View from City Road: Electricity not for the nervous

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The Independent Online
WHILE the political pundits dithered over whether Michael Heseltine, the President of the Board of Trade, had bought himself more than breathing space by delaying pit closures, investors lost no time in deciding he had done the quoted electricity companies a favour.

Shares in National Power quickly gained 3p to 254p, while those in PowerGen were unchanged at 251p. The regional electrical companies also gained ground. Are investors right to be so confident?

All that Mr Heseltine promised was delay and further conideration of the arguments. He made no promise to reverse the closure decision, only to prolong uncertainty.

The generators' share prices were buoyed by Mr Heseltine's assurances that output covered by the new coal contracts would be 40 million tonnes initially. There had been fears that National Power and PowerGen would be forced to take more than this, to help the Government out of its difficulties.

But there are still plenty of uncertainties, not least among them tomorrow's Commons debate. The coal contracts have yet to be agreed, legislation for privatising British Coal has yet to be debated, and Professor Stephen Littlechild of Offer has yet to complete his review. The fact that he may bring forward his investigation into the cost of electricity from gas-fired power stations suggests investors in the regional electricity companies, many of which have interests in new gas stations, have every reason to be cautious.

There are even fears that the whole industry may yet be referred to the Monopolies Commission. That would result in a mammoth inquiry, much more complicated and lengthy than the current investigation into British Gas. But the Government would be wary about taking such a a radical approach, given that it still owns 40 per cent of each of the generators.

Public spending pressures mean it will almost certainly want to sell these stakes, worth pounds 2bn, next year. It will be keen to limit any damage to their share prices between now and then.

Notwithstanding the electricity companies' dividend prospects, those of a nervous disposition should shift their money into the water companies. Even though some of them have got steamed up about the latest round of price cuts they may prove a less volatile investment than electricity companies, for the time being at least.

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