In a submission to a Monopolies and Mergers Commission investigation into the utility, Ofgas put British Gas's rate of return on its assets at between 2.5 and 5 per cent. The utility currently makes 4.5 per cent and says it needs 6.7 to maintain and improve its network.
Sir James McKinnon, Ofgas's director-general, said that the rate of return must be 'no more and no less than reasonable'. He added: 'For every 1 per cent that British Gas earns on its asset base approximately pounds 200m is taken out of consumers' pockets.'
The rate of return is crucial to British Gas's future profits, as third-party use of its pipeline network is increasing rapidly. Ofgas, which wants British Gas to halve its share of the industrial gas market to 40 per cent in the next few years, has licensed about 30 companies to supply gas.
The 4.5 per cent rate was set and approved by Ofgas three years ago, when third-party supply began.
Last July, British Gas published a study that said the rate should be increased to 6.7 per cent for existing assets and 10.8 per cent for new investment. It insisted that these rates were necessary to allow it to maintain and upgrade its network.
In the same month it asked the MMC to carry out a review of its operations to resolve its numerous disputes with the regulator. The report, which is likely to appear next summer, will rule on, among other things, what the rate of return on pipeline use should be. Until then, it remains at 4.5 per cent.
British Gas maintained that Ofgas's calculations were based on false criteria. Philip Rogerson, managing director of finance, said: 'By considering return on Treasury bills rather than index-linked gilts, Ofgas is suggesting that the rate of return should be based on short-dated rather than long-dated securities. This is completely inappropriate for a business like British Gas with long asset lives.'
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