British Gas plc

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British Gas plc

Rivermill House
152 Grosvenor Road
London SWIV 3JL
United Kingdom
(071) 821-1444
Fax: (071) 821-1870

Public Company
Incorporated: 1986
Employees: 79,900
Sales: £9.49 billion (US$17.74 billion)
Stock Exchanges: London Tokyo New York Toronto

The history of British Gas plc is the history of the whole British gas industry. British Gas plc was incorporated in 1986 when the state-owned British Gas Corporation was privatized, and more than 4,025 million shares were issued by the British government. This privatization of the gas industry reversed the nationalization of 1949, when more than 1,000 separate private or municipally-owned companies were taken into state ownership. During nearly 40 years of public ownership, the technical basis of the industry underwent two profound changes. In 1949 the gas industry manufactured almost all its gas from coal. During the 1950s and 1960s coal became too expensive, and processes were developed to convert cheap oil feedstocks into a coal-gas equivalent. When natural gas—methane-became available in quantity, the industry undertook the enormous ten-year task of converting the 35 million appliances of its 13 million customers so that they could use natural gas. The business in the early 1990s served 17.3 million households—that is, more than 88% of homes where a gas supply is available—and is currently the largest integrated gas supply business in the world. Its profit after tax in 1991 was £916 million.

Experiments using coal gas for lighting were made in the late 18th century. William Murdock lit his home in Redruth, Cornwall with gas in 1792, and in the early years of the 19th century, when Britain was the world’s first industrial nation, several factories made their own gas for lighting. The first gas company in the world to provide a public supply was the Gas Light and Coke Company of London, which received its charter in 1812. Gas for lighting proved both popular and profitable; by 1829, around 200 gas companies had been set up. Almost all of these companies relied on private capital, but the first municipal gas department was set up in Manchester in 1817 by the police commissioners and was taken over by Manchester Corporation in 1843.

The first gas companies were established in a competitive climate; there were no restrictions on where a company might set up in business if it could raise the capital and thought it could make a profit. In the early days it was by no means unknown for two companies to serve the same street; in one notable case in South London no less than four competing companies had mains in the same street. It was soon recognized that unbridled competition served neither the interests of gas companies nor their customers. Within London, where the problem was most severe, the Metropolis Gas Act of 1860 allocated each company its own district within which it had a monopoly. To prevent exploitation of captive customers, a statutory limit of 10% on dividends had been imposed by the Gasworks Clauses Act of 1847. This limitation did not satisfy customers. Companies were enjoying monopoly powers and already earning the maximum dividend; there was little incentive for them to cut prices despite increasing sales and improved technology. This form of statutory regulation proved to be ineffective in protecting the interests of the public.

From the mid-1870s competition began to offer customers the prospects of a better deal. At first the competition came from lighting oil. Persistent overproduction in the Pennsylvania oil fields in the United States meant there was a surplus over U.S. needs, which would then be shipped out and dumped cheaply on world markets, especially in the early 1870s. Oil lamps proved a popular alternative to gas. By the late 1870s, electricity was also beginning to emerge as a competitor for the gas lighting business. A practical arc lamp was produced in 1876, and Edison in the United States and Swan in Britain independently produced the first incandescent light bulbs in 1879-1880. The gas industry responded in three ways; it attempted to improve the efficiency of its lamps, it looked for alternative markets, and it looked to its pricing structure.

At the suggestion of George Livesey, chief engineer of the British South Metropolitan Gas Company and the foremost gas engineer of his generation, the sliding scale was introduced from 1875; dividends and prices were linked inversely, that is, increased dividends could be paid if the price of gas came down but if the price of gas rose, dividends had to be cut. Individual companies sought private legislation to permit them to introduce the sliding scale; by the year 1900, two-thirds of all gas sold was covered by this arrangement. Its fairness to customers depended crucially on the datum price, that is, the price from which variations would be calculated. It was the good fortune of the gas companies that many technical improvements to cut costs were made after they adopted the sliding scale. Shares in the major gas companies were regarded as a very sound investment. Livesey also introduced a profit-sharing scheme for his workers in 1889; the bonus was linked to reductions in the price of gas. Similar co-partnership schemes were set up by several of the larger gas companies, but few outside the industry adopted the concept.

When gas companies were looking for alternative uses for gas, they began to consider its use for cooking and heating in the home. The first geyser water heater was invented in 1868 and gas fires to heat individual rooms were developed in the 1880s; but gas companies were more interested in persuading customers to use gas for cooking. Experimental gas stoves had been shown at the Great Exhibition of 1851, but these made no headway against the popular coal-fired kitchen ranges that provided heat and hot water as well as facilities for cooking. By the 1870s there were gas stoves recognizably similar in layout to most modern stoves, with an oven below and burners above. As far as the gas managers of the time were concerned, the special advantage of the stove was that it was likely to be used more during the day than at night; it would therefore use off-peak gas. Lighting, of course, was still the predominant load. For rational, promotional, and financial reasons, the installation of stoves could be subsidized from the profits on gas sales. As customers were disinclined to buy, they were supplied with basic, robust cast-iron stoves on cheap rental terms. By contrast, in the United States stoves were offered for sale, not rent, and were of lighter construction, well-finished, and with attractive trim. This policy of supplying subsidized stoves was developed more extensively in Britain between 1890 and the 1920s than anywhere else in the world, and British companies sold more gas than the rest of Europe put together.

Despite the excitement engendered by the first incandescent electric light bulbs, customers soon found they were costly and unreliable. Gas saw a strong return to popularity in the 1890s, following the invention by an Austrian chemist of the Welsbach incandescent mantle, which increased fivefold the efficiency of gas for lighting. Gas was still very much a middle-class fuel; poorer people living in rented homes used coal, oil, and candles. They could not afford to have gas installed, even if they wanted to use it. This situation was about to change dramatically. The change is usually attributed to the invention in 1888 of the prepayment, penny-in-the-slot meter. This alone would not have brought about the spread of gas into working-class homes. The manager of the municipal Ramsgate gas undertaking, W. A. Valon, noted that half the houses in the town had no gas supply. He decided that instead of offering to provide just the stove on easy terms, he would provide the whole gas installation—pipes, stove, and lights. As his new customers would pay for their gas in advance through a prepayment meter, there was no need to ask for a deposit as security. The profit on gas sales to poor homes was unlikely to be sufficient to pay for the installation costs, so there was a surcharge on the gas price for such customers, typically 25%— the prepayment supplement. The scheme spread like wildfire. In the words of George Livesey, “this extension of gas supply to weekly tenants is the most extraordinary and remarkable development of the business that has ever been known.” Between 1892 and 1912 the number of gas customers increased from 2½ million to 7 million and sales doubled. The use of gas for cooking became more important than gas for lighting, as virtually all new customers were supplied with a stove.

This expansion of the industry was not accompanied by any structural change; it was still extremely fragmented. In 1914 there were some 1,500 suppliers of gas, two-thirds of whom had statutory monopoly powers within their areas of gas supply. There was little pressure toward amalgamation, in part because of high legal and consultancy fees, and also because of geography since supply networks could not easily be linked to achieve economies of scale. Another major factor was the split between the municipal and privately owned companies; about one-third of the industry was municipally owned. Each company could set its own technical standards and, because subsidized rental of appliances was almost universal, there was no independent appliance retailing network that might have encouraged harmonization of standards and appliance innovation.

The interwar period was a difficult time for the gas industry. At the outbreak of World War I in 1914, ten times more homes had a gas supply than electricity. Although the number of gas customers continued to rise until 1939, the increase in gas sales slowed, while electricity sales grew sharply. The prepayment supplement had paid for so many homes to be equipped with gas lighting that the defense of the lighting business was a major preoccupation; it was feared that if electricity displaced gas for lighting, it would soon displace gas stoves and heaters. As a consequence, the industry was distracted and could not concentrate its efforts fully on displacing the huge stock of obsolete rented appliances and selling modern stoves, heaters, and water heaters in their place. The real value of the prepayment supplement—fixed in cash terms before 1914—fell, and cost increases meant there was no surplus for upgrading appliances.

Electric stoves were attractive and modern by contrast with the traditional rented gas stoves. The gas industry had no answer to new types of electric appliances—vacuum cleaners, irons, and radios—which were sold aggressively through retailers and by door-to-door salesmen. These and the convenience and cleanliness of electric lighting ensured that householders came to regard electricity as a necessity. Many builders and customers, attracted by the idea of the all-electric house, saw no need to install gas; some councils with their own municipal electricity undertakings even sought to ban their tenants from using gas. In the right market, however, gas could hold its own. The Ascot instantaneous water heater, developed in Germany by Junkers, was efficient and stylish; it provided a service where electricity could not compete. Its makers targeted their main promotional efforts at architects and builders rather than at gas companies and achieved conspicuous success. The Ascot became synonymous with gas water heating in Britain as the Hoover did with vacuum cleaning.

The Electricity (Supply) Act of 1926 brought about the restructuring of the electrical industry, which until then had been as fragmented as gas. The government-appointed Central Electricity Board was charged with building a national grid. This initiative during the worst years of the Great Depression might suggest that electricity was the key to a prosperous national future, and politicians of all parties were keen to jump on the electrical bandwagon. Nothing comparable was planned for gas. Under the leadership of David Milne-Watson of the Gas Light & Coke Company, the gas industry lobbied strongly for a “level playing field” but its pleas fell on deaf ears. By the late 1930s, people both within and outside the industry realized the existing structure could not survive without radical change. There was a need for some form of national framework for gas; those in the industry hoped that this would not mean state control.

These rumblings were muted during World War II, but thoughts on the future of the industry continued. A government committee under Geoffrey Heyworth proposed the compulsory purchase of all gas companies and the establishment of ten regions; regulation would be undertaken by commissioners, following the analogy of the electricity industry. His report was published in 1945, but by then a Labour government committed to the nationalization of the industry had been elected. There was little public concern or controversy, unlike the debates on the nationalization of coal, transport, electricity, or steel. Few may have given the industry much chance of survival, let alone expansion. Opposition came more from Conservative members of Parliament than from the industry, whose senior leaders gave an undertaking to cooperate with the government’s plans “to maintain an efficient gas service to the public,” in the words of the British Gas Council.

Under the Gas Act of 1948, the industry passed into public ownership on May 1, 1949. Some £220 million of British Gas 3 % stock—3 % annual interest was payable on the face value of the stock—was issued as compensation to the former owners; 1,037 separate undertakings, previously under private or municipal ownership, were amalgamated into 12 area gas boards. Scotland and Wales each had their own board; Northern Ireland was outside the scope of the act. The Gas Council, a small central coordinating body, was established. Apart from its chairman and vice-chairman, this comprised the 12 area board chairmen. Most had held senior positions in the industry although other interests were presented; for example, one had a trade union and one a local government background. The duties of the Gas Council were to advise the minister on gas matters and to promote the efficient exercise of their functions by the area boards; the central body had a small secretariat, of 159 members, one-third of whom dealt with publicity and another third with purchase of coal and the sale of coke. The main executive power rested with the boards, though capital investment programs had to be submitted through the council to the minister for approval. There were national arrangements for wage-bargaining; close cooperation soon brought a measure of voluntary harmonization between the various boards over technical standards, commercial policy, and other areas of common interest. The industry was legally bound to take account of the interests of both work force and customers through consultative arrangements.

The new area boards settled down quickly but faced two long-term problems. Their public image was still that of an old-fashioned if not immediately moribund industry, and they were losing the battle for the domestic load to electricity. In the ten years from 1948, sales of gas increased by 20%; over the same period, sales of electricity more than doubled. Old rented stoves, heaters, and water heaters were not being replaced quickly with modern equipment, and the sales efforts of the boards were hindered at first by postwar material shortages and the export drive, and also by government purchase tax and restrictions on renting. The other problem was the price of gas, which no longer enjoyed its traditional advantage over electricity. While the price of electricity rose by 17% between 1950 and 1957, gas rose by 51%. The cost of high-grade coal for gas-making doubled between 1947 and 1957, whereas power stations could use cheaper grades.

Efforts to rebuild the market for gas appliances were urgently needed but less important than the need to reduce the relative price of gas, and the industry began to search for alternative methods of gas production. One path explored was the total gasification of coal, a process developed in Germany before the war. Another alternative which seemed to offer better prospects was the use of oil feedstocks for gas-making, either as an enricher of gas made by other processes or later by direct catalytic conversion of oil into gas. Britain, and notably the Gas Council’s own scientists, were pioneers in the intense research efforts that resulted in a number of processes that could take any oil feedstock available in large quantity at low cost, especially naphtha and refinery waste gas, and convert it direct into usable gas. Major contracts were signed with oil companies to secure long-term supplies. For the first time in its history, the gas industry’s fortunes were unshackled from coal, during the 1960s.

This technical breakthrough was matched by a change, of course, in marketing. Market research showed that gas still had a negative image by contrast with the strong modern image of electricity. W.K. Hutchison, the deputy chairman of the Gas Council, put himself at the head of the campaign to change the image of gas. In the words of the advertising agents, “The amiable, innocuous figure of ’Mr. Therm’ around which the Gas Council’s advertising had for many a year revolved, seemed too bland, too typecast to take up the challenge . . . And so it was that ’High Speed Gas, Heat That Obeys You’ . . . invited newspaper readers to realize how ’with it’ they were to be using gas.” This coincided with the arrival on the market of a new generation of stoves with timers and automatic ignition, and stylish and efficient gas heaters that quickly took over from coal the main task of heating living rooms. Showrooms were modernized and moved to prime high-street locations. The next stage was to attack the domestic central heating market, which was at the time being vigorously promoted by the oil companies. Gas was helped both by the arrival of natural gas and the OPEC oil price rises from 1973. It was also helped by the introduction of the Clean Air Act in 1956, which aimed to reduce the air pollution caused by coal-burning domestic fires. Natural gas enabled a significant reduction of smoke in the atmosphere. By 1989 more than 70% of all gas customers had gas central heating, a clear indication of the success of this campaign.

The 1960s saw other momentous changes that were to have even more far-reaching effects. Natural gas arrived in quantity for the first time in Britain. In its early days the Gas Council commissioned British Petroleum to act as operator to prospect for natural gas onshore; this search proved unsuccessful. The Gas Council was therefore particularly interested to hear of U.S. plans to ship liquefied natural gas (LNG) by tanker; cooling to very low temperatures reduces methane to a liquid, the volume of which is Vóooth of its gaseous state. The British government gave its approval to a trial to assess the practicality of the scheme, and the first experimental shipment arrived at Canvey Island in the Thames estuary in 1959. Gas Council proposals to proceed with import of LNG on a large scale ran into fierce opposition in government, predictably from the coal and oil lobbies. Approval was finally given by the British cabinet to a 15-year contract to buy gas from Algeria; two tankers shuttling to and fro would carry the equivalent of 10% of British gas output at that time. The two vessels came into service in 1964. To enable all parts of the country to take advantage of these supplies of natural gas, a high-pressure national grid was constructed, at first linking eight boards to Canvey Island. The grid network was 320 miles long in 1966-1967; by 1976-1977 the network extended 2,915 miles, and all boards were connected.

The liquefied methane project was running in parallel with another natural gas project. A huge discovery of natural gas in Holland in 1959 led to speculation that more might be discovered under the North Sea. The Gas Council was very keen to participate in the search and joined in partnership with experienced U.S. operators to explore, drill, and subsequently to produce gas and oil. The necessity for Gas Council involvement was questioned at the time as, under British law, all gas found and landed in the United Kingdom had to be offered for sale to the council. The election of a Labour government in 1964 strengthened the hand of the Gas Council; it was positively encouraged to participate in North Sea activities.

It was fortunate that some of the early acreage allotted contained the huge Leman gas field. The council thus had invaluable information on the actual costs of finding and producing gas; it was able to negotiate prices based more on the costs of production (then 2 pence per therm; 240 pence = £1) than on average revenue (16.5 pence) or the cost of seaborne gas from Algeria (6.5 pence). A whole series of discoveries soon proved that supplies of natural gas from the North Sea would meet British needs for a few decades at least. This raised the question of how best to use it. Up until then, natural gas had been converted into a coal-gas equivalent of only half the heat value of methane, volume for volume. There were enormous advantages of distributing methane without dilution; processing costs would be minimal, and the capacity of gas mains would be effectively doubled. Against this had to be set the cost of converting every appliance so that it could burn methane instead of coal gas. A survey of several thousand customers round the Canvey Island terminal in 1966 showed the great variety of equipment to be converted, three or four appliances per home on average. A large proportion were 15 years old or more. Ways had to be found to convert all these old appliances or to persuade customers, by offering generous terms, to buy new ones.

Despite the cost and potential problems, the advantages of complete conversion were overwhelming, This was an enormous technical, marketing, and public relations exercise. There was undoubted inconvenience, but considering the opportunities for error and complaint, most customers accepted the conversion with good will; it gave them a direct and personal opportunity to share in the excitement of the North Sea discoveries. Conversion was free and, for many, it gave an opportunity for old appliances to be brought up to scratch or replaced cheaply; besides, North Sea gas was cheaper. The conversion exercise was, in the words of Sir Denis Rooke, chairman of British Gas from 1976 until 1989, “perhaps the greatest peacetime operation in the nation’s history.” The main conversion program began in 1967 and, 13 million customers later, the last home was converted in 1977. From 1912 until nationalization in 1940, sales had more than doubled. Between 1949 and the end of the conversion program they increased sixfold.

Until the early 1960s, the gas industry had managed to avoid the relentless tinkering by politicians that had bedeviled the other nationalized industries: coal, steel, transport, and electricity. It had not been perceived as having any long-term significance and had neither failed nor succeeded dramatically. With its involvement in North Sea exploration and consequently higher public profile, this situation changed. Now the government thought seriously about establishing a production board along the lines of the Central Electricity Generating Board. The Gas Council persuaded the government that the existing arrangements were working harmoniously and suited the needs of the industry. As a consequence the 1965 Gas Act, essential to clarify the powers of the Council to buy gas in bulk and sell to its area board customers, left the basic structure untouched. It was clear, however, that strong central leadership was necessary to enable the company to cope with the changes brought by natural gas; new headquarters departments were set up covering production and supply, marketing, and economic planning. Rooke, who had been a member of the team working on the import of LNG from its inception in 1957, became development engineer, responsible for new production processes and planning an integrated supply system. Later, as member for production and supply, he played a crucial role in the technical changes in gas manufacture and distribution in the 1960s and 1970s. The arrangements under the 1965 Act were temporary; a restructuring was necessary to place overall responsibility at the center. In 1973 the Gas Council was replaced by the British Gas Corporation (BGC), still state-owned, and the area boards set up in 1949 became regions under direct control of the BGC.

One outcome of the success of the North Sea search for gas was that the BGC became a producer of oil and thus became involved in international fuel markets. This situation did not survive the election of the Conservatives to power in 1979. BGC was required to sell its oil assets, spun off as Enterprise Oil; the proceeds went not to the industry but to the government. At this time the government also became concerned at the dominant position enjoyed by BGC in the business of retail sale of appliances. The matter was referred to the Monopolies and Mergers Commission, which ruled that BGC’s position in the market was against the public interest. The government drew back from enforcing a withdrawal from appliance trading; gas showrooms served to deal with accounts and service queries as well as selling. Independent retailers now play a larger part in appliance retailing than ever before in the history of the industry; even so, British Gas today has a turnover of £300 million from appliance trading.

When the privatization of the industry was under consideration, some ministers were keen to introduce an element of competition and to break up the unified structure of the industry that had evolved since nationalization, largely in response to the availability of natural gas. Any breakup was opposed by Rooke, who lobbied strongly for the retention of the unified structure that had served the nation so well; his views ultimately prevailed, although the nationalized electricity industry was to be split up in its subsequent privatization. The BGC was privatized as a whole by the Gas Act of 1986 and returned to private ownership in what was then the largest company flotation ever undertaken. After a vigorous TV advertising campaign to “Tell Sid” to buy shares, 3 million people became owners of British Gas plc shares. The advertising alone cost £25 million, much of it paid by the government; the total cost of the privatization, including fees, underwriting, and value-added tax, was £347 million.

As a private company, British Gas is no longer geographically restricted to the United Kingdom and U.K. offshore waters. The government, however still prefers it to purchase its supplies from the U.K. sector of the North Sea for strategic and balance of payments reasons. Rooke retired in 1989 and was succeeded as chairman and chief executive by Robert Evans. The company has made substantial investments in foreign oil and gas assets to strengthen its business worldwide. Since its privatization, British Gas has acquired interests in four exploration and production companies: Acre Oil and part of Texas Eastern North Sea were acquired to strengthen the company’s oil and gas holdings in the North Sea’s U.K. sector; some of Tenneco’s subsidiaries were purchased, with exploration and production interests in a number of countries around the world; a 51 % stake in Canada’s Bow Valley Industries gave exposure to the North American energy market; and British Gas also bought Consumers Gas, Canada’s largest natural gas distributor. It also continues to offer a consultancy service so that others may benefit from its expertise.

With privatization came the need to reinstate a regulatory organization to safeguard the public from the misuse of British Gas’s monopoly position. The Office of Gas Supply (OFGAS), under a director general, monitors tariffs and commercial practices. In 1989 British Gas was obliged to formalize its charging structure for large non-domestic customers. It was also obliged to make its transmission network available to carry gas not sold directly; this allows producers of gas to contract directly with customers for the sale of large quantities of gas. This regulatory change removed the monopoly of gas distribution that had been enjoyed by gas undertakings since the middle of the 19th century.

In the postwar years the position of the gas industry in the British fuel market was totally transformed. From its perceived role as a minor player, it has emerged to become a major force in not only the U.K. but also world energy markets. In the early 1990s it supplied more than half the energy used in British homes. It has made enormous technical and commercial strides and demonstrates that the question of state ownership of the business for much of the period has been irrelevant to its record of dynamism and success. Entrepreneurship is not the exclusive prerogative of the private sector.