WATCHING THE WORLD BRITISH GAS SEEKS GREATER FREEDOM

With David Knott from London Frustrated by restrictions of the U.K. gas industry regulator, Ofgas, and the Office of Fair Trading (OFT), British Gas plc has made a bid for freedom. By calling on the Monopolies and Mergers Commission (MMC) for a full review of its gas business, the company has started a process that may bring major changes. But the gamble may not be as risky as it first seems.

Aug. 10, 1992

3 min read

Frustrated by restrictions of the U.K. gas industry regulator, Ofgas, and the Office of Fair Trading (OFT), British Gas plc has made a bid for freedom.

By calling on the Monopolies and Mergers Commission (MMC) for a full review of its gas business, the company has started a process that may bring major changes. But the gamble may not be as risky as it first seems.

CONSUMERS, INTERESTS

Since its change from public utility to privatized monopolist in 1986, British Gas has been under pressure regarding the interests of consumers. While its monopoly could not be removed by Ofgas, its scope for profit making has been checked. The company maintains it has fairly balanced the needs of consumers and shareholders.

The decision to call in the MMC grew from OFT's requirement that British Gas separate its trading operations from its pipelines side, which handles transportation and storage. The company was happy to accept this, if a fair rate of return on its pipelines would be allowed so it could raise capital.

British Gas wants a 6.7% return on existing assets and 10.8% from new investments. The current return is 4.5% from third party users. Ofgas has refused the company's request for higher returns, leading Cedric Brown, chief executive of British Gas, to ask Michael Heseltine, secretary of state for trade and industry to begin an MMC review.

British Gas has complained that medium and long term planning efforts have been extremely difficult because of regulatory changes. The time demands of an MMC investigation may make things worse. The Department of Trade and Industry has given the MMC 9 months to report.

SALE OF ASSETS?

There is a good chance MMC will recommend splitting British Gas to sell its trading and pipeline interests.

Although this might cause short term problems, it is hard to believe British Gas has not planned for this event.

The company currently is split into three groups. Its core U.K. gas business accounts for 75% of revenues, exploration and production accounts for 20%, and global business stands at 5%. By the turn of the century, British Gas intends to be split 40% U.K. gas, 40% exploration and production, and 20% global gas.

MMC has been asked to review only the core U.K. business. Its recommendations will not affect the exploration and production or global gas groups. By risking sacrifice in a sector it wants to shrink anyway, British Gas might win enough freedom to let its favored groups flourish.