British Gas wins battle against forced break-up

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The Independent Online
THE Monopolies and Mergers Commission has ruled out radical break-up proposals for British Gas, in a report on the industry's future whose conclusions are due to be published on Tuesday.

However, it is widely expected in the City that, after a year-long investigation, British Gas will be stripped of its domestic monopoly on gas supplies, allowing competitors to enter the market by 1995.

British Gas has resisted pressure to sell off its transportation arm or divide itself into more than a dozen small companies, as recommended by Ofgas, the industry regulator. The City believes the company has largely won this argument, with brokers including UBS, Kleinwort Benson and BZW confident last week that the commission will be satisfied with accounting separation of gas distribution from supply, making the charging structure more transparent.

'Breaking up British Gas carries a high political risk,' said Rod Maclean, a gas analyst at UBS, adding: 'What's happened in the electricity industry hasn't exactly been a storming success.'

Peter Spring of Henderson Crosthwaite agrees. A restructuring would almost certainly require primary legislation, he said, and the Government 'does not want to have to put any more contentious legislation than it has to through an uncontrollable Parliament'.

Earlier this year the Gas Consumers' Council, the domestic customers' watchdog, came out strongly against fragmentation of British Gas when James Cooper, the chairman, said: 'No case has been made for radical and irreversible structuring.' He added: 'Competition for the sake of competition is no reason for change.' However, the commission will almost certainly recommend removing the tariff threshold to allow competition in the domestic market, despite reservations at the GCC and among industry experts.

'The Government wouldn't want to drag its feet on deregulation,' said Mr Maclean, pointing out that it would be unwilling to risk impeding deregulation on the Continent. A consortium of companies, including British Gas, is looking at putting a pipeline from the North Sea to the Dutch coast, in anticipation of liberalisation in mainland Europe.

The GCC is warning against a radical shake-up in gas supply. This weekend Ian Powe, its director, said: 'Unless totally convinced that competition will bring prices down, the Government faces high risk in tinkering with a market structure that, rival suppliers and the regulator apart, most people believe delivers the goods.' Mr Powe believes the Government must remain committed to competition but cannot risk a totally free market if there is any prospect of an escalation in bills.

British Gas has predicted that in a free-for-all market, uniformity of gas prices for domestic users across the country would disappear, and some would see bills almost double. Rival suppliers - which include North Sea producers and some of the regional electricity companies - claim potential savings for customers of 10 per cent.

Kristoffer Maroe, managing director of Alliance - a joint venture between BP and Statoil of Norway - believes that no consumers need see higher bills. 'There are only winners,' he said.

Alliance, Utilicorp and Total Gas all say they would agree to a price cap similar to that of British Gas and would accept service standards. Utilicorp said that it is not right that competition, which it says has saved users pounds 100m to date, should be restricted to 2 per cent of gas users. 'It is the deprived 98 per cent, the domestic consumer, that holds the key to meaningful competition,' it said.

Change in the pipeline, page 9

(Photograph omitted)

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