David Prosser's Outlook: What price now, another French bid for Britain's nuclear power industry?

Thursday 14 August 2008 00:00

Is Neil Woodford having any second thoughts about his decision to scupper British Energy's sale to EDF of France? Only two weeks ago, the Invesco Perpetual fund manager, who controls 15 per cent of the nuclear power producer, forced it to call off a deal with EDF just hours before news conferences had been scheduled to announce the takeover. Mr Woodford's view was that EDF's offer of 765p a share significantly undervalued British Energy, given the potential value of nuclear power in an age of soaring oil prices. In the intervening fortnight, however, oil prices have fallen back, and yesterday's figures from the company were hardly inspiring.

Whether or not you judge 765p a share to be a fair price for British Energy depends on your view of where energy markets are headed over the next few years. Mr Woodford is not alone in thinking that high oil prices will continue to make nuclear power seem much more attractive. Based on its projections for power prices, Goldman Sachs has valued British Energy at £11 a share. Evolution Securities suggested 920p on the day after the EDF deal collapsed.

But there is a counter view. Even in the short period that has elapsed since Evolution's note, there has been something of a sentiment shift on commodity prices. The International Energy Agency, for example, this week lowered its forecasts for oil demand over the next year or so, surmising that, as the global economy slows, so too will oil consumption (the group also thinks supply is set to increase).

Over the past two months, oil has fallen back from a high of $147 a barrel to around $113 today. A year ago, such a price would have been considered outlandish, but it still reflects a fall-off of more than 23 per cent from the peak.

Meanwhile, back at British Energy, all is not well. That its first-quarter profits were just a third of last year's total is all the more remarkable once you know that the electricity it produced during the three months to the end of June sold for 12 per cent more than in 2007.

An impressive effort then, to record such a slump. One problem was a rise in coal costs (British Energy also runs a coal-fired station), but a more fundamental difficulty was the fact that two of the company's nuclear reactors have been out of service for much longer than expected. Other plants run by the company have also been plagued by outages.

These maintenance issues are more of a headache for shareholders such as Mr Woodford than one might imagine. While the more ambitious valuations placed on British Energy are predicated on its role at the centre of a nuclear Britain in a high oil-price age, they also depend on the company running its existing plants with fewer shutdowns over the next few years, before the second generation is constructed.

Indeed, the problems British Energy has been experiencing with its reactors underline the need for the next generation of plants – the existing reactors are coming to the end of their lifetimes. Yet it is clear that British Energy does not have the money to build the new plants by itself.

In this context, those shareholders who said "non" to EDF a couple of weeks ago may yet be prepared to reconsider. British Energy said yesterday that talks with suitors were continuing, and despite EDF's fury at the last-minute collapse of the takeover, it is clear the French company remains keen. Once France's business community returns from its holidays, a deal may finally be concluded more quickly than seemed conceivable in the immediate aftermath of the takeover that never was.

Inflation has no truck with egalitarianism

Even the most committed of Labour Party supporters have one big gripe about the performance of successive governments since 1997. That fact that income inequality in society has actually increased over the past 11 years is both an affront to Labour values and the opposite result to the one senior ministers past and present claimed their policies would achieve.

The higher inflation now expected by the Bank of England will almost certainly exaggerate the trend on income inequality. It is often pointed out that higher inflation hits groups on fixed incomes – pensioners, for example – disproportionately hard, but the levels of price rises forecast by the Bank will disadvantage a much wider section of society.

Research from the Future Foundation suggests that the actual rate of inflation experienced so far this year by the richest 20 per cent of the country has actually been lower than the rate experienced during the previous three years. For the other 80 per cent, however, it has been higher – and the poorer you are, the wider the gap.

This is because this year's spike in inflation has been led by rises in the cost of food, housing, home energy and transport, all essential items of expenditure rather than luxuries. The proportion of household spending directed towards these items is now rising significantly for all but the richest in society.

One sociological effect has been a reversal in the trend under which middle-income earners' spending patterns have been converging with those of richer groups. In recent months, middle-income families' shopping baskets have more closely resembled those on low incomes, a trend that will continue.

One other thought on the Bank of England's latest inflation report. Its projections are presented in fan charts showing a range of future outcomes that are more or less likely. The whole fan, the Bank says, represents 90 per cent of all possible outcomes. Interestingly, however, referring back to the charts published in February 2007 shows that today's rate of inflation falls well beyond the 90 per cent fan projected then. Its economic growth projection wasn't quite as bad, but is only just within the 90 per cent limit.

Throwing that level of inaccuracy forward, if the Bank's projections for economic growth prove equally over-optimistic, we are heading for a recession that starts now and does not end until the beginning of 2010. Cross your fingers that the Bank could not get it so wrong all over again.

Criminals have caught up, so must the banks

Maybe we should be surprised it has taken this long, but fraudsters have now cracked "chip and PIN". Since this debit and credit card technology was introduced in 2004, it has led to a dramatic reduction in fraud, at least in transactions where business is done face to face. But police are now warning that fraudsters are turning the system to their advantage.

Already, officers have found compromised chip-and-PIN terminals in more than 30 shops. These machines have had specialist software installed by criminals enabling them to record the details of customers' plastic, including the all-important PIN. The data can then be put on to fake cards that fraudsters use to steal thousands of pounds at a time.

This is the first wholesale attack on the chip-and-PIN system, and computer specialists still aren't quite sure how the terminals have been hacked into – or, by extension, how big a problem this could be.

However, debit and credit card customers should be worried, particularly given a loophole in the compensation system. The Banking Code currently ensures customers who are cheated by fraudsters have their losses refunded in full. But the exception to this rule is that redress may not be offered in instances where consumers have been lax about the security of their PINs.

In practice, it is currently routine for the card industry to refuse to pay up in cases where a fraudster uses a PIN to steal, because there has until now been no known way to beat the system without the cardholder's knowledge, or at least some carelessness. Card providers assume this is what has happened. The rules on compensation will need to be amended accordingly.

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