Electricity prices to be cut by 10%

HOUSEHOLD ELECTRICITY bills are to be cut by about 10 per cent next year, an annual saving of almost pounds 30, the industry regulator is expected to announce later this week.

Callum McCarthy, the head of Ofgem, is to order the regional electricity companies (Recs) to reduce their distribution charges by 25 to 30 per cent from next April. Distribution charges - the amount levied to maintain the local network of wires in each Rec - make up a third of the average domestic bill of pounds 275.

The good news for UK householders comes just two weeks after the water regulator ordered water companies to cut bills by 14 per cent, equivalent to pounds 34 off the average domestic water bill.

The steep one-off reduction in electricity charges will be followed in the subsequent four years by price controls requiring companies to keep increases in bills below the rate of inflation.

In some cases, for the most efficient suppliers, the one-off reduction is likely to be less than 20 per cent. But industry sources fear that some companies could be penalised with reductions next year closer to 40 per cent. Mr McCarthy said earlier this year that he planned to implement a "further significant cut in distribution costs" when he announced the results of his prices review.

Britain's 14 public electricity suppliers will have until November to try to persuade Mr McCarthy to soften his price cuts. They have the option of appealing to the Competition Commission if he refuses to budge.

The last time distribution price controls were set in 1995, Stephen Littlechild, regulator at the time, had to tear up the formula and impose tougher price curbs within months after discovering he had been hoodwinked by the industry over the level of savings possible.

His successor is determined not to fall into the same trap, making a harsh set of price cuts inevitable. Mr McCarthy estimates that operating costs for the electricity companies fell by a quarter in real terms between 1995 and 1998 alone. He will be looking for some of these efficiency gains to be passed on to customers.

Industry observers said the regulator may allow Recs to merge to help them to achieve the demanding efficiency targets. There has already been some consolidation in electricity supply with London Electricity taking over the supply business of Hyder in South Wales. A number of other companies, including Norweb and Midlands, are keen to merge with other supply businesses.

There is yet to be a merger between two distribution businesses. But industry observers believe the most obvious candidate would be a merger between Sweb in the South West and Swalec in South Wales with Midlands possibly joining in as a third partner.

Mr McCarthy also hopes to introduce some form of "rolling regulation" into the forthcoming five-year price review so that companies have additional incentive mechanisms to improve efficiency further.

The price cuts stemming from the distribution review are in addition to an estimated 13 per cent reduction in bills as a result of the overhaul of the electricity pool and the introduction of new trading arrangements, which should take effect next year.