Utility Week

Utility Week 11th October 2013

Utility Week - authoritative, impartial and essential reading for senior people within utilities, regulators and government

Issue link: https://fhpublishing.uberflip.com/i/189195

Contents of this Issue


Page 18 of 31

Finance & Investment Investor view Nigel Robinson THE STORY BY NUMBERS £22 per share Final offer made by Longriver consortium in June 2013 c£17 per share cantly". Many experts argued unsuccessfully that the £4 bid should be accepted. So, were Marks & Spencer's shareholders rewarded for their loyalty? That is debatable. In September 2006, the shares exceeded £6 but by September 2008, after a stark profit warning, their value more than halved. For most of the following four years, the shares were below £4 as the recession kicked in. It is only recently that they have traded well above the £4 level. Severn Trent's average share price since June 2013 30% Premium over regulated asset value offered by Longriver SharE pricE pErFOrmaNcE OVEr paSt 12 mONthS FTSE100 Severn Trent 1760p 1680p Oct 2012 Jan 2013 Apr 2013 Will Seven Trent be subject to a similar roller-coaster ride? In reality, vindication for the board can only be achieved by a favourable, or probably an in-line, periodic view outcome. But if the final determination combines elements of Cox's aggressive thinking, a tight Wacc, price cuts along with a healthy nod to the disenchanted of Westminster, many Seven Trent shareholders may have wished that the board had taken the £22 per share. It should be remembered, too, that Seven Trent floated in 1989 on the basis of a fully paid price of 240p so that – allowing for a few subsequent share value adjustments – £22 per share would have represented a formidable gain. Nigel Hawkins is a director of Nigel Hawkins Associates, which undertakes investment and policy research July 2013 Oct 2013 3.6% Assumed cost of debt that Ofwat allowed water companies in the last periodic review 1.25% The actual cost of debt that water companies enjoy because of the effect of the financial crisis ?% The big unknown: the cost of capital for 2015-20 "Shareholders will be scrutinising the potential for losses and persuading boards to consider some hard decisions" A n advert was placed discreetly in the Financial Times the week before last for a new chief executive for Ofgem, but after Ed Miliband's declaration of his "solution" to all our energy problems, who would want the job? Miliband has issued a clarion call for price controls of energy prices for the two years after an (anticipated) election victory in 2015, but as with all these things, it's not that simple. The true cost to serve, or supply if you prefer, an electricity customer is the sum of a series of individual costs, from fuel, through generation, distribution, billing and funding, plus a profit margin. The margin of supplying power to a retail customer is pitifully low in the UK – somewhere around 2 per cent. In a regime where the end user price is frozen (and at what price we don't know yet) and the cost to serve exceeds that price, then the supplier will be making a loss. In France, when electricity price controls were imposed by the French government a few years back, the loss was borne by the utilities – EDF and GDF Suez – and their shareholders, effectively the French state. In Spain, where again government price freezes were imposed (and still exist?) the loss has been capitalised on the balance sheets of the major utility suppliers – Iberdrola, Gas Natural Fenosa, Endesa– to be repaid at some point by customers through higher tariffs. As of this week, the total "tariff deficit" exceeds €30 billion. So I wonder, if Miliband does take power (apologies for the pun), could electricity and gas price controls in the UK be the ultimate force majeure for the UK utility model as we know it today? Were it not for the public supply obligation, I suspect some utilities would have sold their retail books by now and concentrated on generation and wholesale supply. Shareholders will be scrutinising the potential for losses and persuading boards to consider some hard decisions. As for customers, do we really mind if we buy our electricity and gas along with our groceries from pure retailers, say Tesco, Sainsbury's and Asda? This makes me wonder if the new chief executive of Ofgem will actually preside over a completely transformed sector, where prices are fixed by the government and where we buy our electricity and gas from anyone other than a power company. If that is so, then Miliband may have set in train a complete restructuring of our power and gas sector. And rather than aiming to become our new prime minister, perhaps he is the one destined to be the head of Ofgem. Nigel Robinson, Investec UTILITY WEEK | 11Th - 17Th OcTObEr 2013 | 19

Articles in this issue

Archives of this issue

view archives of Utility Week - Utility Week 11th October 2013