Ofgas asks MMC to resolve gas transport charge dispute

How 'demerged' British Gas would look [19767 bytes] U.K. gas industry regulator Office of Gas Supply (Ofgas) has called in the government's Monopolies & Mergers Commission (MMC) in a bid to force British Gas plc to accept proposals to cut transmission charges. Ofgas has suggested British Gas' TransCo unit, which operates the national gas transmission grid, should cut transportation charges by 20% in 1997, and by 2.5%/year the subsequent 5 years.

Oct. 14, 1996

2 min read

How 'demerged' British Gas would look [19767 bytes]

U.K. gas industry regulator Office of Gas Supply (Ofgas) has called in the government's Monopolies & Mergers Commission (MMC) in a bid to force British Gas plc to accept proposals to cut transmission charges.

Ofgas has suggested British Gas' TransCo unit, which operates the national gas transmission grid, should cut transportation charges by 20% in 1997, and by 2.5%/year the subsequent 5 years.

The regulator reckons transportation costs account for 43% of residential gas bills and that its proposals will lead to a cut of 18% in annual household gas bills.

When Ofgas transmission costs proposals were first revealed, TransCo protested that as much as half its 20,000 staff would have to be laid off to enable it to meet the cost-cutting requirement (OGJ, May 20, Newsletter).

British Gas is no longer using the 10,000 job losses threat-this figure was apparently derived by dividing the annual TransCo income cut demanded by Ofgas by the average salary of a British Gas worker-but a company official said Ofgas' proposals would take away £ 650 million/year ($975 million/year) in TransCo revenues beginning in 1997.

Announcing referral of British Gas to MMC on Oct. 3, Ofgas Director General Clare Spottiswoode said, "Ofgas' proposals would provide substantially lower prices to customers while ensuring that British Gas could finance its transportation business.

"In the face of the British Gas decision not to accept the final proposals, the next step is for an MMC reference. The MMC's inquiry is likely to last 6 months."

A British Gas official said the company feels it has nothing to lose by going before the MMC: "The TransCo network is British Gas' biggest asset. We feel we have a strong case against the proposals, and we would like to safeguard the network we have built up over the years."

Early this year, British Gas announced a plan to split into two separate companies, TransCo International plc and British Gas Energy plc (see chart).

At the time, the plan was greeted as a means of separating British Gas' main asset, the TransCo grid, from its supply and trading business, which stands to incur huge losses on long-standing gas purchase contracts (OGJ, Feb. 12, p. 33).