Price cap on National Grid

TOUGHER price controls have been set for the National Grid Company, which transmits electricity in England and Wales.

Offer, the industry regulator, is introducing a price cap to save pounds 300m over four years for users of the grid, including generators, large businesses and the 12 regional electricity companies. The change was greeted with relief in the City after predictions of a much more onerous regime.

In a separate move the National Grid Company said it would change the way it charges generators to encourage them to locate in the South. In northern areas, where there is too much capacity, charges for those using the grid will increase sharply.

In some southern areas the NGC will pay generators to reflect its savings from not having to move electricity around the country to meet demand. The changes are part of a package that must fit inside the new cap.

Offer's price cap, set for four years from April 1993, is inflation minus 3 percentage points. The NGC has until now been able to increase charges to inflation for those using its system.

Professor Stephen Littlechild, director-general of Offer, said that if the NGC failed to agree the change it would be referred to the Monopolies and Mergers Commission. He added: 'I believe I have set a tough but realistic target. This new control will help keep electricity prices down and will properly balance the interests of customers and shareholders.'

Main beneficiaries will be large users of the grid system rather than domestic customers. Transmission accounts for only 7 per cent of the average household bill.

The regional electricity companies, which own the NGC, are likely to see their dividend from the grid reduced as a result of the change. Last year the NGC made a profit before tax of pounds 314.5m on a current cost basis and paid pounds 117m in dividends to the regional companies. City analysts said, however, that the NGC would still be able to increase its dividend in real terms over the four years.

Professor Littlechild said he believed the NGC could cut operating costs by 5 per cent a year rather than the company's stated aim of 3 per cent. A low-risk business required a low cost of capital, and the NGC should cut capital expenditure by keen purchasing.

At the same time Offer is abolishing the way in which prices are set by predicting inflation. This has prompted customer complaints over price volatility and uncertainty. Professor Littlechild said that in future prices would be set according to historic inflation averaged over six months. He indicated the same approach might be taken with the regional supply companies.

Domestic rebates, page 25