Electricity firms to delay cost-cutting

Regulatory threat removes incentive to make further efficiencies

REGIONAL electricity companies are expected to shelve planned cost-saving measures over the next year because of continuing uncertainty in the wake of the latest statement by Professor Stephen Littlechild, the industry regulator.

The companies fear any efficiency gains they make now will be scooped up by Professor Littlechild in a new price cap to go into effect in April 1996, according to analysts.

"I don't think they'll go as aggressive on their cost-cuttings," said Nigel Hawkins, a utility analyst with ABN Amro, formerly Hoare Govett. "They will also manage their capital expenditure with great care. They won't be spending too much on this side of the review being completed."

The regulator announced on Friday that the latest price regime, which comes into effect next month, will last only one year. A formal review this spring and summer will set a new price cap for the remaining four years of the original five-year term.

The review was prompted by public outcry over too-healthy profits at the privatised utilities and the generous £560m return to shareholders promised by Northern Electric when it came under takeover pressure two months ago from Trafalgar House, the construction-to-cruise-ship group.

Professor Littlechild is expected to squeeze the 12 RECs' profits by altering the pricing formula from 2 per cent less than inflation to 3 or 4 per cent below the retail price index.

He is also likely to order the companies to make one-off payments averaging between £50 and £75 per household - roughly equivalent to two or three months' free electricity for each of the 23 million residential customers. Most of that will come from the proceeds of the National Grid sale, but £20-£25 a household will be taken out of the RECs' balance sheets.

It is the last element that the companies will fight most fiercely, analysts said. The principle of British utility regulation, as designed by Professor Littlechild himself, is that government would not claw back profits made under previous price regimes.

While some RECs have as much as £100m in cash in their balance sheets, others are as much as £300m in debt and will find a clawback of £50m hard to swallow.

Although the companies may threaten to demand an investigation into the issue by the Monopolies & Mergers Commission, they will probably seek to reach a settlement as soon as possible.

Most analysts said the threat of a new price regime has largely been discounted from electricity company share prices in the two weeks since 7 March, when Professor Littlechild first said he was thinking of another review.

Since then, the total market value of the RECs has fallen by £3.5bn.

In his latest announcement, Professor Littlechild said he recognised that some people would suffer from his decision to re-open a debate that the companies thought was closed last summer.

However, he argued that it was better to review the matter soon than to have the issue come up again in the middle of the five-year term.