City cheers MMC verdict on British Gas: Reports mark watershed in acrimonious relationship

THE TWO gas reports produced yesterday by the Monopolies and Mergers Commission follow four separate references last summer and mark a watershed in the long and often acrimonious relationship between British Gas and Ofgas, the gas industry regulator.

Seeds of the latest investigation were sown in 1988 when the operations of the gas contract market were referred to the MMC. British Gas then gave a number of undertakings designed to improve competition.

After discussion with the Office of Fair Trading, which was not satisfied by 1991 with the way competition had developed, British Gas agreed to shed 60 per cent of all large contract sales (about 20 per cent of its entire sales volume), to release more gas to competitors and to set up its gas transport business with transparent pricing and equal access for rival suppliers.

Ofgas, under its blunt and implacable director-general, Sir James McKinnon, then secured a tighter price cap for British Gas's non-contract, tariff market, lowering the pricing formula from RPI minus 2 per cent to RPI minus 5 per cent from April 1992.

Sir James and British Gas, with Sir Robert Evans, chairman, taking up the cudgel, then proceeded to fall out on the establishment of a separate pipeline gas transmission business. Ofgas said that a rate of return on the business of 2.5 per cent to 4.5 per cent was adequate while British Gas wanted at least twice that amount.

Last summer Ofgas told British Gas that it was referring the company to the MMC, the arbiter of unresolved disputes between utilities and their regulators, with respect to its transportation and storage activities. For good measure Ofgas also asked the MMC to examine how tariffs were fixed in the tariff market.

But the disagreement between Sir James and British Gas went deeper than the issue of the rate of return. Later, in the Ofgas annual report for 1992, Sir James revealed that the primary motive for his reference was in fact the question of who should own the transportation system - by implication not British Gas.

Concerned that the Ofgas reference on transportation was too narrow and could have unpleasant effects on other parts of its business, British Gas itself asked Michael Heseltine, President of the Board of Trade, to refer not just transportation and storage but also the entire gas supply business to the MMC.

In July 1992 all four references were made to the MMC. The whole exercise has involved submissions from 140 institutions and individuals, British Gas, Ofgas and government bodies and has cost between pounds 1.3m and pounds 1.4m.

British Gas has often railed against the behaviour of its regulator, Ofgas. The MMC's verdict? That the regulatory system is 'fundamentally sound'.

(Photographs omitted)