BG plc has failed in a bid to escape a government ruling in favor of massive cuts in gas transportation charges to third parties using its U.K. gas transmission grid.
U.K.'s Monopolies and Mergers Commission (MMC) ruled that BG's Transco unit must cut charges by 21% for April 1997-March 2002.
MMC also decreed that along with the initial cut, BG must also reduce transport charges by 2%/year each year for the rest of the control period.
The MMC requirement is a little tougher than that proposed by industry regulator Office of Gas Supply (Ofgas), when it referred BG to MMC in October last year (OGJ, Oct. 14, 1996, p. 24).
Ofgas reckons the cuts will lead to a 9% reduction in the annual gas bills of residential customers and a 5-7% reduction in gas costs for industrial and commercial customers.
Clare Spottiswoode, Ofgas director general, said, "As well as benefiting consumers, the MMC report will also be of benefit to shareholders, because it provides a stable, predictable, and transparent regulatory regime for Transco."
BG doesn't see it like that.
The company claims the ruling will reduce its revenues by 5% in 1997-98, by a further 7% in 1998-99, and 1-2%/year in the following 3 years.
MMC has also disregarded BG's evaluation of its assets, assigning the company total assets of £11.6 billion ($18.6 billion) compared with BG's estimate of £17 billion ($27.2 billion) in true replacement costs.
David Varney, BG chief executive, said, "As a result of this fundamental change, BG intends to write down the value of the company's assets in Transco by some £5 billion ($8 billion)."
Varney said BG rejected Ofgas' proposal to slash transport charges, because earnings would not be sufficient to maintain the gas network properly while allowing a fair return to shareholders. "This is a tough settlement," said Varney, "but, provided we continue to improve our efficiency, one which we believe will enable us to manage and finance our business effectively.
"The MMC report has provided the opportunity to end a prolonged period of regulatory instability and uncertainty. To this end, we have begun to work with Ofgas to translate MMC's recommendations into new license terms."
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