The company now faces further uncertainty as it awaits the Government's reaction. Ministers will not comment before a full version of the report is published next month. There is also likely to be a period of intense lobbying over the MMC's desire to see the company split into two and over planned changes in the price formula that will disadvantage domestic consumers for up to 10 years.
The MMC has called for British Gas to divest its gas trading operations by 31 March 1997. The commission said that the company's dual role as a supplier of gas and the owner of the pipelines that other suppliers need to use leads to a conflict of interest.
Graeme Odgers, chairman of the MMC, said he had considered further splits into regional or local companies but said: 'We came to the view that this would increase costs very substantially indeed and would be against the interests of the industry, shareholders and probably the consumer.'
British Gas warned that the cost of divesting the trading arm would be pounds 130m a year, which would be passed on to consumers under the MMC's plans. The company also attacked the MMC's proposals to limit the rate of return on its pipeline system to a maximum of 4.5 per cent on existing assets and 6.5- 7.5 per cent on new investment. The company had lobbied for 6.7 per cent and 10.8 per cent respectively.
Although the MMC has also recommended relaxation of the company's price-control formula to compensate for loss of market share, British Gas said its finances would still be extremely squeezed. Cedric Brown, chairman, said: 'It is clear that the limited financial relief proposed by the reports will not greatly alleviate the financial pressure being suffered by both the gas supply business and the company as a whole. We shall therefore undertake a stringent review of our entire investment programme, both UK and international.'
British Gas said it would cut 20,000 jobs in the next three years - about one-third of the UK gas business employees - but denied this was a reaction to the report. The company said its interim operating profit for the six months to June would not be less than pounds 634m on a historic cost basis, compared with pounds 637m in the same period last year. It expects to maintain the interim dividend at 6.4p.
Mr Brown does not believe that divesting the gas trading business is necessary to develop further competition. The company had proposed splitting the UK operations into about five parts, with the pipeline and storage system operating at arm's length, but still owned by British Gas.
However, Mr Brown said divestiture should be in the interests of shareholders 'provided an appropriate financial and regulatory formula can be found. Accordingly, BG is prepared, in principle, to discuss with the Government how such a divestment could be achieved'.
Ofgas, the gas industry watchdog, welcomed the report. Greg McGregor, Ofgas's director for competition, said: 'We are pleased that the MMC endorses Ofgas's view that the trading and gas transportation system should be separated. They have also broadly agreed with our views on the appropriate rate of return on the transportation business.'
The MMC has also proposed relaxing the formula controlling price increases for small customers, to compensate British Gas for loss of market share. The changes would mean that millions of small customers, with no choice of supplier other than British Gas, will have to pay more than would otherwise be the case. The proposals sparked an outcry from consumer bodies and the Labour Party. However, Mr Odgers said that British Gas's profits had suffered significantly from increased competition that was not foreseen when the price formula was introduced.
The company has seen its monopoly reduced from those using 25,000 therms of gas or less a year to those using 2,500 therms or less. Under the MMC proposals, the threshold will be reduced further to 1,500 therms in 1997, with the monopoly abolished about three to five years later.
View from City Road, page 24
Market Report, page 24