Despite the higher-than-expected dividends from London Electricity and South Wales Electricity, the sector slumped in the wake of angry explosions from British Gas.
On the same day that London Electricity announced a 15.4 per cent rise in its dividend, British Gas warned of frozen payouts following the new price formula laid down by Ofgas. Only British Gas seems to have been surprised by the terms. Nevertheless, the Recs' shares fell like stones alongside those of British Gas.
The results of the electricity distribution review being undertaken by Stephen Littlechild, director-general of Offer, the industry watchdog, are widely expected in August.
The City suspects Offer will revise the generous terms on which the Recs were first privatised with hefty one-off price cuts, as well as a tighter 'inflation minus x' formula.
Since their flotation in 1990, the Recs have been allowed to raise distribution prices by an average 1.1 per cent over inflation each year. As distribution accounts for between 80 and 95 per cent of their operating profits, this has proved a virtual licence to print money.
However, Offer is now expected to curtail the bonanza for shareholders. Nigel Hawkins, industry analyst at Hoare Govett, forecasts one-off adjustments of between 12 and 15 per cent, with Eastern, London and Southern Electricity being among the most vulnerable Recs. But the blows may be even harder, he says, in light of a letter from Offer leaked earlier this year.
Mr Hawkins believes that Professor Littlechild will use the one-off cuts to level the playing field between Recs with disparate privatisation dowries. They will all then be restricted to distribution price changes of inflation minus 2 1/2 to 3 per cent. With inflation currently about 2.6 per cent, this means that distribution prices could drop in real terms.
Graham Moyse, utilities analyst at Kleinwort Benson, thinks the new formula will be even tougher. He forecasts one- off cuts of between 15 and 20 per cent, and a distribution price cap of inflation minus 3 or 4 per cent.
Yet the results of the two Recs that have so far reported show just how strongly the sector is placed. London Electricity is beginning to benefit from its acquisition of BAA's distribution assets, while South Wales Electricity has made great strides in cutting costs.Reuse content