Fugitive sees rich pickings in electricity: Lisa Vaughan on trader Marc Rich and his entry into the UK electricity market

COMMODITIES KING Marc Rich, wanted in the US on massive tax evasion charges and wary even of setting foot in Britain for fear of arrest, is poised to take up a key role in Britain's fledgling electricity market.

The Swiss-based tycoon, one of the world's largest traders of oil, metals and minerals, has applied for a licence to supply electricity in the UK from April onwards. A decision on the application now before Offer, the electricity regulator, could come any day.

His London operation, Marc Rich and Co, has already been discreetly trading electricity futures for most of the past year. Though it is the only independent non-industry participant, it has been a key, and perhaps essential, to the fledgling market's survival. Simon Spencer of Marc Rich and Co said: 'We've done a significant proportion of the volume that has been traded . . . We see the electricity market in the UK as an interesting opportunity.'

The sector shares many characteristics of the emerging markets the firm likes to tap, such as the oil markets two decades ago and Eastern Europe today.

Marc Rich's interest in becoming a UK supplier has aroused special interest, not least because its chairman is being sought by the US authorities. The firm's licence application was the first from a foreign group and the first to be received for a year. The firm believes it meets all the criteria.

The group is privately owned and only the bare bones of its finances are known. It has an annual turnover of about dollars 27bn and a net worth of about dollars 950m. With its bold trading approach and resources, Marc Rich has been a powerful force on world commodity markets.

Its elusive Belgian-born American chairman has also attracted speculation. Marc Rich, 58, lives in Zug, Switzerland, his company's headquarters - far from the threat of tax charges (linked to oil trading) that were lodged against him in the US nearly a decade ago. His firm says the risk of apprehension by US authorities means he does not visit the UK either.

Other industry users of the futures market say the firm's activity has been beneficial. If the group gets a licence to market electricity in the UK, its use of futures could well increase as it seeks to lock in prices for the power it will be trading.

Combined with other positive factors, its participation could galvanise the electricity futures market and encourage wider use. But the firm says that if its application to become a secondary electricity supplier is refused, its ability to do business in the UK electricity market could be damaged.

Privatisation gave rise to the world's first market in physical electricity - known as the pool. Valued at about pounds 7.8bn, the free market created new price risk for suppliers, generators and big industrial users.

Electricity futures, known as electricity forward agreements, or EFAs, were designed in 1991 to enable generators, suppliers and users in the wholesale market to protect themselves against the daily and seasonal swings in electricity prices and to cover their future needs in a competitive arena.

Only a limited amount of electricity can be stored at one time, so if demand suddenly surges or falls, the price can rise or drop dramatically.

Because suppliers and generators negotiate long-term contracts a year or more ahead, unexpected price gyrations can cause companies big budgetary headaches. EFAs are intended to be a fine-tuning mechanism to compensate for price spikes.

The contracts are traded over the telephone: two parties, anonymous until the deal is done, agree on the future price of electricity in the pool for a specified time slot. The day is broken into half-hourly blocks, as prices vary from hour to hour. If actual prices prove to be greater or less than agreed, the parties compensate one another.

The EFA market has been limping along most of the winter, averaging around two trades a week. GNI Ltd, the futures and options broker that launched the market, says it is just breaking even but is committed to matching buyers and sellers for another year.

Working against the market has been a reluctance by the industry to use futures alongside the old and more profitable method of making contracts with suppliers.

But the eventual resolution of government coal policy and expiry in the spring of long-term contracts set at privatisation could result in a spurt of activity as generators and regional companies scramble for supplies.

Whether consumers will ever benefit from the cost efficiencies the futures market can provide for suppliers is difficult to say. The regional companies say futures should keep prices more stable, but Offer is currently reviewing the extent to which generators are allowed to pass costs on to the customer.

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