Ofgas to set tough rules on pipeline charges

OFGAS, the gas industry regulator, is set to impose tough controls on how much British Gas can charge rivals, including electricity firms and North Sea producers, to use its pipelines, writes Mary Fagan.

The price controls, to be announced on Tuesday, are expected to be based on a real rate of return on new investment of between 6.5 per cent and 7.5 per cent compared with the 10 per cent demanded by British Gas.

The regime, the first to be imposed on the pipelines, is likely to cap annual price increases to inflation minus five percentage points. It was first mooted by Ofgas in June, but British Gas warned that it would be forced to cut investment by hundreds of millions of pounds if the regulator imposed the price control.

The company also said it would mean no dividend increase. Cedric Brown, chief executive, said the company would have no alternative but to accept Ofgas's ruling, which is in line with an earlier recommendation by the Monopolies and Mergers Commission.

The formula is not likely to affect household bills as these are subject to separate controls.

Mr Brown said the regime would make it difficult to deliver an acceptable return to shareholders. He warned that it could delay the introduction of competition in the domestic gas market as British Gas would have to devote more management time to maximising returns from the pipeline business.

Legislation for domestic competition has been shelved because of lack of parliamentary time and government fears that the issue is too sensitive.