View from City Road: A blast of hot air from British Gas

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The Independent Online
British Gas is a master of the futile gesture. To judge by its antics yesterday it has learned nothing from its years of battling with the redoubtable Sir James McKinnon; instead it seems determined to deal with his successor, Clare Spottiswoode, in the same old ham-fisted way.

Ofgas' pronouncement yesterday on price cuts and associated controls on the company's pipeline system were largely expected. It is hard to see what the company gains from warning about dividends and cuts in investment, other than to engage the sympathies of shareholders. The stock market was relaxed enough about the Ofgas document, believing, naively as it turned out, that British Gas was capable of taking the changes in its stride. It was not until the company exploded in its wake that the share price dropped by 15p to 273.5p.

The Ofgas control will limit price increases for shipping gas through British Gas pipes to inflation minus 5 percentage points, after an initial cut of almost 4 per cent in October this year. Admittedly this is a tiny bit more onerous than the City expected, but it is in line with the rate of return the Monopolies and Mergers Commission said last year British Gas should be allowed. The only obvious area where Ofgas appears to depart from the MMC is in saying that the costs of splitting British Gas into gas trading and pipelines should not be borne by consumers. British Gas's future profitability is not really in question - most assume that its trading arm will gain whatever its pipeline arm loses - and the formula proposed ought not to have any effect on dividend projections. Why on earth, then, is British Gas saying that the pipeline company's pounds 900m annual investment plan will have to be substantially cut? Don't feel too sorry for British Gas. Somehow or other, it always manages to survive and prosper.