Leading Article: Gas break-up all to the good

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HAS the Monopolies and Mergers Commission been too soft on British Gas? While the Office of Gas Supply (Ofgas) originally wanted the energy giant broken up into a dozen regional firms, the MMC yesterday recommended the Government to split it into two businesses that will still each be of monstrous proportions. In the meantime, British Gas will be allowed to earn a higher rate of return on its assets than once seemed likely.

Although the company's management promptly claimed it would have to cut investment and make workers redundant, investors were more sanguine. The announcement of the break-up drove the company's share price up, not down - suggesting that the firm may gain more from higher profits on domestic gas supply than it will lose from having to face competitors from 1997 onwards.

Yet the MMC has been more daring than it might seem. It has concluded a long series of skirmishes between British Gas and Sir James McKinnon, the head of Ofgas, by backing Sir James to the hilt. The price cap may not be so tight as before; but gas prices will still fall by 4 percentage points a year in real terms. There are few goods or services in the private sector of which the same can be said.

Some 500,000 customers - 80 per cent of them heavy household users, the rest small businesses - will be able to buy gas from someone else from 1997 onwards. It is hard to predict how far British Gas's prices may fall between now and then, but some of the potential competitors believe they could offer gas at a 10 per cent discount to the monopolist's prices. Competition will allocate resources better in the economy, and thus make the country richer and create jobs. Unison, the union representing half the employees of British Gas, has proved unable to see beyond the short-term redundancies competition will cause; but in the longer term, lower gas prices may turn out to stimulate demand so much that employment in the industry rises.

The MMC's recommendations will be put into effect only if Michael Heseltine, the President of the Board of Trade, has the nerve to back them. With luck, he will do so: the MMC and Ofgas together have put up a convincing case. Once the outcome is decided, however, there will be a devilish amount of detail to work out, notably in deciding how to regulate the prices of the company that operates the pipeline system - which will probably remain a monopoly even after the smallest household in the land has a choice of gas companies. That will not be until the turn of the century, or even later.

Meanwhile, the MMC documents published yesterday raise an interesting separate issue. The Commission says repeatedly that there is an 'inherent conflict of interest' inside a company that both sells a product to consumers and owns the delivery system its competitors must use. That argument makes good sense; but it makes just as good sense in other industries as it does in gas supply.

The MMC report will therefore be read with trepidation in the boardroom of British Telecom. Sir Iain Vallance, BT's affable chairman, has cultivated Oftel rather more successfully than his gas counterparts have cultivated Ofgas - which might help to explain why he has so far avoided the ultimate punishment of a forced break-up. Yesterday's report should offer a clear warning to BT. The days of its domination of both local exchanges and long-distance networks may be numbered.