View from City Road: Generators come under spotlight

TODAY'S review by Professor Stephen Littlechild of price behaviour in the electricity pool - the bureaucratic substitute at privatisation for a genuine market in electricity - may be a watershed in the way the stock market values the electricity sector in general and the generators in particular.

The review may highlight the emergence of 'creeping regulation' of the generators. Although they provide two-thirds of UK electricity, their pricing policies are not directly regulated, unlike those of the regional electricity companies.

A week ago National Power and PowerGen, the two UK generators, were discomfited to find that Offer, the electricity regulator headed by Professor Littlechild, had turned its spotlight in their direction.

Offer had been examining whether the regional electricity companies had been buying fuel economically from independent gas- fired power stations. But it ended up implying that the generators were demanding too much for electricity derived from British Coal - a claim made repeatedly by several regional electricity companies and one that has completely stymied any attempt to sign unconditional contracts between British Coal and the electricity industry.

The RECs are looking more like the good boys at the moment after a reporting season in which they have tried, successfully, to be all things to all men. They have produced average dividend rises approaching 13 per cent, tariff cuts in some cases, lower real operating costs and cheery news on customer service.

Yorkshire Electricity typically ended the season with a flourish, lifting its interim dividend by 14.7 per cent, the highest rise in the current round. It was backed by a 28 per cent profits increase to pounds 42.5m, which owed most to lower provisions and a better trading performance in non-core activities, and a 2 per cent refund for customers in the new year because wholesale supply revenues overshot.

If today's Offer pool price review finds fault, the odds on a new look at the way generators ought to be regulated will shorten. The Monopolies and Mergers Commission would loom. As the generators have lifted dividends by 10 per cent compared with 13 per cent at the RECs but, at 5 per cent, yield 10 per cent less, a switch from one to the other could well continue.