View from City Road: Power industry meets its Eldorado

Anyone wondering how Professor Stephen Littlechild arrived at yesterday's new electricity price controls need look no further than Appendix B of the 118-page document published to explain his thinking (part of which we reproduce on page 3). There, in four pages of mathematical gobbledegook, is the definitive answer. All you have to do is take M to the power of DT, add in some curious squiggles, divide the sum of the price of something incomprehensible by the sum of the price of something even more incomprehensible, fill in a few decimal points, repeat the exercise about 10 times, and there you have it. Simple.

No doubt this precocious piece of extended algebra means something to a few like-minded souls in the City, business, academia and government, but the rest of us are left casting feebly around for any adequate explanation of just what happened. The methodology seems to be at best botched and at worst virtually non-existent.

Even City investors, as they march merrily off into the sunset with their barrowloads of money, confess themselves perplexed by a review that most analysts agree will allow companies to carry on with real dividend growth of up to 10 per cent a year. To them at least, the inflated salaries and gilt- edged share option schemes must seem well earned. After pulling the wool over the Government's eyes at the time of privatisation, the regional electricity companies have managed it again with Professor Littlechild. Few could have expected such an easy passage.

After the squeals of protest that greeted Ian Byatt's review of water company charges, Professor Littlechild must have been braced for a poor reception. Nothing could have prepared him for the maelstrom that hit yesterday, however. Most people expect him to champion consumer interests; judged by yesterday's performance, he seems little more than the industry's lackey.

His problem, of course, is that the job of a utility regulator is not confined to securing lower prices for consumers. The other part is to ensure that sufficient revenue is raised to maintain an adequate quality of service, finance required new investment and allow an appropriate return for shareholders.

In this case, however, appropriate seems to have been interpreted as meaning generous in the extreme. Certainly it is out of all proportion to the risk attached to these rock-solid, low-level utility investments.

So far as there is methodology, Professor Littlechild has assumed that the companies will be able to cut operating costs by 3 per cent a year, a figure plucked apparently at random out of the air. This target is more demanding than companies' original business plans implied, but not by much.

Professor Littlechild has also forced the companies to rein back on investment plans, in some cases by up to 25 per cent. Nor is he allowing them to finance investment entirely out of revenues. Heaven forbid, they are going to have to take on borrowings. But here's the giveaway. 'In general the possible levels of gearing associated with my final proposals do not seem unfavourable compared to other companies. As to profits there would seem at a minimum to be sufficient cover for streams of dividend payments which might reasonably have been expected at flotation.' It is only possible to speculate what the picture is going to look like 'at a maximum'. Presumably something akin to Eldorado.