Households will see their annual bills falling by an average of pounds 7 next year, with a further cut averaging 4 per cent each year until 2000.
Ofgas welcomed the move but British Gas said the controls were tough.
The average domestic customer pays pounds 325 annually for gas and a 4 per cent cut would mean a saving of pounds 13. The cuts are being made under an agreement between Ofgas and British Gas on domestic prices covering the next three years.
Ofgas said: "With competition in the domestic gas supply being introduced throughout Great Britain by the end of 1988, the new control will protect customers while allowing British Gas the flexibility to introduce new tariffs to compete with rival companies."
Clare Spottiswoode, Ofgas's director general of gas supply, said: "This is good news for customers and good news for British Gas. While British Gas still supplies most domestic customers with their gas, the new control will offer all customers a regulated tariff which will ensure their gas bills go down. We have also given British Gas the freedom to bring in additional tariffs."
Deputy chairman of British Gas, Philip Rogerson, said: "Although we still believe the proposals are tough, we expect to accept them as long as they are unchanged following the statutory consultation period."
The new controls affect the amount British Gas can charge for supply. Further controls are proposed for transport costs, which are subject to an inquiry by the Monopolies and Mergers Commission.
Caps will be placed on DirectPay, OptionPay, Standard and PrePayment tariffs.
Competition in the gas supply market began in April this year when half a million customers in the West Country were given a choice of supplier. A further 1.5 million customers in Kent, Sussex, Dorset and Avon will be allowed to choose from February.Reuse content