Reign of regulators tested: Investors are adding their voice to calls for curbs on privatised utility watchdogs. Helen Kay reports on the City's concerns

AS JUDGEMENT day draws near in the water and electricity industry price reviews, there have been further calls to snap a stronger leash on the watchdogs who regulate privatised utilities.

Last Wednesday John Baker, chief executive of National Power, the English power generator, produced a six-point plan for reform. The previous day it emerged that Prudential had written to the 10 regional water companies urging them to seek a review from the Monopolies Commission rather than settle for punitive changes to their price-capping formulae at the hands of Ian Byatt, director-general of Ofwat.

Six months earlier a director of Barclays de Zoete Wedd Investment Management had written to each of the water companies to express BZW's reservations about the methodology being adopted by Mr Byatt.

'In view of the risks to long- term value inherent in Ofwat's assumptions, we believe there would be much to be gained by challenging them, even if this involves an appeal to the MMC,' he said.

At least one other institutional investor also admits to having got involved in the issue. 'We have made some representations to both the water and electricity companies, in terms of what sort of rates of return and risks should be accepted. It was to help the companies themselves, as much as anything else,' said a spokesman.

In fact, altruism and self-interest coincide here, since institutional investors are fearful of seeing the value of their shareholdings slashed in the wake of a review that dramatically curbs profits. Inan unprecedented move to protect their own position several have gone well beyond the discreet dinner-table conversations traditionally used to impart their views to the board.

But this new activism also reflects growing concern in the City, as well as among the management of the regulated companies themselves, about the powers of the regulators. Who, they are asking in a paraphrase of Juvenal, regulates the regulators themselves?

It would be all too easy to dismiss their dissatisfaction with a 'Well, shareholders and bosses would say that, wouldn't they?' Nevertheless, they have a point. Indeed, Mr Baker articulated all the most serious criticisms. And, since National Power for most purposes falls outside the parameters of Offer, the electricity regulator, he could be seen as having less of a vested interest than many utilities executives.

In a published letter he advocated a more precise definition of the regulatory role, an argument that has reared its head several times in the past. Last year, for example, Sir Iain Vallance, chairman of BT, railed against Oftel's unilateral decision to extend its powers to adjudicate on interconnection rates. There was considerable sympathy with BT among the ranks of disinterested industry experts.

Clare Spottiswoode, the new director-general of Ofgas, conceded during a Select Committee session two weeks ago that her predecessor, Sir James McKinnon, had sometimes acted beyond his authority.

If the precise remit of the regulator is one area of concern, the regulatory process is another - on the ground that so much of it takes place behind closed doors. This is sometimes the fault of the utilities themselves, since they insist their trade secrets must not be broadcast. It is also true, however, that certain regulators - Mr Byatt being an exception - have earned a reputation for keeping the process and their reasoning too close to their chests.

Yet the most important of the criticisms levied against the regulatory structure is the fact that it consists of individuals rather than boards - and that the companies have no right of appeal against decisions that may be motivated by little more than whim. This is not true, of course. A company can always ask for an investigation by the Monopolies Commission - but this is a process rather like playing with fire, because the commission could intervene in areas it was not asked to address and make things even tougher.

Still, the argument goes, a one-man or one-woman band is more open to abuse than a board. Mr Baker accordingly recommends replacement of the single regulator with a board of three or five. Similarly, Sir Iain last year suggested a panel of 'non-executives' to regulate the regulators - and, if necessary, curtail them.

The suggestion resurfaced in slightly different form during the year-long investigation of British Gas by the Monopolies Commission, when the gas company gave vent to its frustrations with Sir James, then head of Ofgas, after a notoriously acrimonious relationship. Cedric Brown, its chief executive, argued in favour of measures akin to the corporate governance proposals advanced by the Cadbury Committee for board directors.

In one version or another the idea is supported by a number of institutional investors. 'If ICI is run by a board of directors, why on earth isn't there a board of regulators?' asked Peter Jones, head of research at M&G. 'We believe in collective rather than individual wisdom.'

Mike Grimble, investment strategist at Norwich Union, agreed. 'The one-man band may do well when he's an inspired person,' he conceded, but this made regulation too dependent on individual talent. 'There would be an increase in continuity and consistency if a board were established,' he said.

One industry analyst made the same point more graphically. 'There is a view that the regional electricity companies should be escorting Stephen Littlechild (director-general of Offer) to and from work, to make sure he doesn't get run over by a bus.'

He added that if Mr Littlechild's appointment was not renewed in September, the shares of the regional companies would lose a good 10 per cent of their value. The point is surely the most eloquent testimony to the drawbacks of individual rather than collective regulation.

Needless to say, some regulators take a dim view of this challenge to their jursidiction. The stiff reply from Ofwat was: 'The director-general of Ofwat has a job to do, given him by government. He has statutory duties laid down in law. His ultimate aim is to look after customers and control the level of bills. It is not up to him to look after the shareholders, but he has done as much as possible to keep the City informed, to consult them and be open to their views.'

Some institutional investors have also kept quiet for fear of making matters worse. 'Mr McKinnon would have said: 'Two fingers to you. I'll make it worse.' There's a danger that you might just antagonise the regulator,' said a spokesman for one institutional shareholder.

Then he added: 'If we saw a threat to a substantial part of our investments, then we would be prepared to take a higher profile now.'

(Photograph omitted)