Michael Harrison's Outlook: It's a funny old media world when one man's megalomaniac is another's free marketeer

A utility bubble waiting to burst; London beware: NY is wising up

They're megalomaniacs around at the BBC. Authoritarian to boot, don't you know. That Lord Reith would have given the Burmese junta a run for its money. Me? I'm not an anarchist if that's what you're thinking. I like to call it consumer empowerment. It's the free market. And all for £29.99 a month.

Inviting James Murdoch to a debate on broadcasting regulation was tantamount to asking Herod to open a new branch of Mothercare and sure enough, there weren't many survivors.

But the pot must have run away with the kettle when he accused the BBC of megalomania. All the Murdoch empire owns is Sky, Britain's biggest selling daily and Sunday papers and now a blocking stake in ITV. If you believe Richard Branson, this is not just control freakery but a threat to Britain's very democracy.

The Murdoch thesis is that multi-channel broadcasting and media convergence will largely make regulation redundant, save for preventing minors from being exposed to unsuitable programming on the wrong side of the watershed. Ofcom might as well give up trying to second-guess the market and turn off the lights. For one thing, it just cannot keep up with the sheer pace of change.

All good knockabout stuff and all entirely self-serving. Sky may talk a good game about freedom of choice being the true arbiter of the modern media world. But it is only regulation which has stopped it from abusing its position, be that by taking over Manchester United or ramming bundled packages of programming down subscribers' throats.

Now the regulators face their biggest task - deciding whether or not Sky's stake in ITV constitutes a material influence and thereby stymies the competition which Mr Murdoch says he values so highly. The more you think about it, the more obvious it becomes that there is a case to be answered. Lord Puttnam, who wrote the so-called Murdoch clause into the Communications Bill, has no doubt the plurality of the British media is at risk. It is hard to disagree with that assessment - but will the regulators see it in the same light. Or have they, too, been browbeaten into submission?

A utility bubble waiting to burst

No sooner had the ratings agency Standard & Poor's warned of the dangerous asset bubble developing in the utility sector, than Thames Water gave its new owner, Macquarie, something to think about. Thames' first-half profits fell by a quarter - a salutory reminder that even with inflation-busting price increases, water companies are not always a one-way bet.

The "dual curse" of over-valuation and excessive leverage which S&P is so worried about is evident in spades in the water industry where suppliers are being snapped up by bidders stuffed to the gills with debt financing and prepared to pay top dollar. Thames and AWG, the owner of Anglian Water, have been bought at a premium to their asset value that would have seemed impossible only a couple of years ago.

But the phenomenon is not confined to water. The auction of BAA resulted in the airports owner being sold on a sky-high multiple to a highly-leveraged consortium led by the Spanish toll-road contractor Ferrovial. London City airport also went for a fancy price, as have Britain's two principal ports operators, P&O and ABP. And the definition of what constitutes an "infrastructure" business is being stretched all the time, to include companies such as Laing, which is a collection of contracts rather than assets.

There is an undeniable attraction in asset-backed regulated businesses for pension funds which can match their profit flows against long-term liabilities, unlike private equity funds which operate on a much shorter timescale. But there is also an inherent danger. The whole edifice is being held together at present by cheap and plentiful debt. That is not bound to last forever, as the Governor of the Bank of England told MPs yesterday.

If interest rates rise then it is not hard to see how a number of these new owners of utility companies could find themselves under water. In that event, they cannot expect to be bailed out by the regulators. Ofwat and the Civil Aviation Authority have made it clear that they will set prices to reflect the investment needs of the airport and water industries, not to accommodate the particular way in which the owners of these businesses have chosen to finance themselves.

Ofwat has even gone as far as to ring-fence revenues of regulated water companies to prevent their parent companies squeezing more money out should a fall in their debt rating increase financing costs. The utility bubble is obviously different to the dotcom bubble, which grew from inflated valuations being placed on companies with minute revenues and nothing in the way of profits. But the consequences of it bursting are, if anything, greater. Life went on pretty much as normal when the fashion retailer boo.com went bust. It would be hard to say the same if Thames Water went under.

London beware: NY is wising up

When Ken Livingstone visited New York recently and was asked about his economic development strategy for the City of London, he answered in two words: "Sarbanes-Oxley". The onerous legislation rushed through by US politicians in the wake of the Enron and WorldCom scandals has added millions to the cost of running a public company. It has undoubtedly made foreign bosses think twice about listing their firms in New York, and the London Stock Exchange has been the biggest beneficiary, making successful play of the "light touch" regulatory regime that prevails on its side of the Atlantic.

The worry must be that London is getting complacent. Nasdaq's furious courtship of the LSE is being characterised in some quarters as "if you can't beat 'em, buy 'em", and the British government has rushed to prevent any acquirer from introducing Sarbanes-Oxley style regulation for UK companies.

But the real threat to London is not that US regulation will overwhelm the UK; rather it is that the US has gotten wise and is about to drastically reduce its own burden of red tape.

There is already a remarkable consensus of opinion over what should be done, most focused on reducing the auditors' bills that went sky high when Sarbanes-Oxley was introduced.

The Securities and Exchange Commission has signalled that it is about to water down key provisions of Sarbanes-Oxley, reducing the amount of finicky investigation that auditors must do of companies internal accounting processes. Auditors are finding support for their call to limit their liabilities when they miss frauds. The new Treasury Secretary, former Goldman Sachs boss Hank Paulson, is looking at ways to increase competition amongst auditors, too.

There was another report out yesterday recommending much the same, this one from the Committee on Capital Markets Regulation, chaired by a Harvard law professor, a former Goldman Sachs president and an ex-White House aide. Mr Paulson is making his own push at building a cross-party consensus in the New Year. And New York's mayor, Michael Bloomberg has joined with the powerful New York senator Chuck Schumer to commission their own report from McKinsey, asking for other ideas on how to maintain the city's dominance of global finance.

Sarbanes-Oxley was an Act passed in haste, but Wall Street has no intention of repenting at a leisurely pace.

m.harrison@independent.co.uk