Question Time: Gas: Who wants to break the monopoly and why? - Will competition work? - What do consumers gain?

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Q. Who wants to break up British Gas and why?

A. The Monopolies Commission said last week British Gas should stop selling gas to consumers by the end of March 1997, and concentrate on the storage and transportation of gas. It believes independent suppliers should gradually take over. (For industrial consumers, BG already competes.)

It says they should supply households that use more than 1,500 therms from April 1997 - that covers about 400,000 homes, with four or five bedrooms. Independents should be allowed to sell gas to everyone by 2002.

The commission argues that BG should not supply gas even in competition, because its control of pipelines would enable it to discriminate against rivals by charging them more to use the network. Therefore, it will have to sell its 12 regional sales branches.

Q. So will I have a choice of who supplies my gas?

A. Yes, though the extent may depend on where you live. Companies will apply for licences and must promise to supply anybody in the areas where they operate.

In addition to your old supplier (no longer owned by British Gas) at least one other independent supplier will be allowed to sell in your area.

Q. Will it come through different pipes?

A. The same gas will come through exactly the same pipes as before. You will not see any physical differences.

Suppose you sign up with a supplier called Ideal Gas. It will buy gas from offshore oil companies and traders. It will use BG's storage tanks, though it may eventually build its own. When the gas is needed, it will be sent down BG's pipelines and into your home just as it is now. Ideal Gas will pay BG a fee for using its equipment.

The gas will get mixed up with the gas belonging to rival suppliers. None of this will matter because gas is just gas. You will be billed for the gas you use, at the price agreed.

Q. So what kind of choice is that?

A. The only choice will be in what and how you pay. You will be able to shop around for the cheapest supplier. You will probably also be offered different payment packages. One company might offer two years' gas at a fixed price per therm - rather like a fixed-rate mortgage - regardless of future changes in prices. Another might offer a lower price now with the right to raise prices later; others, more flexible ways of paying.

Q. Won't people just go for the lowest price?

A. Probably yes and critics say that the break-up of BG could simply lead to regional monopolies.

Q. Will it make a difference where I live?

A. Probably. At present, whether you live in Launceston or Lincoln, you pay the same price for your gas, even though it costs far more to get it to Cornwall than to Lincolnshire. The commission says one of the advantages of competition is that you should pay what it actually costs for you to get your gas. However, some independent suppliers favour keeping the present system. They say that BG should charge them a fee which covers the cost of distributing gas to all customers.

Where you live will also matter if new suppliers get licences for particular regions. Their costs and prices will vary, as with the regional water and electricity companies.

Q. Who will supply and read the meter?

A. Another detail still to be decided. BG reads the meters of industrial customers, even when the gas is supplied independently. Some suppliers would be happy to see BG read your meter, too. But others argue that they could do it more cheaply themselves.

Some independent suppliers, linked to regional electricity companies, argue that they could save costs by reading your gas and electricity usage together. The independents could also invest in development of new electronic meters, fitted with radio signals which could be read from a distance.

Q. How easy will it be to change suppliers?

A. Since the product, the pipelines and the meters will all stay the same, you will be able to switch simply by telling your old and new suppliers that you want to.

Q. What happens if I can smell gas?

A. Ring BG, just as you do now. It will almost certainly remain responsible for dealing with any leaks.

But leaks are not the only danger. Because gas is highly volatile, there could be an explosion if air is allowed to get into the pipelines. That could happen if a supplier failed to put in enough gas. .

This is the most problematic - and potentially dangerous - aspect of the commission's proposals. If your supplier runs out of gas, you would still be able to get gas from the pool provided by other suppliers. The risk is that they would run short. So the commission says suppliers must promise that they will always have enough - and they may have to provide a bond as security. And somebody (almost certainly BG) should have the power to disconnect customers quickly if their supplier runs out of gas. Alternatively, the failed company's customers could be discouraged from using gas by a draconian penalty charge.

Independent suppliers may also be caught out by peaks and troughs in demand.

BG would probably need the power to dip into the resources of the independent suppliers if there were any danger - during an exceptionally cold snap, for example - of demand exceeding supply.

Q. How could companies supply the gas cheaper?

A. Because they say they have lower overheads and take less profit. Alliance Gas - one of the suppliers to the industrial market - thinks it can supply domestic gas for 10 per cent less than BG. Also, BG cross-subsidises between customers; if you use a lot of gas you help to offset the cost of supplying much smaller users. Consumers who use between 1,500 and 2,500 therms a year could see their bills drop by 8 to 10 per cent.

Q. How soon will I benefit from these changes?

A. In the short term all consumers will pay more than they would otherwise have done. At present, BG is required by the regulator, Ofgas, to follow a formula whereby the annual change in price must be inflation minus five per cent. (When inflation is less than 5 per cent, as it is now, this means a fall in your bill.) To compensate BG for the partial loss of its monopoly, the commission says that the formula should change to inflation minus 4 per cent. So, at present inflation rates, your gas bill will still go down, but not as fast.

In the long term, the commission thinks everyone will benefit. But the advantages are impossible to quantify and unlikely for some small users, particularly the single, elderly and poor. BG says the 1.4 million customers who use less than 100 therms a year could see their bills almost double.

Q. Does this square with energy conservation?

A. No. From 1997 to 2002, there will be an incentive for domestic users to increase consumption. If they use less than 1,500 therms, they will have to continue taking gas from BG and paying its prices. If they use more, they will be able to go to an independent supplier. The same thing will happen with industrial users.

Q. What about people who bought BG shares?

A. The revision of the pricing formula will give BG some pounds 300m over the next four years. It has also been given a four-year breathing space before it has to sell its retail business. So it could have been worse. But the Government did tell shareholders, in the BG prospectus issued before privatisation in 1986, that: 'in the foreseeable future (BG) expects to remain the sole public supplier of natural gas to the (domestic) market'.

Business Section, page 2

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