Business Comment: Customers pay cost of electricity competition

`If the incumbent supplier remains untouched by competition, the consumer will suffer over the longer term. It's worth paying a short-term price for the introduction of competition, is basically the argument'
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The Independent Online
Professor Stephen Littlechild, the electricity regulator, has become a master of the U-turn. In his first review of electricity distribution charges three years ago, he got it so hopelessly wrong that he was forced into a complete re-review. Even then he failed fully to appreciate the scope regional electricity companies have for cash generation and was much kinder to them than he might have been.

Perhaps stung by this experience, the Prof this time went too far in the other direction and is now being forced to backtrack on the price restraints to be applied in the competitive supply market from April 1998. He'd hoped these new curbs would help cut bills by pounds 30 next year. After screams of protest from the RECs, he's settled for a more modest pounds 15 to pounds 25, depending on where you live.

The main justification for this climbdown seems to be that Professor Littlechild underestimated the costs of introducing competition. Quite a paradox, this, since if competition carries a cost to consumers, you have to wonder what its purpose is. All the same there is something in the argument that if price controls are too onerous, they will act as a deterrent to newcomers. If the incumbent supplier remains untouched by competition, the consumer will suffer over the longer term. It's worth paying a short-term price for the introduction of competition, is basically the argument.

The only problem is that the part of an electricity bill being opened to competition is actually only 7 per cent of the total. Most of the cuts in bills next year were going to happen anyway because of new, cheaper coal contracts and the Prof's existing distribution price controls. In fact bills would have gone down further in the short term but for the introduction of competition.

The electricity regulator has also abandoned his attempt to introduce price controls on the generators via the back door - one of the elements that made up the more ambitious pounds 30 cut in bills he originally proposed. His first set of proposals attempted to curb the premium generators can charge over the pool price. That's now gone.

So who's got the better end of the deal - the consumer or the shareholder? This is one of those cases where we will all have to just wait and see. The Prof may be right that competition will eventually bring significant benefits but it does take something of a leap of faith. So far the newcomers have hardly been battering the doors down in their scramble to enter the market. Only Centrica has so far declared a serious interest. The real test is whether the BPs, Tescos and Sainsburys are going to join the fray.

BG's howls of protest were over nothing

Could British Gas really be so brazen as to announce a pounds 1bn to pounds 2bn share buyback with its interim results next month? After all the carping about how the regulator's new price controls were going to destroy the company, such a move would seem a bit of a cheek. "Only kidding," BG would in effect be saying about all those howls of pain so vocally expressed over the last year. After such an about turn, could anyone take what it says seriously ever again?

Actually the shares have been indicating for some little while now that things at BG are not nearly as bad as the company was saying during its attempt to water down the regulator's proposals. The shares kept on rising strongly right through publication of the Monopolies & Mergers Commission report which largely backed Clare Spottiswoode's demands. Many analysts are saying they have further to go.

Now along comes Simon Flowers of NatWest Securities, and others, to say the balance sheet would be easily capable of taking on an extra pounds 2bn to pounds 3bn of debt. Factor in the pounds 513m BG has to pay for the windfall profit tax and that would leave anything up to pounds 2.5bn for buy-backs or special dividends. It would also leave BG with debt gearing of well over 150 per cent, but as Mr Flowers points out, that's nothing exceptional for a utility with long life assets. Moreover, cash interest cover would remain comfortably above 6 times for the foreseeable future, which compares favourably with many other utilities.

So just what was BG complaining about when it challenged Ms Spottiswoode through the MMC? To be fair, there's a world of difference between the effect of tough new controls on revenue generation and reshaping the balance sheet by swapping equity for debt. For the time being, debt comes cheaper than equity so this might seem a sensible thing for BG to do. Most people won't see it that way, however. To them the act of returning a couple of billion to shareholders is strong evidence that, far from being too tough on BG, the regulator wasn't nearly tough enough.

Despite all this, if BG can afford to do it, it probably should. Lord knows, the company has had to weather worse publicity than a share buy- back is likely to generate. After the traumas of the past few years, long- suffering shareholders deserve a bonus.

Bank settles back for some quiet reflection

On the face of it, yesterday's retail sales figures provided further grist to the headline writer's mill. The highest rate of high street sales growth since the boom of the late 1980s looked suspiciously like Boom Boom Britain again and the Bank of England's willingness to hold fire on further interest rate rises was starting to look cavalier.

Actually a closer look at the figures suggests the underlying picture is rather less alarming. Household goods are still walking out of Dixons at a fair old lick, but the rate of growth has slowed markedly since May and June, when the bulk of the building society conversions took effect.

It's not such a good story, of course, but the possibility that consumers have not allowed a few cash windfalls fundamentally to change their spending and saving habits looks more persuasive than it was. The new game of chase the windfall has presumably distorted the figures to an extent, but the high levels of building society deposits announced separately yesterday suggest many people are content to stash their windfalls away.

It all chimes pretty well with a survey this week from Robert Fleming which estimated only a quarter of the pounds 35bn of handouts would actually be spent. One forecast predicts the windfall boost to consumption could be as little as just 0.25 per cent this year, far less than most have expected.

Of course, the real picture is impossible to predict as no-one knows how much of their new-found dividend income former members of the mutuals will choose to spend, or how their spending patterns will change in the long term because they feel richer with a share certificate in the top drawer.

On balance, however, the Bank's monetary policy committee appears to have got it about right. It jacked up rates to the level Ken Clarke would or should have if he hadn't had an eye on the election. Now it is, rightly, trying some calm reflection.