British Gas chief executive Cedric Brown last week called for Government support, saying the "unprecedented" decline in spot prices on commodity markets for gas, compared with contract prices, had helped its rivals undercut British Gas and caused an accelerating decline in its market share.
A Whitehall source said: "Buying contracts for gas supplies is a matter for British Gas. If there is to be renegotiation the industry will have to do it."
Mr Brown said last week that he believes he has the support of Tim Eggar, minister for industry and energy. But the Whitehall source said: "There may be a view that renegotiation is sensible. But the Department of Trade and Industry is just that - not the Department of Arbitration."
The task of renegotiating contracts is expected to meet with resistance from major gas producers which see no reason why they should help to shoulder the burden. Ofgas, the industry regulator, also says that the issue is beyond its remit and must be resolved by the companies concerned.
Mr Brown said that it is wrong for British Gas shareholders to have to bear all the "pain" of the long-term contracts. He argued that they were largely entered into before British Gas was privatised and the company had to buy enough gas to supply its monopoly market. He appeared to lay much of the blame for its predicament on the Government's decision to accelerate the introduction of competition in the industrial and commercial gas market, where British Gas's share has dropped dramatically.
Last week British Gas announced a fall in post-tax profits to pounds 635m in the first half of the year, from pounds 664m a year ago. The company warned that the surplus gas problem and the sharp decline in prices would have an even greater impact in the second half of the year.
Under the "take or pay" contracts British Gas will, by the end of this year, have paid cumulatively for almost pounds 700m worth of gas which it is as yet unable to sell. One City analyst, said the expenditure could increase to pounds 1.3bn within three or four years.Reuse content