Gas warns profits could halve

British Gas yesterday launched a new offensive against Ofgas, warning that profits at its supply arm could effectively halve as a result of the gas watchdog's proposed domestic pricing regime from next year. British Gas Trading, the supply arm, would see its operating profits drop from a normalised figure of nearly pounds 200m to around pounds 90m, Philip Rogerson, BG's deputy chairman said.

Although he refused to be drawn on the job implications, the cost savings required by Ofgas of around pounds 75m in the first year look almost certain to have an impact on the business's 10,000 employees, given that labour charges are understood to represent around half total costs.

The broadside comes less than three weeks after the gas group unleashed one of the bitterest attacks ever seen against a regulator's pricing proposals, when it condemned the controls suggested by Ofgas director general Clare Spottiswoode over its TransCo pipeline business. That dispute still looks destined to end up with the Monopolies and Mergers Commission. Mr Rogerson said talks with the regulator were making "little progress".

But he signalled that the battle over the proposed Ofgas domestic tariff formula, which would lop pounds 8 a year from the average gas bill for 19 million households, would not be as heated.

"The pipeline proposals were very significantly more extreme than these and tantamount to re-writing the rules." The new supply regime for BG Trading is "inflexible and interventionist", he said.

"It is very harsh in respect of the proposals on costs and the profit margin it would be allowed to earn if it can cut costs to the level proposed by Ofgas." Even so: "We hope over the next few weeks we will end up with a structure which works rather than one which won't."

His sentiments were echoed by analysts. One said the regulator's proposals were a "sideshow to the main event, which is TransCo". The most important aspect was the crimp on profits at BG Trading, but that would have happened anyway in 1998 when the domestic market is opened up to competition. "To me it looks like they won't be going to the MMC on this."

British Gas reiterated yesterday that it supported Ofgas's decision to allow the full cost of gas and its transportation to be passed through to customers.

Although the company accepted the three-year duration of the new domestic price formula, it complained that Ofgas had made no commitment to lift regulations after the year 2000.

However, its main ire was directed at the price controls. It rejected the tightening of the price cap from 4 per cent below the rise in the retail price index (RPI-4) to RPI-5 and its abandonment as a control over total revenue in favour of its application to several different payment methods.

Ofgas's requirement that 15 per cent of costs should be cut between now and next April and subsequent 5 per cent reductions would require the company to slash pounds 75m off last year's pounds 500m bill, with a further pounds 25m in each of the two subsequent years, Mr Rogerson said.

Ofgas will produce its official consultation paper at the end of the month, with a further 28-day consultation period before British Gas must either accept or reject the proposals.