Littlechild slashes pounds 1bn from Grid revenues

The electricity watchdog, Offer, yesterday unveiled a tough new price regime for the National Grid which would slash pounds 1bn off revenues.

The news provoked a furious response from the company, but received a warm welcome from consumers' groups.

The four-year price controls which start from next April would reduce the Grid's revenues by between 20 and 26 per cent in the first year and limit increases in the following three years to 4 per cent below the rate of inflation. The current price formula caps increases at inflation minus 3 per cent.

It would reduce the company's revenues by around pounds 300m a year, equivalent to customer savings of pounds 4 to pounds 5 off an average annual electricity bill of pounds 300. Grid charges account for about 7 per cent of domestic bills. Peter Weston, from the electricity consumers' committees was delighted. "It's a good day for the consumer," he said, "It's proof that the balance of benefit is swinging back to customers and away from shareholders."

Comparing the proposals with the controversial price formula devised by the gas regulator for TransCo, the British Gas pipeline business, the Grid's chief executive, David Jones, said he was "extraordinarily angry at the unprecedented severity and illogicality" of the proposals. But he stopped short of suggesting the dispute would end with a reference to the Monopolies and Mergers Commission. He continued: "I would hope our case is so strong that common sense will prevail. It's just too early to speculate about the MMC."

The announcement took its toll on the Grid's share price, which slumped 10.5p to end the day at 165p, knocking pounds 200m off its stock market value. Grid shares have fallen by more than 20 per cent since the flotation in December.

Backed up by a mass of consultants' reports, the head of Offer, Professor Stephen Littlechild, was confident the targets were manageable. He said: "What I am proposing is in line with what good management can achieve." One analyst said: "Littlechild was a changed man today. He was very relaxed and extremely sure of himself." The Grid has until 10 September to respond, with the final formula due later in the month.

The price regime would cut National Grid's operating costs by between 4 per cent and 6 per cent a year, against the company's projection that cuts of 1.5 per cent were achievable. Offer argued there was further scope for savings, given that the Grid had managed to cut costs by 30 per cent over the past three years, a much faster rate than it had forecast.

But Mr Jones disagreed. "I just don't know where these reductions are going to come from," he said. The Grid has reduced its workforce from 5,900 to 3,500 since 1990 and plans to cut a further 500 to 600 jobs in the next price control period.

Offer also suggested the Grid could operate with new investment of pounds 715m over the next four years, compared with the company's estimate of pounds 1.15bn. Professor Littlechild pointed out that projected capital spending over the past four years, at pounds 862m, was almost half as much as the Grid's original forecast.

But the argument last night centred on Professor Littlechild's pounds 4bn valuation of the Grid's assets, on which the company will be allowed to earn a rate of return of between 6.5 per cent and 7.5 per cent. Mr Jones claimed the true regulatory value should have been at least pounds 4.6bn, and suggested the Grid price review was "another TransCo". But he admitted pounds 200m of this related to the value of the interconnector business, the transmission links with Scotland and France, a price tag which the Grid had agreed with Offer.

The remaining pounds 400m gap between the two sides was accounted for by the valuation the regulator placed on Energis, the Grid's telecommunications business which runs phone lines over power cables. Energis has lost pounds 125m over the past two years. The company argued the asset base excluded Energis, because no value was put on the business at the Grid's flotation.

Analysts were divided over the Energis valuation, though they were also unimpressed by the Grid's argument.

The value of the chairman David Jefferies' 378,000 shares fell by pounds 40,000 yesterday, while the paper value of his share options dropped by pounds 48,000. Professor Littlechild said his consultants had found Grid pay was on the whole higher than the pay of the rest of the electricity sector.

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