Outlook: A mechanism for future errors

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The Independent Online
AFTER nine months and as many draft versions, the Government's proposals for regulating the privatised utilities have finally emerged blinking into the daylight. There are precious few surprises. Nevertheless, the confirmation that Margaret Beckett is not about to tear up the system of incentive regulation which governs the water, gas, electricity and telecoms industries put a spring into share prices yesterday.

As in so many other areas of policy, the realities of office make it hard to deliver on the rhetoric while in opposition. Old Labour would dearly have loved to settle some scores with the privatised utility bosses by squeezing them until the pips squeaked. New Labour, the natural party of business, accepts that imperfect as the system may be, the best way to improve the consumer's lot is to give the utilities an incentive to make profits.

The Treasury's paw marks can be seen all over the Green Paper, particularly in the decision to leave the RPI-X formula as the basis for price regulation. But there is one weasel phrase that will need careful monitoring and that is the proposed "error correction mechanism". The purpose of this, we are promised, is to claw back profits only where the wool has been pulled over the regulator's eyes or where surplus profits are made unexpectedly.

But given the increased degree of political control over regulation which is evident elsewhere in the Green Paper, regulators may be tempted to reach for the mechanism too often.