Grid told to reduce its prices by 20%

The National Grid was contemplating last night whether to follow the lead of British Gas and go to the MMC after its regulator, Professor Stephen Littlechild, announced price controls which, though softened slightly, will still remove pounds 1bn in revenues over the next four years.

The company has until the end of this month to decide whether to accept the proposals, which would cut pounds 4 off the average electricity bill by requiring the Grid to reduce prices by 20 per cent next year and by 4 per cent in the following three.

Professor Littlechild said his final set of proposals were "tough but realistic", representing a "reasonable balance" between shareholders and customers. The regulator has relaxed the formula compared with his initial proposals in August so that the Grid will have to achieve a 4 per cent annual improvement in efficiency instead of 6 per cent.

He has also decided to allow it an extra pounds 60m of capital expenditure over the four years and increased the size of the asset base on which it can earn a rate of return by reducing his estimate of the value of Energis, the Grid's telecoms business, from pounds 400m to pounds 250m.

The Grid declined to comment yesterday, other than to say it would give its response by 30 October.

However, the net effect is only to allow it an extra pounds 200m in revenues compared with the regulator's initial proposals which the Grid said amounted to "expropriation" of exceptional gains. The proposals, it said, were "harsh, inconsistent and ill-founded" and would require "significant changes if they are to be acceptable".

Despite a lobbying campaign by Grid investors, during which 2,500 shareholders wrote to Offer and 10 big institutional investors submitted written evidence, Professor Littlechild said he saw no justification for a further relaxation in the price controls.

A number of large shareholders are thought to have urged the Grid to take its case to the MMC. But analysts were divided yesterday on whether it would. "My feeling is that the Grid will probably accept the proposals," said Andrew Stone at Daiwa Securities. Another analyst said: "I don't think the cost cutting required is too drastic despite all the huffing and hawing."