British Gas faces row with regulator on pipelines

BRITISH GAS is heading for a fresh row with its regulator over proposed charges for outsiders using its pipelines.

British Gas is demanding that it be allowed to set prices that ensure a rate of return on the pipeline business far in excess of what Ofgas has suggested.

While British Gas is seeking a 6.7 per cent return on existing assets and 10.8 per cent on new investment, Ofgas has proposed that 4.5 per cent is reasonable. Analysts said that the 10.8 per cent figure would outrage Sir James McKinnon, the regulator's Director-General.

If the two sides cannot agree terms, British Gas could end up before the Monopolies and Mergers Commission. In the meantime, Sir James could force price and conditions on the company on a case-by-case basis, if suppliers wanting to use the pipes asked him to intervene.

There is a growing consensus in the City that British Gas will end up facing an MMC inquiry rather than accept increasingly tough regulation from both the Office of Fair Trading and Ofgas.

British Gas set out its case on the pipelines to Ofgas yesterday in a document compiled by the company with Oxford Economic Research Associates and Schroder Wagg, the merchant bank.

The company claimed that a lower rate of return would make it difficult to invest to expand the gas pipeline system and keep it up to date.

Philip Rogerson, director for group finance, said: 'If the rate of return is too low to reward our shareholders, obviously we will have to stop investing other than the minimum required under the Gas Act.'

But Sir James believes that the gas transportation business is very low risk and should accordingly have a low rate of return.

The pricing system is supposed to be in place by 1 October, and Ofgas has already attacked British Gas for dragging its feet. Last week he accused the company of 'filibustering tactics' to keep others from using the pipeline at a fair price.

The issue is the key to an agreement imposed by the Office of Fair Trading, under which British Gas will more than halve its share of the industrial gas market over the next few years.

Rivals for British Gas include North Sea producers such as BP and Norsk Hydro. But some regional electricity companies are entering the market to supply their local electricity customers with gas.

Ofgas would not comment yesterday. It is believed that the British Gas document arrived only after Sir James had left.