You simply can't have your sweeties and eat them
Tuesday 14 May 1996
Certainly a very good case can be made for saying that the original privatisation prospectus was a false one. What British Gas has become bears little resemblance to what was actually sold to investors back in 1986. Furthermore, the regulatory and competitive environment has been changed far more swiftly and radically than might have been anticipated then. On the other hand, nothing is for ever in this world and it was perhaps unreasonable of investors to have believed British Gas or the environment in which it operates would remain unchanged.
The reality is that British Gas has actually followed the path that all utility privatisations are meant to. Possibly it has been a somewhat accelerated one, but the glidepath is exactly as it should have been. With the benefit of hindsight, it is obvious that the company was sold on terms which were far too generous to investors and did not adequately address the interests of customers. The result of this was that in the early years, shareholders enjoyed quite spectacular returns. In part this was deliberate - British Gas was underpriced to sell and thereby buy Tory votes. But there was also dramatic and to some extent unanticipated scope for improvement in the bloated tariff and cost structure inherited from the state. For a while, British Gas and its shareholders made hay at the expense of their customers. If utility regulation works as it should, then this apparent imbalance is addressed at the time of the periodic price review when customers get to claim the efficiency gains achieved over the previous five years.
That is precisely what is now happening and what was always meant to happen at British Gas. Taking the total return to shareholders including dividend payments since privatisation, British Gas outperformed the rest of the stock market quite nicely until a year ago. During that time the stock market has risen dramatically. Across the lifetime of privatised British Gas, then, investors have enjoyed a good, if unspectacular, return, relative to other shares and a fantastically good one relative to other "low-risk" investments. Far from being poor, the returns have actually been really quite remarkable given the type of company British Gas is. Furthermore, the underperformance of the past year has been caused as much by the company's disastrous take-or-pay gas contracts as by the prospect of regulatory crackdown.
What Ms Spottiswoode is now proposing is to reduce that overly generous rate of return to a more appropriate level. Shareholders are not being subjected to the "biggest smash and grab ever", one of the more ridiculous of the one-liners dreamt up by British Gas's army of spin doctors to describe yesterday's proposals. They are, however, having some of the privilege of monopoly removed from them. There is no doubting that it hurts when your sweeties are taken away, but it is hardly the same as being conned.
The same fate has already overtaken BT. Over the years ahead water, electricity, and, yes, Railtrack, too, will go the same way. As the regulator, and in some industries competition, begin to bite, the spectacular returns of the early years give way to more pedestrian ones.
For those of us who condemned Professor Stephen Littlechild for being too lax on the regional electricity industry, it is hard to summon up much support for British Gas. When a company screams this loud, it generally means the regulator must have got it about right. British Gas is unlikely to get much joy out of the MMC.
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