Generators light up as they are spared the MMC
Sunday 13 February 1994
Ever since February 1992, when Professor Littlechild was asked by the House of Commons' Energy Committee to reduce their dominance in the market, the generators have traded under a cloud. In July 1993, he decided to investigate whether they should be referred to the MMC - the spectre raised by the committee. Last Friday, several self-imposed deadlines later, he confirmed that he would spare them the MMC's long-winded scrutiny for the next few years.
In return, the generators have promised that prices in the electricity pool - through which the regional electricity companies and large energy users buy their power supplies - will be reduced over the next two years. They have also undertaken to sell 6,000 megawatts of plant. But the impact on their bottom line will be relatively small.
They have been spared the need for a fire sale to dispose of their surplus capacity - something that would clearly have reduced shareholder value. They have also seen off any serious threat to their profits. Andrew Wheeler, industry analyst at NatWest Markets, predicts that with a reduction amounting to about 0.1p per kilowatt hour, the new pool price cap will cut pre-tax profits by some pounds 30m at PowerGen and by pounds 35m at National Power.
What worried the generators rather more was the introduction of a managed market and the de facto extension of the regulator's powers. Although Prof Littlechild's remit covers their licences, it has not, historically at least, gone as far as responsibility for price controls.
'We were so concerned about this that we seriously considered going to the MMC,' said John Baker, chief executive of National Power. However, the company is now convinced that Prof Littlechild is not building up his own empire.
'We also felt that it was better to retain managerial control of the issues ourselves,' said Mr Baker. Prof Littlechild appears to have been working on the same premise.
He may, too, have heeded the example of the gas business, where the Department of Trade and Industry ultimately disregarded the recommendations of the MMC. But, if the compromise he has reached with the generators is a relief to the market, it must be still more so to the Government, which is now free to sell its 40 per cent stake in both companies later in the year.
Given this agenda, many industry commentators suspected the Government would put pressure on Prof Littlechild to prevent an MMC referral. But the opposite seems to have been true. 'I think the Government was very scared of being seen to lean on Professor Littlechild,' said Mr Baker.
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