Watchdog set to hit British Gas shares

The City is braced for a sharp drop in British Gas shares this morning as industry watchdog Clare Spottiswoode unveils her long-awaited new price proposals that could trim up to pounds 400m off annual revenues and force the company to cut its dividend by as much as half.

Analysts believe the regulator will recommend price cuts of 10-20 per cent from April next year for the key transportation and storage business, TransCo International, which manages all of Britain's gas mains and pipelines. At present it must reduce its prices by 5 per cent in real terms every year.

Under a worst-case scenario, analysts reckon shares in British Gas, which closed at 228p on Friday, could fall to as low as 170p. The proposals could also raise doubts about plans by British Gas to split itself into two separate businesses - TransCo and British Gas Energy - next year. The future of British Gas Energy, which will include the domestic supply business, is already shrouded in uncertainty because of its need to deal with an estimated pounds 40bn of over-priced take-or-pay contracts.

But analysts believe that new price controls for TransCo will have an even more more profound impact on the value of British Gas.

Some industry observers were last night playing down the significance of today's announcement from Ofgas.

They say Ms Spottiswoode's proposals are likely to be no more than an opening negotiating position and are therefore likely to be aimed at the high end of market expectations.

British Gas has the option of either accepting the proposals or appealing to the Monopolies and Mergers Commission. Taking the latter course would almost certainly mean putting its de-merger plans on hold.