Public loses faith as utility regulators flounder

Another day, another row over utility regulation - or rather, two of them. Yesterday we had British Gas flouncing off to the Monopolies and Mergers Commission in protest at Clare Spottiswoode's proposed price controls. With Professor Stephen Littlechild refusing to compromise his proposed controls to any significant degree, the National Grid could soon follow suite.

Plainly there is something wrong with utility regulation that it could produce such spectacular, damaging and explosive argument.

If Ms Spottiswoode is right about British Gas, that it has been conducting a carefully orchestrated dirty tricks campaign to undermine her credibility and standing, then this is not an acceptable state of affairs in a mature democracy. Certainly the allegations demand public investigation.

By the same token, if British Gas is right about the degree to which the regulator has been trying to meddle in its affairs, a degree, according to British Gas, which is tantamount to attempting to run the company, then this is equally unacceptable. These companies were not privatised to be run as customer co-operatives. Investors bought them in good faith, believing in the sanctity of a regulatory contract which appears to have been thrown to the winds.

Price regulation is accused of being too lax on the one hand and too harsh on the other. It is hardly surprising that both the public and the City are losing all faith in it. Meanwhile, the regulators are left floundering around, attempting to match each other with ever greater displays of regulatory machismo.

Professor Littlechild was undoubtedly influenced by the example set by his counterpart at Ofgas in what he did yesterday. Unless, of course, it is sheer coincidence that both the Grid and TransCo have been instructed to make a one-off cut in charges of 20 per cent followed by virtually identical real price reductions in subsequent years.

Unless there is a radical change of heart or some interesting mental gymnastics at the Grid, it looks to be heading the same way as British Gas to the Monopolies and Mergers Commission. Ms Spottiswoode massaged her final proposals so as to appear to have given ground but kidded no one, least of all British Gas, that she had compromised in any significant fashion. Likewise the concessions put forward yesterday by Prof Littlechild amount to relatively little. He is offering to relax the efficiency targets the Grid must meet and allow it a rate of return in the middle of the range on a slightly bigger asset base.

It shouldn't be happening that these regulatory reviews are ending with the MMC. That they are is indicative of a failure in the system. The sooner utility regulation is overhauled to make it more accountable, transparent, and professional, the better. Certainly the present set-up seems to be pretty much on its last legs. The next Government should make reform a matter of urgency.

Ferry merger will bring back real competition

It is not often that the Independent, which believes in the principles of the free market and open competition, finds itself in support of a merger that will reduce competition, cost jobs and lead to higher prices for the consumer, but the P&O/ Stena link-up announced yesterday may be one of those rare cases. Certainly Lord Sterling, chairman of P&O, puts a compelling case for it, even if he does overegg the argument a bit. Ever since the Channel Tunnel was first sanctioned by the British and French governments, it was inevitable that one day this would happen.

When Eurotunnel was raising finance for le grand projet, it came out with some wildly overoptimistic forecasts of cross-Channel traffic and tariffs to persuade investors, bankers and politicians that the Tunnel could co-exist perfectly happily with the ferry operators. They were, of course, never any more than self-serving nonsense. No industry could ever hope to add on such a vast chunk of capacity and expect the market to grow large enough overnight to fill it. The reality was always likely to be a vicious price war, with all the usual fall-out from such fights.

By merging, what the two ferry operators are in essence doing is returning the position commercially to where it was before the Tunnel arrived. In the past, there were two main ferry operators on the chief Anglo-French trunk routes, plus a number of hangers on. The Tunnel increased the number of competitors to three. The merger will reduce them to two once more, with the also-rans following up in the rear. The fact that Eurotunnel is privately urging the authorities to agree on this merger would in normal circumstances be a reason for the utmost suspicion. The dangers of a cosy duopoly developing are all too real. But for the time being there is far too much capacity on these routes and as a consequence everyone involved is bleeding to death.

The idea, seriously advanced in support of this merger, that it will create a powerful new competitor for the Tunnel is largely tosh. This merger is not about creating more competition; it is about reducing it and increasing prices. But for a change, these unworthy ends seem largely justified. The alternative is death by a thousand knives for ferry operators and an eventual near monopoly for the Tunnel.

Proposals compare with last decade's Big Bang

Sometimes it is all too easy in analysing City matters to miss the wood for the trees. This seems to be true of the Stock Exchange's new automated trading system, which will begin operation late next year. Debate over the Stock Exchange's future has been clouded and obscured by a seemingly endless series of technical rows over price disclosure rules, the stamp duty regime, and other points of detail. But the really important part seems largely to have been missed. Standing back from it all, what has actually emerged is a surprisingly radical set of proposals that bear some comparison with those introduced at Big Bang a decade ago this month.

From late next year, there will be no market makers in FTSE 100 stocks; trades will be executed automatically on the computerised order book. Really large trades will still be carried out away from the order book, but once completed their prices will be published. When the big securities firms deal in the FTSE 100 stocks that make up two-thirds of the pounds 1.5bn- pounds 2bn daily market volume, their only protection will be the size of their capital and their trading skills, not the special market making privileges which are at present built into the rulebooks.

There will be nothing to stop any other Exchange members competing with them on equal terms. It has taken a long time for the stock market to start practicing the free market principles it so likes to champion for others, but finally we seem to be getting there. Michael Lawrence, unceremoniously sacked by the market's big battalions for the high handed way he attempted to reform the trading system, is entitled to feel at least a little pleased at the revolution he fomented.