Still room for growth in electricities

The Investment Column

The announcement on Thursday by Offer's director-general, Stephen Littlechild, of the new regulatory regime for the regional electricity companies was generally seen as good news for the sector, as yesterday's share prices testified. Eastern and Southern, the industry's two representatives in the FT-SE 100 index, put on respectively 31p to 719p and 28p to 726p, which with rises elsewhere helped to reverse some of the ground lost by the shares since the turn of the year.

The general view was that Professor Littlechild's decision to make a further "central case" one-off cut of 11 per cent in distribution charges next year, while tightening the year-by-year cut from 2 to 3 per cent, should still allow further profit growth in the sector. The way that the regulator based his findings on the recent Monopolies and Mergers Commission report on Scottish Hydro was also seen as likely to close off the possibility that any of the English regional companies would seek an appeal to the MMC.

The resulting relief that the uncertainty surrounding the sector had passed led to yesterday's knee-jerk reaction among share prices. The prospect of bids for electricity companies was the proximate cause of the excitement. The most obvious target remains Northern, which has said it would waive rules preventing Trafalgar House bidding again within 12 months if the regulatory outcome were favourable.

But smaller, more easily digestible companies like South Western and Manweb are also in the firing line, while the "loose" stake in the slightly larger Yorkshire belonging to Swiss Bank Corporation could provide a bid platform.

Hanson may be tempted to step into the fray, now that regulatory issues are out of the way. But the review could also prompt moves by smaller companies to accelerate efficiency savings and cost cuts by merging. A link-up between South Western and South Wales, which are already developing a customer service system together, was one possibility being mooted yesterday.

Analysts are still working through the implications of this year's events on the industry and, as a result, predictions of dividend growth for the regional companies over the next five years vary widely. Average real increases are likely to be half the level which could be expected after Professor Littlechild's original price cap announced last year. But annual rises of 5 to 6 per cent still look possible on a prospective yield of 6.9 per cent for the sector, which is already at a 60 per cent premium to the market. That discounts most things, although perhaps not a massive windfall tax from a future Labour government desperate to raise cash. Investors should hold on for the ride.