Price clamp threatens gas work: Chairman warns of struggle to maintain maximum dividends for shareholders

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BRITISH GAS has threatened to cut investment by hundreds of millions of pounds because of new price controls on its pipelines, which were announced yesterday by Ofgas, the industry regulator. The company said the regime would mean no increase in the dividend this year.

In October British Gas must make a one-off cut of almost 4 per cent in prices it charges rival gas suppliers that use its pipes. These include electricity firms and North Sea producers. Annual price increases will then be capped to inflation minus 5 percentage points. It is unlikely that the formula will make much difference to gas bills as these already have a separate price control.

The cap is the first to be imposed on the pipeline and is in theory open to consultation. But Clare Spottiswoode, director-general of Ofgas, said it was very unlikely that the numbers would change.

Her decision comes as a blow to British Gas, which last year proposed a 20 per cent increase in prices for rivals using its pipeline system. The shares fell 17p to 271.5p.

Cedric Brown, chief executive, said: 'The proposal is very tough and would leave us with an even more difficult task to deliver an acceptable return to shareholders. It would significantly curb investment, leading to lower growth in the gas market.'

The pipeline and gas storage system, which is being set up as a separate company within British Gas, has plans to invest pounds 900m annually. But some analysts believe that this could now be almost halved.

Mr Brown said that the new regime could hinder government plans to introduce competition in the domestic gas market in 1996 as British Gas would be unable to devote time to adapt the supply and billing system to cope with multiple suppliers. He said the company would have to concentrate on raising efficiency in the pipeline company to maximise returns.

Because the new regime is the result of a report on the gas market by the Monopolies and Mergers Commission, published last year, British Gas has no recourse to the MMC. Ms Spottiswoode said: 'They have to accept this, which is why it has been very important to be fair. It is our task to put pressure on British Gas to increase efficiency, and I am not surprised that we are getting squealing noises from British Gas.'

She said that she based the regime on the MMC's view that British Gas should be able to make a real rate of return of between 4 and 4.5 per cent on existing assets and 6.5 to 7.5 per cent on new investments. British Gas has lobbied for 6.7 per cent on existing assets and more than 10 per cent on new.

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