Testing the waters with enforced price cuts

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C ompetition hardly exists in the water in- dustry, unless you count selling overpriced fake spring water in supermarkets. It is the nearest we have to a natural monopoly and is quite different from electricity and gas, which have introduced competition for commercial customers and are slated to do the same for domestic consumers. Indeed, the Monopolies and Mergers Commission inquiry into the takeover of Northumbrian Water by Lyonnaise des Eaux was confined to the impact on the regulatory system.

Ian Byatt, the regulator, was mainly concerned about a reduction in the number of companies. His style of regulation is to set prices by comparing the performance of water companies, using the best as benchmarks to improve the efficiency of the mediocre.

Mr Byatt has got his way, and has sensiibly been allowed to demand sharp price cuts as a condition of a merger of Northumbrian with Lyonnaise's subsidiary North East Water. Water company managements are inward- looking and conservative, he says, so the importance of the MMC decision is that it backs his view that mergers will only be allowed if there is a kick to efficiency. No wonder water company shares sagged.

Since the price cut does not apply to sewage treatment, where Northumbrian faces heavy investment, it is not quite as onerous as it sounds, and is unlikely to deter Lyonnaise des Eaux from finally putting a price on its bid. This may still have to be at least pounds 9 a share if it wants to outflank Northumbrian's plans for a give-away to shareholders.There may be more bids for water companies, but this is not the beginning of a wholesale reorganisation - if for no other reason than that the scale of investment required makes most of the companies cash-negative.

Professor Stephen Littlechild, the electricity regulator, is looking at the same arguments as Mr Byatt about the importance of comparisons between companies as he mulls over whether to recommend referral of the Scottish Power bid for Manweb. He also wonders about the greater vertical integration the bid will bring between generator and distributor.

The market's initial reaction was that the MMC report on the bid for Northumbrian was a veiled threat to all mergers between utilities. This is overstating the case. The MMC may well be told to have a look at the Manweb bid, but the circumstances are different, and it would be entitled to focus on competition more than regulation. The most interesting question is whether the present fragmented structure of the electricity industry actually hinders the introduction of true competition in supplying consumers' homes.

Tobacco companies exhale confidence

The tobacco industry looks under siege. A multi-billion dollar law suit burst into life earlier this year, when a US court gave leave for friends of Peter Castano, a Louisiana man who died of lung cancer last year, to initiate a class action against seven big tobacco companies. Then a fortnight ago the Food and Drug Administration concluded that nicotine was a drug that needed to be controlled, following a recommendation from the influential American Medical Association.

Discussions on possible ways to restrict tobacco consumption have now begun between the FDA and President Clinton, who has already shown himself to be no friend of the industry. His much-vaunted health reforms, shot down by Congress last year, were to have been financed by quadrupling the tax on a packet of cigarettes to 99 cents.

The latest FDA moves sent tobacco shares plunging on Wall Street, dragging down our own BAT Industries, maker of America's second-best selling cigarette. But industry leaders remain relaxed, even complacent, amidst the storm. At yesterday's presentation, board members did not even feel the need to light up to calm their nerves.

Sir Patrick Sheehy, the BAT chairman who next year hands over to Lord Cairns, ex-chief executive of Warburg, has reason to exhale confidence, against the background of a 12 per cent underlying increase in cigarette sales and profits of close to pounds 1.2bn. Despite a scare that the US Justice Department is now getting involved, the political mood has also swung in his direction.

The death of President Clinton's health reforms was merely a precursor to the rightward shift in Congress in last November's elections. That brought in many more friends of the tobacco industry and made it nearly impossible for any generalised curbs on smoking to pass the legislature.

Controls on access to tobacco by children, the route now apparently favoured by Mr Clinton, are unlikely to stir much controversy. Meanwhile, the Castano case has been bogged down in procedural issues. Judging by previous form, the whole matter could take years to resolve.

The tobacco industry has not had to pay a single cent to any claimant in close to 30 years of litigation. American cigarette packets have had warnings about the health risk printed on them since 1972 so, unlike asbestosis, it is more difficult for litigants to claim they did not understand the risks.

BAT is bullet-proof, since it is widely diversified, and even if the US turns from tobacco, the rest of the world is smoking more, a trend the company is ruthlessly exploiting. But remember the quirks of the US justice system, which came close to undoing Lloyd's and may still cause real pain to tobacco companies - though not, it seems, just yet.

Leeson could restore SFO's self-esteem

The Serious Fraud Office has lost what self- confidence it had left after the battering of recent months and the pressure put on its director over the Levitt affair. George Staple no longer smiles. The decision to at least consider interviewing Nick Leeson in a Frankfurt jail is to be applauded.

At last the UK's top prosecuting authority in commercial fraud, which has spent five months supposedly looking into the collapse of the merchant bank, may get to hear from one of the principal players in the Barings affair, which would put it a step ahead of the Bank of England.

Better late than never. Only last week sources close to the office were listing any number of reasons why getting on a plane to Frankfurt would be a bad idea. Perhaps there has been pressure from Westminster.

There are risks attached. In the admittedly unlikely event that Nick Leeson is tried here, he might walk free as others before him have done. That would be, from the SFO's side, a sorry outcome and one far worse than not getting involved at all.

But the upside is there, too. If extradited to the UK, Nick Leeson has already said he will plead guilty to four charges of false accounting and a further unspecified charge. That should be enough to ensure some sort of result, at least, for a prosecutor that has won too few recent high-profile cases.

Whatever the outcome, it would be reassuring if the authority involved in policing the largest financial crimes showed itself to be confident and decisive, rather than risk-averse and seemingly unable to take quick decisions for fear of criticism.

Edited by Peter Rodgers

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