Leading Article: Testing time for privatisation

The regulators who oversee the privatised monopolies that supply electricity, gas, water and phone services, face a time of trial. During the next few weeks, the public pronouncements of Office of Telecommunications chief Don Cruickshank and the Director General of the Office of Water Services, Ian Byatt, will merit the closest attention. They will be making critical decisions. On their performance rests not just how much consumers will be paying for water and phone use at the century's turn, but the fate of the privatisation programme itself.

The way water is regulated will be shown up as Yorkshire Water answers charges of incompetence in its investment planning for pipes and its handling of last summer's drought. Next month in the West Country, a fascinating experiment - masterminded by the Office of Gas Supply - starts transforming British Gas into a "common carrier" for competing gas suppliers, which if successful could mean there is less need for regulation at all.

Privatisation does indeed rank as one of the great achievements of the period of Conservative rule that began in 1979. But the book is not yet closed, and the way the regulators treat the market movements that are leading to growing concentration in supply will be a significant episode in privatisation history.

The quality of water management is variable, to say the least, and one way to force bad managers out is by hostile takeover. The management of the utility providing water and sewerage in Devon and Cornwall has a mixed track record which includes (accidentally) poisoning locals and releasing thousands of gallons of their drinking water into the English Channel. Last week Severn Trent Water announced a bid for South West Water, which is already "in play" after an earlier bid by Wessex. This will be presented as a way of substituting a more effective management team. But who is to judge? These are, in their regions, nearly pure monopolies; the water plcs cannot fail; the only regular and effective stimulus to efficiency and effectiveness is the regulator.

No amount of rhetoric about market forces can relieve the government's regulators from the need to protect consumers against price abuse. When Northumbria Water was taken over by the French Compagnie Lyonnaise des Eaux it insisted on a consumer bonus in the form of domestic water charge reductions. That surely is going to be a minimum precondition if South West Water is merged. But that is not the only consideration. Will investment plans - Devon and Cornwall need more water storage - expand? What if Wessex or Severn Trent, bidding competitively, end up paying over the odds for South West; where is the consumer interest in that? These are hard questions, but is Ofwat capable of answering them? The nagging doubt must be whether its small Birmingham office is competent to deal with industrial wide boys and City slickers.

Meanwhile, British Telecommunications plc and Cable and Wireless are out a'courting. Will they, won't they? Their marriage would dramatically change the basis on which the Office of Telecommunications has operated since the early 1980s. Till now Oftel's line has been to maximise competition. Logic dictates it should resist further concentration in the domestic telecoms market. But BT has, over the years, made a robust case for size, especially in global markets. Is Oftel the competent judge? It is not enough to say these conflicts of interest will be resolved if, as is likely, the Monopolies and Mergers Commission steps in as the superior judge. BT's fate is, whether the government likes the phrase or not, a question of industrial policy, which ministers - who only the other week set up a new Cabinet committee on the future shape of computers and telecoms - cannot duck.

Water and telecoms are not the only arenas in which the state's capacity to keep abreast of market movements has been called into question. But these markets are special; they have been created by the government. The public needs to be assured that its interests are being competently and consistently considered. Till now these watchdogs have basked in public approval. They claim to be independent. But they also need to be sharp, forward-looking, savvy and courageous enough to say no, whichever way share prices move.