City: Gas regulator cooks up crackpot plan

IF YOU want a good laugh, just think about this one. How about forcing British Gas to demerge itself into 17 competing and separately quoted companies? That way there would be no need for a regulator any more. Selling gas would become as competitive as food retailing, as cut- throat as selling soap powder, cornflakes or motor cars. The old monopoly would vanish; competition alone would ensure that the customer would get the best possible service for the best possible price. Sounds great in theory, but you don't need to look very hard into the way it might work in practice to realise it's a non-starter.

If this were one of those hare- brained ideas dreamt up in the early 1980s by the right-wing Adam Smith Institute with the purpose of shocking and challenging conventional wisdom as much as anything else, you might have thought, 'very clever, very ingenious', but then rapidly consigned it to the bin. This however is not some early and largely frivolous piece of Thatcherite radicalism. This was the submission made in all seriousness last week to the Monopolies and Mergers Commission by Sir James McKinnon, director-general of Ofgas, the industry watchdog. After eight years of regulating British Gas, he ought to be as qualified as anyone to comment on the future of our gas industry. But should he be taken seriously? Is it really any part of his job to be proposing such a radical break-up? Is that not for the politicians to decide?

Little more than six months ago, Sir James had this to say on the matter in an interview with Gas World International: 'If there were likely to be an adverse impact on the customer, I would not support it. But in any case it is not my job to determine how British Gas should be organised, so I have no intention of entering into this discussion.' By December last year, he had apparently changed his mind. He proposed that British Gas's pipeline and storage system be separated from the rest of the business. Three months later and he has shifted yet again. Now he wants to separate the 12 regional gas companies as well, so that they can all compete with one another for business. We're all entitled to change our views, I suppose, but this looks more like brainstorm than a carefully thought out evolution in approach.

Nor is this the only example of muddled and inconsistent thinking by Sir James. In December 1990, he was quoted in the Economist as saying that the legal and political complications of reneging on the terms under which British Gas was privatised effectively ruled out any wholesale restructuring of the industry. Two years later and he was saying that the 1986 sale prospectus ceased to have any legal or moral standing 'several years ago'. It is no wonder leading institutional shareholders have angrily demanded meetings with Sir James.

Even his language is becoming progressively more intemperate and extreme. Sometimes it verges on the outright bonkers. In December 1991, for instance, Ofgas issued a press release which said: 'There was some Christmas cheer today for Britain's 17 million gas householders from the industry's Santa Claus, James McKinnon'. Dear, oh dear.

There is of course nothing wrong with bashing British Gas, nor is becoming a hate figure in the City anything to be ashamed of, especially if like Sir James you see yourself as a champion of consumer interests. British Gas thoroughly deserves to be pressurised and constrained. In many respects it is still a dreadful, arrogant and complacent organisation that requires to be repeatedly beaten around the head. In this process, Sir James has undoubtedly had his successes. Were it not for his robust stand, tariffs would be higher and quality of service lower. But of late he has gone way overboard. Even to his own staff he is becoming an embarrassment - a loose cannon whose relentlessly confrontational style is making him seem a faintly ridiculous and ineffective character.

Just recently, Cedric Brown, British Gas's chief executive, has taken to lunching with Sir James on a regular basis. Before that there was no contact whatsoever, relations were so strained. Judging by the latest crackpot idea, however, it doesn't seem to have helped very much. According to British Gas, the costs of a McKinnon-style break-up would be pounds 3bn over 10 years, which either the customer or shareholder would have to bear. This is no doubt an exaggeration, but by the same count so too must Ofgas's calculation of costs of just pounds 250m be a gross underestimate.

The loss of present economies of scale alone would cost at least that. Add in the loss of storage efficiency that would result from hiving off the pipeline system, and the costs of supporting 17 different companies each with their own head offices and IT systems, and you are beginning to talk about very substantial figures indeed. There is also doubt that the regional gas companies could survive as independent stock market animals. Much more likely British Gas would eventually be carved up among a small number of trade buyers.

For most trades and industries, competition is without question the best safeguard of consumer interests. But in the case of a utility like British Gas, it may well be that a tightly regulated monopoly is actually a rather more efficient and less costly way of delivering service to the customer. Certainly, the more competitive environment that reigns in the electricity industry doesn't seem to have done the consumer any good whatever. Sir James should confine himself to regulating British Gas. The quest for competition for the sake of it won't ultimately be to the benefit of anyone. Warts and all, the present system works relatively well. Breaking up British Gas would be an unnecessary and unwarranted leap in the dark.