Budget changes `mean rethink on investment'

London Electricity, which is in talks to merge its supply business with that of Northern Electric to fend off hostile US bidders, warned yesterday that it was reviewing its long-term investment plans following changes in capital allowances announced in last month's Budget, writes Michael Harrison.

Sir Bob Reid, London's chairman, said that the proposed tax changes had forced it to re-examine spending on programmes such as its tunnelling network underneath the capital.

In the first half of the year London's capital expenditure reached nearly pounds 60m, of which pounds 49m was spent on replacing and modernising its infrastructure.

It has a further pounds 200m committed to a portfolio of projects involving the airports group BAA, the Channel Tunnel rail link and the Docklands Light Railway.

But investment in assets with a long life has been thrown into confusion following the Chancellor's decision to increase the tax take on the utilities by reducing the proportion of such spending which can be offset against tax from 25 per cent to 6 per cent a year.

London remained tight-lipped on the alliance with Northern, saying it could not comment because it was deemed by the Takeover Panel to have been in an offer period since 20 November, after it emerged that the US utility Entergy was interested in a possible bid.

A tie-up with Northern on the supply side would be a way of helping the two companies to retain their independence. Northern, which is on the receiving end of a pounds 782m bid from another US utility, CalEnergy, disclosed in its final defence document earlier this week that the joint supply venture would achieve annual cost savings rising to more than pounds 28m, evenly split.