Gas prices row set to end in MMC referral

TransCo dispute: Company claims that watchdog's revised transportation formula is 'savage by anyone's standards'
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The bitter dispute between British Gas and Ofgas, the industry watchdog, appeared to be moving headlong towards a referral to the Monopolies and Mergers Commission yesterday after the company attacked a revised package of price controls for the pipeline business, TransCo.

The regulator, Clare Spottiswoode, insisted she had "backed down" over some elements of her original formula in response to British Gas's unprecedented publicity offensive, which resulted in 25,000 angry letters to Ofgas from small shareholders or "Sids".

But British Gas's deputy chairman, Philip Rogerson, said the value of the concessions was "minimal", and would still result in between 8,000 and 10,000 redundancies. He described the revised controls as "thoroughly disappointing" and "savage by anyone's standards".

The final proposals would cut transportation charges, which account for almost half of domestic gas bills, by 20 per cent from next April. That is at the bottom end of the 20 per cent to 28 per cent range outlined by the regulator three months ago. It would knock pounds 28 off an average household bill of pounds 325.

Prices would increase over the following four years by 2.5 percentage points less than inflation, compared with reductions of 5 percentage points in the previous formula, making a total cut for consumers by the end of the price regime in 2001-2002 of pounds 55. An average small business customer would save around pounds 860, or 13 per cent. In total, domestic and industrial consumers will benefit by pounds 3bn.

The price cuts received a warm welcome from the Gas Consumers Council. Its director, Ian Powe, said: "Ofgas has now redressed the balance between two million shareholders ... and 18 million consumers now revealed as having paid nearly 10 per cent over the odds to fund British Gas's wealth."

British Gas has until 7 October to agree to the controls, or face an almost certain referral to the MMC. Ms Spottiswoode said she was "not going to change anything of substance". She explained: "I feel very strongly that we will win ... if it went to the MMC." However, British Gas said it hoped the six-week consultation period would leave room for further negotiations.

Hopes of a compromise boosted British Gas's share price, which ended the day 6.5p higher, at 204.5p. But gas analysts were gloomy about the chances of avoiding a lengthy and expensive MMC inquiry. Rod Maclean, from stockbrokers ABN Amro Hoare Govett, said: "I don't think she has given much ground. I still think this goes to the MMC."

Ofgas said it had made two changes in the revised proposals. One was to allow TransCo to spend an extra pounds 27m a year on its emergency service which deals with gas leaks. Rebutting concerns that the cuts could compromise safety standards, Ms Spottiswoode said her proposals had satisfied the Health and Safety Executive.

In addition, the regulator has added pounds 700m to the value of TransCo's asset base, on which it will be allowed to earn a 7 per cent rate of return. The new asset value of pounds 11.7bn is above the original range of pounds 9bn to pounds 11bn, because Ofgas has dropped a plan to claw back depreciation paid by British Gas on past investment.

But on the more fundamental area of disagreement, how much room TransCo should be allowed for depreciation in future years, the gulf remains as wide as ever. British Gas wanted to be able to charge depreciation on the entire pounds 17bn book-value of TransCo's assets. Ofgas says it can only depreciate the reduced pounds 11.7bn "regulatory" asset value.

Ms Spottiswoode, flanked by Doctor Eileen Marshall, Ofgas economist and the main author of the review, argued that on British Gas's assumptions consumers would be paying for investment twice. She said she was confident her approach was consistent with that taken by other utility regulators, and by the MMC's investigation into British Gas in 1993, which recommended that the company should be broken up.

But this argument only deepened the rift with British Gas. "I reject utterly the claim that she is consistent with the MMC's 1993 findings," said Mr Rogerson. "She is wholly inconsistent."

He said "softening" the price cuts from 5 percentage points below inflation in May's proposals, to 2.5 percentage points less than inflation, would only give TransCo an extra pounds 400m in five years out of total revenues of more than pounds 16bn. "I'm quite clear that the economic effect of the change is minimal," added Mr Rogerson.

Richard Alderman, an analyst at NatWest Markets, said the price controls still implied a big reduction in TransCo's dividend payout to shareholders when the business is split off from British Gas next year. "There's no way you can physically avoid cutting the dividend and the management look like they're going to stand up for shareholders' rights," he said.

There was a mixed reception to the changes from industrial users. The managing director of a large gas supplier, who declined to be named, said: "I'm pleased that Ofgas hasn't done a complete about-face on this, despite all the pressure."

However, the Energy Intensive Users' Group, was disappointed the regulator had not gone for price reductions of 28 per cent next year, at the top of the original range.

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