The Ofgas climbdown gives very little away
Thursday 22 August 1996
The final set of proposals that the director-general of Ofgas sent across to British Gas yesterday is as cleverly constructed a package as we are likely to see. There is surely art in the way it manages to convey the impression of climbdown while actually giving very little away.
Certainly the markets appeared to have bought the manoeuvre, greeting the news of a nice fat pounds 30 off gas bills next year by propelling British Gas shares briefly to their highest level since the onset of the regulatory shakes in May.
Ms Spottiswoode has listened to British Gas, and a host of other representations, and concluded that her May proposals were indeed too ghastly for shareholders to contemplate. So she has cut the one-off reduction in charges from 28 to 20 per cent, softened the price reductions thereafter from 5 per cent to 2.5 per cent, and raised the regulatory asset base on which TransCo can make a return and charge depreciation from a bottom of the range pounds 9bn to just short of pounds 12bn. Finally she has decided that TransCo should be able to earn a 7 per cent rate of return, a level which compares favourably with other regulated monopolies
So why is British Gas cutting up so rough and threatening to storm off to the Monopolies and Mergers Commission?
Well, if you add up the Spottiswoode concessions, they actually amount to not a lot. In total they will allow TransCo to earn some pounds 400m more than it would have been allowed under the May proposals - not very much when you are looking at a revenue stream of some pounds 16bn over the course of the five-year price control formula.
However, in two important areas Ms Spottiswoode has probably done enough to stay out of jail should the MMC be called on as final arbiter. She has demonstrated that her proposals on depreciation do not amount to a clawback of past profits. And she has demonstrated, to the satisfaction of the Health and Safety Executive and British Gas itself, that her controls on operating expenditure will not compromise safety.
British Gas now has until 7 October to decide whether the MMC is likely to offer shareholders a better deal. It is hard to imagine that it will. The prospect, meanwhile, of a long and exhausting inquiry is hardly the distraction that a business wants when it is breaking itself in two and fending off an assault on its captive markets at the same time.
The belligerent noises coming from the British Gas camp and the implacable stance of Ms Spottiswoode might suggest that the two are inevitably on track for the MMC. But British Gas has six weeks for cool contemplation. The wiser course would be to accept.
Philip Rogerson, the British Gas deputy chairman who has led the side in the battle with Ofgas, would be deeply and fatally embarrassed if, in the end, the company backs down and accepts what is on offer. After the way he has railed against the proposals, he cannot now credibly admit that British Gas can live with them after all. But then Mr Rogerson, a decent man in a difficult job, is expendable. He appears not to have a future in either of the two companies created when BG does the splits, or at least not one that has been publicly announced. It is all too likely that Mr Rogerson will be one of the casualties of British Gas's last stand.
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