BRITISH GAS, OFGAS DISPUTE ESCALATES AGAIN

British Gas plc has clashed again with the U.K. Office of Gas Supply (Ofgas) over third party transportation charges on its pipelines. Officials of each publicly traded charges and countercharges earlier this month over the issue of BG securing an adequate return on third party transportation.

Dec. 21, 1992

5 min read

British Gas plc has clashed again with the U.K. Office of Gas Supply (Ofgas) over third party transportation charges on its pipelines.

Officials of each publicly traded charges and countercharges earlier this month over the issue of BG securing an adequate return on third party transportation.

The privatized U.K. gas monopoly and the U.K. gas industry regulator were at odds earlier this year when Ofgas refused BG's request for higher returns. BG has said it would accept a government mandated divestment of its U.K. trading operations from its domestic pipeline business if a fair rate of return would be allowed to raise capital. When the regulator refused the higher return, BG called on the Monopolies and Mergers Commission for a full review of its gas business (OGJ, Aug. 10, p. 18).

PUBLIC TIFF

The Independent newspaper, London, quoted BG Chief Executive Cedric Brown as accusing Ofgas of a "public outburst" on the company's third party pipeline charges. Sir James McKinnon, Ofgas director-general, had "ignored all the established conventions of a Monopolies and Mergers Commission reference" by speaking out on pipeline charges at a London conference earlier this month, Brown was quoted as saying.

BG currently has a 4.5% rate of return on third party use of its assets. The Independent quoted McKinnon as saying the rate of return must be "no more and no less than reasonable".

Brown responded the following day, saying, "The MMC inquiry was precipitated by the inability to agree with Ofgas on the level of return British Gas was permitted on its investment in the pipeline and storage system.

"A 4.5% rate of return was far from adequate," said Brown. "British Gas is recommending 6.7% from existing assets, and 10.8% from new investments." Both parties must wait until the outcome of the MMC inquiry, expected in spring or summer 1993. Michael Heseltine, president of the Board of Trade, will receive the MMC report and decide the future of British Gas accordingly.

COMPETITION

At a Nov. 16 London conference, McKinnon said two highly experienced companies had attempted to enter the U.K. pipeline market in a major way.

"The efforts of both have come to naught in the face of the overwhelming market power of British Gas," said McKinnon, "the company that is now claiming a high rate of return because it anticipates that its pipeline profits will suffer from competition.

"I reject the company's claim on the danger of competition and I am equally skeptical of British Gas' forecast of future capital expenditure. Without anticipating the results of our consultations in regard to a new system to be in place by October 1993, 1 am able to say that any new pricing method will be based on the principles of the market as applied to a monopoly. Any such method will be closely monitored by Ofgas."

Brown said BG sees itself as a strong contender in a fully competitive market, committed to playing its part in developing that market.

Brown said there are now about 30 companies competing with BG in the U.K. market. They supply almost 50% of the firm contract market at more than 10,000 industrial and commercial sites. About 50% of all gas contracted in the U.K. since June 1989 had gone to competitors.

"If the contract market is to be truly competitive, certain steps need to be taken," said Brown. "In particular, I would like to see a phased withdrawal of the contract price schedules. Many customers find these unnecessarily complex and would like to return to individual negotiation.

"Schedules run counter to the spirit of a free market. Once fully effective competition has been established, the schedules will have done their work and can be abolished.

"I suggest that a start could be made by removing the schedules for large volumes of interruptible gas and by introducing negotiating ranges for prices and terms in the other schedules. Prices could then reflect more accurately both variations in the cost of gas and movements in the price of competing fuels."

PRICE RISE

Financial Times, London, reported fuel costs for large industrial gas users have risen 4.2% in the last year while BG cut prices to domestic customers.

The newspaper said BG raised the price for companies receiving interruptible service.

Andrew Johns, director of the National Utility Services consultancy, which carried out the survey on which these findings were based, told Financial Times, "Any U.K. manufacturing company on an interruptible contract would not be at a competitive advantage compared with its competitors in the countries we surveyed. In fact it would be at a major disadvantage."

The consultancy said prices are rising most rapidly at the bulk volume, low price end of the industrial market, which has not been penetrated by rivals to BG.

Ian Powe, chairman of the Gas Consumers Council, told Financial Times the survey "tends to confirm the view that some sectors of the industrial market are seeing no benefit from competition."