Outlook: The method in Nat Power's madness

EVER SINCE the last government decided to privatise the electricity generating industry by creating a duopoly, National Power has had the reputation of being slower and less sure-footed than its smaller brother PowerGen. When NatPower does move, however, it does not believe in half measures.

Yesterday it announced the disposal of 40 per cent of its generating capacity and a ground breaking move into electricity retailing through the pounds 180m purchase of Midlands Electricity's supply business.

Vertical integration is the name of the power game these days. All its rivals have done it and now National Power has conceded that the way forward is not only to generate the juice but also supply it into the kitchen. Even so, the tactics employed by Nat Power look high risk, which is why the market fretted and wiped 3 per cent off the shares.

By putting Drax on the block, Nat Power is letting go of the jewel in its crown. The station is the newest, most efficient and cleanest coal- fired station in the land. In return, it expects to get regulatory approval to acquire 2.2 million domestic customers who between them generated profits of pounds 19m for Midland last year.

Factor in the high-priced long-term supply contracts Nat Power also inherits from Midlands and the cost of the acquisition probably works at about pounds 150 a customer. Since Midlands made a profit of only pounds 8.60 a customer last year, it does not take a genius to work out that the payback period could be a rather long one.

But there may be method in Nat Power's apparent madness. Precisely because it is so efficient, Drax should fetch a good price - say pounds 2bn. The alternative was to sell off under-utilised plant for a low price and then watch the buyer turn up the wick, eating further into Nat Power's market position.

The Midlands deal looks harder to square. On the other hand, the margin in electricity is moving away from generating and towards supply. Supposing NatPower can sell its 2.2 million customers extra services, like gas, insurance and perhaps telecoms, the sums may begin to add up. More importantly, ownership of a supply business will provide a natural hedge for the generating arm.

So Keith Henry, NatPower's chief executive, has a story to sell. If he wants the market to buy it, he may have to be prepared to return some, if not all, of the Drax proceeds to investors, rather than spending it on further expansion overseas.