British Gas opts for MMC inquiry

British Gas is expected this week to seek a reference to the Monopolies and Mergers Commission to settle its long-running row with regulator Ofgas over price controls for its TransCo pipeline business.

The British Gas board meets this week and, barring any last-minute concessions from Ofgas, is expected to refuse to accept the price curbs demanded by the regulator. That refusal will trigger a referral to the MMC.

Ofgas has set a deadline of 7 October for the company to respond to modified proposals, which were published last month. Since then, the company and Ofgas have been locked in talks to see if a compromise can be hatched. However, sources close to those talks say there has been no break in the deadlock.

Ofgas stunned British Gas and the City when its original proposals, published in May, suggested controls that would cut the company's revenues by between pounds 650m and pounds 850m a year.

After three months of intense negotiations, Ofgas finally revised its proposals late last month. Clare Spottiswoode, the head of Ofgas, insisted that the new controls were more lenient. However, British Gas argued that the amendments were largely superficial and that it would still face a cut in revenues of pounds 650m a year.

The company has consistently argued that the price controls were against the best interests of its shareholders. Insiders suggest nothing has changed to alter that view.

The City believes that a reference to the MMC is inevitable. The inquiry could take six months, but institutional investors are thought to have accepted the argument that the referral offers the best chance for a fairer deal.

Ms Spottiswoode has threatened that if British Gas seeks a referral, she will press for a reinstatement of her harsher May proposals. This is being seen as an attempt to intimidate the company and split the board. However, insiders say it has failed and that the board remains united.

Although it would be possible for the MMC to sanction tougher controls, this is thought unlikely as the precedent such a move would set would create great uncertainty across the entire regulatory regime.

The MMC has also said in the past that it wants to be consistent in its rulings. That has encouraged British Gas, since an MMC ruling in 1993 on the value of its assets would be overturned if the MMC backs the Ofgas proposals.

Fears that an MMC inquiry would be disruptive have also been dismissed by British Gas. Its plans to demerge TransCo from its exploration and production operations will not be affected by the MMC investigation, and the process is going ahead as planned.

Although the investigation will take up management time, it will involve a team of only around 20 executives. This will be headed by deputy chairman Philip Rogerson.

The biggest cost to British Gas will be professional fees, which could run into tens of millions. But such sums are not significant in the context of the group's finances, and will be dwarfed by the pounds 350m of cash flow that British Gas will argue should be handed back to it by a watering- down of the Ofgas proposals.