UK: MONOPOLIES FEEL THE BITE OF CONTROVERSIAL SYSTEM OF CONTROL. - Ofgas's battle with British Gas brings the regulation debate into the open.

by Roger Eglin.
Last Updated: 31 Aug 2010

Ofgas's battle with British Gas brings the regulation debate into the open.

In a country where boardroom level disputes are more commonly conducted behind closed doors, the very public confrontation between Sir James McKinnon, the head of Ofgas, and British Gas's top management, who accuse McKinnon of mounting 'a smash and grab raid', has been riveting.

Too often major issues - such as the future of the railways - are thrashed out in secret with little opportunity for the public to inform itself or join in the debate. With gas, the debate is there for all to see.

When the Thatcher government launched its privatisation drive, a group of powerful monopolies - gas, telecommunications, electricity and water - were hurried from public to private sector with little attention paid to diminishing their monopoly status. Competition was often weak or non-existent and regulators were appointed to provide the sort of stimulus that genuine market competition might otherwise have introduced.

Relying on regulation rather than competition will always be a second best solution. With British Gas, the argument about breaking up the industry will never be resolved satisfactorily. If British Gas remains intact no one will ever know whether McKinnon's break-up plan would have produced greater efficiency, just as we will never know whether British Gas's chairman, Robert Evans, was right to argue that a break-up would be counter-productive and costly. There is a strong suspicion that some sort of break-up might be beneficial but it is no more than a hunch. Where there are several competitors, the odds are that consumers pay prices fairly closely related to the costs of the most efficient producer.

If it was a compromise from the start, the system of regulation has acquired more critics with the passage of time. As the gains that the regulators score on behalf of consumers are usually at the expense of profit margins, it is no surprise that the City is unenthusiastic about regulation. A recent report from the European Policy Forum, a new think tank launched with the Prime Minister's endorsement, sympathises with the City. Investors, it says, are being treated unfairly by regulators who take unpredictable decisions and operate with great secrecy.

Not surprisingly, this view finds considerable support at British Gas. Its chief executive, Cedric Brown, says that what is needed is 'a regulatory framework... that is fair, more accountable and responsible'. Doubtless the sceptics will translate this as a plea for a regulator more willing to dance to British Gas's tune.

Dieter Helm, director of Oxford Economic Research Associates, holds a similar view. He argues that investors need protection from regulators using discriminatory powers, and worries about the enormous discretion over utilities enjoyed by regulators 'without the appropriate accountability'. He fears that new competitors will be deterred from entering the market by the regulators' pressure to drive down prices.

Are regulators really so 'irresponsible'? In the British Gas versus Ofgas shoot-out, the Monopolies and Mergers Commission (MMC), which is to review British Gas, is effectively acting as a court of appeal. The general assumption has always been that utilities would concede to the regulator rather than face an MMC inquiry. British Gas has shown the game can be played the other way by opting for the review. As for the City, there is bound to be disappointment as regulators chip away at monopoly profits. But many investors did well out of the privatisation sales and few consumers will mourn the end of monopoly profits.

Not everyone is a critic of regulation.

In his recent book, Privatisation, Public Ownership and the Regulation of Natural Monopoly, Sir Christopher Foster, who has variously been an economics professor, civil servant and businessman, concludes that, by and large, the system of regulation has worked. This is due, he argues, to the presence at Ofgas, Oftel, Offer and Ofwat, of strong individuals with considerable discretionary powers - which is, of course, the point that worries Helm and the Policy Forum.

Foster has gone right to the centre of the debate. Regulators will always attract criticism due to the very nature of their work. To respond to the critics by shackling the regulators would neuter them and deliver them into the hands of monopolistic managers. Far better to see a regulator being accused of high-handed or irresponsible behaviour than to see one praised for his moderation.

Without McKinnon, who would have goaded British Gas into cutting its prices? Without Sir Bryan Carsberg at Oftel, would BT have become the competitive organisation it is shaping up to be? Carsberg may now seem to be the respected doyen of regulators but there were times when BT and he were embattled.

One reform Foster considers necessary is greater powers for regulators to extract information and to publish it. No doubt the monopolists would fight more disclosure. But as long as the gloves are off and the debate is acrimonious, the chances are that regulation is biting.

Roger Eglin is associate business editor of The Sunday Times.

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