Business outlook: Regulatory review may prove damp squib

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The big event of the year for utilities should be New Labour's promised reform of the way electricity and water companies are regulated. In the end, however, this may prove something of a damp squib.

While in opposition Labour made political capital out of the apparently excessive profits of the privatised utilities and promised to do something about them once returned to office. The review of regulation launched by Margaret Beckett, President of the Board of Trade, emerges around February.

The more radical ideas canvassed before the election, such as profit- sharing to cream off annual excess earnings, have almost certainly been ditched. But other initiatives promise to herald a limited shake-up of the system inherited from the Tories.

One idea which has found favour is to merge the gas and electricity watchdogs, Ofgas and Offer, in a move which will probably see the departure of Clare Spottiswoode, the gas regulator, when her five-year contract expires in October. Professor Stephen Littlechild, the electricity regulator, is unlikely to get the job of "super regulator". The review will also streamline and toughen consumer representation and iron our differences between regulators' powers across sectors.

Industry executives hope the review will settle the thorny issue of whether power generators can buy regional electricity companies (RECs), allowing PowerGen to bid for all or part of Midlands Electricity and giving the green light to mergers between RECs.

If gas was rarely out of the headlines in 1997, with the landmark British Gas demerger vying for space with price cuts, electricity promises to dominate in 1998. By the end of January Professor Littlechild will almost certainly have announced a delay to the start of domestic competition.

A six month postponement from April to September looks increasingly likely. Tony Boorman, head of competition at Offer, says: "People have always understood that there were risks with the time-scale ... The official line is that April looks very difficult."

Meanwhile Offer will give the first word on the size of price cuts to be levied on the RECs' distribution businesses in 2000, with a big one- off plunge in revenues a near certainty. And by the autumn, Ian Byatt, the water regulator, will have decided on the size of the price reduction for water companies in 2000. Shareholders have been warned.

- Chris Godsmark