RECs threaten Littlechild with referral

Chris Godsmark Business Correspondent
Friday 29 August 1997 23:02 BST

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Several regional electricity companies are to renew their threat to refer a dispute over price controls to the Monopolies and Mergers Commission, after complaints that more lenient proposals from the industry regulator have failed to meet their concerns.

The privatised regional electricity companies (RECs) will make their continued opposition to the planned price regime clear next week during meetings with Professor Stephen Littlechild, the regulator. The companies believed to be most unhappy with the proposals include East Midlands Electricity, Midlands Electricity and Southern Electric. They will warn him that his revised proposals, published a fortnight ago, would still cut their profit margins so severely that they would discourage new suppliers from entering the market when domestic competition starts from next April.

Low profit margins have been blamed for the lack of interest in the electricity market shown by the big oil companies and supermarket chains.

In his fifth set of price proposals Professor Littlechild sought to stem the outspoken attacks from the industry by softening the anticipated cuts in electricity bills next year. He said domestic charges would drop by between pounds 15 and pounds 25 over two years from April 1998 on an average residential bill of pounds 270, excluding VAT, compared with expected cuts of pounds 32 in his previous consultation paper.

The chief executive of one large REC said the concessions did not go far enough. "This is still quite clearly MMC material. Nothing has changed since the last proposals and we can't see why anybody should be happy with this. The situation is still a nonsense."

Professor Littlechild had claimed the softer price proposals, which reflected the increased estimate of the cost of introducing competition next year, would avert an MMC referral. "I don't think there's a justifiable basis for a company to go to the MMC," he said at the announcement.

The row centres on his plan for a cap on total bills for the first time, replacing the present system which allows the RECs to pass increases in generation costs to consumers. Savings next year will come mostly from lower generating charges when existing coal contracts come up for renewal. Generation accounts for around 60 per cent of household bills.

The RECs are also unhappy at the plan to cut profit margins on their supply businesses, the divisions responsible for billing customers which are being opened to competition.

Electricity supply, already a low-profit operation compared with distribution, accounts for only about 7 per cent of customer bills.

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