Energy Group threatens regulator

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The Independent Online
Energy Group has threatened to take the electricity watchdog to the Monopolies and Mergers Commission unless it lets the company charge household customers more than it currently will be allowed to when the market is opened to competition next year.

Stephen Littlechild, Director- General of Electricity Supply, has tentatively ruled that Energy Group's electricity distribution company, Eastern Group, will have to cut bills to households by between 7.2 per cent and 9.7 per cent from April next year.

The cuts were contained in Professor Littlechild's consultation paper published two months ago, in which he called for average cuts across the electricity supply industry of up to 10 per cent. He said average domestic bills would fall by about pounds 27 from April.

Eastern, which with 3 million customers is the UK's largest electricity supplier, complains that the new pricing regime is unfair. The company says Professor Littlechild's new pricing fails to take account of the volatility of small electricity users' demands, and that this volatility makes costs higher for it than for companies supplying electricity to big business.

Paul Marsh, Eastern's finance director, said the company "would certainly consider" asking Professor Littlechild to refer the issue to the Monopolies and Mergers Commission, should the regulator not modify his position. He declined to say how much the regulator would have to satisfy Eastern.

Mr Marsh's comments are the first public criticism of Professor Littlechild's proposals, which were seen by the industry as being less arduous than earlier papers.

Analysts like Nigel Hawkins at Yamaichi International are doubtful that any of the companies have the stomach to take the issue to the MMC.

"Any regional electricity company that puts its head above the parapet and risks delaying competition in 1998 isn't going to endear itself to the current government," he said.

Eastern's standard domestic tariff is about pounds 267 a year, about average for the UK. Of that amount pounds 199 accounts for the cost of purchasing and of running the supply business. On that basis it is the most expensive of the regional electricity companies, costing pounds 32 more than Norweb, the cheapest.

A spokeswoman for the Office of Electricity Regulation, said Professor Littlechild will give his definitive ruling on price caps in mid-October. She said he is listening to comments companies have made since the last paper.

However "the Director-General has done a lot of thinking on this, and these are the figures he's come up with," she said.

Mr Marsh explained that Eastern disagrees, in particular, with the regulator's assumptions on what the price of coal will be after contracts with companies supplying coal to the electricity generators expire next year.

Professor Littlechild has said the price of coal for generators next year will fall by between 12 per cent and 25 per cent.

Mr Marsh counters that the price of coal is likely to be volatile, and price caps based on assumptions about a stable and declining coal price are unfair.

"The caps are too tight to deal with that level of risk [for suppliers]," he said

In April, when Britain moves to a fully competitive market, 23 million domestic electricity users will begin to be able to choose their electricity provider, regardless of where they live.