Outlook: Electricity prices

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The Independent Online
CALLUM MCCARTHY, the new scourge of the electricity industry, has learnt from the mistakes of his predecessor, Professor Stephen Littlechild. First, he did not let the electricity companies have sight of his draft price proposals until 10.30 on Wednesday night, thus avoiding the risk of the information seeping into the market and upsetting the regulatory applecart.

Second, he has made the price curbs sufficiently onerous to force a handful of the companies to think seriously about appealing to the Competition Commission. There again, Mr McCarthy is a streetwise merchant banker and not an academic.

He knows what the appropriate reaction of the markets ought to be if the regulator is doing his job properly and yesterday everything went to plan as share prices across the utility sector got a nasty shock.

There is little danger of Mr McCarthy having to revisit this price review within a few months of implementation, as was the humiliating fate of Professor Littlechild in 1995, unless he is presented with a rash of consolidating mergers among distribution businesses.

Should that prove to be the case, he will simply squeeze the orange a little tighter once the merger partners reappear on the other side of a Competition Commission investigation.

Admittedly, the mathematics behind this latest regulatory assault look challenging for the companies. Mr McCarthy's pricing formula allows the industry a post-tax return on capital which is even more stingy than that set by the water regulator Ian Byatt.

It also assumes annual reductions in operating costs for the next five years on a scale which will keep the personnel departments busy.

But history shows that the utilities can take almost anything a regulator can throw at them and still keep the dividends switched on. Appealing to the Competition Commission is generally also a futile course.

Down in the valleys of South Wales they will be pondering the hardest over what to do. Hyder's Graham Hawker has the choice of appealing or handing back pounds 90 to every household in cheaper water and electricity bills. Talk about a rock and a hard place.

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