Government drops gas market plan: Scrapping competition legislation raises fear of continuing monopoly - Delay angers energy supply rivals

THE GOVERNMENT has quietly dropped plans to legislate this autumn to open up the domestic gas market to competition, raising fears that British Gas's monopoly will remain intact for years to come.

Ministers are understood to have removed the planned legislation from the list of future business at a cabinet meeting last week to give priority to other projects such as privatisation of the Post Office.

The Government had originally intended to open up the smaller tariff market, for users of less than 2,500 therms a year, on a gradual basis. The aim was to free 5 per cent of the market in both 1996/7 and 1997/8 before throwing it open to full competition in 1998.

The decision to delay legislation will be seen as a reprieve for British Gas, which generates 60 per cent of its sales from the smaller tariff market.

At the instigation of the Monopolies and Mergers Commission, the company has seen its share of the large contract market - above 2,500 therms a year - fall from 95 per cent to 46 per cent since 1991.

British Gas has complained that the time scale for opening up the smaller tariff market was extremely tight. Cedric Brown, chief executive, said last month that he was uncertain whether British Gas could devote the time and management effort needed to adapt the billing and supply system to cope with multiple suppliers of gas to homes.

Ofgas, the industry regulator, wants to see British Gas's universal service obligation extended to new suppliers and a 'level playing field' on prices.

British Gas customers pay the same price for gas nationwide. Low users of gas located far way from the main trunk gas pipeline are subsidised by large users near to the pipeline.

Ofgas, which is consulting with the industry on the issue, is keen to prevent new entrants to the smaller tariff market 'cherry-picking' highly profitable larger users of gas, leaving British Gas with less profitable customers. This happened when competion was introduced into the large contract market.

The Government is also anxious to avoid big jumps in gas prices in remoter areas of the country, while metropolitan prices fall, especially after the political damage inflicted on it by the decision to impose VAT on fuel.

Ofgas would have to resolve this issue before it could introduce a pricing formula for the smaller tariff market to usher in the first stages of competition in 1996/7.

Delays in the introduction of competition are likely to anger rivals to British Gas, including electricity firms and North Sea producers.

However industry sources said yesterday that they were hopeful that gas legislation might yet feature in the Queen's Speech. They also said that, in the absence of legislation, there could be other ways of introducing domestic competition. Legislation is needed to amend the 1986 Gas Act, which enabled the privatisation of British Gas and gave it the necessary authorisation and licence to operate.

Ofgas could enable competition to be introduced without legislation by unilaterally reducing the threshold above which rivals can supply gas.

However, this would not be regarded as a long-term solution. Lowering the threshold would also raise again the issue of universal service obligation.

Ofgas, British Gas and the Department of Trade and Industry declined to comment on the issue last night. But one source said that the question was one of parliamentary time. Independent gas companies said they would be concerned if there were hiccups at this stage. However they believed that the Government would not abandon domestic competition altogether.