House of Commons - Trade and Industry

Select Committee on Trade and Industry First Report

WINNERS AND LOSERS?

182. While gains and losses resulting from the system of regulation cannot be restricted to the purely financial[435] it was usually in these terms that they were presented to us; in this section we return to the vexed question of who has profited and by how much. The position is obscured by the difficulty of identifying the results of regulation as opposed to those of the `dash for gas', falling coal and oil prices, privatisation, liberalisation, innovation or other factors. When asked to what extent the reduction in charges she quoted was due to competition or to the drop in gas prices the DGGS said "it was competition and the price of gas; the two are related",[436] adding that the current level of prices was probably not sustainable. (For a discussion of the relative effect on energy prices of regulation and other factors see paras 36-39).

183. Some witnesses, notably the DTI, regulators and some RECs thought that "the regulatory regime ... has provided management with the necessary incentives to invest efficiently and to deliver real benefits to customers and shareholders".[437] Others, while agreeing that they had benefited, were convinced either that another group had done, if anything, better than they had or that the witnesses had not done as well as they would if the regulator had performed his or her function properly.

184. Witnesses agreed,[438] that energy prices to the consumer have undoubtedly fallen since the regulatory system was introduced, most dramatically in gas but also in electricity.[439] In electricity, according to the DTI, "Over the nine years from privatisation in the [fourth quarter of] 1986 to the [second quarter of] 1996, average domestic electricity prices fell by 1% in real terms (and fell by 8½% on a VAT-exclusive basis which provides the direct comparison with 1990). In addition, domestic customers in England and Wales benefited from a one-off rebate of £50 in early 1996 as part of the terms of sale of the National Grid ... Further downward pressure is in prospect from the recent distribution and transmission price reviews by the DGES ... In the same 6-year period since privatisation, annual average electricity prices in the UK as a whole fell by about 15% in real terms; within this broad picture there were real reductions in prices to both small and large companies (down 13% and 16% respectively), although average prices can conceal variations for individual companies. Changes in gas prices are shown in Table VII below.

Table VII: British Gas Prices to Domestic Customers
1986-96 (January 1996 Prices)

British Gas Prices to Domestic Consumers 1986-96 (Standard Tariff)
Date	Commodity Charge (p/therm)	Standing Charge (£/year)	Annual Bill (650 therms) (£)	Change (%)
1 May 1986	58.26	54.58	433.23
1 Jan 1996	44.55	37.92	327.48	-24.41

British Gas Prices to Domestic Consumers 1986-96 (Prepayment Tariff)

Date Commodity Charge (p/therm) Standing Charge (£/year) Annual Bill (380 therms) (£) Change (5)

First 156 therms Other therms

1 May 1986 88.1 62.1 22.96 299.28

1 Jan 1996 63.7 47.2. 14.64 219.74 -26.58

Sources: Digest of UK Energy Statistics, Energy Trends, Central Statistical Office.

Table VIII: Real Price Changes (1988-96) for
Non-Domestic Gas Customers

Real Price Changes

Firm Size % change in real prices

Small (<51,180 th/y) -44.87

Medium (51,180-300,260 th/y) -54.30

Large (>300,260 th/y) -54.25

Average -53.07

Sources: Digest of UK Energy Statistics, Energy Trends, Central Statistical Office.

185. A number of witnesses questioned whether regulators had done as well as they might for consumers.[440] Thus the GCC said "the consumer has benefited from reductions in gas prices in real terms ... but my whole prejudice is that ... they could have been lower".[441] The ECCCG felt that the original price controls (albeit set by the Government and not the regulator) had been too lenient[442] and that, though a 14% reduction in prices had been achieved, more would have been possible.[443] The EIUG criticised OFFER but not OFGAS for not doing enough to reduce prices to large industrial consumers.[444] ESTUC [reminded us] that while "privatisation was followed by an immediate fall in electricity prices ... after this initial fall prices then rose appreciably".[445] Evidence now shows that they have resumed their downward trend.

186. We were told by several witnesses that shareholders had made unduly large profits from privatised industries.[446] The balance of advantage between shareholders and consumers, like that between different kinds of consumer,[447] alters through time and here again, as so often in this field, the situation may be changing; the ECCCG suggested that as the regulators set stricter price controls "the electricity industry is now under-performing on the FTSE index by 20%".[448] Whatever the situation now, a general perception that privatisation and regulation had disproportionately benefited shareholders is reflected in such phrases as privatisation "on terms grossly weighted to the interests of prospective shareholders".[449] Original bias by the Government at the time of privatisation towards the interests of shareholders was attributed not only to the need to ensure that the flotations were successful but also to the difficulty of determining, for instance what degree of efficiency savings was available from formerly nationalised industries when no such exercise as privatisation on this scale had ever been attempted anywhere before.[450] We are aware of suggestions that there should be a `windfall tax' to recover excess profits made by the privatised utilities. No details have been made available to us, and we have not inquired into the matter.

187. ScottishPower drew our attention to the difference between their experience and those of the privatised electricity companies in England and Wales. They felt a fairer balance of advantage had been struck in their case, with good price reductions and a satisfactory return to the shareholder. They attributed this situation to being privatised late, at a time when the Government had learned more about the valuation of electricity companies and the regulators about the RPI-X system.[451]

188. Most allegations that shareholders had profited unduly were made in general terms, though the ESTUC produced figures showing that "the largest gainers from privatisation and liberalisation ... have been the shareholders of the RECs, many of whom have seen the value of their initial investments rise between 250% and 300%" over a period when the FTSE had risen 73%.[452] Detailed evidence from the CRI on the dividend yield and annualised capital gain received by small private investors (different and less favourable original terms were available to institutional and overseas investors) supports ESTUC's figures that RECs have considerably out-performed the FTSE although this is now moderating.[453] Concerns that small shareholders in British Gas might have suffered actual losses on their original investment due to the impact of regulatory decisions are not borne out, though it must be borne in mind that the data was obtained before the British Gas demerger of February 1997. It is worth noting as a possible measure of market profitability that all except one of the RECs have attracted take-over interest. The CRI figures for returns are set out in the tables below.

Table IX: Total Investment Returns (before tax) to
Shareholders in Privatised Industries

  Note Month Sold NOMINAL Internal Rate of Return p.a. REAL
Internal Rate of Return p.a. Investment
Period ## (years)

British Gas Dec. 1986   16%   11%   10

Eastern Electricity   * Nov. 1990   46%   42%   5

East Midlands Electricity   ** Nov. 1990   38%   35%   6

London Electricity   ** Nov. 1990   35%   32%   6

Manweb   * Nov. 1990   42%   38%   5

Midlands Electricity   * Nov. 1990   43%   40%   6

Northern Electric   ** Nov. 1990   40%   37%   6

NORWEB   * Nov. 1990   47%   44%   5

SEEBOARD   * Nov. 1990   50%   46%   5

Southern Electric Nov. 1990   35%   32%   6

South Wales Electricity   * Nov. 1990   43%   40%   5

South Western Electricity   * Nov. 1990   44%   41%   5

Yorkshire Electricity Nov. 1990   38%   35%   6

PowerGen
- first tranche
- second tranche

Mar. 1991
Mar. 1995

  34%
  20%


  30%
  18%

  6
  2

National Power
- first tranche
- second tranche

Mar. 1991
Mar. 1995

  33%
  24%

  30%
  23%

  6
  2

ScottishPower June 1991   17%   14%   6

Scottish Hydro-Electric June 1991   15%   13%   6

Northern Ireland Electric June 1993   26%   23%   4

British Energy
(part)/fully paid
  # July 1996   (121%)/31%   (111%)/28%   1

Notes:

## The "Investment Period"is the time from privatisation until 31/1/97, rounded to the nearest whole year. When a company is taken over, the Investment Period is deemed to end at the takeover date, even when the IRR calculations assume the investor retains associated shares e.g. in NGC or the new owner.

# The 31/1/97 IRR for BE is for part-paid shares and could be misleading. The fully paid forecast estimates the IRR after the final instalment, assuming no further change to the share price.

* Taken over

** Takeover agreed

1 Now United Utilities

Table X: Dividend Yield and Capital Gain

	Note	REAL Internal Rate of Return p.a.	Dividend Yield	Capital Gain p.a.
British Gas		11%	9%	2%
Eastern Electricity	*	42%	11%	31%
East Midlands Electricity	**	35%	23%	12%
London Electricity	**	32%	18%	14%
Manweb	*	38%	12%	26%
Midlands Electricity	*	40%	18%	22%
Northern Electric	**	37%	23%	14%
NORWEB	*	44%	12%	32%
SEEBOARD	*	46%	11%	35%
Southern Electric		32%	15%	17%
South Wales Electricity	*	40%	12%	28%
South Western Electricity	*	41%	11%	30%
Yorkshire Electricity		35%	23%	12%
PowerGen - first tranche - second tranche		30% 18%	10% 5%	20% 13%
National Power - first tranche - second tranche		30% 23%	18% 20%	12% 3%
ScottishPower		14%	7%	7%
Scottish Hydro-Electric		13%	6%	7%
Northern Ireland Electric		23%	7%	16%
British Energy (part)/fully paid	#	(111%)/28%	(10%)/7%	(101%)/21%

Notes:

# The 31/1/97 IRR for BE is for part-paid shares and could be misleading. The fully paid forecast estimates the IRR after the final instalment, assuming no further change to the share price.

* Taken over

** Takeover pending

435 Q.871. Back

436 Q.870 Back

437 Mem. p.35. Back

438 Mem. p.88. Back

439 Mem. p.86. Back

440 Mem. p.68; Q.428. Back

441 Q.428. Back

442 QQ.481, 502. Back

443 QQ.481-2. Back

444 Q.438. Back