Outlook: Sod's law says the blackout that cannot happen, will happen

Life-time limit; Debs shootout

Both National Grid Transco and the electricity regulator Ofgem took me to task for daring to suggest last summer that the paralysing power cut that afflicted London in August was a wake-up call on a looming problem of underinvestment in the electricity industry. My comments were alarmist and just plain wrong, I was told. Actually I was quite measured compared with some, but City editors are meant to be grown-up about these things, and avoid exaggeration. In Ofgem's opinion, the deregulated electricity market was working exactly as it should, with little danger to supply.

Well, it now transpires that there is some danger after all, though according to the regulator nothing we should bother our silly little heads about. National Grid's safety cushion - that is the excess of generating capacity over demand - shrunk to 16.5 per cent over the summer, and although it has since risen a bit as mothballed capacity has been brought back on stream, it is still low by historic standards and in certain "exceptional circumstances" would be insufficient to meet demand, for instance during a prolonged freeze with the interconnectors from France and Scotland not operating at full tilt.

Actually this doesn't strike me as so unlikely as to be wholly implausible, and it's Sod's law that what is not meant to happen has a habit of happening. On one day last winter, the cushion shrank to as little as 2 per cent. It would only have required the outage of a single, medium-sized power station for there to have been blackouts.

In any case, National Grid is unnerved enough by the prospect as to put a whole raft of contingency measures in place, allowing it to override the interruptible contracts of some gas-fired power stations so that shippers would be obliged to keep the gas flowing to them. This hardly looks like the perfect solution, given that it would presumably create gas shortages elsewhere. The lights might be kept on, but at the cost of the gas-fired central heating going down.

The cushion has fallen because of the collapse in wholesale electricity prices that occurred after the Government introduced the new electricity trading arrangements (Neta), causing generators to mothball capacity or withdraw from the market entirely. It also caused the nuclear generating industry to go bust, but that's another story.

The mothballing and closures should not have surprised anyone, as in any industry with excess capacity where the market is allowed to operate, prices will fall to below the cost of production until the excess is removed. With electricity supply, this is a rather more serious eventuality than in most businesses, because the industry needs a degree of excess to meet short periods of very high demand and thereby avoid power cuts.

What's more, the construction of new electricity generating capacity tends to be on long lead times, which means that investors need a degree of certainty about future prices before they'll commit to new projects. As things stand, there is insufficient incentive in the system to allow for the construction of all the capacity the nation needs to guarantee supply as older generators are taken out of commission.

Of course, the power cut that so crippled the London Underground last summer was nothing to do with a shortage of generating capacity. Rather it was down to faulty transmission, which National Grid blamed on a one in a million chance - an incorrectly fitted fuse as it happens.

None the less, the same general observation can be made. Parts of the Grid are being depreciated for regulatory purposes over too long a period to ensure timely and adequate replacement. Current prices are consequentially lower, but problems could be getting stored up for the future. Britain has one of the best electricity supply systems in the world. Under investment hasn't historically been a problem and power cuts of any duration are rare. For heaven's sake let's keep it that way.

Life-time limit

It's hard to have lunch with a chief executive these days without angered reference to the "life-time limit" which the Government plans to impose on savings put into a pension plan. Regrettably this is not a problem that most of us will have to confront, as it is only the very well paid that are likely to reach the £1.4m maximum pension pot the Government proposes before punitive rates of tax kick in. Yet quite enough will be hit by it to make it into a serious bone of contention. When the proposal was first made a year ago, the Inland Revenue estimated that only 5,000 people would be affected, which is plainly far too low. According to Mercer, consulting actuaries, the real number is likely to be 100 times as many, or more than half a million.

Furthermore, those affected are among the most powerful and influential in the land - judges, top lawyers, senior civil servants and, of course, high earning executives. For such people, the new rule would remove all incentive to save through a pension once the upper limit had been reached.

Given that a pension is only a form of deferred pay, it might also act as a significant deterrent for companies to locate in Britain. Business leaders have already warned Tony Blair, the Prime Minister, on the likely loss of competitiveness should the Government push ahead with the proposal. Most serious of all, perhaps, is that it contravenes the spirit of Labour's pledge not to raise the the top rate of income tax, as the effective marginal rate on pension savings above £1.4m would be 60 per cent.

A number of possible compromises are being explored. One would be to define the £1.4m as the value of contributions, rather than the accumulated value of the fund. For all but a few thousand people, this would solve the problem entirely, but it is said to be meeting strong resistance from Mr Blair's next door neighbour, the Chancellor. Now there's a thing. Another would be to index the upper limit to earnings rather than prices. Again, it seems unlikely the Government would go for that given that it has strongly resisted pressure to restore the earnings link to state pensions. To do so with the life-time limit would look too much like one law for the rich and another for the poor.

That leaves the option of raising the limit, say to £1.8m. Actuaries point out that with the continued decline in annuity rates, the effect would be only to return the income that could be bought with such a sum to what it was with £1.4m when the proposal was first made. But in any case, it's unlikely of itself to satisfy high earners.

The Government should never have gone down this route in the first place. Now it has, it is hard to see what the solution might be, other than a total climbdown. The Chancellor would do well to remember that the top 1 per cent of earners pay nearly a quarter of all income tax. The scale of the Government's ambition for public spending means this is not a constituency it can afford to damage with the politics of envy.

Debs shootout

In an attempt to bring the five month private equity battle for Debenhams to a close, the Takeover Panel last night outlined a timetable that would, assuming neither party drops out in the meantime, culminate in a sealed bid auction on Tuesday 4 November. The final shootout will be decided on the basis of the maximum each bidder is prepared to offer, rather than the formula basis that has been used in the past.

The panel may be right in believing it won't come to that. With both bidders already not that far off the maximum they are prepared to offer, the matter ought to be settled through the exchange of fire that occurs before the sealed bid process begins. Whatever the outcome, some shareholders will continue to believe they are being short changed. However high private equity goes, it will expect to make at least a 20 per cent annual rate of return on its money. "Keep it public" should become the slogan of all shareholders at the end of private equity bids.

jeremy.warner@independent.co.uk