Events that sparked electrical storm

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Stephen Littlechild, the electricity regulator, cast his first shadow over the pounds 4bn sale of the Government's remaining shares in the electricity generators as far back as January.

Concerned about sharp fluctuations in the price the generators charged, he said was considering a formal inquiry.

The surprise move came days before the Government was to publish the pathfinder prospectus for the sale of shares in National Power and PowerGen.

The Treasury's reaction was to postpone the prospectus - which gives most details of the sale apart from the price - to allow revision to reflect the development. The delay was widely interpreted as an over- reaction by the Treasury and its advisers, Barclays de Zoete Wedd and Kleinwort Benson.

Shares in the two generators hardly moved, and the prospectus was published with minor modifications on 6 February.

The marketing campaign to sell the shares went into top gear, with Government advisers content that the regulator was no longer a threat to the sale.

The view that all was well was to change in dramatic fashion little more than a month later, when Professor Littlechild made his second intervention in the electricity markets this year.

With hindsight, what took place in late February and early March was eerily reminiscent of what had happened in January. But for reasons now at the heart of an internal Treasury investigation requested by the Stock Exchange, the outcome was quite different.

It was this second incident that led to accusations by Labour that the Government was insider-trading by selling shares without telling the public the full facts.

The events that led to severe embarrassment for the Government began in first days of March. Professor Littlechild informed the Treasury and probably the Department of Trade and Industry that he was considering an announcement of a review of rules governing electricity distribution prices - the amounts charged to final customers by regional electricity companies.

The regulator or an executive from his office - details remain confused - made clear that what he was about to say could have an effect on the electricity industry as a whole, beyond regional companies themselves. The implication was that Professor Littlechild was worried that National Power and PowerGen could be caught up somehow in the backwash.

On the evening of Friday, 3 March, the Treasury, called in its advisers, the merchant bankers and the lawyers, Slaughter and May, to discuss what to do about Professor Littlechild.

It is hard to over-emphasise the responsibility that night on Sir George Young, financial secretary to the Treasury, and Kenneth Clarke, the Chancellor. With pounds 4bn of proceeds in their sights when the sale went ahead after the weekend, the Treasury ministers had agonising choices to make. Should the sale of shares be postponed, or should the Treasury say nothing?

Their first reaction was to approach Professor Littlechild. The merchant bank advisers asked him if he considered the prospectus was still accurate.

The Chancellor repeated yesterday that Professor Littlechild had cleared the prospectus. In fact, the document already contained a warning about regulatory risk. The new inquiry being considered by Professor Littlechild did not strictly concern the generators at all.

The ministers' decision was not the only agonising choice that weekend. Professor Littlechild, it is believed, changed his mind twice about making an announcement on prices.

The Chancellor's attempt to cite the regulator as authority for the Treasury's decision to go ahead may not hold water when the results of the inquiry into the affair are released.

Under fierce attack, Professor Littlechild left little doubt that in his view it was not his job to decide what was or was not market-sensitive information.

It is understood he made clear to the Government the previous week, in the run-up to the fiasco, that responsibility lay with ministers and their City advisers.