Under investment pays dividends for RECs as customers lose out

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Regional power companies have failed to spend more than pounds 450m on investment over the past two years alone, despite receiving the money from customer bills.

Chris Godsmark, Business Correspondent, reports on figures which show the companies' shareholders, many of which are US power groups, are benefiting at the expense of consumers.

The documents, lodged recently with Offer, the electricity watchdog, reveal a huge discrepancy between the investment targets set by the industry regulator, on which customer bills were based, and the cash spent in practice by the 12 regional electricity companies (RECs). The targets were outlined by Offer in its final price cap for the RECs' distribution businesses, which account for about a quarter of household electricity bills.

The RECs have to lodge their capital spending figures each year with Offer, along with forecasts of investment for the full five-years of the price control. Since the wave of REC takeovers saw 11 of the 12 businesses disappear from the stock market, these documents are one of the only clues to their performance under their new owners.

According to the reports, the companies have spent pounds 1.99bn over the first two years of the price cap, to the end of March 1997. Yet Offer's five- year target implies they should have spent pounds 2.45bn, a shortfall of more than 18 per cent.

Over the five-year price formula the companies now predict they will spend pounds 5.5bn, a figure which is 10 per cent below the pounds 6.1bn set by Offer. In both cases the companies receive cash from consumers to fund their full investment target and have used the shortfall to generate bigger profits and more generous dividends for their owners.

Yvonne Constance, head of the Chairmen's Group of Electricity Consumers' Committees said customers were paying for service improvements which the companies have not carried out. "The regulator shouldn't be letting them get away with this. This money is going to their shareholders. If they don't spend the money, it turns into extra profit."

The worst offender, according to the documents, is Seeboard, one of the seven US-owned RECs. Offer's 1995 statement said the company should spend pounds 492m over the five-year price control, but Seeboard now forecasts it will only need to invest pounds 387m, a drop of 21 per cent.

Worse still, Seeboard's investment so far, at pounds 109m, is 45 per cent below the pounds 197m implied in the Offer formula. Seeboard last night disputed the methodology used in this calculation, which divides the five-year target into equal annual instalments. However, this arithmetic is used by other RECs, including Southern Electric, the only remaining independent business and one of the few so far to invest up to its full pounds 142m a year target.

John Weight, Seeboard's managing director of distribution: "This isn't money Offer said we had to spend. We spend money wisely and are always looking for ways to improve efficiencies."

Asked why consumers had not been given money back from the productivity improvements, as in the water industry, he continued: "That's what incentive regulation is all about. Offer will take that into account into the next price formula from 2000, so taking this too literally is dangerous."

Midlands Electricity, also US-owned, is another big offender according to the documents. The company has told Offer it will spend pounds 389m over the five years, a reduction of 22 per cent on the pounds 500m in the price formula.

A spokeswoman for Midlands said the company had identified extra savings in several big projects since submitting its evidence to Offer. "We have told the regulator about this. There are number of projects we've deferred because of new technical developments such as switch gear and we can get the best value."

The figures are likely to increase fears that US groups have used the RECs as short-term "cash cows", in anticipation of a much tighter price formula from the millennium.

Other US-owned RECs spending less than the targets include Northern Electric, which expects to invest 18 per cent less than in the price formula. At East Midlands Electricity investment so far is 25 per cent down on the target. The company has told Offer it will spend 13 per cent less over the five years. London Electricity has also told Offer it will undershoot its five-year target by 13 per cent.

The under investment is expected to put pressure on Professor Stephen Littlechild as he begins work on the next price formula. Ian Byatt, the water regulator, this year asked several companies not to raise bills by as much as allowed in their price caps after concerns about low investment spending.

The Department of Trade and Industry is understood to be investigating the issue of dividends paid out by RECs, as ministers mull over the report by the Monopolies and Mergers Commission into the takeover bid for The Energy Group, owner of Eastern Electricity, by PacifiCorp of the US. The Government is expected to clear the deal, but only with new conditions to prevent PacifiCorp from milking excessive dividends from the regulated utility business.

The investment report lodged by Eastern could fuel the Government's concern. The company, which was bought by Hanson and then spun off into a separately quoted energy business, told Offer it would spend pounds 138m less over the five years than the pounds 847m implied by the price formula, a 16 per cent shortfall. Over the last two years the underspend has been pounds 117m, a shortfall of more than a third.

capital spending by recs

Offer projection for 1995 to 1997: pounds 2,449

Company spending, 1995 to 1997: pounds 1,996

Underspend over two years: pounds 453m

Offer five-year plan, 1995 to 2000: pounds 6,100m

Company forecasts: pounds 5,514

Underspend over five years: pounds 586m

Eastern Electricity pounds 709

East Midlands Electricity pounds 469

London Electricity pounds 482

Manweb pounds 339

Midlands Electricity pounds 389

Northern Electric pounds 300

Norweb pounds 513

Seeboard pounds 387

Southern Electric pounds 708

Swalec pounds 343

Sweb pounds 300

Yorkshire Electricity pounds 575