Electricity companies escape harsh controls: Supply price regime is less stringent than feared - Regulator wants pounds 100m spent on energy efficiency

THE regional electricity companies breathed a sigh of relief yesterday after new price controls imposed by the industry regulator turned out to be less stringent than feared.

Shares in the companies rose after news of the new regime for electricity supply prices emerged from Offer, whose director-general, Stephen Littlechild, is also requiring the companies to spend a total of pounds 100m over four years on energy efficiency schemes.

Under the new formula, increases in prices for electricity supply - a tiny proportion of consumers' total bills - will be limited to the retail price index minus 2 percentage points (RPI-2). The present regime limits increases to RPI and analysts had predicted that the new formula could be tightened to RPI-4.

Regional electricity company shares gained 10p-15p yesterday as analysts greeted the mildness of the formula. 'It just seems to be slightly tougher without any nasty surprises thrown in,' Angelos Anastasiou of Panmure Gordon said.

The new formula will have little effect on individual bills, saving consumers pounds 20m in total over four years. It is also unlikely to have a significant impact on the earnings of the supply companies, which make the bulk of their profits from physically distributing electricity over the wires. It is the rest of the business - the cost of purchasing power from generators and servicing and billing customers - that constitutes supply.

Professor Littlechild warned that he would look closely at companies' recent profits in his forthcoming review of electricity distribution charges, which lags the supply review by one year. Recent dividend increases by the regional companies - which averaged 15.3 per cent - would be taken into account, he said.

'The scope there has been for profit increases in the past and the high dividends paid are clearly something that will be in my mind in looking at distribution price control.'

The supply price controls introduced yesterday will apply only to franchise customers - mainly households that have to buy from their local electricity company. For the first time from April, Offer is removing all controls on supply bills for large business customers who can shop around. On the same date, the number of customers able to choose their power supplier will increase greatly.

Professor Littlechild said: 'Unnecessary regulation is to be avoided where possible and protection should be focused on those who most need it. I propose lifting the price control from the competitive market.'

Offer has also responded to environmental concerns by changing the way the price mechanism works so that it no longer gives companies a big incentive to sell more power.

Professor Littlechild said the change would force companies to examine whether customers' needs could better be met by investing in energy efficiency than by selling them more electricity.

The separate pounds 100m scheme for specific energy efficiency projects is based on each company spending pounds 1 per customer every year until 1998. The schemes put forward by the companies will have to be approved by Offer in consultation with consumer bodies. They are likely to include help for customers to carry out energy audits and to invest in insulation and more efficient light bulbs.

The Labour Party said the proposed changes were overdue and urged the regulator to take a tougher line in his distribution price review. Martin O'Neill, its energy spokesman, called for help in particular for some large electricity users which had seen dramatic price increases over the past two years. 'Electricity prices have a huge impact on our manufacturing costs. Our chemicals, cement and steel industries all use electricity as a feedstock.'

(Graph omitted)