Gas and water watchdogs clash over controls

MARY FAGAN

Industrial Correspondent

An unprecedented public row broke out yesterday between the water and gas industry watchdogs when Ian Byatt, director general of Ofwat, attacked proposals from the gas regulator for a radical overhaul of the regulatory system.

He rejected Ofgas's suggestions that future controls could return "excess" profit to consumers, an idea also backed by the Labour Party.

The dispute highlighted growing disagreements over the potential changes in utility regulation and how best to benefit customers in future.

Clare Spottiswoode, director general of Ofgas, issued a consultation document in June calling into question the inflation-linked "RPI minus X" formulae that form the basis of utility regulation in the UK. She is thought to favour a form of profit-sharing for customers above a certain level - the idea also put forward by the Labour Party.

In a letter to Ms Spottiswoode, Mr Byatt said: "Proposals to share risks between customers and shareholders through predetermined formulae would reduce the power of incentives and could simply result in higher prices to customers over the longer term." Mr Byatt called for evolution rather than revolution and warned that too much has been achieved through the existing system "to justify tearing down the edifice and starting from scratch".

Mr Byatt said: "The form of price control adopted for UK utilities has been successful, leading to saving of costs, with long-term benefit to customers. Incentives to increase profits as a result of cost-saving within the price cap in a stable medium-term regime have played a major part in this."

Mr Byatt also said that price limits should continue to last for about five years before being reviewed - another issue raised by Ms Spottiswoode - with more frequent changes allowed only in exceptional circumstances.

Mr Byatt's comments come at a sensitive time. Power companies are smarting from a decision in March by their regulator, Professor Stephen Littlechild, to reopen a price control agreed last year, culminating in the recent announcement of tougher price cuts.

Mr Byatt said: "It is sometimes alleged that inadequate information in the hands of regulators leads to 'incorrect' price limits and therefore that some error-correction mechanism is required. Any projections inevitably contain a margin of uncertainty. Frequent changes in price limits reduce incentives to future efficiency. Retrospective adjustments will destroy them altogether."

He said he was also examining ways of accelerating the benefits of increased efficiency for customers. But he said that the importance of preserving the incentives to efficiency mean it would be "foolish" to rush this process".