View from City Road: Closer look at the regulators overdue

The case for some kind of public inquiry into recent regulatory reviews of water and electricity prices grows stronger by the day, even if only a low-level one by the backbench trade and industry select committee. There is now enough public concern about the methodology and standards applied in these reviews to demand a full debate. It seems hard to believe that either Ian Byatt at Ofwat or Professor Stephen Littlechild at Offer could have been in any way negligent in the way they conducted the reviews; the point is, however, that we know so little about the inner workings of these regulatory authorities that it is impossible to tell. Certainly consumers might be forgiven for thinking that both regulators failed adequately to protect their interests.

All 12 regional electricity companies were so delighted by Professor Littlechild's review that they virtually bit his hand off in their eagerness to accept. The new deal was far, far more lenient than they, their advisers or the City had expected. Though Mr Byatt was more helpful in explaining his methodology, the same might be said of his review. Only one of the big water and sewerage companies, South West, has appealed to the Monopolies and Mergers Commission, and this only because his methodology had an abnormally harsh effect on South West when set against the others.

In defence of regulators, it has to be said they are on a bit of a hiding to nothing when it comes to protecting consumer interests. Whatever they decide, it is never going to be enough for the customer. Furthermore, regulators are required by Act of Parliament to ensure that enough revenue is raised to maintain quality of service, provide finance for investment and allow an appropriate level of return for investors. Within those parameters, however, there is plenty of scope for juggling. Just what is an appropriate level of return, and in deciding it, what can the regulator assume about the scope for cost-cutting in a company? If cost-cutting potential is underestimated, as it appears to have been in the electricity and water reviews, what might seem appropriate can be boosted with ease to become spectacularly inappropriate.

Plainly, tough questions need to be asked about whether regulators are striking the right balance between the interests of consumers and shareholders. The American system, whereby any price change in the water and electricity industries has to be vetted by full public inquiry, might seem an administratively clumsy and costly alternative. By the same token, our own system of largely unaccountable regulation needs urgent attention if it is to regain public respect.

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