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U.K. power rates slashed
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August 12, 1999: 10:50 a.m. ET
Electricity regulator cuts prices as much as 42%; stocks tumble
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LONDON (CNNfn) - The U.K.'s electricity watchdog sent a tremor through London power stocks Thursday when it published punishing price reductions and operating cost targets for electricity companies.
The Office of Gas and Electricity Markets (Ofgem) demanded an average 25 to 30 percent reduction in electricity distribution prices, trimming an average 5 percent from consumers' household electricity bills.
Analysts said the tougher-than-expected ruling could encourage consolidation among electricity companies, about half of which are owned by U.S. utilities.
"The most efficient companies are the biggest in this sector," commented analyst Iain Turner of Deutsche Morgan Grenfell, "so this might lead to people wanting to merge."
Distribution costs account for approximately one- third of electricity costs to households in Britain, and consumers should save 15 pounds ($24) annually on their bills under the new pricing arrangement.
The announcement pummeled electricity shares as analysts worked out which companies will be hurt and which will be helped by the order.
Leading the decline in utility stocks was water and electricity supplier United Utilities (UU.), which tumbled 7 percent to 743 pence. Rival Hyder (HYR) which supplies water and electricity to Wales, slumped a similar amount to 548 pence.
United's electricity unit will have to slash prices as much as 35 percent, and PowerGen could face a 34 percent cut. Seeboard, owned by Central & South West (CSR) of the U.S., faces a whopping 42 percent price reduction.
Other stocks were less affected by the ruling, with ScottishPower (SPW) facing a maximum 17 percent reduction and Scottish and Southern Electricity (SSE) looking at a maximum 20 percent drop. Both those stocks were virtually unchanged on the London stock market.
The regulator's announcement is just the latest stage in the round of pricing reviews. A final ruling on the reductions is due to be published in November. The changes in the pricing schedule will be implemented next April.
Changes in utility licenses are required to be agreed to by the companies involved, so the utilities can appeal the regulator's decision.
"It would be a surprise if at least one of the companies doesn't appeal to the Competition Commission," said Simon Taylor, utilities analyst at Salomon Smith Barney.
Deutsche's Turner warned, though, that Callum McCarthy, director general of Ofgem, may be keen to be seen as taking a hard line, given that this is the first pricing review he has been in charge of. "He doesn't want to be seen as a pushover," cautioned Turner.
Salomon's Taylor said the regulator's proposals were "on the harsh side," a view shared by Adam Forsyth, utilities analyst at Robert Fleming Securities, who said the measures are "tougher than expected".
The proposals cover the 14 companies licensed to supply electricity in the United Kingdom.
The companies were privatized in a series of deals during the late 1980s and early 1990s. Many of them subsequently were bought at huge premiums by U.S. utilities seeking to broaden their activities into a liberalized power market.
Returns from many investments have been less than budgeted however, as regulators have taken an increasingly tough line. The current U.K. government hit privatized companies with a huge windfall tax shortly after it came to power in late 1997.
The companies are: Eastern Electricity, owned by Texas Utilities (TXU); East Midlands Electricity, owned by PowerGen (PWG); London Electricity, owned by France's EdF; ManWeb, owned by ScottishPower; Midlands Electricity, owned by GPU Inc. (GPU); Northern Electricity, owned by MidAmerican Energy Holdings (MEC); Norweb, owned by United Utilities; Seeboard, owned by Central & South West Corp. (CSR); Southern Electricity, owned by Scottish & Southern Electricity; Swalec, owned by Hyder (HYR); SWEB, owned by Southern Co. (SO); Yorkshire Electricity, owned by American Electric Power (AEP); and ScottishPower and Hydro-Electric, owned by Scottish & Southern Electricity. 
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