Scottish Hydro-Electricis a special case

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The Independent Online
With South Wales Electricity now into its second shares buy-back, the idea of a windfall tax to punish greedy utilities is rapidly becoming something of an irrelevance. Far from hoarding cash, boards are scorching the earth. Labour will find little of value to plunder to meet its promise of retribution for excessive profits.

Sympathy for electricity companies is about as fashionable as clogs, but yesterday they seemed to find support from a curious source - the Monopolies and Mergers Commission. The MMC found that Scottish Hydro-Electric had been treated too harshly by Professor Stephen Littlechild, the electricity regulator, in his price review last year. Its report on Hydro, the result of the company's protests about last year's electricity price review, actually reduced the gains for consumers proposed by the regulator, admittedly by rather marginal amounts.

What, if anything, should the MMC's report tell us about what the professor will do to the distribution industry in his rethink of price controls, due to be published next month?

The MMC has no direct control over the regulator, but its position as the appeal body against his decisions gives it clout and could have an important indirect influence over what he does. Professor Littlechild will have at the back of his mind that if he pushes the companies too far, they could follow Hydro's example and go en masse to the MMC.

The MMC in fact accepted Hydro's main arguments in favour of changing the way cross-subsidies between different parts of its business are treated. Hydro is in many respects a special case with little relevance to the rest of the industry; unlike the regional electricity companies, it is a vertically integrated generating and distribution company with customers far and wide.

Even so, there seem to be some wider lessons. The MMC took issue with the regulator's decision to reduce the level of capital on which returns in the distribution business are based. This is mildly positive for Hydro, and perhaps also for the regional companies, if only because it shows that the regulator can be challenged successfully on important financial details.

The most important lesson, however, is that the MMC has also reduced the base level on which operating costs are calculated at Hydro. If this approach was transferred to the regional companies, it would be highly costly for them. It is perhaps dangerous to take parallels with the rest of the distribution industry too far. Even though Hydro seems to have come out on top, there is little in the report that would give comfort to the RECs, which can only expect to be dealt with extremely harshly.