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TWST: In Italy, the deregulatory process is at what stage exactly?

Mr. Rowland: The large users are in the competitive market, and there's a time span for lowering the threshold of usage that gets you into the competitive market over the next few years. It's a fairly gradual process. The more important issue on liberalisation is to create a competitive market in generation; so at the moment generation is totally dominated by Enel, who have about an 80% market share. What the law requires is for them to sell 15 gigawatts of capacity, which will leave them with 37 gigawatts of capacity. That 15 gigawatts has to be sold in three separate companies - one of 2.5 megawatts, one of 5.5 megawatts and a 7 megawatt company - to create new competitors. At the moment there is no pool or wholesale market; but that is expected to come into place at the start of next year. This is the way they're opening up the competitive market with a bit of freedom of choice for large users, a more competitive wholesale market generation. The requirement on Enel is actually to make the disposal of this 15 gigawatts by 2003. I believe the company, encouraged by the government, is trying to get major progress made in the next six to 12 months. They can see there's no point in trying to frustrate competition; they may as well just embrace it and get it going quickly. There's a monopoly business of transmission and distribution and there are price control formulae in place which are set at CPI minus 4% in both cases, but they should be able to cut costs by more than is implied by that formula.

TWST: Let's turn to the stocks that you like; what's your favourite stock at the moment?

Mr. Rowland: I'll just give you some qualification and then answer that. The way we're looking at stocks now is that we're not just looking for the cheapest stock in the sector. We think that it's probably better to avoid the really cheap ones and aim for ones which are not fully valued in relation to the way the companies are developing their businesses. So I guess there's two or three names that we'd come up with. In no particular order, the first is Enel in Italy, which is valued as a pretty sound electricity company, and I think it has got a huge opportunity to develop as a multi-utility across Italy, which it's gradually progressing towards. That's not reflected in the valuation. Over the next six to 12 months, I'd expect them to make some material progress in that, and that should help their valuation.

TWST: Can you give me a snapshot of its activities; is it a pure electricity utility?

Mr. Rowland: It's started making small bolt-on acquisitions on the water and the gas side, but it's basically got 29 million electricity customers across Italy - it's a huge player. It is not that interested in generating electricity and, indeed, has to make some disposals of power stations to meet the regulatory requirements of introducing competition in generation. But that quite suits its policy, and it wants to reinvest that money into building up its presence in the water business and in selling gas to its existing base of electricity customers. There is no one with the scale that they have across the whole of Italy to be able to bolt on extra customers and get the cost savings and the revenue enhancement that can achieve.