Grid investors protest at new price regime

Investors holding up to a third of the shares in the National Grid have written to the electricity regulator, Professor Stephen Littlechild, to protest at proposed tough new price controls.

Some leading fund managers have urged the Grid to take the dispute to the Monopolies and Mergers Commission if Offer, the watchdog, refuses to water down the four-year price regime when the final formula is unveiled, possibly later this month.

One of the Grid's main shareholders said: "I have absolutely no doubt they should go to the MMC. I think they've got a very strong case."

National Grid, which operates the high-voltage electricity transmission network, had appealed to investors to write to the regulator, in the same way as British Gas did over its row with Ofgas. Many attacked the price regime, which would slash up to pounds 1.2bn off the Grid's revenues in four years.

From next April, the formula would knock between 20 and 26 per cent off charges, and limit any increases in the following three years to no more than 4 percentage points below inflation. The cuts would be worth pounds 4 to pounds 5 off average domestic electricity bills.

David Gould, manager of investment services at the National Association of Pension Funds, which has also written to Offer, said: "The proposals are clearly detrimental to shareholders. There should be a fair balance between the interests of shareholders and consumers and in this case the balance is against investors."

National Grid yesterdayclaimed the proposals were "the harshest in the energy sector", describing them as "inconsistent and based on ill- founded assumptions". The company's formal response in the consultation process said the controls would "result in an immediate expropriation of exceptional efficiency gains achieved under the current price control".

Offer argued that the Grid could cut its operating costs by between 4 and 6 per cent each year, after allowing for inflation. The company fiercely disputed this calculation. It said it had already reduced its costs by 37 per cent in the past three years and could only make future efficiency savings worth 2.3 per cent a year.

Some City electricity analysts last night suggested the argument was shifting towards the Grid, raising the prospect of an MMC investigation should Professor Littlechild decide not to back down. Last month, Northern Ireland Electricity rejected a five-year price regime, triggering an immediate MMC referral.

"Offer has no evidence that the Grid is inefficient," said one analyst. "But the regulator is using a price formula which suggests the company is inefficient. That is totally perverse."

Another key area of dispute is over Offer's pounds 4bn calculation of National Grid's assets, which the company insists are worth pounds 4.75bn, which would give shareholders a greater return.

Professor Littlechild had deducted pounds 400m from the asset base to represent the value of Energis, the Grid's new telecommunications operation. Yet during the Grid's flotation no value had been attributed to the business. Another fund manager said Offer had "used the most pessimistic market value for the Grid that you could possibly come up with".