Regulator set to approve British Gas price cuts in South-west

Clare Spottiswoode, the gas industry regulator, is poised to approve British Gas's controversial package of selective price cuts in a ruling which could provoke uproar among rival suppliers and have long-term consequences for competition.

Her decision on the discount scheme, which has cut some British Gas bills by up to 12 per cent in the first domestic competition trial area in the South- west of England, will not be announced until after the election. Earlier indications from Ofgas, the watchdog, of a pre-poll announcement were optimistic given an unexpectedly large response to the public consultation exercise.

Centrica, the demerged British Gas supply business, revealed the price cuts last month after losing 20 per cent of its customers to rival suppliers in Devon, Cornwall and Somerset since the trial began last May.

The package, the first time British Gas has varied its tariff on a regional basis, also gives direct debit customers a 6 per cent cut, doubling their discount, if they sign up for a year.

Ms Spottiswoode is understood to have told some rival gas companies that she is "minded" to let Centrica continue with the price cuts, known as Value Plus. The move would be another sign of the thaw in relations with the company since it demerged from British Gas , now BG, in February. Earlier this week Ms Spottiswoode indicated she would be sympathetic to Centrica's efforts to avoid Labour's windfall utility tax.

Ofgas has also studied the wording of the Gas Act which paved the way for competition. It says her role is to "establish" competition but does not say she must "sustain". Centrica has argued the loss of 20 per cent of its market share means competition has been achieved.

Critics of Value Plus argue it would transform the competitive playing field. The chief executive of a large oil group, who did not want to be named, warned the price cuts would discourage the company from moving into the domestic gas market. He said the group was waiting to see how competition developed and would examine potential profit margins.

Ofgas said it had received more than 80 responses to the consultation process, of which more than half were in Centrica's favour. The company has mobilised considerable support from some unusual sources, including letters to Ofgas from three of its banks privately arguing that the cuts were a vital plank of its business plan.

The Gas Consumers Council recognised Value Plus would benefit some consumers but strongly opposed its introduction. Sue Slipman, GCC director, warned that the decision could stifle competition as the industry moved towards full national choice next year.

Four of the largest independent suppliers, Beacon, Eastern, Calortex and ScottishPower, all vehemently opposed the price cuts. Evidence from Calortex claimed that, since the introduction of Value Plus, numbers of homes switching from British Gas had dropped alarmingly.

The independent gas companies say British Gas could extend the price cuts to the newest trial area of Kent and Sussex, where competition is more fierce. In two months Centrica has lost about 20 per cent of its customers. Ms Spottiswoode has told rival suppliers her ruling on the South-west would not necessarily apply to the South-east.

Alan Lias, Beacon's managing director, said competition was not established yet. "These are still trial runs. The damage has already been done by British Gas in encouraging customers to believe if they stay with the company they will eventually get the same discounts. There's still tremendous inertia in the market."