The wide-ranging review of utility regulation, launched last week by Margaret Beckett, President of the Board of Trade, is almost certain to conclude that an annual profit-sharing mechanism, though attractive in theory, would be too complicated and bureaucratic to operate in practice.
Instead, the review is likely to focus on radical plans to give consumers a much greater say in decisions by regulators, along with guarantees that poorer customers would not lose out after the introduction of domestic electricity and gas competition.
The decision to sideline profit-sharing has pointed to tensions within the DTI over the interdepartmental review, which ministers fear could be watered down by civil servants, many of whom created the existing regime under the Conservatives.
Labour's final proposals for utility reform before the election envisaged retaining the price mechanism used in most privatisations, which limits customer bills using a formula based on inflation. To supplement this Labour proposed a system of profit-sharing, where utility companies would be set a ceiling for earnings each year. Any excess profits would have to be shared with customers through lower bills or rebates.
The intention of the system was to combine the regulatory certainty and incentives of the inflation-based regime with guaranteed benefits for consumers. Its architects were concerned that price caps typically lasting four or five years lacked the flexibility to cream off unexpected efficiency gains. An earlier proposal for a US-style price-setting mechanism based on rates of return was ruled out long before the poll.
Less than two weeks into the review the DTI has identified several barriers to the policy, including the difficulty of designing a complex mechanism to calculate profit ceilings for each of the companies. Another concern was that competition emerging in the water and electricity sectors would eliminate the need for detailed price regulation.
One suggestion could be to apply profit-sharing to a smaller group of monopoly utilities which will never be subject to competition, including BG, responsible for the gas pipeline network, and National Grid. However, these companies have recently been forced to make large one-off price cuts by regulators, reducing their capacity to make excess earnings in the first place. Similar one-off reductions are due in the water industry in 2000.
Mrs Beckett appeared to recognise some of these difficulties when she launched the review. She said: "I am anxious, however, that we consider fully the practicalities of such a proposal." The Government did not want to control companies "by the back door".
Moves to reject profit-sharing would be strongly supported by utility companies, which argued they would reduce their incentive to make bigger efficiency improvements. Industry regulators had also questioned the change.
They are likely to be less happy with the latest thinking on consumer representation. The review is considering moving beyond the existing system of customer committees to widen the public consultation during price reviews.Reuse content