Offer seeks merchant bank advice on distribution prices

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The Independent Online

Industrial Correspondent

Offer, the electricity watchdog, has sought the help of the City in its review of electricity distribution prices. In a departure from normal practice, the regulator has asked for information from Smith New Court, the merchant bank, on how past events in the industry - including Offer decisions - have affected share prices.

Professor Stephen Littlechild, director-general of Offer, has been criticised previously for lack of dialogue with the industry or the City. Sources at Offer confirmed that it had asked about the City's perception of the price review but had not asked for any advice on what the new controls should be.

Professor Littlechild is now thought to have completed his price review. The outcome could now be announced by the end of next week, but may slip back.

Bryan Townsend, chairman of Midlands Electricity, said yesterday: "It is going to be more difficult, there is no doubt about that." Midlands said that the review could have a substantial impact on profits in the sector while having limited effect on household bills. The distribution charges account for only about 25 per cent of an average bill.

Midlands yesterday came near the top of the league in the sector with a 28.2 per cent increase in the dividend in the year to 31 March. The company said its "robust" performance had been helped by strong growth in the local economy and the knock-on effect on industrial electricity sales.

Midlands, which is one of the larger electricity firms, has cut about 1,000 jobs since April 1994, accelerating its cost reduction targets. Last year, the company said it aimed to take out pounds 30m annually in costs within three years to help offset tighter controls on electricity distribution prices.

Pre-tax profits fell to pounds 178m last year from pounds 195.4m in 1993/94, after a pounds 40m charge related to the planned sale of the retail business. The underlying result was an 11.6 per cent increase to pounds 218m, with earnings per share rising by 18.6 per cent to 77.3p.

Midlands warned that the gas supply business, which made an operating loss of pounds 2.9m, would continue to suffer from intense competition and squeezed margins. The company plans to compete in the domestic market when it begins to open up to competition next year but has no plans to invest in more long-term gas supplies.

Mr Townsend said the company had enough gas to last three or four years, but added: "If it turns out to be a disaster, we will not stay in the business."

The company, which has substantial investments in gas-fired power generation, also said it was unlikely to build more big power stations in the UK because of the price of long-term gas contracts.