LEADING ARTICLE: An electric storm, but will the customers get soaked?

Yesterday's takeover bid by North West Water for the Norweb, the same region's electricity distributor, has raised a howl of protest across the political spectrum. Even John Redwood, would-be flag carrier of the Tory right, thinks the deal should be blocked.

There will be spontaneous sympathy for this view. Although some of the privatised utilities, such as British Telecom, have achieved notable improvements in service since entering the private sector, the performance of others has left much to be desired: the behaviour of some of the water companies in this summer's drought is the example which springs immediately to mind. Insult has been added to our sense of injury by the largely unmerited personal enrichment of many senior managers through share distribution schemes in gas, electricity and water. If the North West-Norweb deal goes through, there will be another crew of undeserving millionaires.

Much of this, however, is beside the main point. The question is: should this merger be referred to the Monopolies and Mergers Commission, which has the power to recommend that the Government blocks it?

There are some for whom this is a simple question. Those who take the view that all of Britain's utilities should have been retained in the public sector, as the Labour Party used to, know where they stand. But those, such as the Independent, Mr Redwood, Tony Blair, Paddy Ashdown and Michael Heseltine, who have recognised to some extent or another the benefits to utilities of achieving full access to private-sector capital and private-sector management, can't take such a fundamentalist position, even when it is immediately popular to do so.

A more sophisticated assessment has to recognise that there are decent financial arguments in favour of this deal. The two companies, which share two million customers, predict substantial administrative savings from their union. They could bill and meter consumers at the same time for water and electricity. The management of the two industries is not so different as to make these claims plausible. Consumers should, over time, benefit.

More dubiously from the public interest standpoint, a takeover should also yield tax savings: high capital allowances for North West's investment programme could be used to write off some of Norweb's taxable profits. The fact that hundreds of people would lose their jobs is also a factor not to be discounted in the balance of positives and negatives.

Down the road, perhaps, there will be further possibilities: in 1998, the electricity industry will be deregulated, so Norweb could poach new customers. Who better to start with than the five million people who already use water from North West but have yet to plug into Norweb?

Some of this is, of course, guesswork. It is also possible that the benefits will not come through to consumers. Even North West admits that they may not see much advantage in the early years. Indeed, consumers should worry that, with Norweb shareholders looking for a better price than an already generous-looking pounds 10.15 per share offer, the cost-cutting required to make the deal worthwhile could damage services. Customer confidence is already not particularly high in the management of North West Water, which has just introduced a hosepipe ban in one of Britain's wettest regions. It is also a matter of standard business wisdom that most mergers fail to deliver their claimed benefits.

Upon whose judgement can the consumer rely to ensure effective performance from utilities such as Norweb and North West or the super-utility that would result from their marriage? The answer is the industry regulator, and it is here that the most serious worries about this proposal arise.

As the businesses of the water and electricity companies become entangled, it could become more difficult for Ofwat and Offer, the respective industry regulators, to make sure that consumers are getting a fair deal. They need transparency of accounting to spot inefficiencies and hidden profits. Experience of the electricity regulator, Professor Stephen Littlechild, who has had to revise his pricing formula, suggests that at least the electricity industry's finances are already opaque.

So this week's proposed takeover puts the Government on the spot. Do we trust the existing regulators to guard the consumer interest against the monopoly powers of a super-utility? The regulators themselves are due to give an answer to this question on Monday and close attention should be paid to their judgement.

Until the regulatory question has been addressed, it is too soon to say that the MMC should be called in. As Ian Lang, the Industry Secretary, has argued, private sector companies cannot be excluded from the marketplace, including involvement in mergers and acquisitions. They are joint stock companies, whose owners are entitled to sell to the highest bidder. Mr Lang indicated his support for this principle only a week ago when he cleared three offers for regional electricity companies from two multinationals and Scottish Power.

Action, therefore, in the North West/Norweb case should not necessarily focus on blocking the takeover. It should focus upon the question of whether the regulatory regime is up to dealing with super-utilities. If it is judged to be so, then there is a good precedent for protecting the specific interests of consumers in this case. Ofwat has demanded price cuts of up to 20 per cent before it will allow Lyonnaise des Eaux of France to take over Northumbrian Water. A similar solution should be considered for the two utilities in the North-west.

The issue of the quality of regulation is more complex. There have been calls for a super regulating body, which would take in all the existing watchdogs. But this could prove bureaucratic and inflexible to the differing conditions in each industry. However, some form of cross-utility regulation will be needed if the utilities do merge.

When it privatised the utilities, the Government could not have been expected to foresee all of the difficulties that would arise in regulating them, but it was obvious that proposals for mergers would occur and it is extraordinary that a politician like Mr Redwood should be guilty of such a naive response. But the North West deal has further exposed the need for fresh and clear thinking about utility regulation.