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Energy sector faces trouble

Turbulent times ahead for gas and electricity
Turmoil in the energy sector looks set to increase, with British Gas facing price cuts of as much as 20 per cent - double the amount originally forecast by the City - when the industry watchdog unveils its first review of proposed fees charged by the company's pipeline business.

Electricity companies are also expecting trouble - furious foreign investors are up in arms over the Government's failure to establish a workable framework for them to invest in the sector.

The review by Ofgas, the gas regulator, due out tomorrow week, will represent "a more significant issue for shareholders than the surplus take-or-pay contracts", said Daniel Martin, an analyst at stockbroker BZW

With a 20 per cent price cut, profits at TransCo, British Gas's pipeline arm, would fall by more than 30 per cent, or some pounds 300m, between 1996 and 1998, Mr Martin says.

That would also signal a harsh cut in the dividend. Other brokers fear the dividend will be halved in 1997 as a tougher Ofgas regime comes into play and British Gas continues to lose ground in its domestic markets to new competitors.

British Gas and Ofgas are already at loggerheads over the pending review. Much of the disagreement stems from a decision to regulate TransCo's business on the replacement cost of maintaining the pipeline network. Clare Spottiswoode, the Director of Gas Supply, has threatened to forbid British Gas from offsetting a full depreciation charge against the cost of maintaining the network.

The new review will take effect from April 1997, and will run for five years. The document due out on Monday week is an initial discussion paper. Ofgas will publish its final decision in June. If British Gas objects, it can request a referral to the Monopolies and Mergers Commission.

Meanwhile, last week's controversial decision by Ian Lang, President of the Board of Trade, has exasperated some overseas institutional investors. Mr Lang declared that the Government would use its golden shares to block any foreign takeovers of the generators, National Power and PowerGen.

Analysts say foreigners are angry at what they see as the Government's fickleness. They fear that if further convulsions beset the utility sector foreign money could be withdrawn.

Dr Bill Mott, head of UK investment at Credit Suisse Asset Management, was scathing about the Government's performance. "Recent decisions do seem to have been relatively random. It seems there is no firm framework for investors," he said.

However, Anthony Watson, managing director of the Australian AMP Asset Management, was more sanguine. "It would have been better if there had been guidance for the market, but then people do make up policy on the hoof," he said.