Gas price freeze is misleading watchdog says

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BRITISH GAS is to freeze prices from 1 April in the latest round of its battle with the watchdog Ofgas. A formula agreed with Ofgas should mean a cut in prices of about 2 per cent but British Gas says that other factors within the formula have offset the need for a reduction.

Under the price control, British Gas is supposed to keep increases to inflation minus 5 percentage points. However, the formula also allows the company to pass through certain costs related to the price it must pay for gas supplies.

Norman Blacker, managing director of the UK gas business, said: 'People tend to forget that there is more to the formula than the 'RPI minus five' often quoted. On the other side of the scales, the gas cost index clearly allows the permitted price to rise.'

Greg McGregor, deputy director-general of Ofgas, attacked the British Gas announcement as misleading, and said any implication that British Gas was freezing prices for the next 12 months was wrong.

He said: 'This is a serious misrepresentation of the way the formula works. We monitor the position closely and what we need to do is look at the situation in a month's time. We will be on to British Gas to make sure they deliver.'

British Gas said it needed to get a better picture of inflation for the year and of 'other factors' before it made any further moves on price. Whatever the company did would be in line with the formula, Mr Blacker said.

City analysts said the announcement by British Gas was a pre-emptive strike against Ofgas, which issues its annual report on the company today.

Relations between British Gas and Sir James McKinnon, the director-general of Ofgas, have deteriorated markedly in recent months. Today's report is likely to be the last annual missive issued by Sir James, who hopes to retire early from Ofgas.

Under pressure from Ofgas, British Gas has cut prices for domestic customers by 5 per cent over the past year. The watchdog monitors the company continually to see if there is any scope for further price reductions.

Ofgas has also called for the break-up of British Gas as part of a submission to the Monopolies and Mergers Commission, which is investigating the gas business in the UK.

At the same time the company is at loggerheads with Ofgas over the rate of return it should be allowed to earn on its pipeline and storage business.