Regulator backs down on electricity price cuts
Thursday 21 August 1997
Professor Stephen Littlechild said domestic charges could drop by between pounds 15 and pounds 25 over the two years from next April, a fall of 7.5-10 per cent on an average pounds 270 bill excluding VAT. The new proposals compared with a forecast cut of 12 per cent in his previous consultation paper last month, worth pounds 32 off bills in just one year and more over two years.
The climbdown followed claims by the regional electricity companies (RECs) that the price controls would plunge their supply businesses into the red, discouraging new entrants into the market when domestic competition is introduced from April 1998. Some RECs had threatened to take the dispute to the Monopolies and Mergers Commission, a move which could have delayed competition.
Professor Littlechild said he had accepted the RECs' claim that introducing competition would mean higher administrative costs, with the likelihood of a much larger volume of customer queries. But he launched a defence of the competition experiment, insisting it would mean bigger savings in the long term. "You can't deliver by price restraint what you can deliver from competition," he said.
He claimed the new plans had probably averted the possibility of an MMC referral by the companies. "I don't think there's a justifiable basis for a company to go to the MMC. If it did, we've got a good case."
The price proposals related to the RECs' supply businesses, including administrative and billing systems, which account for about 7 per cent of domestic bills. The RECs' distribution divisions, responsible for 30 per cent of bills and most of their profits, are already subject to tough price cuts.
Professor Littlechild denied he had softened the price cuts after intervention from John Battle, the Industry Minister. In an unusual step, the Electricity Association had written to complain directly to Mr Battle, who has put himself in overall charge of delivering competition. "I haven't had any ministerial pressure brought to bear," said Professor Littlechild.
The power watchdog, Offer, gave other significant concessions to the RECs on the cost of introducing competition. The proposals raised the estimate of the costs which the industry could pass through to customer bills, from pounds 383m over five years to pounds 500m. However the figure remained well below the pounds 850m suggested by the companies.
The cost of competition, which covers the introduction of complex new computer systems to track customers as they switch supplier, will now be pounds 2.60 a year for each household, or 1 per cent of bills, a figure included in the overall estimate for bills. Offer's original projection was for customers to pay just pounds 1 towards the cost.
Consumer groups gave the proposals a cautious welcome, despite the prospect of smaller cuts in charges. Ken Prior, from the Electricity Consumers' Committees, said: "It's a pragmatic solution. On this basis competition will happen."
The biggest change in the fifth consultation document yesterday was in Offer's projections for generation costs, which account for almost 60 per cent of bills and are not price regulated.
The plans suggest a drop of 6-10 per cent in generating costs next year, largely because high price coal contracts expire from April. The previous proposals envisaged reductions of up to 12 per cent, with big cuts in the profit margin earned by the generators over the price in the wholesale power market, the Electricity Pool.
Shares in the generating companies soared on the concessions, which have effectively removed the threat of back-door price regulation. National Power shares rose 23p to 516.5p, while PowerGen gained 35p to 761.5p.
Other electricity company shares also rose, with Southern Electric, the last remaining independently quoted REC, adding 7p to 461p and ScottishPower rising 11p to 431.5p.
Simon Flowers, head of utility research at NatWest Securities, said : "The reductions in consumer bills will now largely come from the reductions in the coal contracts which were going to happen anyway next year, rather than the regulator forcing down contract prices between the generators and the RECs."
The latest proposals have added to the gloom for RJB Mining, the company which bought most British Coal pits at privatisation and this week announced the closure of the UK's newest mine.
Potential cuts in electricity bills 1998-99*
Company Generating costs Non-generating costs Total
Eastern -9.6% -0.5% -6.3%
East Midlands -7.7% -1.5% -5.3%
London -7.9% -0.8% -4.8%
Manweb -7.8% -1.3% -4.9%
Midlands -8.5% -1.7% -5.9%
Northern -8.3% -1.3% -5.3%
Norweb -8.0% -2.4% -5.8%
Seeboard -6.8% -0.5% -4.2%
Southern -8.4% -0.8% -5.3%
Swalec -8.2% -2.8% -5.5%
South Western -7.5% -2.3% -5.2%
Yorkshire -7.2% -0.3% -4.5%
ScottishPower -7.2% +3.8% -2.7%
Hydro-Electric -9.4% +7.8% -3.3%
Average England & Wales -8.0% -1.4% -5.3%
Average Scottish -8.3% +5.4% -3.0%
Average GB -8.0% -0.2% -4.8%
(*based on an average 8 per cent reduction in generating costs)
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