Ofgas forced to review plans for price cuts

OFGAS is coming under increasing pressure to reach an agreement with British Gas over its controversial plan to introduce new price controls for TransCo, the gas transportation business.

Fears that the Ofgas proposals will cut vital safety spending and concerns that they are in direct conflict with the Monopolies and Mergers Commission's stated views on regulatory consistency have prompted a last-minute rethink by the regulator.

Last week, Ian Powe, director of the Gas Consumers' Coun cil, wrote to Ofgas seeking assurances that its promise that "safety standards should not be compromised" was still valid. Mr Powe is concerned that the Ofgas proposals will result in a 40 per cent reduction in safety and emergency expenditure over the next five years.

According to trade unionists, Clare Spottiswoode, the director general of Ofgas, has admitted privately that she is proposing investment and cost reductions in safety-related areas. They said she expects to see spending on safety and reliability fall by 35 per cent and that on the emergency service to fall by 54 per cent over actual 1995 levels.

Yet in its original proposals Ofgas stated categorically that "full allowance has been made for safety-related expenditure proposed by TransCo" and "TransCo will be allowed a full allowance in its charges for safety-related capital expenditure".

So concerned is Ofgas by the safety worries that it is drafting a special memorandum designed to deflect criticisms that it is putting safety at risk.

The Health and Safety Executive, which oversees gas safety, and the Department of Trade and Industry are now considering the safety implications of the Ofgas proposals.

If it is shown that they will jeopardise safety, it will weaken Ofgas' hand in its battle to force British Gas to cut gas transport- ation prices by almost 30 per cent.

Ofgas is also having to reconsider its proposals to reduce British Gas's regulatory asset base - the valuation of its assets for purposes of regulation - in the light of a recent Monopolies and Mergers Commission report into BAA, the airport operator.

In that report, the MMC said: "We did not base the capital value on rolling forward the privatisation value, as this would imply a different value to the end 1990/91 assets to that in the 1991 MMC report: this in turn would raise the possibility that future regulators would use different values for the existing assets to those that we have used. Such a possibility would tend to increase uncertainty and might act as a deterrent to BAA investing."

This is important because as part of its price control plan Ofgas has proposed a significant reduction in British Gas's regulatory asset base. That base was agreed by the MMC in its 1993 report into British Gas and endorsed by Ofgas a year later.

If Ofgas insisted on cuts in the asset base, it would run contrary to the spirit of consistency that the MMC espoused in the BAA report. Although the MMC does not seek to impose consistency between industries on specific regulatory matters, it is keen to ensure that the broad principles of regulation are applied uniformly.

If British Gas and Ofgas cannot reach an agreement over the new proposals in the next few weeks, the matter will have to be settled by an MMC investigation.