View from City Road: Gas shareholders need not despair

THE latest in what threatens to be a series of missives from Ofgas, detailing its submissions to the Monopolies and Mergers Commission over the future of British Gas, is typically uncompromising.

Ofgas clearly sees itself as the people's champion, with a mission to stimulate maximum competition in the market for gas.

But what catches the eye in Ofgas's latest explosion into print is its suggestion that by pulling out British Gas's pipeline and storage business into a completely separate company, eventually to be demerged or sold, it is doing British Gas shareholders a favour.

The British Gas board, which fought hard and long to keep the integrated activities of the company intact at privatisation, has itself suggested a 'Chinese wall' between gas marketing and the pipeline and storage system in order to retain economies of scale and to avoid the costs of a break-up.

This does not go nearly far enough for Ofgas. It proposes a tightly regulated natural pipeline and storage monopoly, presumably earning a rate of return at the bottom end of Ofgas's proposed 2.7 to 5.1 per cent range.

Since pipeline and storage accounts for 90 per cent of all British Gas's pounds 20bn assets, such a tight regime does not at first sight bode well for the profitability of this newly separated company.

Shareholders need not despair, since Ofgas claims that economies of scale in pipeline and storage do not really exist and any short-term costs of separation will be more than offset by extra efficiency and enhanced shareholder value.

The MMC will have to adjudicate between them. Meanwhile the yield - 7 per cent with the shares at 270p - looks set to stay high.