Comment: PowerGen eyes horizon far beyond Midlands

On the surface, PowerGen's case against a referral of its pounds 1.95bn bid for Midlands Electricity reflects much the same old arguments as those that have already convinced the Government not to kick the Scottish Power bid for Manweb into touch. But there is far more to this than meets the eye.

Scottish Power, also a generator, is res- tricted in the amount of power it can sell south of the border by the limited capacity of the transmission lines, which are the Grid equivalent of a bottleneck. Even if it wanted or were allowed to invade the English and Welsh market and sell power uncompetitively through a captive subsidiary it could not do so on a large scale at the moment.

PowerGen is different. It is a large generator in the English and Welsh markets and an important supplier to the electricity trading pool. Without suggesting for a moment that it has any intention of setting out to abuse its position, the regulatory problem of ensuring that prices are set fairly is clearly of a different order, and the company admits that. In regulatory matters, it is important to be above suspicion.

But if it were just a matter of ensuring that Midlands Electricity's distribution business is ring-fenced from PowerGen, headquartered half an hour's drive away, it would be relatively simple. Stephen Littlechild, the electricity regulator, can easily ensure that he gets the information he requires.

But PowerGen has ambitions well beyond the Midlands. As Ed Wallis, its chief executive said, Midlands is geographically unique in being entirely surrounded by other electricity companies so PowerGen has tremendous opportunities to raid across boundaries to expand its supply business as deregulation of the industry progresses.

This is where the arguments often get confused. When domestic electricity is opened to competition from 1998, the distribution network that carries the power will remain a tightly controlled monopoly utility whose charges are closely monitored by Professor Littlechild. It is in the supply of power over these utility networks - roadways for other companies' power - that competition will emerge, and PowerGen believes that is the area of the electricity industry with the most potential left for growth. The regulatory issue is not the usual one of price caps and all the paraphernalia that go with them, which is the way the distribution networks are controlled. Instead, it will be a matter of ensuring fair market pricing between competing suppliers.

Some will be regional electricity companies, some will be generators and others new entrants to the industry, including the likes of British Gas, which will be entitled to buy power and sell it wherever it likes. Professor Littlechild's job will be to ensure a level playing field. It was far from a coincidence that PowerGen chose the same day to announce the sale of two large power stations to Eastern Electricity, which is determined to become a large power generator in its own right. That underlines more than any other recent event the changes under way in the electricity industry, unwinding much of the structure set up at privatisation.

PowerGen has offered Professor Littlechild all the help he needs in working things out so regulation can cope. But as the Commons Trade and Industry Committee said in a report in the summer, the regulator and the industry have a long way to go before they are ready for 1998, and progress so far has been a shambles.

Since PowerGen's eyes are on that date and beyond, the Government should seize on this bid to launch an inquiry into the implications for regulation of the vast changes under way in the industry.