to rise as a result of fuel price increases and also as a result of the entry of new players. The access of new players in the Irish market is likely to result in the stranding of existing, relatively efficient plants and an increase in Transmission Constraint costs which may also push up prices. Market dynamics: market over-capacity. One of these conditions is the supremacy of a scarce margin of reserve capacity. If there is supply elasticity, one firm demanding a high price for its output will just shift market share to another supplier. But under the strained market conditions prevailing with a scarce margin of reserve, this supplier might obtain the high price demanded without losing market share; he could even be tempted to withhold some of his electricity in order to drive up prices 3. 2 See S Borenstein and J Bushnell: Electricity Restructuring: Deregulation or Reregulation?. Regulation 23 (2000): 49 3 See California State Auditor Report on Energy Deregulation, March

8 Graphic 1 NET CAPACITY AND PEAK DEMAND (Tw) 120,0 (%) 110,0 45,0 100,0 90,0 35,0 80,0 70,0 60,0 50,0 40,0 30,0 26,1 32,0 23,1 21,0 16,9 14,9 8,6 6,1 11,9 18,3 20,0 12,8 12,6 25,0 15,0 5,0 20,0 10,0-12,9-11,1-5,0 0,0-15,0 Germany France United Kingdom Italy Spain Sweden Norway Netherlands Austria Switzerland Finland Belgium Portugal Ireland Luxem Net Capacity Peak Demand Reserve Margin Source: Eurelectric Graphic 1 shows the reserve margin situation, that is to say, the relationship between peak demand and available capacity in Europe. Installed capacity figures have been adjusted in accordance with energy capability. In the four main areas Europe can be divided into for analytical purposes, the situation is as follows: In the Nordic region, the absence of new capacity may lead to increasing prices. In Continental Europe, generation capacity exceeds demand and prices tend towards marginal costs. In the UK, given the insignificant amount of hydroelectric capacity and the interconnection capacity with France, the reserve margin does not announce an imminent price increase. In the Iberian market, the uncertain rainfall, together with an unforeseen unavailability of the installed capacity could impose severe market conditions

9 With regard to these reserve margins an unexpected effect of competition must be borne in mind. The outset of competition has created incentives not only to replace old inefficient capacity, but also to decommission it in a first stage. This reduction of old capacity in some areas has led, as a result, to an increasing pressure on wholesale prices. Market dynamics: demand evolution Graphic 2 ELECTRICITY DEMAND: HISTORICAL DATA AND PROJECTIONS 5,3 1,8 1,7 3 1,4 3,3 3 2,6 2,4 1,5 1,6 1,5 1,6 3,9 2,2 2 3,2 3,1 2,8 1,5 4,3 3,6 1,5 1,6 0,9 0,5 0,1 0,8 0,8 0,6 0,3 0,6 Austria Belgium Germany Denmark Spain Finland France United Kingdom Ireland Italy Luxembourg Netherlands Portugal Sweden Switzerland Norway Source: Eurelectric Graphic 2 presents the historical data and projections of demand evolution. The same countries where electricity demand was characterised by the highest expansion rates in the nineties (Spain; Portugal, Ireland and Luxembourg) are anticipated to continue with this tendency for the next decade. Belgium and the Netherlands are the exceptions, since in accordance with projections, they will not maintain growth levels above 3% between 2000 and 2010, as they did in the nineties. Market dynamics: new entrant and marginal costs. If there are many participants in the market and there is excess capacity, wholesale market prices will tend towards marginal costs 4. Nevertheless, if demand gets close to available capacity, prices will increase and, given the inelasticity of the majority of demand, such increase will be reinforced until new capacity is built or the lights go out. 4 See Methodological Annex

10 If fuel prices rise, prices will tend naturally to go up, but, depending on the degree of market fragmentation, it will be less or more difficult to transfer this fuel price increase to end customers. If several market participants are able to control the market and reserve margins are under pressure, prices will tend to levels well above cash costs 2 and there will be incentives to build new plants. When incumbents may exercise market power, they can choose between reducing prices below cash costs and above marginal costs in order not to lose market share or maintaining prices so as to preserve their margins in spite of losing market share. Graphic 3 FUEL PRICES EVOLUTION 300,0 250,0 200,0 150,0 100,0 50,0 0,0 jan- 96 apr- 96 jul- 96 oct- 96 jan- 97 apr- 97 jul- 97 oct- 97 jan- 98 apr- 98 jul- 98 oct- 98 jan- 99 apr- 99 jul- 99 oct- 99 jan- 00 apr- 00 jul- 00 oct- 00 jan- 01 Gazexport-Ruhrgas FO 1% CIF NWE Coal (MCIS index) Source: European Gas Markets, Platt s and McCloskey s Coal Report. In conclusion, everything that has been said illustrates that the relationship between liberalisation and price decline is not direct. Electricity markets have their own particular dynamics in which several aspects are interwoven, being the supply/demand balance and the market structure the pre-conditions influencing the remaining factors. Electricity prices However dubious the nature of the relationship between deregulation and price decline may be, the indisputable fact is that electricity prices, both industrial and residential, have indeed declined in Europe. With the exceptions of Denmark, the Netherlands and Italy, it is possible to observe a general declining tendency in industrial prices. Regarding prices for households, a declining tendency can also be noticed, with Denmark, Italy, the Netherlands and England and Wales being the exceptions this time

11 Graphic 4 INDUSTRY ELECTRICITY PRICES EVOLUTION (Variation % in nominal terms) 20,0 17,0 13,3 10,0 0,0 6,4 0,8-10,0-20,0-2,8-5,5-6,5-9,4-10,5-14,8-15,2-17,9-30,0-22,3 NETHERLANDS ITALY DENMARK BELGIUM FRANCE LUXEMBOURG AUSTRIA SPAIN ENGLAND&WALES PORTUGAL SWEDEN FINLAND GERMANY Source: EUROSTAT. Had the price decrease been limited only to industrial customers, we could have come to the conclusion that the emergence of competition is responsible for this price reduction. Nevertheless, this tendency may also be observed in the household segment where the influence of the regulatory authorities should not be ignored. To what extent this price decline is due to domestic competition (in those countries where a free market for household supplies is already existing) or regulatory intervention, is a question that remains unexplored

12 INDUSTRIAL ELECTRICITY PRICE COMPARISON (July 2000, Euro/kWh) 8,00 7,00 6,00 5,00 6,93 6,86 6,09 5,75 5,66 5,48 5,44 5,16 4,96 5,35 4,00 3,33 3,23 3,00 2,00 1,00 0,00 ITALY ENGLAND&WALES BELGIUM GERMANY SPAIN PORTUGAL FRANCE LUXEMBOURG DENMARK SWEDEN FINLAND Source: EUROSTAT. Graphic 6 HOUSEHOLD ELECTRICITY PRICES EVOLUTION (Variation % in nominal terms) 45,0 35,0 36,4 33,7 25,0 15,0 5,0 15,3 3,5 1,0-0,4-5,0-15,0-25,0-2,7-6,5-9,9-13,9 DENMARK NETHERLANDS ENGLAND&WALES ITALY AUSTRIA BELGIUM PORTUGAL FRANCE SPAIN GERMANY Source: EUROSTAT

13 IMPACT ON THE FINANCIAL STATEMENTS OF THE ELECTRIC UTILITIES Whatever the origin of electricity price diminution, there is no doubt that it has had a deep effect on the financial performance of the electric utilities. Most companies have had to deal with a reduction in electricity sales. Deviations from the general tendency can be explained either by a demand growth above the average, as in Portugal, Ireland and Spain, or as a result of the consolidation process that some companies have undertaken. Graphic 7 SALES EVOLUTION (Cumulative Annual Growth Rate 5 ) 15,0 10,0 5,0 0,0 6,5 6,3 6,2 5,5 5,3 5,2 3,1 2,9 2,5 2,5 2,1 1,9 1,5 0,1-0,3-0,8-1,0-1,4-5,0-3,5-10,0-6,0-6,5-15,0-11,6-12,6-13,4-13,7-20,0-20,3-25,0 Source: Company Annual Reports. See Annex 2. Not only has turnover reduction affected electric utilities operating result, but also an important decrease of fuel prices in the last year (see Graphic 3). Another additional effect of liberalisation on companies financial performance has been the need to deal with social effects of job losses (in own industry or linked industries, for example mining). However, these social effects may have been treated as an extraordinary item and, thus, not have affected EBIT 5 The period has been taken as the reference period as long as some figures have been available for the year ended Different fiscal years are considered for some companies (such as RWE Energie, EVN or most British companies), but this fact has no significant effects on the comparison

14 Graphic 8 OPERATING PROFIT (EBIT) EVOLUTION (Cumulative Annual Growth Rate) 40,0 30,0 28,8 26,1 20,0 10,7 10,0 0,0 7,2 6,8 5,4 4,3 2,3 1,9 1,6 0,4-0,1-10,0-2,3-3,2-3,6-5,4-5,5-6,8-9,4-20,0-14,3-14,9-18,8-30,0-24,4-27,6-27,6-27,6-40,0 Source: Company Annual Reports. See Annex 2. Graphic 9 SALES vs OPERATING PROFIT (EBIT) EVOLUTION (Cumulative Annual Growth Rate) 30 EBIT 15 SALES -25,0-10,0 5, Source: Company Annual Reports. See Annex

15 Looking together at Sales and Operating Profit evolution (Graphic 9), it can be seen that most companies tend to concentrate around the axis origin, reflecting that when companies have obtained a positive variation in EBIT, usually as a result of a positive variation in sales, the variation percentages are reduced. On the contrary, when EBIT variation is negative, variation percentages can be very significant. This is the reason why the axis origin is moved towards the right hand side of this scattered chart. It can be noticed that the superior left-hand side of the chart is almost deserted, since, normally, companies with no sales increases have had a very negative evolution in EBIT. Some companies have managed to defend themselves against this hostile environment by implementing very aggressive cost cutting programmes. Drastic reductions may be observed in items such as purchased services or sundry operating expenses. However, there seems to be a general tendency towards personnel cost reductions. Graphic 10 shows that there has been a general reduction in personnel expenses, except where consolidation processes are under way. Graphic 10 PERSONNEL EXPENSES EVOLUTION (Cumulative Annual Growth Rate) 25,0 20,0 15,0 21,5 17,0 10,0 8,2 7,2 5,0 3,9 3,5 3,1 2,7 2,4 0,9 0,7 0,5 0,5 0,2 0,0-5,0-0,6-10,0-15,0-3,8-5,2-5,5-6,9-7,4-8,2-8,4-10,3-11,7-12,3-20,0 Source: Company Annual Reports. See Annex 2. Regarding the evolution of profitability, Graphic 11 shows the relationship between Return on Invested Capital and Weighted Average Cost of Capital. The underlying thought is that those companies with ROIC above cost of capital (placed on the graphic over the dividing line) are being capable of generating value with their investments while companies where the ROIC is below the cost of the capital employed would be value destroying for their shareholders

16 Graphic 11 VALUE CREATION (ROIC - WACC) EVOLUTION Value Creation ROIC WACC Value Destruction Source: Credit Suisse First Boston and Eurelectric estimates. The comparison between the situation in 1997, illustrated in Graphic 11 by rhombus in blue, and 2000, depicted by red dots, permits us to conclude that for a significant number of electric utilities the economic situation has deteriorated during this period. The graphic shows a tendency towards the axis origin, due to a reduction in the cost of capital, but also to a reduction in the return on invested capital, because the number of companies below the line is greater in 2000 than in STRATEGIES ADOPTED IN RESPONSE TO DEREGULATION As we have already mentioned, one of the first reactions of electric utilities being confronted with deregulation was the implementation of ambitious cost-cutting programmes. But this reaction is clearly insufficient given such a important change of the industry environment and, moreover, the potential for cutting costs is limited. After a few years, exploiting more economies and efficiencies becomes impossible without putting in danger a reasonable standard of operation. Hence, other strategies have been put into practice by electric utilities in order to adapt themselves to the new deregulated environment. As occurs very often in business, the riskier the strategy, the more profitable potential it may incorporate. The following graphic classifies several of the strategies taken

17 Graphic 12 STRATEGIES IN RESPONSE TO DEREGULATION RISK Expansion Cores Business Investing in non-electric utilities International expansion New telecom business POTENTIAL RETURN 1. Expansion inside the usual segment of business Together with cost-cutting, some companies have searched for investment opportunities in the domestic core business, because they were convinced that this would be the most efficient way to profit from their expertise and knowledge. Investment in the regulated segment of the industry distribution and regulated supply- has been regarded as an opportunity by those companies involved in generation as a way of hedging against volatility. Investment in new plants has also been contemplated in order to profit from unregulated assets, to obtain a more diversified and flexible asset base or to increase their market share. However, not all the domestic core businesses are characterised by enough investment opportunities. In mature markets with low wholesale prices there are no incentives to build new plants. In countries where the structure of the industry is still integrated opportunities for investment in regulated assets may be scarce. 2. Growth by investing in non-electric utilities Water and gas have been the preferred targets, were the skills developed in the traditional electric business would be more easily applicable. At the beginning, the rationale of these investments was clearly to take advantage of economies of scale: the same administrative functions (billing, customer call centres,..) for customer support could be shared by the three businesses. However, as more segments of each market were being opened to competition, the opportunity to leverage the company customer base was clearly visible. It became evident that customers will choose as a supplier that company capable of providing more services in just one package, not only including classic utility services but also plumbing, electric repairs or telecoms

18 3. Growth by developing a new telecom business The emergence of competition in the telecom business has also represented a natural way of diversification for the electric utilities. Many electric companies had built important fibre optic networks for their ordinary operations, which, with the arising of competition in the telecom business, could become more profitable. This is the origin of the decision to take participation interests in telecoms, a decision that is now shared by several companies. COMPANY PARTICIPATION INTEREST IN Infostrada, Wind Edisontel Oni AUNA AUNA ENEL Edison EDP Endesa Unión Eléctrica Fenosa National Grid Scottish Power Scottish and Southern SSE Telecom United Utilities Norweb Telecom Energis, Inteligi, Telergy Thus Moreover, the degree of involvement required has gone up very significantly. In particular, the process of obtaining UMTS licences has required high amounts of investment, placing the holding companies at a riskier situation. Even riskier than telecoms are the technological developments associated with Internet, such as the B2B or B2C platforms, but they constitute a very relevant potential source of value. 4. International expansion Reasons for acquiring a foreign utility or for investing in an international project may be: To obtain extra-profits from less mature markets. To profit from only recently deregulated markets through the knowledge acquired after several years of operation in a fully liberalised environment. To benefit from economies and efficiencies that may remain unexploited. The value generation potential of international expansion is widely recognised, but also the relevance of the risks involved: The institutional framework of the target country may hinder or even prevent the actual control of the investment. Regulatory uncertainties may prove to be more difficult to manage than those of the core domestic business. An unstable economic context may damage the investment return, for instance as a result of the weakness of the destination country currency

19 Apart from this classification based on the relationship between risk and return, there may be some other ways of clustering strategies adopted by electric utilities. Other possible classification is based on the opposition between asset managers and customer managers that we believe is beginning to evolve. Most companies are changing from a classic culture of utility supplier to a customer satisfaction culture, trying to leverage their customer base with the aim of selling more products to more customers, developing what has been called the multi-utility concept. Utilities following this path might find the competition of companies from the retail sector or from new economy players. Nevertheless, this is not the only possible strategic positioning. Some other companies are not so oriented towards the retail segment of the market, but focusing on asset management. A market for operating assets might evolve, particularly if securitisation became a widely accepted instrument for some companies to access new sources of liquid funds. The property of certain balance sheet items or even complete businesses might be transferred and the giving company might become a provider of infrastructure and network services. Not only utilities but also engineering companies might follow this strategy. Graphic 13 FOCUSING ON ASSET OR RETAIL MANAGEMENT 5 Number of Utility Services LATT UU EDI NGG RWE EON END UNF CNA IOG PWG SSE ENEL SPW EDP 0 Asset Managers Retail Managers Source: Paribas. In some countries with longer liberalisation experiences, regulated companies have been interested in reducing their cost of capital below the standards considered by regulatory authorities when reviewing price controls. In this regard, securitisation has allowed to pay-back capital and, consequently, to lower weighted average cost of capital, being more a reaction to regulation than a move made in reply to deregulation

20 In the above graphic, an arbitrary classification based on this opposition between asset managers and customer managers is presented. There is a further strategy available to companies facing liberalisation, that of the merchant energy operator, taking risks and making money from the economics of extraction/production and wholesale markets. This strategy may be complementary, in particular, to the wide retail offering strategy, but also may exist on its own in some pure form

21 ANNEX 1 : METHODOLOGICAL ANNEX Definitions of cost drivers of prices Marginal cost: We consider that that the marginal cost of an electricity generation plant includes fuel costs as well as variable operation and maintenance costs. Cash cost: Additionally to marginal costs, cash costs also comprehend the fixed operating costs of a power plant. Covering all cash costs the plant is able to reach its break-even point. New entrant cost: New entrant costs will be covered when the plant generates sufficient revenues to cover marginal and cash costs and, moreover, a reasonable in market terms- return for the capital inverstment. Value Generation definitions We consider that a capital invested is value generating when the return on invested capital (ROIC) is above the weighted average cost of capital employed (WACC). Return on invested capital (ROIC): Net operating profit after tax divided by invested capital Invested capital (IC): Net tangible and intangible fixed assets plus working capital Net operating profit after tax (NOPAT): Operating revenues minus operating expenses (depreciation and operating provisions included) multiplied by (1 - effective tax rate) Weighted average cost of capital (WACC): Return on capital required for compensating debt and equity investors. After tax cost of debt and cost of equity is weighted by the company's capital structure. Cost of debt: Interest paid plus other financial expenses (exchange losses included) multiplied by (1 - effective tax rate) Effective tax rate: calculated by dividing annual corporate tax expense by profit before tax. Cost of equity: Calculated in accordance with the Capital Assets Pricing Model. Oneyear average of the yield-to-maturity five year government bonds plus (Beta x risk premium) Beta: Indicator of stock volatility, it is the coefficient of the regression line relating to variations in the general index and variations in the stock. (For UK utilities we have kept the same coefficient of 0,85) Risk premium: Market equity risk premium, difference between average market return and risk-free return

22 ANNEX 2 : REFERENCES MADE AND DOCUMENTATION UTILISED The Annual Reports of the following companies have been consulted: EDP, ENEL, EDF, ESB, ESB, RWE Energie, EON Energie, PREAG, BAYERNWERK, BEWAG, VERBUND, EVN, ELECTRABEL, CEGEDEL, EPON, EPZ, REMU, Scottish Power, Scottish and Southern Energy, PowerGen, National Power, Statkraft, Fortum, Vattenfall, Sydkraft, Endesa, Unión Fenosa, Iberdrola. Furthermore, BNP PARIBAS: European Utilities. February S. Borenstein and J. Bushnell: Electricity Restructuring: Deregulation or Reregulation? Regulation, 23 (2000). California Independent System Operator: State Auditor Report on Energy Deregulation. March Credit Suisse First Boston: Swiss Electrical Utilities. December 2000 Credit Suisse First Boston: Euroutilities: Top picks for January Credit Suisse First Boston: Euroutilities in January 2001 Endesa: Endesa. Focus on Value. Morgan Stanley Dean Witter Iberian Uitlities CEOs Conference, Madrid, April Eurelectric: Statistics and Prospects for the European electricity Sector ( , ). EURPROG Network of Experts (Draft Version). May Eurelectric: European Electricity Supply Industry: Demand and Generation Prospects to Synopsis of the 2000 EURPROG Report. March UBS Warburg: UK Utilities. Restructuring the Value Chain. November UBS Warburg: UK Wholesale Electricity Prices. Still Defying Gravity? May

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