Electric Raid Sets Sector Humming

By Bowen, David | The Independent (London, England), January 15, 1996 | Go to article overview
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Electric Raid Sets Sector Humming


Bowen, David, The Independent (London, England)


Trafalgar House's assault on Northern Electric has set the City abuzz with talk of rule-bending, and whether the whole sector is about to change hands. The financier George Soros's stake in Northern has added to the juicy speculation, as has the b ehaviour of Trafalgar's adviser, Swiss Bank Corporation, in buying 8.24 per cent of Yorkshire Electricity and lesser stakes in four other regional electricity companies (RECs).

But will these manoeuvrings have any real effect on the electricity industry? Will consumers, employees or even shareholders notice the difference?

The answer is: maybe. It depends above all on the attitude of the technocrats, and particularly the super-technocrat, Stephen Littlechild, director-general of the Office of Electricity Regulation (Offer).

If he takes a relaxed view of the competition issues, the market will take over - and we could well see a wave of takeovers and mergers. These would certainly affect employees and shareholders, though consumers would struggle to spot the difference. Dis t ribution prices are decided by the regulator, not the RECs, and they make up less than a third of the average bill. It is the price of coal and gas, not merger mania in the REC market, that will make the real difference to our meter charges.

There may, however, be subtler differences. The most intriguing development could be the emergence of integrated utility companies: the same van would service electricity, water and gas supplies, and one bill would cover them all.

Britain was the first country to privatise its electricity industry, in 1990. Ministers set the rules then, and said they could not be changed for five years. In England and Wales, the business was split between two generators, PowerGen and National Power, and 12 regional electricity companies (RECs). The RECs were the replacements for the old local boards. In Scotland, Scottish Hydro and Scottish Power were established as integrated generators and suppliers, while Northern Ireland Electricity was left out of the initial upheaval - it was not privatised until 1993 .

Unlike the generators, the RECs make most of their money from a natural monopoly. Though some have shares in gas power stations and can compete to win the business of the biggest electricity users anywhere, their bread, butter and jam comes from the power supply to homes and businesses in their regions. There is only one set of pylons and lines, and no-one is proposing to build another.

Without competition to keep prices down, the Government has had to do it. It told the RECs when they were established that they could increase their prices by 1.5 per cent above the inflation rate for five years. It also took a Golden Share in each company, to protect it against takeover, and said that no one could own more than 15 per cent of any one company.

These restrictions run out on 31 March, which is why the City is smacking its collective lips in anticipation. The Trafalgar House bid for Northern confirmed its belief that the sector would soon be shaken by takeovers.

It is possible that the bid will be referred to the Monopolies & Mergers Commission. The issue would not be competition: Trafalgar House and Northern do not compete. Rather, the Government may ask the MMC to look at the whole industry, to see how well the privatisation experiment has gone in its first half-decade, and how it should continue.

The spate of bloated profits announced by the RECs in the last months of 1994 suggests there is a strong case for casting a stern eye over the industry. Profits and dividends up by more than 20 per cent may have been good news for shareholders and the City - but customers could justifiably look askance.

Professor Littlechild looked askance, too. Last autumn he said the RECs would have to make a one-off cut of up to 14 per cent in their charges, and increase their prices by 2 per cent below the inflation rate.

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