Offer, the electricity watchdog, warned that the regional electricity companies might in future be forced to split their supply operations - in which they sell to the customer - from the distribution of electricity over the wires. Professor Stephen Littlechild, director-general of Offer, said he would consider such a separation in preparation for competition in the domestic market in 1998.
The threat to the fundamental structure of the industry emerges in Professor Littlechild's response to the recent report from the Trade and Industry Select Committee on the electricity sector.
Professor Littlechild said: "In the context of the 1998 discussions I shall be considering whether to take further steps to require the greater separation of the Recs' distribution and supply activities. It would be open to me to make reference to the Monopolies and Mergers Commission if I were to conclude that the present position is against the public interest."
The regulator's comments come at a sensitive time in the industry, which is in the throes of a wave of takeovers. Bids for three regional firms have succeeded in recent months and planned acquisitions by North West Water, National Power and PowerGen are awaiting regulatory clearance.
Any sign that Professor Littlechild is considering radical changes in the businesses of the regional companies could be seen as deterrent for further bids. Investors in the industry are still smarting from his unexpected decision earlier this year to re-open price controls agreed only months previously.
The responses to the Select Committee also show that the Government may consider merging the gas and electricity regulators, Ofgas and Offer, after 1998 when domestic competition in both markets is in place. But the Government stresses that there is no case for a merger until that time and also rejects the suggestion that a regulatory panel, rather than an individual watchdog would be more effective in each industry.
The Government also attacks the committee's call to impose a duty on regulators to give reasons for the decisions they make. "The Government eschews unnecessary regulation. It therefore sees no need for a formal requirement [on the regulators] to do what, as a matter of good working practice, they do already."