Principal Research Results

Management Strategies of Energy Supply Companies in a Competitive
Environment
Background
In Japan, the Electricity Industry Committee under the Advisory Committee for Natural Resources and Energy (ANRE) ofMinistry of Economy, Trade and Industry (METI) submitted a proposal to enlarge the eligibility of the direct access customers on
February 18, 2003. Based on the proposal, all industrial and commercial customers over 50 kW will become eligible for the choice ofsuppliers by April 2005, and the investigation will start around 2007, whether direct access should be allowed also for household customers. Influenced by this trend of further development of competition, utility companies are now forced to reconstruct their management strategies. In Europe, where electric restructuring has been advancing, various strategies have been undertaken to cope with competition. Therefore, it will be useful for us to evaluate these precedents to consider future management strategies of Japanese electricutility companies.

Objective
We investigate and evaluate various management strategies of energy supply companies in Europe, and induce importantlessons for Japanese electric utility companies.

Principle Results
We evaluated the major management strategies of representative European energy supply companies through investigating
the regulatory backgrounds and based on the analysis of financial data focusing on economic profits taking RWE, Scottish & Southern(SSE), Centrica, British Energy (BE), National Grid Transco (NGT) as examples, and obtained the following results (Table 1):
1. The objectives to enhance management efficiency of energy supply companies in a competitive environment can be summarized
mainly into economies of scale, economies of scope, innovation of management and technologies. Concrete strategies to realize
these objectives, mergers and acquisitions for realizing economies of scale, diversification and vertical integration for realizing economies of scope, cost reduction and adopting new technologies for introducing innovation.
2. Based on the evaluation of the corporate strategies, the followings can be pointed out:
1) Prudence is necessary about expansion strategies into other areas and domains. Expansion into new and energy -unrelated product ranges have not been successful in Europe.
2) Risk management is an essential component of any strategic framework. Some energy supply companies have been successful
through risk managements by vertical integration and internationalization.
3) Strategies have to be tailored to the respective regulatory context.
Ultimately, whether a strategy is successful depends on whether the companies make use of their core competences. It isnecessary to understand the core competence of their own companies exactly and to select domains and areas where they can demonstrate their competence most effectively and efficiently.

Future Developments
We will investigate further the impacts of electricity liberalization on management strategies of energy supply companies inEurope and the US and induce implications for the strategies of Japanese utility companies.
Main Researcher: Masayuki Yajima, Ph.D,
Acting Director, Socio-economic Research Center
Reference
Masayuki Yajima, Mika Goto, and Miki Tsutsui (2004),” Management Strategies of Energy Supply Companies in a Competitive
Environment − An analysis of representative European energy supply companies”, Central Research Institute of Electric Power
Industry Y03026 (in Japanese).

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1. Socio-economy - Support for management strategies

Table 1 Management Strategies of Representative Energy Companies in Europe
Name ofTurnoverCompanies (2002）

RWE（Germany）

E.ON（Germany）

SSE（UK）

Centrica（UK）

46.6
bn

36.6
bn

4.0
bn £

10.0bn £Objectives

Management Strategies

Business Field

Evaluation

Economies of Scope

Multi-Utilities（Electricity, Gas, Water, Waste）

Retail Supply

×Economies of Scope

Multi-Energy（Electricity, Gas）

Whole Business(Particularly Procurement）−

Economies of Scope
Economies of Scale

Merger with VEW(Energy Company)

Whole Business ofElectricity and Gas△Economies of Scope

Acquisition of Ruhrgas(German Biggest Gas Company)

Whole Business(Particularly Procurement,Gas Storage）−

Innovation

Reduction of Personnel Expenses,and Administrative Expenses

Whole Business ofElectricity and Gas◎Economies of Scope
Economies of Scale

International Activity
through M&A

Whole Business ofElectricity and Gas○Innovation

Investment in Renewable Energies

Generation◎Economies of Scope
Economies of Scale

Diversification toElectricity Supply,
Telecommunications,
Road Service,
Credit Card Business

Retail Supply ofEnergy Related Services
Retail Supply of
Non Energy Related
Services

Economies of Scope

Vertical Integration;
Generation and Retail Supply

Fuel Procurement,
Generation, Retail Supply◎Economies of Scope
Economies of Scale◎×BE（UK）

1.9bn £

Innovation

Cost Reduction,Quality Improvement

Generation×NGT（UK）

9.4
bn £

Economies of Scope
Economies of Scale

Combination of Transmission andDistribution of Electricity and Gas

Network Business○◎：Highly Successful、○：Successful、△：Neutral、×：Failure、−：No Evaluation

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