These are the second set of cuts in as many months and, together with tougher controls on the prices charged by British Gas's transportation arm TransCo, will reduce the average bill of pounds 320 by pounds 40 from April next year.
British Gas immediately warned that the proposals, if implemented, would cause a significant squeeze on profits and hamper its ability to compete when the domestic market is fully liberalised in 1998.
Philip Rogerson, deputy chairman of British Gas, said they would reduce the profits of its domestic supply business by 40 per cent from pounds 152m to pounds 90m and require it to reduce costs by 15 per cent between 1995 and April next year.
Although British Gas's response to these latest price curbs was more measured than its reaction to the TransCo proposals, Mr Rogerson said: "Nobody should be under the impression that we are happy. We have been less vociferous only because the proposals are less extreme."
Ms Spottiswoode defended the new price curbs saying: "They give British Gas the freedom and flexibility to compete while protecting consumers."
Ian Powe, director general of the Gas Consumers Council, welcomed the proposals, saying: "This is a triumphant day for regulation and gas consumers." They would, he added, redress the balance of shareholder and consumer interest.
Under the proposals, British Gas Trading must limit price increases to inflation less 5 per cent for the three years from April, 1997. The present price cap is RPI-4. Within the overall cap, however, it will be able to offer different price tariffs to different categories of customer provided that its basket of price stay within RPI-5.
British Gas will also be allowed to pass on to customers the full costs of its massive and loss-making take-or-pay contacts with North Sea suppliers. Had Ofgas decided that these costs could not be passed on, and British Gas had to charge its domestic consumers market rates, then bills next year would have fallen by between pounds 21 and pounds 48. Ms Spottiswoode said the new regime would require British Gas Trading to achieve a 5 per cent annual reduction in operating costs and would allow it a 9 per cent return on capital.
Although tough, the new price curbs are unlikely to prompt a referral to the Monopolies and Merger Commission. However, TransCo still looks certain to end up before the MMC. Mr Rogerson repeated yesterday that the TransCo price curbs were "ill-founded, damaging to the interests of British Gas shareholders and not in the overall best interests of gas consumers".
But Ms Spottiswoode said she had yet to receive any "logical or coherent" response from British Gas. So far all she had received was "a huge emotional barrage".Reuse content