Guessing game continues on gas shake-up

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AFTER the sound, the fury. In August the Monopolies and Mergers Commission recommended that British Gas should be forced to sell off its trading arm before competition was introduced in the domestic gas market. Since then, the independent gas suppliers have been agitating loudly to bring that day forward.

Michael Heseltine, President of the Board of Trade, is widely expected to make an announcement this week, before Parliament closes for Christmas. But what he decides is almost anyone's guess - and almost everyone has certainly been guessing.

The guesswork began with a British Gas claim that ending its monopoly would mean higher bills for 12 million domestic consumers. How it reached this conclusion is unclear; it recently called in Price Waterhouse to help with its cost allocations.

The guessing was compounded by a report produced by Charles Barker on behalf of independent suppliers. It said all domestic customers could achieve significant savings by switching from British Gas. The total, it said, could amount to pounds 470m a year - an average saving of pounds 26 per household.

In arriving at these figures, the report rejigged the allocation of costs as arbitrarily as had British Gas. Moreover, its figure for household savings was apparently based on the unreal assumption that independents would take over all the retail business of British Gas.

The report - derided by Ian Powe, director of the Gas Consumers Council, as a 'Rupert Bear annual' and by Peter Spring, a gas industry analyst, as having 'the credibility of a time-share sales brochure' - has been almost universally dismissed by industry experts.

'What are the independents bringing to the party? They want to take a cut for putting in a bill,' said Mr Spring. 'All responsibility for safety and security is to be left with BG, which is also expected to act as their wholesaler.'

Many observers, including the Monopolies Commission, believe the mere existence of competition may generate improvements. The problem for Mr Heseltine is how to introduce that competition, especially since it will now almost certainly precede any sale of BG's trading arm. Several scenarios have been suggested, but all present serious obstacles.

The independents favour a free-for-all - any company licensed as a public gas supplier having access to any part of the market. However, as pointed out by Jonathan Stern of Gas Matters, it would then be easy for them to pick the most lucrative, leaving British Gas as the supplier of last resort.

Of course, the independents deny any such intention. But some independents are sharp. In the latest round of applications under the gas release programme that compels British Gas to sell them some of its gas, one independent managed to notch up at least 11 applications under various names.

Mr Stern also argues that the regional electricity companies and their allied gas marketing ventures would have an unfair advantage over competitors by virtue of their market knowledge. They could also introduce a single bill for electricity and gas that might obscure any cross subsidisation.

Finally, he suggests that fear and inertia might stop many consumers from switching out of British Gas. For these reasons he favours some kind of geographical franchise: either a local monopoly based on the 90-plus British Gas districts - which would be relatively easy to regulate - or a multiplicity of regional suppliers.

Mr Stern's view has found supporters. 'Anybody who is serious ought to accept the concept of franchising,' said Philip Leyton of the Trichem gas consultancy. He conceded that the option is politically unpalatable because it simply replaces one monopoly with another, but it removes the problem of inertia - and if the Government really wants to introduce competition it would undoubtedly be the fastest route, he said.

He added that Mr Heseltine faces headaches elsewhere: 'If you fragment the market, who will buy the large upstream gas fields? The big gas producers may not want to supply two- bit pipsqueak players.'

Mr Heseltine may try an intermediate compromise, according to some commentators. He could, for example, 'throw a bone to hungry independents by giving them early access to the 96,000 industrial and commercial British Gas customers who use between 1,500 and 2,500 therms,' said Mr Powe. 'That would open up a market worth over pounds 70m annually, but with little impact on British Gas, whose monopoly revenue exceeds pounds 4.5bn.'

(Photograph omitted)