RECs warn controls will damage competition

Electricity companies have stepped up their attack on new price controls proposed by Professor Stephen Littlechild, the industry regulator, by warning the Government that they could risk damaging moves towards domestic power competition next year.

In a letter sent a fortnight ago to John Battle, the industry minister, the Electricity Association claimed the new price structure would wipe out supply profits for the regional electricity companies (RECs).

The complaint followed what were described as "frosty" meetings between Professor Littlechild and the RECs. An industry source said the companies had written jointly to Mr Battle because he had effectively put himself in charge of delivering competition, which is due to start in phases from April 1998.

The letter added that the profit margin on supply, which accounted for around 7 per cent of customer bills, would be so drastically cut that it would make it uneconomic for any new operators to come into the market. A copy of the letter was sent to the industry regulator.

The consultation paper, published last month, suggested average household bills would fall by 12 per cent from April to around pounds 238 excluding VAT. Part of the reduction is already guaranteed from the existing distribution price controls, which account for some 30 per cent of bills. But the latest plans also envisage supply costs, such as billing overheads and marketing, falling by 1.5 per cent a year, with bigger reductions for higher-cost RECs.

Generators have already attacked the suggestion in the document that generation costs will drop by between 4 per cent and 12 per cent in real terms next year as cheaper coal contracts come into force. The new regime would, for the first time, impose maximum prices instead of the current formula which allows higher generation costs to be passed through into bills.

The chief executive of one of the largest RECs attacked the proposals as "idealised" and said he had warned Professor Littlechild that the industry would "fight the price controls all the way", implying the issue could be referred to the Monopolies and Mergers Commission. The final supply price formula is due on 22 September.

He added: "This is a ludicrous situation to be in. The price cap he's proposing won't foster competition. It will deter competition. We're spending almost pounds 1bn as an industry preparing for 1998 and we'll have nothing to show for it."

The chief executive claimed an average REC, with annual sales of pounds 500m, would see its profit on supply of pounds 8m turn into losses of up to pounds 50m.

Profits margins in electricity supply have always been low, with most earnings coming from the regional distribution monopolies.