Ofgem ruling

Prices cut by 4% next year Prices cut by 2% every year after that until 2007

Ofgem says Transco will have to cut prices by 4% next year and by 2% every year after that until 2007.

Gas distribution costs make up between 35-40% of consumers gas bills and the ruling should cut about �5 off the price of an average bill.

But the new regime is less strict than previous proposals which would have seen Transco facing a 14% price cut in 2002.

Such a cut would have seen an average gas bill cut by about �15.

Share spike

The regulator has also ruled that Transco must spend more on renewing gas mains than the company had originally projected.

Under Health and Safety Executive rules, Transco must replace all iron mains within 30 metres of buildings, within 30 years.

Ofgem expects the cost of this programme to rise to about �2.1bn over a five year period, �300m less than Transco's forecast.

Shares in Transco's parent company, Lattice, leapt 3% on the news before falling back below 154.75, as traders digested the full impact of the review.

"At first sight it (the review) looks very favourable," said one analyst.

Possible appeal

Lattice Group's director of regulation, Chris Bolt, described Ofgem's price review as "extremely challenging", and left open the possibility of an appeal to the Competition Commission.

"The key is whether we can continue to pay acceptable dividends to shareholders, while servicing Transco's debt and meeting any extra funding requirements, and continue to maintain a strong investment grade credit rating.

"If the board has serious doubts on this issue, that will determine the case for a Competition Commission reference."

He added: "I'm not making any predictions about an appeal to the Competition Commission. That's a matter for the board.

"We will need to do more analysis of these proposals," he said.

Although, at first sight, the review appeared to be a favourable one for Transco, Mr Bolt insisted that there remained a "very substantial gap" between Ofgem's proposals and Transco's position.

He said the shortfall was just under �1.9bn, compared with a shortfall of around �3bn under the previous proposals.

Lattice has until 25 October to lodge an appeal with the Competition Commission.