British Gas steps up fight on revenue cap

Chris Godsmark

Business Correspondent

British Gas is stepping up its latest battle with Clare Spottiswoode, the industry regulator, over the implementation of big cuts in pipeline charges recommended by the Monopolies & Mergers Commission.

The company last night submitted its formal response to Ms Spottiswoode's proposals, accusing her of going beyond the MMC's report in a move which could cost BG up to pounds 500m in revenues over five years.

BG yesterday refused to rule out calling a judicial review into the changes.

The MMC investigation largely endorsed Ofgas's planned price regime, recommending a cut of pounds 29 in average domestic bills from this year. At issue in the new row is how much benefit BG should gain from fluctuations in the amount of gas running through its pipelines.

With demand for gas rising sharply, BG's earnings would be likely to go up significantly. Ms Spottiswoode has proposed placing a cap on these revenues after concerns that the company's estimates for demand, on which the price controls were based, were too conservative.

The move by BG came as one of the leading gas analysts suggested the company could be on the verge of a pounds 1bn share buyback programme and could raise pounds 100m this year from asset sales. Simon Flowers, from NatWest Securities, also increased his valuation of the company to 280p a share.

Though BG reluctantly accepted the MMC's conclusions, David Varney, the chief executive, has since claimed the revenue cap departed "fundamentally" from the MMC's recommendations. The MMC report recognised the regulator's worries, but proposed capping only half the revenues.

The company's response will reiterate its view that Ms Spottiswoode should accept the MMC's conclusions "in their entirety". It is also likely to fuel the row by expressing BG's "disappointment" over the way the licence changes have been handled. The company will argue that a cap on all its revenues would mean it would face extra costs from the increases in demand, but would receive no more income.

Ofgas, the watchdog, is likely to announce the licence modifications next month.

A BG spokeswoman said the company was still working to seek implementation of the MMC's recommendations. "We would review the situation only if the need arose," she said.

The dispute has raised new questions about the role of utility regulators as the Government continues its review into regulation. Last week Northern Ireland Electricity referred a similar rift to a judicial review.