Gas bills to tumble as BG loses battle
Ofgas victory will slash revenues by pounds 380m
Thursday 19 June 1997
The decision will slash the company's transportation charges by 21 per cent and knock an average of pounds 29 off this year's domestic bills.
The MMC's surprise conclusions, accepted by the company, will reduce BG's annual revenues by about pounds 380m until 2002, hitting profits and shaving dividends to shareholders by up to one-half.
City analysts predicted the dividend this year would plunge to between 5p and 9p, compared with 14.5p in 1996.
Clare Spottiswoode, the regulator, described the MMC report as a "vindication" of every basic demand made by Ofgas since the original proposals were launched last May. BG, then British Gas, had accused her of mounting the "biggest smash-and-grab raid in history".
The company had warned up to 10,000 jobs could go from TransCo, the pipeline division, putting customer safety at risk. Some 35,000 small investors, or "Sids", had written to Ofgas to complain at the company's request.
A jubilant Ms Spottiswoode yesterday accused the company of crying wolf. She said: "We always said it was not good to fight a big press campaign to win the hearts and minds of the public. I never understood why they did that."
But the predicted share price turmoil failed to materialise. BG shares rose 6.5p to 219p after some City analysts raised their dividend forecasts. They pointed to the extra pounds 500m of operating expenses BG had extracted from the MMC over five years compared with Ofgas's figure of pounds 6.6bn.
Simon Flowers, head of utility research at NatWest Securities, said: "I don't think this is a total victory for Ofgas. They went back to the MMC with even tougher demands and were kicked into touch. But Ofgas has won a significant victory in other areas."
There was no sign yesterday of the two directors closely associated with the decision to call in the MMC - Dick Giordano, chairman, and Philip Rogerson, deputy chairman. David Varney, BG chief executive since last year, admitted to being "frankly disappointed" with some of the conclusions but said they were manageable: "I think this presents tough challenges but it represents the umpire's verdict." He said the MMC probe cost the company pounds 10m.
The report sided with Ofgas on the central issue of how much BG's asset base was worth. The MMC has cut the asset valuation for regulatory purposes from the pounds 17bn in the company's accounts to pounds 11.6bn, an even lower figure than Ofgas had suggested.
BG will be able to earn a 7 per cent return on these assets, implying a cut of 21 per cent in pipeline charges, which account for 43 per cent of domestic bills. For the four years from April 1998 charges will drop by 2 per cent below inflation.
The cuts translate into a drop of pounds 29 for an average household gas bill of pounds 325, against the pounds 28 in Ofgas's original proposals. By 2001-2002 the annual saving will rise to pounds 54.
Centrica, the demerged British Gas supply business, is obliged to pass these savings on to customers, though other independent suppliers taking part in domestic competition trials may use some of the cut to boost their profit margins. Neil Lambert, joint general manager of Calortex, said: "In broad terms we will pass it on but I can't guarantee that every customer will get the same impact."
Caroline Harper, managing director of Amerada Hess Gas, said: "I'm going to look at my gas price and my transportation costs and my competitors and then make a decision."
But confusion mounted last night over how much of the savings consumers would see when the price cuts, delayed from April by the MMC investigation, are implemented this October. Ms Spottiswoode accused BG of "clutching at straws" by suggesting it would boost its revenues by passing on some pounds 100m of additional charges from last year which it decided not to levy on suppliers. This would reduce the pounds 29 bill cut by about pounds 4.
"They're trying to make their figures look better than they really are. It's quite false. There's no agreement about when that pounds 100m will be recovered," said Ms Spottiswoode.
Mr Varney would not speculate about job cuts on top of the 4,500 since the beginning of 1996 which reduced TransCo's workforce to 16,000.
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