Ofgas plans price cut; British Gas complains

British Gas plc is once more protesting after U.K. gas industry regulator Office of Gas Supply (Ofgas) disclosed a plan to cut domestic gas prices another 2.5%. Ofgas proposed that British Gas reduce bills to households an average 8 ($12)/year by trimming the supply cost part of its bill to customers. The supply part covers billing and marketing costs. This proposal follows a plan announced last month to reduce average household bills by 30 ($45)/year, which is equal to 10% of the typical

June 24, 1996

3 min read

British Gas plc is once more protesting after U.K. gas industry regulator Office of Gas Supply (Ofgas) disclosed a plan to cut domestic gas prices another 2.5%.

Ofgas proposed that British Gas reduce bills to households an average 8 ($12)/year by trimming the supply cost part of its bill to customers. The supply part covers billing and marketing costs.

This proposal follows a plan announced last month to reduce average household bills by 30 ($45)/year, which is equal to 10% of the typical householder's bill (OGJ, May 20, Newsletter).

Price cut fallout

After the earlier proposal, aimed at cutting that part of bills due to transportation costs, British Gas said the Ofgas measures could lead to a halving of the 20,000 staff of the company's Transco transportation unit.

This time, British Gas has not made such dramatic claims but has maintained its view that Ofgas' proposals are ill conceived, damaging to British Gas shareholders, and not in the overall interest of gas consumers.

Philip Rogerson, deputy chairman of British Gas, said, "The proposals are unprecedentedly harsh and assume reductions in costs which, after the rapid productivity gains of recent years, cannot be achieved. Ofgas has overstated the extent of achievable cuts in operating costs."

An Ofgas official said household bills are made up 40% of gas purchase costs, 40% transportation costs, and 20% supply costs.

The two price cuts proposed by Ofgas are expected to take effect in April 1997. Talks with British Gas about the proposals are to be complete in about 1 month.

The Ofgas official said there would then be no further plans from his agency to impose price cuts on the former U.K. gas monopolist. However, Ofgas also has proposed that British Gas pass through savings in gas purchase costs.

Purchase contracts

Many of British Gas' gas purchase contracts specify prices agreed to before government's liberalization of the U.K. gas market and the later slide in spot prices caused by a glut of gas supply.

British Gas is campaigning to renegotiate its long term purchase contracts, particularly with major suppliers that include Shell U.K. Ltd., Esso Exploration & Production U.K. Ltd., and BP Exploration Operating Co. Ltd.

Late last year, British Gas started a court action again Shell and Esso over gas supplies from Strathspey and Brent fields in the U.K. North Sea. Shell and Esso maintain the contracts are legally binding (OGJ, Dec. 11, 1995, p. 30).

Ofgas said its further proposal to pass on gas purchase costs direct to customers "...will ensure that any improvement in prices, for example by the renegotiation of long term take or pay contracts, is passed on to customers. There will also be a requirement for British Gas to demonstrate that its costs represent best value for money."