British Gas heads for new price battle with Ofgas

BRITISH GAS is heading for a fresh tussle with its watchdog, Ofgas, over prices charged to its domestic and small business users.

Earlier this year the company angered Ofgas by cutting prices by just 3 per cent from 1 July, though its price-capping formula is inflation minus 5 per cent. Sir James McKinnon, director-general of Ofgas, has written to British Gas asking for details of the costs of buying gas from the North Sea. These costs are offset against the formula and have been used by the company as a reason for not making a real price cut.

Sir James said he wanted to see the justification for resisting reductions. He said that, if needed, larger cuts in bills in this financial year should be made as soon as possible.

A British Gas spokesman said: 'A number of factors can tilt the balance in determining the prices. It is under constant review.' The company could not yet say what its gas-related costs would be, but he admitted that the cost of buying gas had fallen slightly over the past year.

Relations between the regulator and British Gas reached a new low at the end of last month when the company asked the Government to refer the entire gas business to the Monopolies and Mergers Commission. It is believed to have done this to thwart Ofgas's plans for a referral on the narrow issue of how much it could charge other gas suppliers, including North Sea companies, to use British Gas pipes.

Sir James, who set the RPI minus 5 price-cap formula, is determined to keep a tight regulatory rein on British Gas while the year-long MMC investigation proceeds. He is also imposing a tough interim regime on the company to encourage new gas suppliers to use its pipes while the MMC scrutinises the business. The prices charged to third parties will be based on a rate of return on investment of 4.5 per cent, compared with the 6.7-10.8 per cent previously demanded by British Gas in talks with Ofgas.

It is already required by the Office of Fair Trading to put its pipeline and storage system at arm's length, so that other suppliers may use the pipes at the same price as British Gas. When it made this decision, the OFT said it favoured the sale of the pipeline system. This will be considered by the MMC.

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