British Gas plc has responded formally to a proposal by U.K. gas industry regulator Office of Gas Supply (Ofgas) to cut residential gas prices.
Over these residential proposals BG and Ofgas are talking "in a businesslike" manner, but debate remains heated over earlier proposals to cut third party transportation costs. Thus the prospect of the issue being referred to the Monopolies and Mergers Commission by the end of July grows increasingly likely.
In May Ofgas disclosed a plan to cut the cost to new suppliers that use BG's grid. BG said that would halve the 20,000 staff in its Transco unit. Ofgas then proposed to cut billing/marketing costs passed on to customers (OGJ, June 24, p. 26).
Responding to the latter proposal, BG Deputy Chairman Philip Rogerson said, "The domestic price review, combined with Ofgas' proposals for Transco, places British Gas under unprecedented regulatory pressure. And it comes at a time when we are seeking to maintain operational integrity and safety of the gas industry's infrastructure in the run-up to full domestic competition."
Unresolved issues
BG said proposals still unresolved are:
- The move from a price cap on total revenue to inflexible multiple price caps applied to different payment methods.
- The call for rapid adjustment of current tariffs by April 1997 to remove cross-subsidies.
- Ofgas' call for a 15% price cut in BG operating costs by April 1997, followed by 5% efficiency improvements the following 3 years.
- The proposed cut of profit margins to 1.5%, said to be "harsh, particularly as this occurs at the same time as the risks in the business are increasing with the introduction of competition."
- The proposed annual economic gas purchasing review, which BG denounced as a move towards "regulatory micromanagement contrary to the principles of U.K. regulation."
Consultation over residential prices is expected to continue until the end of July, after which Ofgas will publish final proposals.
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