British Gas shares trading leads to inquiry

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THE STOCK Exchange has launched an investigation into the sudden rise in the volume of British Gas shares traded last week, after suggestions that price-sensitive information was released by Clare Spottiswoode, the new industry regulator, at a lunch attended by leading institutional investors.

More than 47 million shares - worth about pounds 163m - changed hands during the week, after a number of investment houses construed Ms Spottiswoode's comments as bearish for British Gas. The lunch was hosted by Smith New Court, the stockbrokers, last Tuesday. The following day, trading in British Gas shares more than doubled from 5.1 million to 13 million. Dealing remained hectic for the rest of the week, with 12 million shares changing hands on Thursday and another 10.6 million on Friday.

At the meeting which sparked this heavy trading, Ms Spottiswoode is thought to have raised questions about the way the gas giant's pipeline and storage assets are valued, and the rate of return it should receive on them.

Prior to her appointment last November, the Monopolies and Mergers Commission recommended that British Gas should be paid a higher rate of return on new investments than on old ones. But Ms Spottiswoode appears to be considering a unified rate of return, which would be easier to calculate and to regulate. She also corrected the impression that the tariff formula would be revised along the lines proposed by the Commission.

An Ofgas spokesman denied that she had made any price-sensitive remarks. 'Clare gave no specific indication of what the revised tariff formula would be. Nor did she comment on the rate of return issue,' he said.

Any suggestion that Ofgas is examining the basis on which British Gas assets are valued will be treated with dismay by investors. A previous investigation by Ofgas concluded that British Gas had not 'gold-plated' its transportation arm and that there were no grounds for substituting an alternative valuation.

Some independent gas suppliers have disputed this view. They argue that the company should value its pipeline and storage facilities - which account for about three-quarters of its total assets - according to what it paid for them rather than what it would cost to replace them. This would cut their value dramatically. At present, the group's transportation arm is valued at about pounds 16.3bn, but on a historical cost-accounting basis it would fall to some pounds 6.4bn, according to Stephen Turner, industry analyst at Nomura. This would produce a big drop in British Gas charges - and its returns.

However, it would win favour with rival gas suppliers that will pay BG for use of its distribution network. It would also be popular with the Gas Consumers Council, which looks after the interests of some 18 million domestic customers. 'The thing that will have the greatest effect on pricing is the transportation cost,' said Ian Powe, director of the GCC.

(Photograph omitted)

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