COMMENT: Can this accident-prone regulator survive?

"The regulator's new review is bad for the regional electricity companies and their shareholders but not nearly as bad as it could have been."

That the debacle of Professor Stephen Littlechild's electricity price review should end finally in a flourish of leaks and insider dealing, seemed somehow wholly predictable and appropriate.First he cocked up his price review, then he cocked up the timeing of its repeal, now he has messed up on the announcement of its replacement. It is hard to see how this Forrest Gump of a regulator can survive the latest shambles.

With customary naivete, the electricity watchdog delivered its latest "private and confidential" missive to the twelve regional electricity companies first thing yesterday morning under strict embargo until it had been released to the stock exchange the following day. By coffee time, there were hundreds of people who knew the outcome of Professor Littlechild's keenly awaited second stab at the problem of controlling electricity charges. With so many insiders it was inevitable that the information would leak. And so it did.

The regulator's new review is bad for the regional electricity companies and their shareholders but not nearly as bad as it could have been. The up front, one-off cut in electricity prices - 10-13 per cent - is just a little higher than expected but the price cap thereafter - RPI minus 3 - is better; most analysts had pencilled in RPI minus 4.

Up went share prices and those quick off the mark, the market professionals, made money. By mid afternoon, the luckless professor was on the train down to London for a rushed evening press conference, the announcement of his latest review flushed out early.

Having got the balance between shareholder and customer so badly wrong first time round, this accident-prone regulator has a lot to prove with his latest controls. What's the verdict? There is not much humble pie in this report. Prof Littlechild blithely concludes that the process he adopted last time was "fundamentally sound". The changes he introduces in his methodology are presented as little more than tinkering at the edges in a manner suggested by the Monopolies and Mergers Commission when it looked into the price controls imposed on Scottish Hydro.

According to the regulator, the assumptions he made last August about the scope for cost cutting among the RECs were perfectly alright. A few companies even said they could not see ways of reducing their costs to the extent he had assumed, the regulator protests. Now there's a thing. However, while Professor Littlechild chose to include the cost of redundancies in operating costs, the MMC thought that inappropriate. It is this difference that allows Offer to toughen the price control formular from RPI minus 2 proposed in August to RPI minus 3.

As for the up-front, one-off cut, that is derived by applying a lower asset valuation. This in turn reduces the sanctioned return to shareholders with the consequence that a corresponding tightening of the price controls can be achieved. Though the two changes to method described may not seem very dramatic, the effect most certainly is. They reduce the amount which the RECs have for distribution to shareholders or spending on diversification by nearly half as much again as the August proposals.

Even so, there is nothing here seriously to unnerve the RECs or the various predators standing in the wings to snap them up. The scope for gearing up these companies with debt is still considerable and in truth, the ability to cut costs remains quite substantially greater than the regulator seems to think. Nor is there anything here seriously capable of answering the now widespread public concern that has grown up around these very wealthy private sector monopolies.

With his characteristic "by the book" stubborness, Professor Littlechild also rejects any form of profit sharing, a practice which is now being introduced voluntarily by a number of the water utilities. Furthermore, any retrospective clawback of excess profit from the previous price control period would be a breach of faith with investors and a disincentive to efficiency, Professor Littlechild argues.

It is perhaps inevitable that the man responsible for inventing the RPI minus X way of controlling prices among privatised utilities should think in this way. A radical and bold concept when it was first introduced for the privatisation of British Telecom, it has become, in its undiluted form, a rather tired and unexciting thing, which is apparently incapable of delivering the value for money that consumers now require. Professor Littlechild too seems unable to deliver the change that an ever more demanding public requires.

Edgy times for US economy

The Fed's decision yesterday evening to cut rates was greeted with predictable euphoria by markets. Now the question is whether this presages a more sustained reduction in rates. Here opinion remains sharply divided. What is at issue is whether the US economy is simply undergoing a growth pause or whether it is heading south.

The optimistic reading of the US economy points to the absence of financial stresses that usually usher in a full-scale recession. Inventories have been slashed after an unsustainable growth spurt in the last quarter of 1994. As this process comes to an end, the economy will resume a steadier growth, with net trade providing a substantial fillip, thanks to the devaluation of the dollar.

If this reading of the economy is correct, then what the Fed is doing is moving interest rates into neutral. Having over-tightened back in February, some compensation is now called for. Those looking for quite substantial cuts in future months are likely to be disappointed, however. By contrast, the pessimistic reading of the US economy focuses on the risk that the inventory correction could spill over into a broader decline in activity. The scale of job losses in the May employment report were an ominous sign here. The sharp drop in the Conference Board's reading of consumer confidence last week was also a worrying signal.

The context in which this debate occurs is an economy in which inflation, running around 3 per cent, is behaving in more docile fashion than in the past. Little wage pressure is evident despite tight labour markets. However, the unemployment rate is still under the 6 per cent rate usually associated with an acceleration in inflation.

Politics adds a further dimension to interpreting the Fed's decision. Alan Greenspan, the chairman, is due to give his bi-annual Humphrey Hawkins testimony to Congress later this month. With deputy chairman Alan Blinder reportedly lobbying for the top post, Mr Greenspan is likely to have more than half an eye on his own chances of reappointment next year.

It is clearly easier to win the hearts and souls of Congressmen, as well as the favour of the President, with an interest-rate cut under your belt. Further cuts thereafter will only be made if concrete evidence of weakness in the US economy emerges. The employment data both today and in future months will properly be the focus of much market attention.