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The City, too, regards any regulatory change not provided for in the privatisation prospectus as at least a breach of faith, if not of contract. Any form of retrospective action, such as a windfall profits tax, would be seen by the City as a form of theft – like attempting to up the price of a car after it has been sold.So what is the solution? One of the most obviously appealing options is profit sharing, dividing up excess returns on a predetermined basis between shareholders and customers Like most good ideas, it is not new. Harry Moulson, managing director of Transco, the British Gas transmission system, likens the regulator’s rule to a constant process of chiselling, so that you never know where the parameters lie or what the priorities are meant to be.Peter Strickland, strategy manager at British Telecom, complains that in BT’s case, the terms of the original regulatory contract have been written over with such frequency that it is no longer possible to know what that contract is. In the case of the RECs they have been vast, with ordinary dividends, special dividends, share buybacks and the like delivering the sort of returns more normally associated with a blockbuster product discovery than a bog standard utility.Over time, excessive returns associated with the early years of privatisation begin to diminish, as the regulatory screw tightens with each successive review.Even if the problem is eventually self-correcting, however, the perception remains that the system isn’t working. Nor is it only consumers and opposition MPs who see it this way The City and the utilities have their own concerns. The regulator seemed hopelessly to have underestimated the scope for cost cuts, as well as misunderstanding what an “appropriate rate of return” might be for monopoly suppliers of this type.Furthermore, the transitory gains shareholders get ahead of periodic review can be substantial.

The rate of return, in nearly all cases, has turned out higher than assumed. This is supposed to be compensated for through periodic review of charging controls.The RECs could not believe their luck when they saw the results of Professor Stephen Littlechild’s first review of electricity prices. In theory it is a highly effective way of balancing the interests of customers and shareholders. In practice it may leave something to be desired.Forecasting future cash flows, deciding on “appropriate rates of return”, is an inexact science, even in businesses with a stable source of monopoly revenue. This is called “price cap” regulation and it was largely invented in Britain. Labour thought it had discovered a scandal; instead, the campaigners ended up shooting themselves in the foot, by convincing the City to buy.Even so, the water companies had to be primed with massive “green dowries” – a process that the passage of time showed to have been unnecessary.With all the utilities, tariff controls are set so as to give an “appropriate” rate of return, hedged against inflation, minus an amount as an incentive to encourage efficiency. The campaigners then publicised a leaked Government document showing the soon-to-be-privatised companies as capable of delivering a rising dividend stream into the indefinite future on the generous regulatory framework proposed.

By the summer of 1989, for instance, fierce campaigning by a combination of Labour and Friends of the Earth had convinced the City that the water authorities were largely unsellable. In this it was assisted by the Labour Party, whose campaigns against each privatisation generally had the effect of making the price much more favourable to investors. With each utility sell-off, the Government’s overriding priorities were to sell as quickly as possible for as much as possible.Since there was no precedent, the regulatory system had to be deliberately lax to attract investors. As in all commercial negotiations, there was also an amount of deliberate deception involved. Managements played down the real worth of their businesses and the scope for efficiency gain so as to flatter their own performance in the aftermath of privatisation and help to justify lucrative share option and bonus schemes.The same was true of the City, which in its own interests bid down the price of sell-offs as much as it could.

Publicly they are impotent, for the problems go beyond bad decision-making and poor PR.To be fair on the Government, this is a debate not as cut and dried as it might first appear, not least because utilities regulation is intimately bound up with the politics and philosophy of privatisation.To understand the present furore, you have to return to the roots of privatisation. Privately, they are furious, blaming the individuals who head up thequangos for the shambles. Ministers mouth an increasingly hollow defence of the regulatory set-up. At a conference today of regulators, analysts and industry executives, Jack Cunningham, Shadow Trade and Industry Secretary, is to spell out his own prescription for reform.The Government seems to have been embarrassed into silence.