BRITISH GAS PAYS FOR PEACE

In 1992 British Gas plc Chief Executive Cedric Brown took a major risk.

He invited the U.K. government's Monopolies and Mergers Commission (MMC) to review the company and its role in a privatized gas market.

Brown called for an MMC ruling to bring an end to British Gas' feud with industry regulator Office of Gas Supply (Ofgas) and the government's Office of Fair Trading (OGJ, Aug. 10, 1992, p. 18).

OFT wanted to separate British Gas' trading operations from its transportation and storage business. British Gas wanted to raise tariffs for third party use of its pipelines but was prevented by Ofgas.

Last Dec. 21 British Gas plc heard the U.K. Department of Trade and Industry's ruling based on the MMC's report.

MMC had recommended that British Gas divest its U.K. gas trading business to avoid conflict with its gas transportation business and its domestic supply monopoly should end in 2000 2002 (OGJ, Aug. 23, 1993, Newsletter).

NO SELLOFF

Trade and Industry Chief Michael Heseltine decided British Gas must separate its trading and transportation businesses, but it need not sell its trading division.

British Gas preempted this move by announcing Dec. 17 that its regional structure would be reshaped into five independent businesses, with transportation/storage and public gas supply as separate entities.

Brown said divestment of the trading division was not necessary for development of competition in the market. Because divestment of trading was linked by MMC to increased tariffs, however, he still had concerns.

"Ensuring adequate profitability of each of the regulated parts of the gas supply business is still vital for the company and its shareholders," Brown said. "This needs to be taken into account by Ofgas."

TARIFFS QUESTION

Ofgas last month published a document giving its views on how British Gas should charge independent suppliers for use of its pipelines. Ofgas aims to have a tariff system in place by October 1994.

MMC had recommended that British Gas be allowed a 6.5 7.5% return on new and replacement transportation/storage assets and 4-4.5% on existing assets. British Gas wants 10.8% and 6.7%, respectively.

The Ofgas document did not contain a proposed figure for return on investments. For that British Gas will have to wait on another document, to be published next month.

Meanwhile, although Heseltine left British Gas in one piece, he brought forward the deadline for removal of the domestic supply monopoly. During 2 years beginning in April 1996, independent gas suppliers will gain access to Britain's domestic gas market, valued at 5.6 billion ($8.4 billion) in 1992.

In the first year, independents will be limited to taking 5% of the domestic market. In the second year, independents win gain another 5%. If those phases are successful, the market will be opened fully in April 1998.