"Shareholders have experienced a huge transfer of wealth from the Government and the electricity industry's employees"

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The Independent Online
The markets are entering the dog days of August, but nobody could accuse them of being short of incident or interest. Certainly, few in the electricity industry can look forward to much of a holiday.

The whole sector is now in effect on bid alert, following the bids for Manweb, South Western and Eastern Electricity. There are bound to be more bids and mergers in the next few months, and only the quixotic industry regulator, Professor Stephen Littlechild, as unpredictable as the England cricket team, now stands in the way of the wholesale rationalisation of the sector.

The Regional Electricity Companies (Recs) have been one of the most spectacularly profitable investments seen in this country since they were privatised five years ago. The total return (dividends and capital gains combined) that those who invested in Eastern at flotation, for example, stand to gain from Hanson's bid is a remarkable 40 per cent compound per annum.

And this from a company that, like its 11 fellow electricity distributors, still has a monopoly franchise, an ironclad balance sheet and the capacity to pay high and rising dividends for many years to come. And between them they own the National Grid, which is a monopoly asset in its own right. This, in fact, has been one of the rare exceptions to the rule that there is no reward in stock markets without commensurate risk.

The Recs are not quite "money machines", but they are about the nearest thing most investors are likely to see in their lifetimes. With a monopoly franchise and huge scope to cut costs after years of overmanning and bureaucratic inefficiency, yet sold on the cheap by a government desperate for the cash, the Recs have been an investor's dream. In effect, shareholders have experienced a huge transfer of wealth from the Government and the industry's employees, many of whom have lost their jobs.

By definition, this has to be a one-off experience. It is clear that the campaign to provide more benefits to consumers will now intensify.

Having been hoodwinked by the Recs about the scope for profit improvements, and with a general election looming, Professor Littlechild will be forced to do more for them in future.

The electricity market, in any case, is set to become more competitive, all of which implies that the gains to shareholders in the next five years will be less prodigious than they have been to date.

The irony in all this is that consumers themselves have also benefited from substantial real cuts in their electricity bills since privatisation.

It all goes to show that there is nothing like a monopoly franchise to earn exceptional returns for investors. Lord Thomson was the first to make this point publicly when he described the early independent television licences as "licences to print money".

The success of many local radio stations - now also enjoying a round of bid activity that is generating big returns for investors - illustrates the same phenomenon.

Smart investors will keep their noses quivering for the next monopoly business that comes around - and note that the bids for the electricity companies only make sense if the bidders can extract further economies of scale from the monopolies for which they are bidding.

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