Leading article: Living with Littlechild

Two weeks ago this newspaper criticised the electricity industry regulator, Professor Stephen Littlechild, for his laxness in setting a price regime for the privatised electricity companies. "He made a mistake and he should admit it," we said. What a difference a fortnight makes! Yesterday the professor dropped a hint that perhaps at least one of the electricity companies may not have revealed its true profitability last August, when the prices were set. To the consternation of the City he then indicated the need for a revised price regime.

All's well that ends well, then. The excessive dividends to be paid to shareholders should be replaced by a bonus of some sort to customers. Three cheers for the prof, surely? Not exactly the view of the financial markets yesterday. In the first place the regulator's timing could scarcely have been worse. Only hours before his announcement the Government had raised £4bn from the sale of Powergen and National Power. The investors who put their money into these shares did so on the basis of the old prices. But it was a false market.

Some politicians yesterday thought they could sniff a conspiracy, with the regulator conveniently waiting until investors' pockets had been lightened before moving in for the kill. That is unfair. Professor Littlechild is an independent regulator and there is no reason to suppose that his decision was strategically delayed to aid the latest sell-off.

The issue is not really one of fairness to investors. Many have reaped benefits from the privatisation of the electricity companies that have exceeded their wildest dreams. It is not unreasonable to expect people to take the pricks with the kicks. No, the problem here is one of confidence. Investors have the right to expect that the regulator will take a strategic view and avoid sudden lurches in approach.

Nationalised industries were constantly bedevilled by the fickleness of ministers; yesterday's performance will sow further doubt about the constancy of independent regulators, too. Next time a price regime for a utility is set, few investors will see it as a final basis for taking investment decisions. They will always be wondering what other pressures might force a change of mind.

So what conclusions can we draw from all this? One could be that the whole regulation business is a sham. Perhaps - this argument goes - monopoly utilities and private ownership are genuinely incompatible. Regulators cannot be expected to find a regime that protects the interests and rights of both shareholders and of consumers.

This is too defeatist. Regulation of private-sector monopolies is a difficult art, but one which is conducted more or less successfully all around the world. In Britain, the experience with British Telecom and Oftel has been broadly positive. There the regulator managed to deliver a substantial (but not excessive) rate of return on capital, and, on some measures, the cheapest telephone service in the world, albeit in a situation where technology and international competitive pressures were on the side of a happy ending.

The truth is that anyone owning shares in public utilities faces a significant degree of regulatory risk and some continuing political risk. Who knows, some future government may even want to renationalise utilities. The job of the regulator is difficult. It requires judgement of complex financial issues as well as common sense and intuition. Professor Littlechild has struggled with this balance and yesterday's market chaos is the price. But it is better that he acted late than not at all.