British Gas calls off pounds 250m Scottish sale

Scottish Hydro-Electric said last night that discussions had ended with British Gas for the purchase of the gas group's Scottish and north of England supply business, in a deal thought to be valued at around pounds 250m.

The sale would have created the UK's first truly integrated gas and electricity group, serving 2.3 million homes in Scotland, Northumberland and Cumbria, and would have involved the most dramatic step yet in the planned break- up of British Gas, which is facing intense regulatory and financial pressure.

No reason was being given last night for the abrupt termination of the talks but it is thought that the proposed sale was just one distraction too many for the gas group which, it has emerged, will amost certainly ask this week to have the bitter dispute with Ofgas over pricing referred to the Monopolies and Mergers Commission.

In a statement last night Hydro-Electric, which mainly serves electricity customers in the North of Scotland, said: "British Gas and Hydro-Electric confirm that they were in discussions about the possible purchase by Hydro- Electric of the domestic gas supply business of British Gas in Scotland and northern England. These discussions are no longer being pursued and, as a result, no further announcements will be made."

Hydro-Electric, chaired by Lord Wilson of Tillyorn, a former governor of Hong Kong, is thought to be very disappointed by the collapse of the talks, which it had been expected would be successfully concluded this week. But as well as the pricing review of its TransCo business, which has caused such bitterness with Ofgas director-general Clare Spottiswoode, British Gas is facing a review of its supply business and the demerger of its trading and supply businesses next year.

The deal would have meant several thousand employees from the gas group's 49,000-strong workforce moving over to Hydro-Electric, which would have taken over gas supply, meter reading, billing and servicing.

News of the breakdown of the talks comes just two months after Lord Wilson said that by increasing year-end gearing of 25 per cent, the group would be able to release pounds 500m to expand its business.

He told shareholders at the group's annual meeting: "Your board takes the view that there are many opportunities to maintain our high rate of expansion by investing such funds carefully in new projects. Our major institutional shareholders have made it clear that they agree with this policy if the investment is in expansion." He added that, as well as defending and developing its traditional Scottish businesses, the group would also focus on "expanding our market share and profits in England and Wales".

Meanwhile, barring a last-minute change of heart by Ofgas, it is now thought a foregone conclusion that British Gas will ask for its dispute over pricing at its TransCo pipeline business to be referred to the MMC by the deadline of next Monday. Any investigation is expected to last around six months.

One insider said over the weekend that there was "not a prayer" that the group would accept the Ofgas proposals, despite the concessions offered by the regulator last month. A meeting last week between Philip Rogerson, BG deputy chairman, and Ofgas failed to find any common ground between the two sides.

The gas group claims the changes offered by the regulator result in a 3 per cent improvement in revenues compared with the original terms of the regulatory formula, which it says is "not material". It is also being suggested that a referral will scupper Ms Spottiswoode's plans to bring forward the extension of domestic gas competition.