Transco warns of cuts in services if Ofgem imposes curb on profits

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Transco, the gas pipeline operator owned by Lattice, warned yesterday that 20 million households could suffer a decline in service levels if the energy regulator imposes draconian price curbs on the company.

Callum MacCarthy, the chief executive of Ofgem, is considering slashing Transco's regulatory asset value by £2bn and reducing the amount it is allowed to earn on those assets. He is due to announce his proposals at the end of this month.

Lattice said that if the regulator carried through his threat it would cut Transco's profits by £140m a year, forcing it to reduce costs by at least 10 per cent to compensate.

Chris Bolt, the group's director of regulation, said this would put intense pressure on Transco to cut staffing levels further at a time when it is trying to recruit up to 1,000 extra staff to cope with the backlog of mains gas pipeline replacement. "We could not manage such a reduction in our operating costs without it affecting the level of service we provide to customers," he said.

Lattice is also concerned about the impact of the regulatory review on the company's credit rating and its ability to raise the £5bn it needs to invest in the network over the next five years. Following the last review, in 1997, which resulted in a one-off reduction in transportation charges of 20 per cent, Transco was forced to cut its 20,000-strong workforce by 3,000 and improve efficiency by 4 per cent a year.

Transportation charges account for a third of the average household gas bill.

Ofgem said it had not yet decided whether to reduce Transco's regulatory asset value from the present level of £12.6bn or what cost of capital to allow it although this is expected to be close to the 6.25 per cent ceiling it proposed in its initial document in February.