Leading Article: The danger of mixing water and electricity

We've always been told that water and electricity don't mix. Plunge a toaster in the bath and watch the sparks fly. The same motto probably applies to the companies that provide water and electricity services.

A fashion is sweeping through the privatised utility industries. Like most fashions it is superficially appealing but transitory. The fashion is that utilities which are quite effective when they focus on a relatively simple task, supplying electricity to a region, for instance, should really become multi-utility companies. The skills learnt in, say, providing water services can easily be transferred to gas and electricity and even to telecommunications. The result is you get a stronger company, based on several legs.

In reality this fashion is almost certainly merely a justification for empire building. Aggressive managers want to show what they are made of so they go looking for acquisitions, armed not just with surplus cash but with flashy sounding theories supplied to them by their handsomely paid City advisers and management consultants.

The multi-utility concept lies behind Scottish Power's bid to gobble up Southern Water for pounds 1.56bn. Southern Electric countered yesterday by bidding pounds 1.6bn. Scottish Power, the electricity generator in Scotland, already owns Manweb (the regional electricity company), Scottish Telecom (which is linked to Vodafone the mobile phone operator) and a gas supply subsidiary.

Why should we bother about these bids? Companies change hands all the time. If the management of one company can do a better job of running another one as well, then mergers or takeovers may make everyone better off. A little chopping and changing was inevitable as the utilities adjusted to emerging competition. They tell us that water in pipes, electricity in wires, all follow the same principles. After all, building societies and banks are moving into one another's territories. Surely broadly based utility service companies can be as efficient as broadly based financial service companies?

Perhaps. But the merger mania across utilities seems increasingly ludicrous. The arguments aired by Scottish Power and Southern Electric in pursuit of its water company prey are tenuous to say the least. And the risks of allowing these monopolies to coagulate are considerable. What makes managements efficient is competitive pressure. These mergers will further reduce competition and so erode pressure on managers to deliver a better service to consumers.

We are supposed to believe for a start that Southern Water will be better run by the management of one of these other companies. Perhaps. But the idea that they bring any special expertise that will automatically improve the business is not very credible. After all, what do power stations in Scotland and baths and sinks in Brighton have in common?

Southern Electric marshals a slightly more plausible case. At least that company and Southern Water have customers in common. Arguably there could be savings from joint billing. But even so, the geographical overlap is not complete. Modern information technology bills so swiftly and smoothly that the savings from a common system are unlikely to be immense. And meanwhile, the public will be right to worry that the family defaulting on its electricity bill could find its water supply jeopardised, too.

The record of the mergers that have been allowed so far is not persuasive. The City is distinctly unimpressed by the take-over of Norweb (the regional electricity company) by North West Water. Privatised industries have been down this road before. Managers of recently privatised companies do not feel they are proper private sector managers until they have lost their virginity on the acquisition trail. Soon after its privatisation in 1984 BT acquired a Canadian telephone manufacturer called Mitel on the grounds that there was great synergy. It was a disaster that took years to unravel.

Newly privatised companies seem to have a macho, but entirely irrational, desire to expand into other fields that they know nothing about. Management should know their strengths, and their limits, and stick to what they are best at. But if they are tempted to stray, then the regulators and competition authorities should watch closely, because the merging of important utilities will be bad for consumers in the long run.

The regulators within each industry have a hard enough job as it is, working out what the real costs are that the companies face, what their profits are likely to be, and how low they should set their prices. Companies keen to make profits for their shareholders have an interest in disguising future profitability. How much easier it will be for them to do this if they have diversified into other utilities.

These utilities are not so much trading assets as trading regulatory regimes. As competition emerges in the electricity and gas markets, huge companies with safe profits from their secure water monopolies will be in a stronger position to withstand the competition. Predatory pricing, it's called. It would be much harder to stop in a world of merged multi- utilities.

At this point Ian Lang, President of the Board of Trade, should step in. The individual regulators won't bat an eyelid at the bids. The Monopolies and Mergers Commission, we know, is quite happy to see utilities merge; it thinks that will create national champions. Mr Lang should step in to rule out further consolidation, just as he did with the bid from Powergen to take over Southern Electric last month. But if these kinds of mergers across utilities are allowed to continue, it will create the need for regulation to keep pace. Super-utilities need super regulators to bash them, beat them and keep them in check.