Generators facing stiffer competition

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Offer, the electricity industry regulator, has cast a shadow over the £4bn sale of shares in National Power and PowerGen with an announcement that the 12 regional electricity companies will be allowed to generate more power.

The regional companies are limited to generating about 15 per cent of their own electricity, and some have been lobbying to have the ceiling removed.

National Power and PowerGen have privately expressed concern about the move, on the grounds that it could create vertically integrated regional electricity monopolies. Although there will be competition in domestic electricity supply from 1998, it is widely expected that the regional companies will have a de facto monopoly for a considerable period after that.

Professor Stephen Littlechild, director-general of Offer, declined to set down clear rules but said he would consider individual requests from the regional companies to lift the generation limits. He also moved to ease the generators' fears over potential cross-subsidies by saying the costs of own-generation could not be passed through to domestic customers who have no choice of supplier.

"I conclude that it would be reasonable to consider a regional company's request to increase its own-generation limit, on condition that it accepted explicit restrictions on the contracts it signed with its supply business, and at a minimum would be prohibited from passing additional own-generation contracts into its franchise market," he said He said his aim was to increase competition in generation while avoiding allegations that the regional companies were exploiting captive markets.

His decision is thought to have dismayed some regional companies, which wanted the limits removed with no qualifications. It has also left National Power and PowerGen without a clear picture of where they stand as regards competition.

Neither generator would comment, but one industry source said: "We expected a clear decision and he has ducked it in favour of what appears to be ad hoc regulation. It is a major issue and he has left it effectively unresolved."

Eastern Electricity, one of the most aggressive of the regional companies in the power generation market, said: "Our strategy is for careful expansion of our business from a sound base and we firmly believe that removing the constraints would improve competition in generation, bringing lower prices to all electricity customers."

The entire area of increased threat from regulation and competition will form a key part of the pathfinder prospectus for the sale of the Government's remaining 40 per cent stake in National Power and PowerGen, which is due to be published at the end of this month.

Separately, Eastern Electricity announced it would buy back a further 3 per cent of its shares at a cost of £55m under current market conditions. The company bought back 5 per cent of its shares last year.