The regulator has already said that a further "significant" reduction in prices is likely when he unveils his proposals this summer for distribution charges, which make up 30 per cent of the average household bill.
The new price controls will take effect next April and run for five years. Some analysts believe there could be a one-off cut of 15 per cent in distribution charges next year, followed by smaller reductions in real terms in subsequent years.
Mike Hughes, the chief executive of Midlands Electricity and president of the Electricity Association, indicated, however, that if charges were cut by more than 20 per cent over the five-year period then the industry would challenge the regulator. "A one-off cut of 10 per cent and then annual reductions of 3 per cent in real terms after that would make my eyes water," he said.
Midlands has argued for no one-off cut but a steady 3 per cent reduction in charges in each of the five years.
Mr Hughes claimed that anything harsher than that would jeopardise its pounds 500m a year investment programme. In total the electricity industry estimates it will spend pounds 5.4bn over the next five years to maintain and upgrade distribution networks.
The return on capital that the electricity companies are allowed to earn is likely to fall from 7 per cent under the present price controls to 6 per cent.
In a consultation paper earlier this month, Mr McCarthy also said that the RPI-X formula for determining the annual reduction would be supplemented by a rolling series of targets for the industry to meet during the period of the price control.
This means that companies which perform below the average will face tougher targets.
Separately, the industry is at loggerheads with the regulator over who should bear an extra pounds 280m in costs resulting from the introduction of competition into the domestic market.
The regulator has said he will allow the companies to pass on pounds 726m, but the industry claims its total bill is more than pounds 1bn.Reuse content