Outlook: National Grid

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The Independent Online
WHEN THE first lemming leaps over the cliff edge it starts a trend but, as subsequent lemmings soon discover, it is not one that is worth following. Yesterday, National Grid followed the example of Scottish Power by stepping off terra firma and forking out a fancy premium for a US electricity business.

Not surprisingly, the Grid is keen to distance its takeover of New England Electric Supply from the frosty reception given to ScottishPower's acquisition of PacifiCorp.

The blurb accompanying the deal waxes lyrical about the "excellent chemistry" between the respective managements and the "exciting prospects" that await the Grid in New England. Close your eyes and you could momentarily forget it is shelling out pounds 2.7bn for a dull old, low growth electricity transmission and distribution business, albeit one that supplies the well-heeled folk who live off Cape Cod.

The PacifiCorp deal did not have much to commend it but at least the Scots have bought a business which, as the estate agents would say, has room for improvement. ScottishPower reckons it can shave $200m a year off PacifiCorp's cost base and still not bump up against the ceiling of its regulatory rate of return.

In the case of NEES, however, the Grid is buying one of the more efficient US utilities, which presumably means there is not much fat left to trim. Of course, there will still be cost savings to be had. The Grid was being coy about the precise scope yesterday for fear of giving the regulators an early sight of the target they have to aim at.

The Grid maintains NEES is a steal because it is in the vanguard of the move away from rate of return (profit capping) regulation to incentive- based regulation. This will allow retention of the efficiency savings for shareholders, rather than handing them back to customers, the Grid reckons.

But if the US regulators have learned anything from the British experience of this form of regulation, it is that the hurdles can safely be set very high before the pain becomes too much.

The codenames used to disguise the identities in this deal are instructive. The Grid was called Pilgrim and NEES was the Mayflower. The founding fathers endured some harsh winters after landing in the New World. This deal, coupled with the Grid's determination to blow the proceeds of its Energis stake on further overseas utility acquisitions, may tempt some shareholders to jump ship.