Predatory eyes light up as price setting passes to power firms

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There will be no fanfare, no glitzy reception, there probably won't even be a press release. But the final vestige of electricity nationalisation will tomorrow be removed.

After 12 years of deregulation, during which prices have fallen by 30 per cent, companies will be able to charge us what they like for supplying electricity. Callum McCarthy, the head of energy regulator Ofgem, will surrender his price-capping powers and in their place will come naked free-market forces.

The early signs are that electricity bills will become dearer in the coming months as companies enjoy their new-found freedom and try to offset dwindling margins in the wholesale market. Only the Competition Commission will prevent companies misbehaving.

The effects of removing the price caps – which will also include the gas market – won't be restricted to the monthly bill.

Since privatisation, scores of British electricity companies have been gobbled up by continental European rivals, often operating in monopoly domestic markets. Removing the last barrier to a truly competitive sector will make the remaining British-owned electricity firms even more of a tasty morsel to foreign predators.

It wasn't supposed to have happened like this. Mr McCarthy's decision to deregulate the market was greeted by a chorus of disapproval from MPs and consumer groups earlier this year. The February announcement is even thought to have caused a rift between the headstrong Mr McCarthy and Energy Minister Brian Wilson, regarded in Westminster circles as a "driven" politician.

The minister doesn't disagree that price controls should be lifted but is concerned that, if applied across the board, it will hamper the Government's attempts to eradicate fuel poverty by 2020.

It's too late now because Mr McCarthy has made up his mind, but Mr Wilson is still worried about the 2.5 million people on low incomes who use pre-paid meters for their power. These customers pay up to 30 per cent more for their electricity than those who use direct debit. The fear is that electricity firms will in effect price this band of customers out of the market.

Last month Mr Wilson's Department of Trade and Industry fired off a letter to the regulator expressing concern over the plans and the timetable. "The DTI told McCarthy to get back in his box," says a Whitehall source. But with powers to act almost autonomously of White- hall, Mr McCarthy went ahead with his plans undeterred and the Government now faces a conflict between its social and economic aspirations for electricity.

The gas and electricity watchdog Energywatch is also worried. A spokesman says: "The changes will come into affect on 1 April, but the hardship the Ofgem decision will cause to vulnerable energy customers is not funny at all."

Most electricity companies refuse to openly discuss their plans for prices. Privately, however, they say prices will rise in the coming months. Many cite planned improvements to customer services as reasons for the increases, but few are prepared to comment on pre-paid customers. In the longer term, though, prices could fall as competition increases.

Most operators in the electricity market are classed as "integrated", such as London Electricity and Scottish Power. This means that they are involved in the generation, distribution and retailing of electricity. The National Audit Office is investigating the generation side of the market amid fears that falling wholesale prices could force companies to mothball power stations.

Taking advantage of the deregulated market, a band of "retail only" companies has also sprung up, dealing solely with the customer end of the market. The sector includes companies like Compare Gas & Electricity, Atlantic Electric & Gas and Cambridge Gas & Electricity.

These companies plan to exploit the removal of price controls by offering discounts of up to 10 per cent on the average bill. It is predicted that this will eventually force the integrated operators to reduce their prices.

John Murphy, operations director of utility consultancy AMT Sybex, argues that long-term price cuts could put some companies out of business. "If there is predatory pricing then it will hit the retail-only firms. The big integrated suppliers will be able to offset the risk in the other areas of their businesses and as a result won't be as exposed."

He adds that the time it takes to change supplier, in most cases at least 28 days, will prevent many customers switching to take advantage of price differences.

All this makes the integrated electricity companies even more of an attractive takeover target. Earlier this month the board of Innogy, Britain's largest electricity retailer, which also owns 11 power stations, agreed to a £3.1bn offer from Germany's RWE.

RWE's rival, Eon, is on the verge of taking over Powergen, again a significant retailer, distributor and generator

Meanwhile, France's EDF, which last week reported a 26 per cent fall in net earnings, owns London Electricity and South West electricity.

RWE, which also owns Thames Water, has been criticised by some of its domestic shareholders for overpaying for Innogy. But RWE's chief, Dietmar Kuhnt, believes the price tag is justified because of the potential cost savings and new revenues that can be generated by integrating Innogy and Thames Water.

The arrival of the German and French companies on British soil hasn't been without controversy. While the DTI has no gripes with foreign firms taking over British privatised utilities – and actually sees it as a sign of the deregulated market becoming more efficient – ministers are aggrieved that Britain's continental European rivals have been slow to open up their own markets.

This, claim ministers, gives them an unfair advantage as state-owned firms such as EDF have access to cheaper borrowing compared to the commercial rates that British companies have to pay.

With fire in their bellies, British politicians, headed by Tony Blair, attempted to force a date for full European electricity liberalisation at the recent Barcelona summit. But the plans were blocked, notably by France, and a compromise was reached covering just the industrial electricity sector – a move which Mr Blair described as "limited but solid".

The French government is unwilling to press ahead on full liberalisation with a general election looming. Privatisation is still a dirty word in France.

However, British ministers are keen to seek assurances from France that it will open its markets after the election, which could lead to a partial float of EDF in October.

Britain will raise the matter on Wednesday when Mr Wilson meets EDF's chairman, François Roussely, and France's secretary of state for industry, Christian Pierret, in Paris.

Mr Wilson is unlikely to receive any cast-iron guarantees, but the DTI's aim is to keep liberalisation on the boil.

With the removal of price controls and the moves to open up the continental market, the next seven days could be critical for the British electricity market.