Outlook: The American taste for RECs

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The Independent Online
PacifiCorp is more than a little rattled as it ponders whether to relaunch its takeover bid for The Energy Group, the power and mining business which demerged from Hanson last year. No sooner had the Monopolies and Mergers Commission given the US group the green light to bid again, than stories began to circulate of rival suitors waiting to pounce at a much juicier price.

Sadly for PacifiCorp, these rumours seem to have more substance than might have been thought. The word last night was that Texas Utilities would swoop within 10 days, while an undisclosed financial buyer is hovering as well. PacifiCorp may also face competition from from National Power and PowerGen, if previous regulatory obstacles are eased.

At first sight it seems surprising that yet another US utility should be eyeing a UK regional electricity company (Eastern Group, the largest REC, is part of The Energy Group). Other American owners which overpaid for RECs, and were subsequently clobbered by the windfall tax, privately regret moving into the UK. Worse, the successful buyer of Energy Group will have to contend with a big one-off revenue cut for its distribution business in 2000, hitherto the most lucrative part of the operation, when a new price formula starts. Energy Group has completed most of the post-privatisation cost cutting, leaving little obvious one-off efficiency gains for a new owner.

On the other hand, it is not all dark clouds for investors in these industries. With the windfall tax out of the way, Labour's other big idea for the utilities - the review of regulation - looks like being much softer than might have been expected. The electricity and gas regulators are to be merged, boosting customer input in decision-making and replacing individual regulators with a board of experts, but none of this is likely to give shareholders across the Atlantic sleepless nights.

Nor will the suggestion of a common approach to price regulation across different utilities - another likely Green Paper suggestion. Some of the more worrying aspects of earlier Labour policy, such as the idea of creaming off excess profits by assessing companies on an annual basis, seem to have been quietly dropped. In many respects, then, the Green Paper ought to improve the position for investors by offering to replace the present potential for unexpectedly controversial decisions from regulators with a degree of certainty.

None of this will come as any comfort to PacifiCorp. By the time it makes up its mind about a new bid, it could be too late.