View from City Road: The MMC has been even-handed on gas

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The Government pays frequent tribute to the therapeutic values of competition. Therefore it should give its full backing to the recommendations of the Monopolies and Mergers Commission on British Gas just as the MMC has backed Ofgas, the gas industry's truculent and implacable regulator, virtually to the hilt.

In asking for the divestment of British Gas trading operations the MMC has chosen the least disruptive and least costly option for forcing long-term competition into the gas market while leaving British Gas as a significant corporate entity with international clout.

It has sensibly passed over the alternative of breaking up British Gas into 12 regional gas companies on the lines of the regional electricity companies. This would have multiplied overheads and customers' bills far beyond the pounds 130m costs of divesting gas trading.

The MMC, although right behind Ofgas, has also been remarkably even-handed in its treatment of the interests of customers and shareholders. So much so that the stock market is unsure whether British Gas is more or less valuable in the wake of its proposals.

Anyone buying quantities of more than 2,500 therms has been free to shop around since August 1992. But to compensate British Gas for the loss of some of its lucrative tariff customers (such as schools and supermarkets) the MMC is proposing a pounds 300m handout by allowing the company to charge higher prices.

But if British Gas is grateful, its response is restrained. On its reckoning, its tariff business is heading for losses even under the relaxed RPI price formula. Enforced loss of market share in the contract gas market is already expected to cost British Gas up to pounds 100m this year, according to analysts.

Not only that. A proposed real rate of return on its pounds 17bn pipeline business of 4.5 per cent against a rate of 6.2 per cent in 1992 stands to lop more than pounds 250m off operating profits. This will swamp the cost savings from its current 20,000 job-cutting programme, British Gas complains.

Until details of future price controls on the British Gas pipeline business are agreed and the make-up of the transmission and trading arm are determined - the current 70:30 profit split will be irrelevant - British Gas shares are likely to drift.

And even before the MMC's proposed changes, calculations of break- up value provided little comfort, coming fairly close to the current share price. Demerger, the most likely option for divestment, may not add much value.

There is also a worry that the company's exploration and production arm, due to contribute pounds 600m of profits in a couple of years' time, will be rationed for cash.

But the big consolation is that the British Gas dividend, left pointedly unchanged in yesterday's interim announcement, looks safe enough.

Dividend growth, given slim cover, is another matter. A yield of 5.4 per cent at 327.5p, up 5p, is only a 15 per cent premium to the regional electricity companies, where double- figure dividend growth is expected for the next few years. This may keep the share price on the back burner.