British Gas plc (BG) has accepted the U.K. government's Office of Gas Supply (Ofgas) proposals on a formula that will control gas prices for 17 million customers for 5 years effective Apr. 1, 1992.
The formula covers gas supplies to all U.K. customers using less than 2.5 billion BTU/year. That includes residential customers and most small industrial and commercial customers.
The revised formula sets a limit for increases in gas prices based on a changed approach to the cost of gas supplies BG buys and on real reductions in the nongas element of the sale price.
The nongas component of the price will be subject to a limit of 5 percentage points less than increases in the U.K. Retail Price Index (RPI). Under the formula, the allowable cost of gas itself will be indexed each year from a base of 1990-91 and subject to a cumulative reduction of 1%/year.
In addition, service standards will be published and monitored.
Taking the package as a whole, Ofgas believes an appropriate current cost rate of return for the tariff is 5-7% and the review formula will enable this to be achieved.
The rates of return earned in the tariff sector since privatization are consistent with this range, BG said.
"This presents us with an enormously tough challenge," said BG Chairman Robert Evans. "It is a more stringent formula than we had expected...
"Gas prices will become even more competitive, and that will enhance the potential for increasing the market for gas."
The current formula covers the costs of the gas itself plus a limit on increases in the nongas component of the price to 2 percentage points less than the increase in the RPI.
BG has stayed within this maximum, increasing the number of customers, improving productivity, and reducing tariff prices in real terms, the company said.
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