View from City Road: Charged with power to waste money

Remember the explanation so often peddled by regional electricity companies to justify fat salaries and gilt-edged share option schemes for senior executives after privatisation? It was, they claimed, in recognition of their top-class management skills.

Most of us have always wondered precisely what that meant since electricity executives appear to be doing exactly the same job in the private sector as they had been doing in the public sector. Courtesy of East Midlands Electricity, we now have a whole new definition. It apparently means ability to waste shareholders' money on a grand scale. (In the old days it was the taxpayers'.)

East Midlands has admittedly been by far the worst offender in embarking on hare-brained diversifications away from its core business of distributing electricity. Electrical contracting, security, a dud joint retailing venture with Yorkshire Electricity and an alarming flirtation with privatised coal pits were just some of the worst excesses.

Two months ago the non-executive directors, led by Nigel Rudd of Williams Holdings, who knows a thing or two about acquisitions, ousted John Harris, East Midlands' pounds 225,000-a- year chairman. Only shortly before, he had picked up a gross profit of pounds 437,800 on share options granted at privatisation.

East Midlands shareholders yesterday received a nasty bill in the shape of a pounds 130m headline charge for restructuring the previous management's acquisitions, involving hefty job losses, closures, accumulated trading losses and asset write-downs. It is hard to imagine a worse instance of profligate waste.

Startling as this figure is, the burgeoning wealth of the privatised regional electricity industry means that shareholders will not suffer. East Midlands is expected to make pre-tax profits approaching pounds 190m this year. Swelling cash flows will offset the expected pounds 30m cost of redundancies and trading losses in the current financial year. A generous double-figure dividend increase for 1993/4, expected by the market, will be unaffected.

The stock market had in fact been anticipating fairly vigorous, yet relatively painless stable-cleansing ever since Mr Rudd wrested control of the chairman's desk from Mr Harris. On a good day for the sector East Midlands shares jumped the most.

Although East Midlands has been a lot more reckless than its fellow electricity distributors - small-scale power generation being a notably profitable exception - the Rudd treatment must give pause to others. Mr Rudd has long claimed that the electricity industry is one of the most inefficient in the land. Run on the same cost basis as any normal private sector business, he argues, it might be possible to cut prices by 10 per cent or more and still make bumper profits.

If the electricity companies don't trim costs voluntarily, Professor Stephen Littlechild, the electricity watchdog, is itching to do it for them. It may already be too late. By all accounts a highly painful pricing formula will emerge from the present regulatory review by Offer.