Reshaping electricity requires more debate
Friday 06 October 1995
The only obvious constraint is just how much consolidation the Government is prepared to allow. As things stand, the industry is divided into 19 moving parts - 12 regional electricity companies, 2 gencos, 2 Scottish power companies, two state-owned nuclear companies and one in Northern Ireland. All the bids to go through so far have been by outsiders and therefore do not involve any reduction in the number of players. That is about to change.
Provided Manweb shareholders do not lose their sanity by opting to remain independent (the sad and lonely fate of Northern Electric should deter them), Scottish Power becomes today the first to achieve a consolidating takeover. Government clearance of the National Power and PowerGen bids will reduce the players by a further two but this is still a long, way from the consolidation industry executives believe would produce optimum efficiency and competition.
It is a strange logic that argues that the number of players has to be substantially reduced to give competition a chance but in the Alice-in- Wonderland world of electricity companies, it may be true. Nobody believes the regional electricity companies as they stand have the will or the guts to start paying any more than lip-service to competition in domestic supply post its official introduction in 1998. But a smaller number of more powerful players - ministers have alighted on six - might do the trick.
The more aggressive in the industry see it settling down into four or five majors with perhaps as many also-rans. The race to become one of the big four must involve a new wave of consolidation. While Ian Lang, President of the Board of Trade, appears to accept the inevitability and desirability of this, what is happening is a fundamental reshaping of the industry, which requires a more penetrating public debate than we have seen. The case for referring National Power and PowerGen grows stronger.
Going back to basics after Bankers Trust,
It is becoming hard to tell which is worst - the sales technique of Bankers Trust or the naive way in which Procter & Gamble, one of America's biggest and toughest companies, fell into the derivatives trap.
Papers released by a US court this week give a unique insight into the atmosphere inside a deal-driven bank whose staff did not seem to care a fig about whether its products were right for the client, as long as they made a profit selling them.
The language revealed by the documents - such as the ROF (or Rip-Off Factor) - should join "greed is good" and the rest of the brutal epithets of the 1980s in Wall Street's over-the-top lexicon of shame. BT will have a hard time repairing the damage done to its image by these disclosures and may find it wiser to settle out of court than see its affairs become the financial media equivalent of the OJ trial.
The papers do not show P&G in too good a light as a customer, either, judging by initial extracts. Erik Nelson, chief financial officer, told P&G's audit committee that no worst-case scenarios were tested to see what would happen if interest rates took off. "We were betting that the financial markets wouldn't move against us. This, too, ran contrary to our policy of knowing our risks up front ... our judgement was clouded by the belief that rates wouldn't rise quickly and that we understood the pricing formula, when in fact we didn't."
Derivatives remain an essential tool for modern business. It must be tempting for regulators to say "a plague on both your houses" and let the players get on with it. With large corporate clients, at least, more detailed regulation is unlikely to be the answer. At one level, the simplest lesson is that managements must go back to basics, ensuring that sales staff do not regard customers as turkeys for the plucking. How else do you persuade them to come back again as clients? These are disciplines that apply as much to toothpaste salesmen as to the purveyors of the products of Wall Street rocket scientists.
Customers such as P&G - big grown-up companies - have no excuse either for not having the management systems to control risks and the nous to avoid the temptation to take a punt on interest rates at the wrong moment. Above all, they must learn to understand the products.
Fault lines facing G7 ministers
This has been a year in which the markets have presented challenge after challenge to the international financial community. The orthodox view, which will be heard again in Washington as the Group of Seven finance ministers assemble for tomorrow's meeting, is that although the markets overreact they are basically always right.
The logical answer to a market challenge is to improve policies to the point where traders can find nothing to which they can raise objections, and to improve surveillance so the authorities can be nearly as vigilant as the markets.
The finance ministers' agreement in April to get the yen back down to a more manageable level took a step away from that purist view. The turning point was the co-ordinated currency intervention during the summer. But this weekend, fault lines will show between the Germans and the Japanese on one hand, and the Americans and French on the other. Conveniently for Kenneth Clarke, the British are sitting quietly in the middle while tensions among the others become more obvious.
Market speculation has focused on whether Robert Rubin, the imposing US Treasury Secretary, speaks for all members of the administration when he says a strong dollar is good for America. Investors suspect some officials still think a weaker dollar would be preferable. They also doubt the strength of Germany's commitment to further co-ordinated intervention to support the dollar, knowing the Bundesbank's traditional reluctance to step in.
Despite these rifts, the mood in the corridors of Washington about the currency swings achieved so far is one of quiet satisfaction. Ministers' main attention will rest instead on progress on surveillance and on the IMF's ability to react to crisis, 10 months after the Mexican emergency. But the two areas of concern - currencies and the developing world - are linked by the same theme: can the finance ministers ever really tame the financial markets? As the Plaza agreement on currencies exactly 10 years ago proved, their successes are likely to be ephemeral.
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