DOES U.K. WANT FREE GAS MARKET OR NOT?

In their recent handling of British Gas plc, U.K. regulatory agencies show where governments can play a constructive role in the affairs of commerce and where they cannot. In recent weeks, two agencies have hammered British Gas from opposite directions. First, the Monopolies & Mergers Commission (MMC) recommended that the formerly state owned gas company divest its merchant operations and lose its monopoly in the U.K. residential market. Then the Office of Gas Supply (Ofgas) moved to prevent

Sept. 13, 1993

3 min read

In their recent handling of British Gas plc, U.K. regulatory agencies show where governments can play a constructive role in the affairs of commerce and where they cannot.

In recent weeks, two agencies have hammered British Gas from opposite directions. First, the Monopolies & Mergers Commission (MMC) recommended that the formerly state owned gas company divest its merchant operations and lose its monopoly in the U.K. residential market. Then the Office of Gas Supply (Ofgas) moved to prevent use of British Gas profits in the U.K. residential market for investments abroad.

Particulars aside, the MMC initiative heads in a proper direction. The Ofgas proposal leaps backwards.

SEEKING COMPETITION

British Gas officials seemed to greet MMC's recommendations in the context of their company's privatization program under way since 1986. The prevailing expectation had been not for outright divestiture of sales functions but for some form of segregation between trading and transportation. MMC's more-radical proposal at least provides some basis for long-term business planning, the officials said. Since 1986, regulatory questions attending privatization have kept them guessing about the future shape of their shareholders' company.

Indeed, British Gas requested the MMC inquiry of its gas business last year in an effort to ease a regulatory squeeze. At the time, the Office of Fair Trading was calling for separation of the company's sales and transportation activities. British Gas supported the goal but not with allowed pipeline returns at levels set by Ofgas. It said the profitability limits precluded capital formation and asked for an MMC investigation to break the logjam. The MMC proposal would grant British Gas some price compensation for the phasing out of its residential monopoly but leave pipeline-profitability caps about where they are.

There are no perfect ways to end monopolies and foster competition; MMC's recommendations are destined to have flaws. It is the move toward a free gas market that is most important. The U.K. government is correct to be making it.

But what's to be gained from circumscribing British Gas profits in the U.K. residential market? Ofgas says it wants to protect British consumers from losses British Gas might incur in risky foreign projects. The agency either hasn't heard that privatization and free markets are official British policy or doesn't understand the concepts. Private companies invest where they see maximum rewards commensurate with risk. Free markets imply competitive pricing and consumer choice. To tell a company to compete for sales and capital then instruct it in the use of its cash flows is inconsistent.

TESTY RELATIONS

The Ofgas proposal appears to spring from relations with British Gas that have been, charitably speaking, testy. Ofgas has jawboned for lower residential gas prices and publicly doubted the ability of British Gas management to function in a competitive market - exertions that look like political grandstanding. And now, after opposing returns on investment that British Gas says are necessary for capital formation, it resists the company's efforts to generate returns on its shareholders' capital outside the U.K. That's simple regulatory excess, and it conflicts with British policy objectives.

Someone should tell Ofgas that markets, not regulators, set prices; that markets, not regulators, decide which managements succeed and which fail; and that markets, not regulators, steer capital. Governments should promote and preserve the free operation of markets. Then they should be silent.