The long-awaited Green Paper on utility regulation also sets out plans to bring the policing of the gas, electricity, water and telecoms industries under a greater degree of political control.
Shares prices of the privatised water companies rose in response to the decision, widely expected, not to alter the fundamental way in which prices are controlled. The Department of Trade and Industry had wanted to include a mechanism for capping excess profits but was overruled by the Treasury.
Individual regulators for each of the industries will be issued with statutory guidance requiring them to take the Government's wider social and environmental aims into account in policing the utilities.
This means that they could have an explicit obligation to protect the interests of poorer consumers and other disadvantaged groups through, for instance, cross-subsidisation of prices. The regulators would also have a new primary statutory duty to protect consumer interests.
However, the Government has decided to stick with the system of incentive regulation developed over the last 15 years whereby the RPI-X formula - which sets percentage price rises below inflation - is retained as "fundamental basis for price regulation".
This will allow companies to keep profits which result from greater efficiency. But alongside this the Government has proposed the introduction of an "error correction mechanism" which would allow excess profits to be clawed back promptly.
The mechanism would be triggered either when companies benefited from factors outside their control - for instance, a sudden drop in costs of supplies - or when they had deliberately misled regulators into setting too lenient a price cap by giving inaccurate or incomplete information.
Margaret Beckett, President of the Board of Trade, insisted the Government was not returning to Old Labour ways by penalising the utilities. She said a better deal for the consumer would be achieved by "competition where possible, regulation where necessary".
But John Redwood, the shadow Trade and Industry Secretary, said the proposals could amount to a "back door" tax on business and warned they could lead to permanent uncertainty about how much they could earn and afford to invest. "She should set a price control and live with it," he added.
The Green Paper also proposes:
The merger of the electricity and gas regulators, Offer and Ofgas, into a single energy regulator.
Separation of electricity supply (buying and selling of electricity) from distribution - the wires which deliver electricity.
Greater openness and accountability with a requirement on regulators to justify key decisions.
The Government said it had not ruled out the idea of advisory panels to aid individual regulators. Replies are being sought by the end of May.
Mrs Beckett said there was no reason why the review should not lead to lower prices but this would be achieved through a mixture of fairer regulation and the opening up of the markets to competition particularly in gas and electricity.
The proposals were broadly welcomed by the regulators themselves, consumer groups, and the industries involved.
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