Gas
A report on the matter of the existence or possible existence
of a monopoly situation in relation to the supply in Great
Britain of gas through pipes to persons other than tariff
customers.
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Summary
On 25 November 1987 the Director General of Fair Trading
referred to the Commission (see Appendix 1.1) the supply of
gas through pipes to non-tariff customers. These are customers,
mainly in the industrial and commercial sectors, who use more
than 25,000 therms of gas per annum. The reference was made
following complaints about the pricing policy of British Gas
(BG). Our inquiry confirmed considerable dissatisfaction with
BG amongst its contract customers.
In Great Britain BG is the only authorised gas supplier, and
accounts for virtually all gas supplied through pipes. Gas
forms part of the wider energy market and some users can switch
relatively easily to other fuels, but many others have no
immediate or realistic alternative to gas, neither do they
have at present an alternative gas supplier. In a substantial
part of the market BG is subject to only limited competition
from other fuel suppliers.
We have found extensive discrimination by BG in the pricing
and supply of gas to contract customers. We believe that this
is attributable to the existence of the monopoly situation
and operates or may be expected to operate against the public
interest in a number of respects. First, BG's policy of price
discrimination imposes higher costs on customers less well
placed to use alternative fuels or to obtain such fuels on
favourable terms, which in turn places an arbitrary, cost
disadvantage on these customers, and distorts competition
in the markets in which they operate. Secondly, BG's policy
of relating prices to those of the alternatives available
to each customer places it in a position selectively to undercut
potential competing gas suppliers. This may be expected to
deter new entrants and to inhibit the development of competition
in this market. Thirdly, the lack of transparency in pricing
creates uncertainty in the minds of customers about future
gas prices and renders more risky the business environment
in which they operate. Furthermore, BG's refusal to supply
interruptible gas to some customers imposes additional
costs on those users; its prices for gas used in Combined
Heat and Power schemes have inhibited the implementation of
some such schemes; and its insistence on particular contract
terms has imposed additional costs on users!
We have also concluded that BG's failure to provide adequate
information on the costs of common carriage, its ability to
use information obtained when negotiating common carriage
terms to identify potential customers of competing suppliers
and the potential source of gas, and its position as a dominant
purchaser of gas, may all be expected to operate against the
public interest by deterring new entry into the market.
During our inquiry, BG itself put forward a number of proposals
for changing its pricing policy and other terms of supply
and we have taken these into account in reaching our conclusions.
In our view these proposals would produce some benefits but
they would retain discrimination in pricing and supply and
leave intact BG's position as a monopoly supplier and dominant
purchaser of gas.
We have therefore made a number of recommendations which we
believe go to the heart of the matter both by encouraging
competition in the supply of gas and by restraining BG's discriminatory
policy on pricing and supply of gas until such competition
is effective. Our main recommendations are that BG should
be required:
(a) to publish a schedule of prices at which it is prepared
to supply firm and interruptible gas to contract customers
and not to discriminate in pricing or supply;
(b) not to refuse to supply interruptible gas on the basis
of the use made of the gas or the alternative fuel available;
(c) to publish further information on common carriage terms
in sufficient detail to put a potential customer in a position
to make a reasonable estimate of the charge that would be
sought by BG;
and
(d) to contract initially for no more than 90 per cent of
any new gas field.
1.7. We recognise that, to the extent that BG's profits on
contract gas have relied on discrimination, its profitability
is likely to suffer in the short term as a result of our recommendations.
We also recognise that among BG's customers some will lose
and some will gain. We believe, however, that the gains will
be more significant than the losses and that our proposals
will contribute towards the emergence of effective competition
in gas supply. It is only through such
competition that a long-term solution can be found to the
adverse effects we have identified in our inquiry.
It would be wrong to conclude this summary without mentioning
the high degree of co-operation which we received from BG.
Although we have found certain policies to operate against
the public interest, we have formed a high opinion of BG's
professionalism, and would like to pay tribute to their unfailing
courtesy and speed of response throughout an inquiry which
imposed
considerable burdens on them.
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