Talks planned over British Gas split

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The Independent Online
SIR JAMES McKINNON, director-general of Ofgas, the gas industry watchdog, is to meet institutional shareholders in British Gas to discuss its proposals for splitting the company up.

The meeting follows an 'abrasive' letter sent to Sir James by one of British Gas's largest shareholders. It is the first sent by an institution concerning Sir James's treatment of British Gas.

A source at Ofgas said: 'It was a forceful letter written by a very angry person.' He said that there was an inference in the letter that the regulator was running roughshod over the company.

The yield on British Gas shares has risen sharply in the past two years, reflecting the stock market's uncertainty about the company's future in the wake of interventions by Sir James. Such poor price performance has unsettled investors.

Sir James recently called for British Gas's pipeline system to be floated off as a separate company under new management. He believes that this is the only way to achieve true competition in gas supply and to ensure fair play for others who want to use the pipes.

However, British Gas has reacted angrily to the proposals. The pipeline and storage system comprises almost all the company's assets. Sir James intends to hold discussions with the main shareholders over the next few weeks.

'It is an interesting interface,' he said last week. 'I have no responsibility for looking after shareholders except in ensuring that British Gas is sufficiently viable to serve its customers - in which case that should give shareholders a reasonable rate of return.

'I am not out to destroy this company. Quite the reverse.'

He said a split would be good for customers and shareholders and he saw no reason why British Gas should not be split into two with the same people owning both companies.

His proposals have been submitted to the Monopolies and Mergers Commission, which is investigating gas supply in the UK with a view to publishing its results in April.

Meanwhile, British Gas and Ofgas are still at odds over the rate of return the company should be allowed to make on the pipeline business. Sir James is expected to argue for a much lower rate of return than the company wants, whatever the MMC proposes.

Ofgas believes that a rate of return of between 2.5 and 5 per cent is reasonable. British Gas wants more than 6 per cent on existing assets, against 4.5 per cent at present, and around 10 per cent to justify new spending on the transmission network.

Sir James considers shareholders got a good deal when British Gas was privatised. He argues that valuing assets on a replacement basis, as British Gas insists on doing when calculating returns, is unfair to the customers who end up footing the bill.

Sir James also believes that British Gas, which announced more than 1,200 job cuts last week, still has vast scope for reducing costs.