DTI plans review of utility regulation

The Government yesterday pledged to redress the balance between utility customers and shareholders with a review of how privatised companies are regulated, but admitted that the main planks of the existing system were likely to be preserved.

Key plans to ensure poorer consumers did not come out worse off from emerging domestic energy competition also ran into immediate conflict from the Clare Spottiswoode, the gas regulator, who warned against one group of customers subsidising another.

Margarett Beckett, President of the Board of Trade, said the interdepartmental review, which would take several months, would look at all aspects of the way the privatised utility companies were regulated from price controls and dividends to consumer representation. The results would then go out to public consultation.

She said privatisation had given the impression that shareholders interests came first and promised any changes would leave "a very tough" regime. "Satisfied consumers are the key to regulatory stability. The balance between the returns to shareholders and those to consumers from efficiency gains is part of this debate."

However, she also sought to reassure companies that some of the more radical proposals previously floated had been ditched. "Were not talking about the Government taking control by the backdoor."

One option, trailed by Labour before the election, was to introduce annual profit sharing to cream off any excess profits which were not intended to emerge under longer-running price regimes. It would work alongside the existing price cap system, which limits bills through a formula based on inflation.

Mrs Beckett also confirmed the Government had ruled out moving to a rate- of-return regulation system on the US model, where prices are directly linked to investment spending, which critics have argued led companies to "gold plate" their networks.

The profit sharing plans ran into swift opposition from Midlands Electricity, the US-owned regional power company. Mike Hughes, chief executive, warned: "Profit sharing is both bureaucratic and it puts up costs. It damages incentives and it pushes up prices."

Ofwat, the water watchdog, also cast doubt on the system. "The question is whether that reduces incentives so customers get a larger share of a smaller cake," said a spokeswoman. A DTI source later stressed the need for regulatory consistency, describing Ofwat's voluntary system of profit sharing as "slightly bonkers".

Another concern was that pre-payment meter customers on low incomes were seeing the smallest savings from domestic energy competition because they cost more to supply. "We must ensure that competition provides a better deal for all consumers, including the poorest," said Mrs Beckett.

Ms Spottiswoode said it was impossible to have "invisible cross subsidies". "There's no point in trying to fight for things that are not possible any more."