Comment: Cruickshank's carrot-and-stick does the trick

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The Independent Online
Don Cruickshank would appear to come from an altogether more subtle school of regulation than his opposite number at Ofgas. Whereas Clare Spottiswoode has set about British Gas with lead piping, the Director General of Telecommunications looks like getting his way with BT using a much cleverer combination of carrot and stick.

Indeed, the package of price and fair trading controls presented yesterday by Mr Cruickshank looks as neat a stitch-up job as any done on a privatised utility since the merry band of regulators leapt onto the scene a decade ago. BT will undoubtedly bellyache. It will complain about natural justice and the lack of an appeals procedure against the regulator's proposed powers to tackle anti-competitive behaviour. It will squirm and wriggle and wring its hands at the demanding price cap which, indeed, is more demanding than it appears at first sight. But in the end it will probably accept.

As the consultative process has evolved, culminating in these final proposals, Mr Cruickshank has either knocked over the obstacles erected in his way by BT, or simply swerved around them.

BT wanted a new regulatory regime that reduced quite dramatically the range of services that are price-capped. It has got precisely that. Under the new formula only a quarter of its revenues will be governed by price controls whereas under the existing controls it is two-thirds. BT says it wanted an approach that would encourage investment and allow competitors sufficient headroom to enter the market. It seems to have got that too. This is balanced by a Fair Trading condition which, if written into its licence, would give Mr Cruickshank and any successor greater discretion in tackling anti-competitive behaviour.

BT finds this abhorrent, but unlike the issue of pricing where the industry presented a more or less common front against the regulator, few support its stance on this other matter. Refusing to accept the fair trading proposals and marching off to the Monopolies and Mergers Commission risks looking like an act of truculence which, in any case, is not guaranteed to produce a more favourable outcome for BT.

British Gas looks set inevitably on a course for the MMC but that is because it believes shareholders' funds are being expropriated. That is not the case with BT. The smart upwards movement in its share price yesterday makes it very hard for BT to argue the British Gas case, that Oftel is being beastly to Sid. BT should be thankful for small mercies and accept Mr Cruickshank's proposals.

Calling the regulators to account

Few outside Yorkshire Water's own shareholders are going to have any problem with the penalty imposed on the company yesterday for last year's drought fiasco and other related management failings. If Yorkshire Water is to be believed, not increasing prices by more than the rate of inflation next year amounts, in effect, to a fine of about pounds 40m over the lifetime of the present price controls. Yorkshire's pricing formula was originally set to allow it to raise prices by two and a half per centage points above the rate of inflation. On top of the revenue loss, Yorkshire is also being forced to spend an additional pounds 50m shoring up its crumbling infrastructure.

There is, however, one thing that Ian Byatt, the water regulator, does not explain in an otherwise lucid, clear and comprehensive report on Yorkshire Water's failings. And that is how the fine was arrived at. According to a spokeswoman for Ofwat, it was a question of the director general's "judgement" of what was appropriate, taking into account the fact that the company paid out a special dividend of pounds 50m last year. Many will find the judgement too lenient; rather fewer, too harsh. The fact that Mr Byatt doesn't explain himself lays him open to the old criticism of arbitrary regulation.

Yorkshire has agreed the penalty, as well it might given the weakness of its position. All the same, something needs to be done to standardise regulatory proceedure and make it more transparent and accountable. As things stand, we have a series of all-powerful regulators waltzing around by themselves, decision-making in a way which is subject to neither test nor appeal. Each privatised monopoly has its own particular regulatory needs, requirements and priorities, but even so some commonality in approach and judgement might reasonably be expected. In practice there is hardly any.

It is perhaps unfair to lay such criticism on Ian Byatt, one of the more enlightened, and thoughtful of the regulators. This is especially the case given that most people would heartily agree with his action against Yorkshire. Nonetheless, only in Britain would it be possible to impose such a vast fine on a company without accounting publicly for how it was arrived at. The fact that the regulator may have got his decision-making about right both in the Yorkshire Water case, and in the more complex BT price review, is no excuse for the arbitrary nature of the process. Because regulators act alone and without public debate, their judgement is highly likely to be at fault, or at least out of tune with the times. Priority should be given by the next government to root and branch reform of the system. Both the regulated utilities and the public at large are rapidly losing all faith in it.

Tesco tip-toes into financial services

Tesco's move into financial services is not so much a running jump into the deep end as a tentative toe in the water. Supermarket watchers had been braced for something much bigger - a credit card, say, or even a full-blown deposit account branded with the Tesco name. Instead we have got a half-way house, a budget card which is also a debit card. Basically it is a NatWest account that will help you do your Tesco shopping. In other words, little more than a loyalty gimmick.

All the same, we can safely assume this is a stepping stone to other whizzy financial products, such as the Tesco life assurance plan or the Sir Ian MacLaurin pension scheme (he does retire soon after all). Tesco should beware, however. The route to financial services is not always an easy path as other retailers have discovered. Marks & Spencer launched its financial services products with much fanfare but has found the going much tougher than it expected. Virgin, on the other hand,has fared better with its PEP and is now going into life insurance.

The aim here is clear. Retailers and other top companies want to use the strength of their brand names to bolt on other products. Brands such as Marks & Spencer and Boots always rate highly. By contrast everyone loves to hate the banks which are seen as inefficient and unfriendly. As the banks continue to push customers further away with cash machines and telephone banking, the supermarkets are drawing theirs closer to their bosom with loyalty cards and the like. The banks are easy prey so we can probably expect to see more announcements like this. And who knows, it may work.