Regulator poised for fight over cut in electricity bills

THE ENERGY regulator, Callum McCarthy, was preparing to do battle with the electricity industry last night after announcing sharp cuts in domestic bills and tough new fines for poorly performing companies.

Speaking after he had unveiled proposals for a 5 per cent cut in electricity charges next year - worth pounds 15 to the average household, Mr McCarthy, director general of Ofgem, said: "I am perfectly reconciled to the fact that one of the fourteen companies will take this to the Competition Commission and I am unfazed by that."

The regulator is proposing a one-off cut next April of 25-30 per cent in electricity distribution charges which make up a third of the average domestic bill. In each of the following four years distribution charges will be reduced by a further 3 per cent in real terms.

Share prices of some electricity companies fell back heavily. Shares in United Utilities, which owns Norweb, retreated 7 per cent to close at 740p while shares in Hyder, which owns Swalec, also ended the day 7 per cent lower at 550p. Scottish and Southern Energy was another loser, its shares falling 15.5p or 3 per cent to close at 540p.

Mr McCarthy will not fix final price controls until November but he had a tough message for shareholders in electricity companies, saying: "Distribution is not and should not be a high-risk, high return business."

The price curbs will require the electricity companies to cut operating costs by 7-8 per cent a year and set a cost of capital for the industry of 4.2-4.5 per cent. This is lower even than that set for the water industry by Ian Byatt of Ofwat in his price review last month.

Hyder, one of the companies hardest hit by the water price cuts, said it would press Mr McCarthy for an outcome which was "deliverable" and which struck the right balance between shareholders and customers.

Norweb described the proposed price reductions as "extremely demanding" and said they would require further discussion with the regulator.

Although distribution charges - the amount companies levy to maintain their local network of wires - will fall by 25-30 per cent next year under the new formula, the regulator will allow 9 per cent of that to be passed on to each company's supply business. However, Ofgem officials expect that the cost transfer will have to be absorbed by the companies rather than passed on to consumers, since electricity supply is now a competitive market.

British Gas, which has signed up more than one million electricity customers, described Ofgem's proposals as "excellent news". The reduction in distribution charges will have to be reflected in the amount BG pays to use local wires networks.

There has been speculation that the new price controls will prompt a wave of mergers among distribution businesses seeking efficiency gains. But Mr McCarthy said he would recommend referring any such merger to the Competition Commission. According to Ofgem's calculations, distribution mergers produce pounds 10m-pounds 12.5m of cost savings, which would need to be reflected in a further cut in bills.

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