Windfall awaits Rec directors

Electricity giveaway: 'Fat cats' hatch controversial tax credit 8 Hanson delays details of share distribution

Industrial Correspondent

A number of regional electricity companies are planning to pay directors windfall tax benefits as part of the pounds 3bn sale of the National Grid Company, fanning the privatised utility "fat cats" row.

The latest embarrassment emerged as a last-minute hitch delayed the scheduled publication yesterday of details of the National Grid flotation. The delay was widely blamed on Hanson, the industrial conglomerate which has taken over Eastern Electricity, holder of about 12 per cent of the grid shares. SEI, the new American owner of Sweb, is also said to be proving obstructive.

There has been speculation that Hanson would try to hang on to its stake in the grid, but the Government has told the group it must sell within a year.

One industry source said the hitch was "technical" and related to the structure of Hanson's shareholding in Eastern Group.

Some of the 12 regional companies which at present own the NGC are planning to pay directors an added cash top-up to compensate for taxation on the grid shares they are entitled to in the float.

The tax payment issue relates to share options held by executive directors in the regional firms and to the sharesave schemes under which thousands of employees save to buy shares.

Option holders and sharesave members will be given grid shares to make up for the fact that shares in the regional companies will diminish in value once the grid is floated off.

In addition, some Recs have determined to pay directors who hold options an extra cash top-up to compensate for tax on the grid shares. Nearly all private shareholders will have to pay tax on the grid shares in the normal way.

Most Recs are rejecting the extra perk as too controversial in the present climate but at least two are said to be planning to push ahead regardless.

The extra payout will further embarrass the Government, coming on top of revelations that electricity executives stand to make millions of pounds from the grid flotation.

Most companies will also compensate employees who are members of the sharesave schemes for the tax on grid shares. One industry executive said: "I reckon that will be considered acceptable." Another added: "It is likely that employees and unions will have something to say if they suffer from any loss in the value of their shares in the company." The sharesave members are mainly ordinary employees but some also include executive directors.

This is the latest in a string of embarrassing revelations over the grid. Earlier this week it emerged that the normal share allocation to existing Rec shareholders as a result of the demerger will be treated as a form of dividend, meaning that those funds and others exempt from tax can claw back money. The issue is sure to enrage many private shareholders who as normal taxpayers will not be able to benefit in this way.

Negotiations over the demerger of the grid have been dogged by disagreement between the 12 companies and the Government and within the industry itself, exacerbated by massive benefits it will generate for executives.

The Labour Party has called for the flotation to be delayed pending an investigation into the issue. On Thursday Gordon Brown, shadow Chancellor, also warned that the Government could make a net loss on the flotation because of a series of intricate tax concessions totalling hundreds of millions of pounds.

An added embarrassment for ministers is that directors of the NGC will benefit hugely from a special dividend payable to the 12 regional companies before the flotation. This special dividend, thought to be worth between pounds 800m and pounds 900m, was intended to compensate the companies for a pounds 50 rebate to be given to customers and for the amount of tax levied on the flotation by the Government.

David Jefferies, chairman of the National Grid Company, stands to make pounds 190,000 from the dividend payable on his shares, while three other directors will get payments of pounds 125,000 between them.

Their decision to take the profit is known to have incensed Tim Eggar, Minister for Energy and Industry, and also angered executives in some of the 12 regional firms. The issue marred the policitical victory claimed by ministers over the pounds 50 customer rebate, which had been strongly resisted by the companies.

A spokesman for National Grid said that 500 individuals below board level in the company also owned shares and "are legally entitled to the dividend".

Comment, page 25

Tax plan to enrich the directors

Shares in the National Grid, owned by the 12 regional companies, to be distributed among their shareholders. When this happens, shares in the Recs can be expected to fall as the value of the grid is removed from them.

Share option holders in regional companies, including directors, to be compensated for loss of value that occurs as a result of the grid flotation.

Compensation will be paid in grid shares held back from distribution and paid to option holders next year.

Distribution of grid shares will be treated as a dividend for tax purposes. Unless they are tax exempt funds such as pension funds, all shareholders will have to pay tax at a minimum basic rate of 25 per cent.

Some Recs have undertaken to compensate for this tax with cash payments to option holders.

Two or three Recs are planning to extend this principle to director option holders who may then get a 40 per cent tax credit, paid for by their companies, on top of their grid share entitlement.