COMMENT : When profit-sharing becomes an electoral bribe
Tuesday 14 November 1995
The idea is eminently plausible for it is exactly the sort of thing the President of the Board of Trade, or his Energy Minister, Tim Eggar, might have suggested. Whether it was ever seriously put to the utilities - those contacted yesterday claim not - is anyone's guess but it is certainly not something they could even begin to consider.
Mutual back-scratching by big business and government is always a highly suspect thing; when it amounts to businesses giving a simple cash-in-hand "vote Tory" electoral bribe to their customers it begins to look positively corrupt. In the terms floated, what would happen is this. Collectively, the utilities would ensure a pounds 200 rebate to every household in the country, helping the Tories, who have no windfall profit tax plans, to a stomping great victory at the next election. Alternatively, should the plan backfire and Labour win anyway, the utilities would be sufficiently weakened financially to make the imposition of such a tax virtually impossible.
There is a precedent for this - the National Grid flotation, which involves a pounds 50 customer rebate. The regional electricity companies didn't have to do this and indeed some of them didn't want to. With stick and carrot, Mr Eggar eventually persuaded them. But this was a rather different set of circumstances.
There are two big drawbacks with the latest idea. The first is that there is no obvious reason why the utilities should want to give succour to a lost cause when there is a good chance of the other side punishing them for it, regardless of their financial ability to cope, in 18 months' time. The other is the more principled point that having finally escaped through privatisation the politically motivated manipulations of the state, there is no earthly reason why the utilities would want to rush back into them.
Some utilities are already voluntarily "sharing" excess profits (profits over and above those anticipated by the regulator) between customers and shareholders. Though there are drawbacks with formalising these arrangements - Ian Byatt, the water regulator believes they could act as a disincentive to efficiency - if the Government wants to go the excess profit-sharing route, it clearly has to be done through the mechanism of an independent regulator. To do it direct - minister to utility - would be a process wide open to abuse and ridicule. Labour has already shown disturbing signs of retreat to this corporatist approach to economic and electoral management with its mooted British Telecom deal. Let us hope Michael Heseltine isn't planning to take it a stage further.
Some cheer for cable investors
Telephony has become the undisputed driving force of the cable TV industry, to British Telecom's great annoyance. In the eight years before the Government allowed cable operators into the telephony market, the industry cabled only 103,000 homes. But in the four years since the rules were changed, 900,000 more homes have been added. Poor little BT is currently losing customers at an annual rate of 120,000. According to the latest industry estimates, cable could take as much as 9 per cent of the UK telecoms market by 2004, up from about 1 per cent now. By the end of the decade, there could be as many as 4 million cable telephone lines in the country.
That should provide at least some cheer to investors treading water with cable shares since the first UK issue, TeleWest, came to the London market last December. Of the three UK quoted stocks, only one, General Cable, is trading - just - at more than its issue price, and that is only because it was so radically down-scaled prior to the flotation.
With networks now much more extensive than a year ago, and the subscriber base growing steadily, it may finally be possible to expect a return on investment. Certainly General Cable, which yesterday unveiled results for the nine months to 30 September, is showing robust growth, with two of its three units in operating profit.
It may well be that valuations which looked fancy in the extreme when first thrust upon reluctant British investors are at the point when they begin to look at least reasonable if still not exactly good value.There are a few caveats, however. The biggest source of concern is the low penetration rates achieved by the leading cable operators. The industry average is barely over 20 per cent. Moreoever, churn rates are well in excess of 30 per cent in many franchise areas, even if better marketing and tighter credit controls are beginning to bring the figure down at the better managed operators.
There are also doubts about how successfully pay-TV can entice viewers used to quality "free" television, and how long BT will allow cable companies to continue poaching freely from them. There is a point at which BT says enough is enough and puts in train a very aggressive round of price cuts to counter the cable threat. It has not been reached yet, but it isn't far off. Still protected by regulation from the entry of BT into the broadcasting market, and aided, as well, by Oftel's tight controls on BT's pricing, the operators have a very narrow window.
On balance, however, the betting is that the UK penetration rate will rise to a more respectable 50 or even 60 per cent by the end of the decade, closer to the level achieved in the US, fuelled in part by the introduction of such services as home banking and interactive shopping. Furthermore, the number of cable companies is likely to be greatly reduced by merger and acquisition to perhaps as few as half a dozen. The resultant economies of scale will help the survivors, among which the publicly quoted operators are bound to be counted.
Power bids decision remains a close call
With Ian Lang's decision on whether to refer the PowerGen and National Power bids for regional electricity companies to the Monopolies and Mergers Commission little more than a week away, markets are working themselves up into a lather of speculation. We already know what both the electricity regulator and the director general of fair trading want, unless they have radically changed their stance after recent rebuffs. They are both in favour of referral. Apart from the DTI, so too are most government departments, with widespread scepticism of the claims being made in favour of vertical consolidation in this industry. Not an easy one to predict.
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