Labour's attempt to regulate the privatised utilities

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From Mr James Winpenny

Sir: Was it a coincidence that the Independent published news of Labour's plans for controlling privatised utilities ("Labour plans 'fat cats' act", 17 May) in the same edition as a full-size reproduction of a classic Monopoly board? To the serious Monopoly player, the public utilities cards (Water Works, Electric Companies) were disappointing assets.

How times have changed. In recent years the shares of water companies have been among the best performers on the London Stock Exchange.

The Labour Party has pinpointed the substantial rises in water prices since privatisation and drawn attention to the difficulties facing Ofwat, the water industry regulator, in curbing high profits being earned under the current regime. It has floated the idea of dividing excess profits between consumers and shareholders.

Ofwat has an obligation to ensure that water companies earn a reasonable return on their assets, as well as to protect the customer from high prices and other monopoly abuses. This dilemma has been heightened by the large investment programmes that companies have undertaken to meet our commitment to EU environmental standards, replace old water and sewage pipes, and satisfy the environmental regulator, the National Rivers Authority. Before privatisation, the water industry earned what the Treasury considered a poor return on its assets. It now has to raise capital in competition with other profitable businesses.

Private monopolies can be regulated by two broadly alternative approaches, one focusing on the rate of return earned on assets (favoured in the US) and the other seeking to control prices. In the UK we have favoured the latter approach, on the grounds that it leaves companies an incentive to be efficient and choose cost-effective investments, because they can keep the savings. The Labour Party's proposals would involve regulation of both prices and profits. Labour's proposal may not make too much difference to company incentives in this relatively safe business.

The proposals would not, however, deal with the real cause of high water prices, which is that the industry is subject to separate environmental and water regulators, tugging the companies in opposite directions. Many observers think that the UK has accepted excessively high environmental standards for water under the EU, compounded by the efforts of the NRA, without reference to what British consumers want and are willing to pay for.

The implication of these commitments is that the long-term price of water is set to rise further.

Yours faithfully,

JAMES WINPENNY

Overseas Development Institute

London, NW1

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