Michael Harrison's Outlook: An elephant that Crosby doesn't need to shoot

D-Day is looming for James Crosby. Whether it is this week or next, the chief executive of HBOS does not have very long left to decide whether to launch a counter-bid for Abbey National. Judging by the level of the rhetoric emerging from the HBOS camp, as demonstrated by the weekend rant at Mario Monti for all but giving Santander's agreed offer the green light, there can be little doubt that he wants to press the button.

The markets think HBOS will strike, which is why the Abbey share price has climbed above the value of Santander's shares and cash offer for the first time since the Spanish pounced six weeks ago. Mr Crosby's fee-hungry investment banking advisers will undoubtedly be egging him on. And it is a reasonable bet that his legal advisers can be persuaded to come up with the answer he wants to hear - that a bid for Abbey would have a better than evens chance of getting past the competition authorities.

But then, Mr Crosby has to balance all this with a dose of reality. First, a referral to the Competition Commission is a foregone conclusion, which could mean the Abbey saga dragging on until the start of next summer. A deal which would create a bank with 35 per cent of the UK mortgage market, one in five current accounts and a quarter of the savings market cries out to be referred and, very probably, blocked or severely constrained.

Second, if HBOS does bid then the rest of the UK bank pack is very likely to join the chase. Third, in the unlikely event that HBOS was cleared to take over Abbey, so might one or two of its UK rivals with deeper pockets than Mr Crosby and therefore a much better chance of success if it comes down in the end to a shootout based on price.

And then, there is the question of how Santander itself would respond to a bid from HBOS. With regulatory clearance in the bag, the argument that a bird in the hand is worth considerably more than two in the bush would have great resonance, especially if that bird chose to include a much bigger cash element in its offer to Abbey shareholders.

That, in turn, would present HBOS with another danger - that of overpaying for Abbey to offset the greater regulatory risk attached to its offer. On some calculations, the current Abbey share price is already close to the maximum that HBOS could reasonably afford to offer. Unless, of course, it were subsequently to take the hatchet to Abbey in a way that would be politically unacceptable and cause another set of serious obstacles to a successful bid.

Perhaps this is why there appear to be more cautious, and maybe wiser, heads on the HBOS board for whom an Abbey bid is not the "once in a generation" opportunity which it is viewed as by the chief executive.

Meanwhile, the longer Mr Crosby and the HBOS board continue to ruminate, the more the rumour mill grinds. Is their procrastination an attempt to ensure that, when HBOS does finally bid, the regulatory timetable will take it beyond the deadline of next March set by Santander for wrapping up an Abbey deal? Or does Mr Crosby secretly accept in his heart of hearts that HBOS will not be allowed to acquire Abbey but wants to ensure that Santander ends up buying as damaged a set of goods as possible?

Having gotten this far down the road, Abbey has, for Mr Crosby, become the equivalent of George Orwell's elephant - a beast he has to take a pot shot at or lose face. HBOS ought not to bid for Abbey because it will be a waste of time and management energy. But it probably will.

¿ Electricity prices

Electricity distribution price controls are not the sort of thing to make the heart beat faster. How much more, or less, households should have to pay to ensure that their electricity is delivered safely and reliably is about as exciting as the price of fish.

But, just occasionally, the sparks do fly. Back in 1995, the then electricity regulator Stephen Littlechild got his fingers badly burned after his numbers proved to be spectacularly wrong. Professor Littlechild was forced to tear up his price controls when they were barely six months old and introduce new and tougher ones, with an electrifying effect on the share prices of the companies involved. His excuse was that a hostile bid for one of the regional power companies, Northern Electric, had exposed just how much spare cash was swilling around these businesses.

A decade on, the latest review, presided over by the new electricity regulator Sir John Mogg of Ofgem, is upon us and the temperature is rising.

The lesson of 1995 was that it pays regulators not to be taken in by the blandishments of monopoly businesses such as regional electricity distributors. Sir John has clearly taken the lesson to heart. His draft proposals, announced in June, envisage a cut in distribution charges from next April compared with the increase the industry had been banking on to fund a £6bn investment programme. To rub salt in the wound, Ofgem also decided that the electricity companies could live with a return on capital lower than that allowed for their counterparts in the water industry.

This is not necessarily the end of the matter. Ofgem is due to deliver an update on its proposals later this month before announcing final price controls in November so there is still time for a change of heart.

If Ofgem stands firm, then the companies can either lump it or haul Sir John off to the Competition Commission. For a quoted UK company whose entire business was electricity distribution, this would be a big call. Once a regulatory decision has been appealed then everything is up for grabs, which is one reason why the water price controls are unlikely to be contested.

In the case of electricity distribution, however, a lot has changed since 1995. What were once independent, listed UK companies have largely become distant outposts of huge corporations run from Düsseldorf, Paris, Texas and, in the case of two of them, Warren Buffett's home town of Omaha, Nebraska. Along with EdF, the French-owned company which supplies London, the two Buffett-owned distributors, Northern and Yorkshire, came off worst from Ofgem's initial proposals. Viewed from Omaha, or Paris for that matter, an appeal to the Competition Commission may look more like a shot to nothing than a high-stakes gamble.

Professor Littlechild's reputation never really recovered from the débâcle of 1995. So his successor will be doubly keen that his first big ruling stands the test of time. Ending up in front of the competition authorities and seeing his decision overturned would come as a nasty shock for Sir John.

¿ Congestion charges

Ken Livingstone enters the lion's den tonight when he appears before the London Chamber of Commerce for a two-hour grilling from businessmen in the capital. There is no doubt what will be top of the agenda: the congestion charge. The scheme has been an undoubted success with 70,000 fewer car journeys a day into central London than before the £5 charge was introduced. The problem is that it has succeeded beyond its wildest dreams with the result that revenues are barely enough to cover the scheme's running costs. The Mayor's Transport for London insists that all but 5,000 of those 70,000 visits are now being undertaken by means other than private car. But that is hard to believe when Oxford Street retailers such as John Lewis report a 7 per cent fall in sales. It is doubly hard to accept when the scheme is failing in its original goal of generating revenues to re-invest in London's creaking public transport system.

There are, therefore, drawbacks with the existing scheme which need to be addressed before Mr Livingstone ploughs ahead and extends the charging zone westwards - a proposal with dubious economic justification which could end up undermining the C-charge altogether.

m.harrison@independent.co.uk

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