Regulation cannot continue without reform

In clearing all three offers for regional electricity companies, Ian Lang, Secretary of State for Trade and Industry, has in effect declared open season for bids in the electricity sector. Despite blanket condemnation from his rent-a-quote shadow, Brian Wilson, it is hard to see how he could have done otherwise. Two of the bids raised no competition issues at all and the other, the Scottish Power bid for Manweb, only minor ones. The decision is another slap in the face for Professor Stephen Littlechild - but his case for having the Scottish Power bid referred was always a questionable one. Though the takeover clearly involves the loss of an independent comparitor, it can hardly be argued that this is critical to the regulator's ability to do an adequate job.

To the extent that there was ever any kind of a case for referring these offers it was largely an emotional one, argued from the heart rather than the head. If these bids are to be allowed, the argument went, there should be customer benefit as a quid pro quo. It is debatable that the MMC or the Government actually have the powers to impose such conditions, but even if they did, to exercise them would have seemed arbitrary and extreme. We have already had one rethink of the charging review; if the regulator still has it wrong, then it is the system of regulation that is at fault. This is not something that can be properly addressed by a Monopolies and Mergers Commission inquiry into a series of takeover bids. As Ian Lang pointed out in his statement yesterday, having privatised these companies, it is hard to argue that they should in some way be above the normal disciplines and opportunities of the market place, including involvement in mergers and aquisitions. These are now joint stock companies, not customer co-operatives, and their owners, the shareholders, are entitled to sell to the highest bidder.

The issues of charges and customer service are different ones. Public dissatisfaction with the water and electricity utilities and our system for regulating them has reached a pitch that makes radical overhaul virtually inevitable. Again, an MMC inquiry into, say, Hanson's bid for Eastern, is not the appropriate place for such a debate. Though it is plain that regulators have got the balance of shareholder and customer interest badly wrong, it is not at all clear why and what the remedy should be. This is far too serious and complex a policy issue to be decided privately by an inquisitorial competition authority like the MMC. It needs to be publicly debated and the law reformed accordingly.

So what is the answer? Certainly it would be a shame if all aspects of the present system of independent regulators were abandoned. Labour's plans to put utility regulation back in the hands of ministers would be a profoundly regressive step. Politicians answerable first and foremost to the ballot box are likely to make poor and capricious regulators and it seems hard to believe the customer would in practice end up with a better deal. Equally, the present system - blinkered, rule bound, secretive and often oppressive and ill judged in its actions - cannot be allowed to continue without reform.

Regulators need to be become far more open and sensitive in their approach, more clever and fleet of foot. As far as economic regulation is concerned, the American system of making changes subject to public inquiry, though a slow process, seems to have much to commend it since it helps establish consensus. The outcome is at least seen to be fair and there is less chance of Littlechild type cock-ups.

Presumably the three bidders have factored changes of this nature into their calculations. If they have not, then they are being foolish indeed for the era of the great electricity water industry rip offs is now largely over. Though there is still plenty of scope for gearing these companies up - put bluntly, making the companies pay for themselves - the best of the spoils have gone already.

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