PowerGen gives timely warning

It was not exactly the message Ed Wallis, PowerGen's chief executive, meant to put across, but the company's better-than-expected profits give a timely warning to potential investors in nuclear power privatisation.

Nuclear Electric's Heysham and Dungeness reactors were shut in January and February, and its Hartlepool station also had problems.

That gave PowerGen the opportunity to leap in and sign up customers short of power. As Mr Wallis colourfully put it: "One of the dogs has fallen over so you drop your price, rush in there and grab his bone."

Even a minor difficulty at a nuclear reactor can lead to expensive out times, both because of the complexity and sensitivity of the plant and the need to run them at full belt to make money.

But the shutdowns were good news for PowerGen, which ran at 99 per cent capacity from November to February, after several years of pressure in the marketplace from the expansion of output by the nuclear generators.

These events give the lie to the view that the power generating market is as uncompetitive as the regional electricity boards, with their cosy local monopolies.

PowerGen's market share fell from 27.1 per cent to 25.9 per cent in two years, while National Power has gone from 41 per cent to 33.9 per cent.

But if the marketplace is tougher, the regulatory risks are the same. PowerGen is less likely now to have to step up spending on emission controls but the shares are overhung by uncertainty about how it will sell 2,000 megawatts of capacity, as recently ordered by Professor Stephen Littlechild.

The fact that there are four interested bidders gives less comfort than it should do,with Prof Littlechild about.

The unpredictable regulator seems to want a clean break between the 2,000 megawatts of plant and its current owners, PowerGen, in order to increase competition.

But the buyers want the company's help running the plant, and Prof Littlechild is perfectly capable of scuppering the deal by vetoing that.

Buying PowerGen, which has recovered to above the March price at which the government stake was sold, is only partly a bet on disposal.

About 75 per cent of investment is now in the non-core business, with new power ventures abroad - in Portugal and Indonesia - and others in the pipeline.

But even if that raises risk, the promise to reduce dividend cover from 3.3 to under 2.7 should underpin the shares.

They have some way to go yet.