Lights dim for power broker: Professor Stephen Littlechild, the electricity regulator, has been overtaken by events

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The Independent Online
PROFESSOR Stephen Littlechild, the electricity regulator, admitted last week that the structure of the industry was inadequate and may never develop into a fully competitive market.

'There is not enough diversity in generation and I remain to be convinced that there ever will be,' he said, attacking the duopoly of PowerGen and National Power, the two generating companies.

Defending the 'dash for gas' by electricity companies that have been building gas-fired power stations, he said: 'The problem is to stimulate a competitive market when there isn't one. The rules I administer as regulator are a second best for competition.'

Professor Littlechild has found himself at the centre of the storm over the Government's plans for coal pit closures and the running of the electricity industry. In recent weeks he has been accused of failing in his regulatory responsibilities.

His admission of the inadequacy of the industry structure may be an indication that the criticisms are hitting home. The Major Energy Users' Council (MEUC) accuses the regulator of failing to prevent manipulation of prices in the electricity 'pool' - the basic supply of Britain's power - by the two generating companies.

Professor Littlechild himself has accused the generators of price manipulation, albeit within the rules, and has threatened them with a Monopolies and Mergers Commission referral. Beyond that, he has done nothing to stop the practice.

Nor has he done anything to dampen the 'dash for gas' that is threatening the coal industry. 'We nagged Littlechild to look at the gas price to see if the new gas-fired power stations would produce cheaper electricity, but he did nothing,' said Peter Rost, chairman of the MEUC. Only now is the regulator looking at these contracts, and he expects to report his findings by January. His critics say this is slamming the stable door after the horse has bolted.

Professor Littlechild was installed as electricity regulator in April 1990 to provide the missing forces - the checks and balances - that would make this artificial construct behave as efficiently as a real market.

He is a quiet, bearded academic from Birmingham and Stanford universities. He was more attracted to the study of business than the practice and has become an expert on industry regulation.

The Office of Electricity Regulation (Offer) operates from the 15th floor of a block in the administrative district of Birmingham. Under Professor Littlechild's control are a total of 214 officials around Britain. Last year, he was paid around pounds 80,000 for his services.

He was bequeathed an almost impossible system by Cecil Parkinson and John Wakeham, the ministers who privatised the electricity industry. The two generating companies did not constitute a real market. Messrs Parkinson and Wakeham, now in the House of Lords, are therefore most to blame for the chaos in the electricity industry.

As a staunch supporter of competition, Professor Littlechild has been trying to dilute the power of the generators. For this reason he had little inclination to slow the 'dash for gas'. The desire of the regional electricity companies to build new power stations would challenge the duopoly of National Power and PowerGen in electricity production.

But his critics accuse him of not taking an active enough role in regulation. 'It is up to the companies to make their own commercial decisions about gas,' the regulator said. 'I simply check what they have done.'

However, his refusal to monitor the 'dash for gas', and to regulate it only after the regional companies have signed up their gas contracts, has left everyone bewildered. Until his review is complete, no one can be sure whether gas or coal-produced electricity is cheaper.

He is required by law to ensure the regional companies buy electricity at the 'best effective price', without ever defining precisely what this means in advance. 'After this review we will have a better idea of what the BEP will mean,' he said. But if he had defined it at the outset, many of the new gas- fired power stations might never have been planned as they would not have met the regulator's criteria. That, in turn, might have strengthened the Government's resolve to maintain the coal industry.

Ironically, this may be the outcome of Professor Littlechild's review. Industry experts believe many of the gas contracts signed by some regional companies over the past two years were at prices so high that they cannot produce electricity economically. According to the East Midlands regional electricity company, only about 10 gigawatts out of a planned 25 gigawatts of new electricity will ever be produced.

Equally ironically, since only about half of the new electricity will be produced by companies other than the two generators, this means Professor Littlechild may well have failed to increase competition.

The politicians handed him a hopelessly ill-considered industry structure, but he has made his own problems worse by failing to intervene to shape the market. Unless Professor Littlechild changes tack, the view from his Birmingham office block is likely to grow bleaker.

(Photographs omitted)