COMMENT : Grid looks vulnerable as watchdog locks on

'Grid shareholders may not like it, but they can't say they too weren't set an example. Hanson's timing in selling out at 192.5p is looking better by the day'

Professor Stephen Littlechild has seen the future and it appears to be Spottiswoode coloured. There was never any doubt that the electricity industry regulator was going to come down hard on the National Grid. But the example of his counterpart over at Ofgas, Clare Spottiswoode, has given him fresh inspiration and fresh ideas about how to apply the thumbscrews in the most unpleasant way possible.

The new price control formula proposed yesterday by Prof Littlechild for the Grid was harsher than the City had been expecting and it has duly produced the predicted howls of anguish. David Jones, the Grid's chief executive, managed to stop short of accusing the good professor of expropriating shareholders' funds - one of the many colourful charges levelled by British Gas against its regulator. But he is clearly a far from happy man. The proposals, he fulminates, are unprecedented in their severity and illogicality and amount, moreover, to penalising the business for its past success.

The chairman of British Gas, Dick Giordano, might question the bit about them being unprecedented, but otherwise he must be in common cause today, mourning the beastly way regulators take with one hand and rob with the other.

Alas for the National Grid, all those months spent with Offer explaining why the business is absolutely nothing like BG's TransCo (except that both are monopolies, both run nationwide systems for transmission of energy and both have grown fat on bumper profits) have come to nought.

Prof Littlechild has concluded it is indeed a lot like TransCo and, like Ms Spottiswoode, he has decided to remedy the situation by recalculating the value of the regulatory asset base on which the Grid is permitted to make a return. This may sound like arcane stuff that only academics such as the professor could be bothered to spend time on, but it is of critical importance to TransCo and the Grid. Prof Littlechild has decided, not unreasonably, that the worth of the Grid should bear some relation to what shareholders paid for the assets, not solely their current cost replacement value based on the figures in the accounts.

In this way the value of the business falls from pounds 5bn (the Grid's figure) to pounds 4bn (Offer's figure). Unless Mr Jones can come up with some impressive reductions in running costs, he is looking at a big hit on profits.

This is where the pincer movement takes effect. The Grid reckons it can only shave 2 per cent a year at most from operating costs. The Professor believes it can do twice as well, pointing to numerous studies by management consultants and the Grid's own past performance. In reality the gulf between the two sides may not be as big as the Grid might have us believe. The main dispute on asset valuation concerns its telecommunication arm, Energis, which the Grid says is worth nothing and Offer values at pounds 400m. The actual effect of this, however, is not great - only pounds 28m a year off operating profits of pounds 656m. Likewise 4 per cent annual efficiency gains hardly look daunting against the 35 per cent achieved in the previous five years and the Grid's declining capital expenditure profile.

But there is a bigger picture which the gridlocked Mr Jones is missing. His company is unpopular. Its boardroom excesses are legion and it needed to be dragged kicking and screaming into giving customers a pounds 50 rebate at the time of flotation. The new price curbs, even as they stand, would only mean pounds 4 off the average bill. Prof Littlechild is hardly likely to settle for less than that after his maladroit handling of the first electricity distribution price review.

Supposing Ms Spottiswoode stands her ground with TransCo, then Prof Littlechild's hand can only be strengthened. Grid shareholders may not like it, but they can't say they too weren't set an example. Hanson's timing, in selling out at 192.5p, is looking better by the day.

Fund managers should speak out on excesses

The story about the institutional investor which sold its shares in Matthew Clark because it disapproved of excessive relocation expenses for directors is quite the most amusing financial vignette yet to have emerged from the silly season. This is not because of the episode itself - for a small cider company like Matthew Clark to pay its finance director nearly pounds 500,000 to move house is an undeniably disgraceful episode which demands protest - but because the institution involved never publicised the matter and even now is reluctant to emerge from behind the veil. It's a bit like the terrorist bomb for which no organisation ever claims responsibility. The public at large is led to believe there is something, somewhere, that someone is not very happy about, but the point is lost because nobody is prepared to stand up and be counted.

There is a serious point to this story, however. Institutional shareholders are the only people who can actually do anything worthwhile about boardroom excess but so far they have proved remarkably reluctant to act. Fund managers have always regarded executive pay as largely irrelevant to the primary objective of maximising investment returns, and in any case, many of them are quite highly paid themselves.

But things are changing. There is a growing realisation among fund managers that boardroom excess does matter, and not just because the public at large is outraged by it or because pension fund trustees are beginning to demand curbs. In smaller companies, excessive executive pay can amount to a very substantial proportion of the profits. And even in larger companies it has a tendency to drag up salary levels throughout the organisation, eventually making the company uncompetitive.

If the institutions are going to have any impact, however, they really do need to start putting their mouths where their money is. The silent protest, the quick sale, may make them feel worthy, it might even satisfy the pension fund trustees, but it hardly provides the example to others that is needed if the executive feeding frenzy is to be curbed.

Euro factions not yet in harmony

The European Monetary Institute, the precursor to the European central bank, today publishes its first "progress report" on the Target project. If nothing else, this shows that while British Euro-sceptics might continue to believe that the single European currency is never going to happen, or hope it won't in any case, everybody else in Europe is steaming ahead with preparations confident in the knowledge that it will.

Target, a system for settling big interbank transactions in the euro, is based largely on British expertise and structures. Just to invent the system, however, is not to participate in its workings, and beneath the picture painted in today's report of steady and harmonious progress, lies a snakepit of disagreement and squabbles.

The French and the Germans want EMU members to get better terms of access to intra-day credit in the euro than those outside the new currency. The British naturally want a system that treats ins and outs the same. On this matter, there is no "progress" at all.