The Government has dealt a swingeing blow to British Gas by refusing to pave the way for a levy on its rivals to offset the massive costs of long-term contracts with North Sea producers.
The company has some pounds 15bn worth of contracts that are forcing it to buy more gas than it can sell and it has called repeatedly for ministers to help bail it out of its predicament.
There are fears in the City that British Gas will cut its 1996 interim dividend because of estimated liabilities of pounds 1.5bn related to the contracts. This year alone the company is paying pounds 520m for gas it cannot yet use.
Richard Giordano, the chairman, has warned that the problem could be exacerbated by the planned introduction of domestic competition from April.
The blow came just a day after British Gas announced sweeping boardroom changes with the appointment as group finance director of Philip Hampton, the 42-year-old finance director of British Steel. The move allows his predecessor, Roy Gardner, to take on a much wider brief including renegotiation of the contracts. Mr Gardner is increasingly regarded as the eventual replacement for Cedric Brown, chief executive.
British Gas said: "These gas contracts are part of the costs of restructuring the gas market. It would be inequitable for the full cost of transition from monopoly to the competitive market [from which consumers will benefit] to be borne by British Gas shareholders alone." But it pointed out that renegotiation was always seen as the key, with a levy as a "safety net".
A source in the company added: "With more than pounds 15bn in payments to be made under the contracts, this is by any definition a very serious problem."
The Government's decision was applauded by a jubilant Gas Consumers Council. Ian Powe, director, said: "The levy was never going to be more than an insurance policy against British Gas going bust, but the political premium was beginning to look a bit pricey. Consumers would have found it intolerable that any government should think it reasonable they should bail out British Gas, whose directors are well rewarded to sort out the company's own problems."
Provision for the levy would have been included in the new licences for public gas suppliers, including offshore companies and North Sea firms. The idea was to have a last-ditch solution in the event of British Gas failing to renegotiate and the industry descending into disarray, to the detriment of consumers.
Tim Eggar, Minister for Energy and Industry, said there were "encouraging indications of progress" in discussions between British Gas and the producers. But British Gas said negotiations were at an early stage and some North Sea companies say that the talks have barely begun.
One City analyst said: "This is a gradual wasting illness. British Gas will really have to start talking in earnest now that they have failed to win this safety backstop." Another said the company was in a state of "chaos" from which there was no simple escape and that it could not just blame the Government's decision to introduce competition in the market- place.
There is also a view, however, that the company may be overstating the size of the problem to gain sympathy.
The Gas Consumers Council has called for an inquiry by the House of Commons Trade and Industry Select Committee to clarify the situation, but so far to no avail.Reuse content