The Govt’s abuse of power

The electricity markets demand a better quality of regulatory service, so why has Ian Lang been allowed to act so inconsistently? George Pitcher investigates

I hesitate to draw attention to an area of the Government’s business policy that is in a muddle. It might be considerably easier to cite an area of its business policy that is not in a muddle.

But it has to be said that Trade Secretary Ian Lang (note, with appreciation, that he is not styling himself ‘President’) has not looked much further than the end of Lord Hanson’s nose when it comes to deciding the degree of intervention in the current spate of electricity takeover bids.

This, in current spin-doctor parlance, is not a sexy subject. By which I mean that it is not really much of a vote winner/loser. Sure, there is considerable anti-utility sentiment to be whipped up by opposition parties – executive remuneration and drought orders are but two populist issues that have grown potent in the post-privatisation era.

But, ultimately, they are walk-on parts. Centre-stage and hogging the limelight will be the economy (including the housing market, irrational as that may be), direct taxation and that troublesome mistress of the Tory party, Laura Norder.

The consequence of this lowliness in the rank order of political issues is that competition policy – la Lang – will probably raise its head only briefly and partially above the public parapet of the forthcoming political conference season. And then, in all probability, only as a party pledge “to serve the best interests of customers as well as shareholders” (a phrase that either – or all, in fairness to the Lib Dems in Glasgow this week – of the main political parties would these days adopt).

This is a pity. Competition policy eventually affects us all – as business people and consumers. In this respect, what Lang is doing and not doing with the electricity industry should be seen as a model for all the areas of commercial activities that more directly touch our lives, such as petrol retailing and the brewers’ control of the means of distribution to name but two.

So what precisely is Lang doing? Well, he has inherited an industry imperfectly privatised during the gung-ho Eighties, a department that was told by his predecessor to intervene in British industry (though there is precious little evidence that it ever did) and a regulatory system that you could drive a power station through.

You can forgive him for adopting a fairly laissez-faire attitude. Industrial policy is a mess and trying to do something about it is only likely to draw attention to the degree of that mess.

So, when bidders emerged for regional electricity companies – Southern Company of the US for South Western, Scottish Power for Manweb and Hanson for Eastern – Lang was minded to wave them through without reference to the Monopolies & Mergers Commission, as if this sort of consolidation in the electricity industry was what his Government had intended all along.

Well and good if that really is what Lang intended to convey. A very strong case can be made for economies of scale resulting from utility conglomerates working in the best interests of customers.

But, if that is not what he intended, then he has set a precedent by allowing through the first tranche of Rec bids without reference to the MMC. There is no earthly logic now in referring subsequent inter-utility takeovers, meaning that Lang, unwittingly or otherwise, has approved a future in which we have mega-utility conglomerates.

The fear must be that, as ever, regulatory decisions on subsequent takeover bids – such as that from PowerGen for Midlands Electricity, or North West Water for Norweb – will not be made on the basis of strategic purpose, but for short-term political reasons.

The pity of it is that Lang is able to do this – that is, if so minded, he can exercise inconsistency in markets that demand a better quality of regulatory service. After holding open the door for the likes of Hanson to have a pop at a cash-generative Rec, he should not now be able to slam it in the face of subsequent predators in the sector.

Hanson has always enjoyed a remarkably good record of non-referral to the MMC. One can only congratulate Hanson’s team of competition experts for consistently ensuring that its bids are in accordance with Government competition policy – whatever that is.

But there is only one sauce on offer in a single market for geese and ganders. One should not be able to differentiate – some might say discriminate – between utilities endeavouring to achieve much the same as each other.

In the end, PowerGen will know that it must have access to domestic customers if it is to survive the erosion of the duopoly in generation. These are markets of the Government’s creation and it has a responsibility to ensure that a principle that it sets by allowing early mergers between utilities should apply consistently to all within the sector.

This might, of course, be the line that Lang has adopted. But history does not provide much evidence for this view. Referral to the MMC has always appeared to be something of a lottery.

Much of the blame can be attributed to short-term political interests. But political expediency is only possible where the regulatory framework allows it.

And the regulatory framework in competition policy certainly does allow it. A referral to the MMC can be made where there may be dramatic changes in the market structure, where there could be loss of market power by the consumer or an abuse of a monopoly position.

Then there is one further criterion – where there are issues of public interest. For public interest read political interest.

This self-serving phraseology might not matter much when it comes to the relatively abstract (for most of us) world of utilities. But it matters a great deal when we wonder how principles – or the lack of them – being applied to privatised industrial conglomerates might similarly be applied to “downstream” companies in retailing or consumer goods production.

Where would Lang stand if one regional retailer bid for a retailer in another region? What if they were in the same region? What if a manufacturer bid for the retailer of its products?

These are hypotheticals, and politicians and regulators are fond of saying that each case must be treated on its own

merits. But that is no excuse

for a competition policy that effectively allows a secretary of state to make it up as he goes along.

Too much is being left to chance. It would be nice if politicians of all parties in coming weeks were to be pressed on the issue in Glasgow, Brighton and Blackpool.

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