City & Business: Don't be swayed by Northern's exposure
Sunday 15 December 1996
Having gobbled up a 30 per cent stake in Northern, CalEnergy may be forgiven for counting its chicks before they are actually hatched. To do so, however, would be complacent and underestimates the strength of the arguments Northern has mounted in a defence which has confounded those who glibly wrote it off as a lost cause at the outset.
Northern has successfully reminded investors that there is value still to be found not only in its business but also in an ever diminishing independent sector. It is the attributes of the sector which are the most important, particularly to institutional investors who retain shareholdings across the remnants of the sector.
CalEnergy's bid does not reflect the intangible but significant value which is to be found in exposure to the British regulatory regime. This value is only apparent to overseas companies - particularly those from the US - and explains why so many US energy companies have expressed an interest in the electricity sector.
It is little appreciated that the current US regulatory framework is widely but quietly regarded as defective and will need to be changed to make it relevant as a promoter of competition rather than the defender of vested interest which it has become. When that change comes, the model will be the UK regime established by Professor Stephen Littlechild. It has become recognised as the blueprint for electricity regulation worldwide and is already being adopted in South America and Scandinavia.
Shrewd US utilities have recognised that not only does the British electricity market offer intriguing growth opportunities but it also allows them first- hand exposure to a regulatory framework which ultimately will be imposed on their key domestic markets. Given that the management of regulatory risk has become a crucial management imperative for utilities, the UK experience represents an accumulation of extremely valuable knowledge.
The opportunities to secure that experience at first hand are rapidly slipping away. However, the natural laws of supply and demand are not being observed by CalEnergy. The scarcity value of independent electricity companies is not reflected in the price it is offering for Northern. This is bad news for investors in that company and also for those in the rest of the sector where companies will be picked off one by one. London Electricity is expected to fall shortly; the others will follow. The worry is that if the Northern price is allowed to represent a benchmark then British investors will be exposed to significant undervaluation.
Concern that rejection of Northern will leave it isolated is overdone. So great is the US thirst for exposure to the sector that there will be other potential bidders, including CalEnergy which is committed to keeping its 30 per cent stake, come what may. For while much has been made about political and regulatory risk and windfall taxes, these are not deal- breaking issues. Under Professor Littlechild it has been made clear that overseas investors will be welcomed providing they promote competition and bring innovative thinking to the sector. Dominion Resources' bid for East Midlands should be cleared this week, confirming that US companies will always be welcome. As far as taxation is concerned, the US distance from the politics of this country means they can more readily appreciate that a windfall tax is much easier to talk about than it is to implement in any magnitude.
Northern may not have found its white knight but that is a reflection of US reluctance for contested bids rather than reticence about the sector.
The CalEnergy bid should be rejected. It undervalues Northern and if it is accepted it will undervalue the remains of the sector.
This week Imro, the fund management regulator, and Deutsche Morgan Grenfell are expected to reach agreement on compensation for investors in the European unit trusts managed by fallen star Peter Young. For the sake of the integrity of City regulation I can only hope that the grand finale of this complex matter will be handled by Imro with a little more dignity than has been demonstrated during the pre-match warm up. Imro appears to have adopted the regulatory equivalent of a shoot to kill policy. It is unsavoury, misguided and unnerving for those who come under Imro's jurisdiction.
There is mounting fear that Imro's aggressive high-profile method of dealing with those who have strayed from the straight and narrow is neither in the interests of regulation nor those whom Imro is trying to protect.
DMG, for instance, has been astounded to find so much of its private discussions with Imro being aired so publicly in the press. Throughout the whole Peter Young saga, DMG has played with a straight bat. It has acted swiftly and decisively, always with the best interests of investors at heart. It has always promised to compensate investors - the bill will be around pounds 200m - and is understandably aggrieved to find that Imro appears not to have respected the confidentiality which DMG had understood to be an integral part of the regulatory framework.
It was not so long ago that Imro, in the wake of the Maxwell pension scandal, was deemed to be weak and flabby. There is no doubt that Philip Thorpe, its chief executive, has done a fine job in restoring confidence both internally and externally. But he is getting perilously close to stepping over the line which takes regulation from the land of firm and fair into loud-mouthed and bullying territory.
If Imro does not retreat a little then it will expose itself to criticism that it is pursuing an agenda which has more to do with the reputation of Imro than the protection of investors. That can only undermine a credibility which it has fought hard to secure.
Effective regulation is built on the trust and respect of investors and the investment community. That requires a delicate balance to be struck, with the emphasis very much on the delicate.
If Imro does have ambitions to play a lead role in the regulatory world envisaged by a new Labour government then these will be better furthered by a profile which is based on efficiency and effectiveness rather than bluster and bullying.
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