City: Cold comfort for the gas consumers

IT USED to be a standing joke among officials at the Department of Energy that the only thing that really interested Peter Walker about gas privatisation, which he presided over as Secretary of State for Energy, was how many Tory voters it would create.

Every time a new batch of market research arrived indicating the likely level of subscription for the offer, he would do a rough back-of-the-envelope calculation on what that would mean in the event of a general election - his assumption being that every traditional Labour voter who could be persuaded to buy British Gas shares would overnight be turned into a rabid capitalist and switch his allegiance to the Conservative Party.

Mr Walker seemed to see gas privatisation as almost exclusively an exercise in popular capitalism. To him, the overriding imperative therefore became making the share issue as attractive as possible to the small investor. The interests of consumers - and arguably the taxpayer too - suffered accordingly.

No doubt this is a somewhat exaggerated and simplistic view of the way Mr Walker saw his role, but it is nevertheless true that he agreed to virtually everything that British Gas's powerful and autocratic chairman, Sir Denis Rooke, demanded of him during lengthy and tortuous negotiations over how the corporation should be de-nationalised. Cabinet colleagues of a more radical persuasion - Margaret Thatcher and Nigel Lawson included - were told in no uncertain terms that if they tried to interfere with British Gas's traditional monopoly, Sir Denis, with the full support of Mr Walker (who was later rewarded for his help with a non-executive directorship of the company), would do everything in his power to frustrate them.

The result was that British Gas was privatised in what many came to see as a woefully inadequate fashion - in a way, moreover, that shut the door on the development of any kind of viable competition and that was clearly not in the best interests of large numbers of substantial gas users and suppliers. It was a botched job and it set the tone for seven years of increasingly acrimonious and confrontational squabbling between the company and the industry regulator, Sir James McKinnon of Ofgas. British Gas seemed determined to defend all aspects of its traditional monopoly whatever the costs, and Sir James, out of frustration as much as anything else, became progressively more extreme in his attempts to remedy the situation.

Other privatised industries have had their run-ins with the regulator, too, but nothing on the scale of gas. BT has always been relatively relaxed about the growing challenge to its monopoly position; though it has muttered bitterly about many of the regulator's initiatives to encourage new entrants to the telecommunications market, it has generally accepted them as something it must live with.

In a number of disputes, BT has been to the wire with Oftel (the telecommunications watchdog), but in the end it has always backed away, knowing that a wide-ranging reference to the Monopolies and Mergers Commission - the regulator's last resort if the industry fails to agree to his demands - could be far more damaging to its long-term interests than the worst the regulator might do.

British Gas, by contrast, largely because of its own dog-in-the-manger attitude, got itself into a position where the MMC seemed a good bet set against the progressively more outlandish views of Ofgas. It's no wonder that it welcomed last week's MMC report with open arms. Though the outcome was a little more severe than the City expected - the enforced break-up of British Gas into its pipeline and marketing arms certainly amounts to a dramatic restructuring - it could have been a lot worse. If Sir James had got his way, the break- up would have been much more radical - into 17 separately quoted and competing companies - and the restrictions put on rates of return and prices would have been so severe as to be financially crippling. On the whole, shareholders seem to have ended up with a fair and reasonably balanced set of proposals.

What they mean for the ordinary domestic gas consumer is more difficult to judge. Certainly, the short-term effect is negative. The MMC has taken the view that since ultimately it will be customers who benefit from the restructuring and the competition it brings, they and not the shareholders should pay for its pounds 130m of annual costs. Longer term, competition will bring lower prices, more choice and greater innovation, the MMC believes. Well maybe, but the case is by no means proven. In a utility business supplying a commodity product such as gas, it seems to me at least possible that a tightly controlled and regulated monopoly might actually be a better and more efficient way of delivering service than having a large number of small competing firms.

If I were President of the Board of Trade, I would find the idea that customers should pay for an uncertain benefit an extremely worrying one, especially at a time when Treasury demands for enhanced VAT on fuel bills are driving up prices anyway.