National Power may have opened Pandora's box
"If it makes sense for generators to merge with distributors and suppliers, the bids can be used as a way of forcing a much more radical break-up of generating capacity than presently envisaged"
Tuesday 03 October 1995
By this he meant that the regulatory environment has changed. Something he thought would certainly not be allowed a couple of months back now seems to be perfectly OK as far as ministers, the Office of Fair Trading and the electricity regulator are concerned - the vertical integration of companies in electricity generation, distribution and supply. There seems to be no answer, other than the obvious, as to why National Power, the largest in the industry, left it to Scottish Power and PowerGen to blaze the trail of vertical integration. Certainly there is a "Johnnie come lately" feel about this bid.
However, National Power's slowness off the mark is perhaps an irrelevance set against the main issue of whether it is right to allow the market to continue reshaping Britain's electricity industry in any way it pleases. Clearly the National Power bid marks, if not a turning point in the game, at least a substantial acceleration of the action.
Even after selling off a fifth of its generating capacity, National Power will remain, with 23 per cent of the market, the dominant producer. Combine that with the acquisition of one of the two largest regional electricity companies, and it becomes overnight far and away the most powerful player in the reshaped electricity industry. Should this be allowed? The case in favour goes along these lines.
Consolidation of the industry is both an inevitable and a beneficial thing. Electricity "disaggregation", to use Mr Baker's word, ahead of privatisation, may have suited the Government's purpose at the time but things move on and an industry divided into 18 moving parts is plainly not the optimum in terms of efficiency. Nor is it necessarily a structure most capable of delivering to the consumer the benefits of free competition in supply, set to begin post 1998. To enter this market properly, the generators need the infrastructure investment in billing systems already made by the regional electricity companies. For a generator to invest on that scale without an existing customer base would not make any kind of commercial sense.
Furthermore, the argument goes, if National Power and PowerGen are referred to the Monopolies and Mergers Commission there is a strong possibility that the Americans will nip in and steal the bid prizes.
When PowerGen put these arguments to ministers it got a sympathetic hearing. Nothing, however, is ever as simple as presented. While it is true that vertical integration works perfectly well in many industries without damage to competition, it is probably fair to say that when a dominant producer links with a monopoly supplier, the effect is nearly always harmful regardless of regulatory safeguards. The "pool" provides no kind of protection. Nor, as we already know, does Professor Stephen Littlechild. Competition might eventually, but it will take time.
There is, however, an opportunity for ministers in the generating bids. If it makes sense for generators to merge with distributors and suppliers, the bids can be used as a way of forcing a much more radical break-up of generating capacity than presently envisaged. As a condition of the bid, for instance, National Power could be made to divest not just a fifth of capacity, but two fifths, or even three. If other RECs were given a fighting chance in generation, then the fully competitive market that ministers dream of becomes a real possibility. In bidding for Southern, National Power might have opened a Pandora's box.
GEC heavyweight should make way for flyweight
Like heavyweight boxers, corporate pugilists rarely know when to quit. Lord Weinstock should have retired long ago but seems intent on hanging on to the bitter end. Yet, the call for change grows. At least one senior GEC executive has been "whispering" to fund managers about the need for new management blood. A poll of GEC's key investors reveals an overwhelming call for Lord Weinstock's retirement. If that was not enough, look at the financial figures. GEC's plodding performance has disappointed the market for years.
Through it all, Lord Weinstock has maintained a lofty silence. The issue of the succession has now gained some urgency.Lord Weinstock himself imposed a deadline of next summer to resolve the matter. Last year he extended his contract until 1996, when he will be 72. The institutions did not particularly like it but voted it through on the understanding that the GEC nominations committee would arrange a smooth transition. But so far, nothing. If the strategy is simply to hold on long enough to ensure that his son Simon gets the job, then it is doomed to failure. The institutions will have none of it.
Lord Weinstock's brilliance as a manager and one time visionary is undeniable, but the company today seems structurally incapable of achieving rapid growth. His "scientific" management, rigid cost control, and evolutionary rather than revolutionary change has given GEC a tendency towards inertia. GEC urgently needs new blood. It has able insiders, like Peter Gershon at Marconi, or finance director David Newlands. But what is needed ideally is an outsider, someone capable of riding rough shod over the old guard. GEC has a strong order book, but lacks the commensurate earnings growth. To achieve the later, a fundamental shake-up at the divisional level is perhaps required. Do not count on this happening, however. GEC is far from the parlous financial condition that allows institutions to insist on a new broom. But would it not be something if Lord Weinstock displayed some of his old visionary flair by ensuring that a very different kind of man succeeds him.
Open secrets behind closed doors
The accountancy firm KPMG today finds itself in the unaccustomed position of hogging the limelight normally reserved for its clients. Such is the interest that has been generated by its plan to incorporate its audit arm that Britain's second biggest accountancy firm has taken over part of London's Savoy Hotel to announce the outcome of the vote.
One way in which the change is being sold to clients is that it will result in greater financial disclosure, enabling them to obtain the same sort of information about the financial health of their auditors as they can about most of their other suppliers and customers. Unfortunately for the clients, they will only learn details of the new incorporated structure after it has become a fait accompli. Let's hope the information is reassuring.
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