Electricity watchdog cuts bills by 9%

Household electricity bills are set to fall by 9 per cent over the next two years in a new price regime unveiled yesterday by the industry regulator, Professor Stephen Littlechild.

Chris Godsmark, business correspondent, reports on a package which has already stirred up controversy.

The electricity watchdog, Offer, said the final price formula for the 12 regional electricity companies (RECs) and two Scottish power groups would knock pounds 24 off an average domestic bill of pounds 270 between 1998 and 2000. The reductions, which vary between the different companies, would come in two stages, with a 6 per cent drop from next April followed by a further 3 per cent the following year.

Professor Littlechild also stuck by a plan to place an overall cap on customer bills for the first time. The current price regime allows the RECs to pass fluctuations in their generating bills on to consumers.

The price controls envisage an 8 per cent fall in the cost of wholesale power bought by the RECs, of which 4.5 per cent would come when high-priced long-term coal contracts expire next April.

The regulator also confirmed he would allow RECs to pass pounds 500m through to bills, a figure included in the overall price control, to cover the cost of introducing domestic competition next year. Professor Littlechild has already watered down his original price proposals after admitting they would have slashed profit margins so far that few outside companies would have wanted to take part in the competitive market. A previous formula suggested a 12 per cent cut in power bills in just one year, equivalent to a drop of pounds 32.

The RECs, some of which had threatened to go to the Monopolies and Mergers Commission, were studying the final package last night. Some had complained that the previous plans would have plunged their supply businesses, the administrative and billing arms which account for around 7 per cent of customer bills, into heavy losses.

The regulator admitted that some suppliers would make losses if they failed to cut their costs, but said he did not believe they had a case for the MMC. "My main aim wasn't to avert an MMC reference.... Some (RECs) were very insistent that this price would be too low. I don't share those views," he said.

Shares in the two privatised generators rose sharply as Offer confirmed that it had backed away from more direct curbs on their wholesale power prices charged to the RECs. National Power shares ended 14.5p higher at 565.5p, while PowerGen jumped by 7p to 759.5p.

Separately yesterday, the Electricity Pool, the wholesale power market, agreed to press ahead with a review of its structure, which consumer groups claimed was a pre-emptive move to avert an MMC inquiry.