Offer, the electricity industry regulator, may well turn nasty and inflict a painful cap on the RECs' prices in its five-year review of distribution prices next year. Significant falls in real prices to customers from 1995 to 2000 seem likely.
Such a draconian regime - some electricity prices to be set on average at 5 percentage points below inflation - will not cripple the RECs. Most still have fat to shed. But it could cramp their ability to increase dividends at recent rates in real terms.
They could look to NGC for a dividend stream growing fast enough to compensate for a lot of the RECs' regulator-squeezed earnings.
Alternatively the RECs could sell NGC by way of a stock market flotation at a price likely to be well above book value. Energis, its telecoms venture, looks a serious challenger to Mercury and BT.
In its first three years, with transmission prices allowed to rise in line with inflation, NGC chalked up compound growth in pre-tax profits of 18 per cent. Offer tightened the price cap to three points below inflation from this spring but NGC has still managed to produce pre-tax profits growth of 9 per cent to pounds 285.3m in the half year to September. The profit rise was half due to a cut in operating costs and half to a rise in unregulated income mainly from new power station link-ups.
Having cut staff in the core transmission business by only 15 per cent since privatisation compared with 60 per cent for the generators, NGC seems eminently capable of removing the pounds 300m of costs needed to offset the tighter cap.
This ought to keep profits moving ahead at near current rates and dividend growth could be faster still if dividend cover is reduced from a too high three towards 2.5 times. Welcome as this would be to the RECs, Alastair Buchanan at BZW reckons NGC could be valued at more than pounds 4bn or twice book value on flotation.Reuse content