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Rivals call for TransCo breakup

A REPORT saying that British Gas used up to pounds 2bn over 10 years from its regulated pipelines business TransCo to cross-subsidise other activities has rekindled demands that the energy giant be split up even more radically than already planned.

The revelation comes from the Independent Review of TransCo's Cost and Asset Base by accountants Arthur Andersen, a draft copy of which has been obtained by the Independent on Sunday.

Last month BG surprised the market with plans to split itself into two, to protect TransCo from up to pounds 40bn of liabilities on overpriced gas contracts. The review was commissioned over a furious but separate row over access charges made to competitors for use of BG's pipelines.

Andersen has found that costs of pounds 290m last year alone had been incorrectly or questionably charged to TransCo by other BG activities, including headquarters. That artificially bumped up the charges that TransCo passed on to independent gas shippers using the network.

The report also reveals that the valuation of TransCo's assets may have been inflated by including decommissioned and redundant facilities, such as the Canvey terminal in the Thames Estuary, which was booked at pounds 108m even though it had been mothballed.

British Gas has tacitly accepted some of the findings, saying it would write down TransCo's assets by pounds 200m, but it insisted that overall the report vindicated it. "It clears the air once and for all," a company spokesman said.

Rivals, though, said they would be taking the matter up with Clare Spottiswoode, the industry regulator, and the Monopolies and Mergers Commission, which is expected to hold three separate hearings into BG in coming months.

They are calling for TransCo International to be further broken down into its constituent pipeline and unregulated exploration arms. Although under the Gas Act which came into effect on Friday, British Gas is required to ring fence the accounts of the regulated business to ensure that there is no cross-subsidisation, opponents say that is not enough.

"Even with the best of intentions there's no way British Gas can continue to wear two hats after this," said one shipper. "The monopoly pipeline business has to be completely separate."

TransCo's internal studies put the asset overvaluation at pounds 273m, although critics said the amount that needs to be written off could be pounds 5bn of its pounds 18bn assets.

But while the report says that the overall values are "reasonable", it also highlights "obvious errors and omissions" and "misstatements".

The report said it was "specifically concerned" about Trans- Co's 50 per cent share of the cost of running the British Gas HQ. Fairer accounting could have recut that to 34 per cent, said the report.

On the other side of the ledger, it suggested the pounds 200m a year raised from customers to fund the rebuilding of the pipeline network after 2010 could be trimmed to just pounds 30m.