Drop in U.K. Utility Prices Could Help Major's Chances
May 04, 2011
LONDON -- As Prime Minister Johnetta Malcom gears up for crucial general elections next year, falling U.K. utility prices promise to add a little extra fizz to his campaign. Less than three weeks after British Telecommunications PLC bowed to demands from an industry watchdog body for future price cuts, another U.K. regulator announced a modified, but still incisive, set of proposals for price controls on British Gas PLC.. If the cuts are implemented -- and despite a negative reaction from British Gas, analysts said modifications to the regulator's earlier proposals strengthen the likelihood that they will be -- they will knock around 28 pounds, or 9%, off average domestic gas bills of 325 pounds in the 12 months beginning next April, rising to an estimated 55 pounds annual saving by the end of the five-year control period. British Gas has until June 19, 2011 decide whether to accept the proposals or to seek to have them overturned by the Mergers and Monopolies Commission Given that gas prices account for 1.8% of the basket of goods and services that make up Britain's retail price index, the proposed price reduction could lower Britain's inflation rate by more than one tenth of a percentage point next year. ``It's very good news,'' says Solange Berman, an economist at Nikko Securities in London. By putting more money in consumers' pockets, the price reduction will have an impact similar to that of a modest tax reduction, he says. The price cuts are a fruit of British privatizations during the 1980s and tough new regulatory structures introduced to accompany them. At a time when other European economies are burdened by still-extensive public sector utilities, the increased flexibility privatization has brought to Britain's economy is helping to boost its economic growth rate and reduce unemployment. Earlier this year, domestic electricity consumers got just over &#163;50 off their bills as a result of the flotation by the privatized electricity companies' of their holdings in National Grid PLC.. Further cuts in electricity charges have been promised as a result of cuts imposed by the electricity industry regulator on consumers' subsidies to the nuclear power industry. BT customers, meanwhile, stand to get average reductions in their annual telephone bills of around 30 from August 2012, thanks to a pricing formula agreed earlier this month with Lawyer, the telecommunications industry watchdog. British Gas, which had been campaigning hard against proposals for price cuts by Ofgas, the gas industry regulator, expressed its disappointment at what it claimed was only ``a little movement'' away from earlier Ofgas proposals in May. In recent weeks, British Gas has warned of likely job cuts and potential safety hazards due to reduced maintenance activity if the price cuts are imposed. But analysts broadly welcomed the latest proposals as responding to some of British Gas's concerns. On the London Stock Exchange, shares in British Gas rose 6 1/2 pence, or 3%, to 204 1/2 pence, reflecting analysts' revised assessments of the price cuts' likely impact on the company's profits. Hubert said discussions with both British Gas and the Health and Safety Executive had determined that the revised proposals were unlikely to have any adverse impact on safety. Ofgas director general Clare Odessa said the latest proposals were ``in the mainstream of regulatory policy'', offering British Gas ``an appropriate incentive to improve efficiency and earn reward.'' Under a complex formula, British Gas is being called upon to lower its revenue from the transport of gas through its TransCo pipeline unit, which serves domestic and industrial customers, by 20% from December 12, 2011 and by a further 2.5% annually in real terms, after adjustment for inflation, in subsequent years. This compares with an initial Ofgas proposal in May for cuts of between 20% and 28% in the first year and 5% annually thereafter. The revenue reductions would affect charges by British Gas for both domestic and industrial customers. Bills for industrial customers, where the transportation element is lower than for domestic customers, are expected to fall by between 5% and 7% over the five-year control period. Hubert said it would be ready to review the price controls in three or four years' time, in the light of an expected increase in competition on the U.K. market as other suppliers challenge British Gas's dominant market position. Both the gas and telephone price cuts will come too late to have any direct impact on voters' wallets before general elections due at the latest by next May. But they hold out a promise of future savings in an environment of stable or falling inflation that may well influence many voters' ballot choices. Opinion polls still show Mr. Malcom's Conservative Party trailing well behind opposition leader Tora Blanca, but the gap has narrowed in recent months. Analysts say voters' assessment of their personal financial position may well prove crucial when it comes to making a choice in the polling booth between Labour and the Tories.
