Privatised utilities are trapped between a rock and a regulator

In all the excitement of the first dealings in Railtrack shares this week, it will have been easy to overlook a significant development in another railway venture. A parliamentary application to build a freight line from the heart of the industrial Midlands to the Channel Tunnel was made on Monday.

The project is called Central Railway and, among other things, it promises to reduce freight haulage on roads and link British business more effectively with the European transport infrastructure – all at no expense to the public purse.

This would all seem to be in keeping with the Government’s long-standing environmental and economic principles. So it would be a shame if ministers were too distracted by other rail issues – the sale of Railtrack and the donation of other state railway assets to Richard Branson’s passenger operator London & Continental Railways – to give Central Railway the parliamentary attention it deserves.

The trouble is that obsession with privatisation often seems to override all other reason. And this lack of reason, I would suggest, is in danger of severely restricting our ability to compete internationally.

We have debated the state of our privatised utilities to such an extent that it is all too easy to overlook the damage caused by a confused and contradictory regulatory system to some of our most valuable commercial assets.

Last week, the gas industry regulator Clare Spottiswoode imposed price controls of such draconian proportions on British Gas that even commentators used to the knee-jerk reaction of applauding anything that inconveniences a privatised utility were moved to suggest that perhaps matters had gone a bit too far.

British Gas is effectively being expropriated from its shareholders in favour of its customers in a manner that compares chillingly to renationalisation – something to which even the Labour Party is no longer committed. Remember, this is a regulator put in place by a Government that favours free-market enterprise. I feel there is something of a contradiction here.

The story is much the same wherever you look in privatised utilities. But the paradox of liberating corporations from state control, only to burden them with unpredictable and inconsistent regulation, is nowhere more apparent than in the telecoms industry.

Along with British Gas, the flotation of BT was considered a flagship privatisation of the Eighties. Oftel has been considered one of the more effective and civilised of regulators. And yet its record has been a sad one, a fact that has passed largely unnoticed because there have been bigger and sadder problems in the privatised energy utilities.

The story of BT over the past decade has been one of missed opportunities, despite the rather more popular version of improved service and unvandalised phone boxes. BT has been prevented from supplying entertainment services through its domestic lines because of its monopolistic status. So foreign-owned and often rather inefficient cable suppliers have entered the market. Meanwhile, BT’s quasi-monopoly has seen off Mercury from the public phone market, so customers have no realistic choice there either.

We seem to have ingeniously engineered the worst of both worlds in UK telecoms. We neither have a strong monopoly supplier providing all that it could, nor a properly developed competitive market containing a range of competent and competitive suppliers.

The market, as it stands, seems to be in an impasse. BT’s overtures with Cable & Wireless seem to have come to nothing and its ambitions to form an alliance with Rupert Murdoch’s BSkyB to develop a digital TV service will, I fear, be stifled by the good old competition authorities.

One wouldn’t mind so much if these competition authorities were at least consistent. A glance at the electricity industry shows that they are about as consistent as Andy Cole in front of goal. You can own an electricity distributor if you are a Scottish vertically-integrated generator/distributor, but not if you are an English generator. You can own a distributor if you are foreign, or if you are Lord Hanson, but not if you are a British generator, in which case you must sell some of your plant to a distributor. Meanwhile, horizontal integration – such as water with electricity – is fine and, of course, local monopolies can buy each other.

There is some hope that Labour in government would bring some sense to these markets by replacing the whims and idiosyncrasies of individual regulators with one super-regulatory commission. But worryingly, Labour shows a far greater inclination for clobbering the privatised utilities with windfall taxes and tougher regulation than it does for helping them to flourish – regardless of what Peter Mandelson might have to say about New Labour being on the side of business.

It is frightening to consider what damage has been done to British competitiveness abroad by the heavily flawed attitude that you can liberate state assets with free-market principles and then clobber them with inept, cumbersome and contradictory regulation. Of course there is a role for regulation in markets, but we need radically to redefine its quality.

I never thought I’d hear myself say it, but regulation of British industry direct from Brussels could, as things stand, only be an improvement.