British Gas set for new row with watchdog

(First Edition)

OFGAS is heading for another battle with British Gas over how much the company should charge users of its pipelines.

In a report due in the next few days the watchdog will reaffirm its stance that the return on the pipeline system should be limited to 2.5 to 5 per cent. This is despite the regulator's preliminary report at the end of last year, which drew broadly the same conclusion but was attacked by City analysts and financial institutions.

British Gas, which asked for a reference to the Monopolies and Mergers Commission on the issue, wants a return of 6.7 per cent on its existing system and more than 10 per cent on new investments. Despite speculation that Ofgas has done a U-turn, the company expects its final report to be at least as tough as before.

A British Gas source said the matter was of fundamental importance and acknowledged that a row was almost inevitable. Paul Spedding, an analyst with Kleinwort Benson, said Ofgas's view of the rate of return was 'ludicrous - it would kill the expansion of the natural gas industry.'

The Ofgas report will be submitted to the MMC, which is expected to announce the results of its industry investigation in April. An official said the regulator was not bound by MMC recommendations. Relations between British Gas and Ofgas reached a new low recently when Sir James McKinnon, the regulator's director-general, suggested the company be broken up into more than a dozen parts. Robert Evans, chairman of British Gas, accused Sir James of a 'smash and grab' operation.

One industry observer said: 'The wasted time and effort in arguments and public battle with the regulator is criminal. It does not help anyone.'

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