Price fears over gas plans

Energy-intensive manufacturers fear that stringent impending price controls on Transco, the national gas transmission operator, could stifle supplier competition and keep prices high.

Next week industry regulator Ofgem is due to publish proposals on Transco’s charges up until 2006. The company has warned that new controls could constrain its ability to meet demand for extra capacity.

Jeremy Nicholson, economic adviser to the Energy Intensive Users’ Group, said Transco would have to invest up to £1.3bn in the system over the period to relieve potential bottlenecks, or many North Sea companies would be unable to bring gas ashore. This would restrict competition and keep industrial prices at the high level they have stood at since doubling over a year ago. ‘We suspect capacity problems have been a factor in pricing,’ he added.

A partial solution to the problem of price controls – to which Ofgem seems agreeable in principle – would be to set different controls for the national system and the regional networks.

Ofgem also wants to change the way it values Transco’s assets, which determines the company’s allowed rate of return and capital expenditure, to take into account only its pipelines and storage facilities. This would reduce Transco’s regulated asset value by about £2bn, which a spokesman said would cut the amount available for investment. He said the company would oppose the move.

The regulator argues the old method of valuing assets, which took into account all the company’s assets, is outdated, as it is a throwback to the days when Transco was part of BG. It wants to treat the gas transmission company in the same way as its electricity counterpart, National Grid Company.

Transco needs to invest heavily to expand the network, ready for an increase in imports by the end of 2002, when UK demand is projected to outstrip supply.

The level of investment will depend on where the gas is landed – St Fergus in Scotland, Bacton in Norfolk, or a combination of the two. The £1.3bn estimate assumes more imports will come through St Fergus, requiring an expansion of the transmission system to allow more gas to be shipped southwards.