Are British Gas's profits too big?

 
A gas ring flame Centrica, which owns British Gas, has seen its profits rise

Centrica was unhappy this morning at my pointing out on the Today Programme that its revenues from supplying gas to households in the UK rose 21% to £3.2bn the first half of the year, whereas consumption of gas increased 3.2%.

I drew the implication, which is unavoidable, that prices charged by its British Gas business had risen - and that this might upset a few people.

There is a similar story in electricity revenues: consumption actually fell 0.1% (a big hooray for energy conservation) whereas revenues were up 10% to £1.6bn.

Thanks to tighter control of costs, these revenue increases translated into operating profits from the supply of gas and electricity of £345m, 23% higher than in the same period of last year.

Now, to be clear, I did not make any value judgements about this. I did not suggest, for example, that Centrica is profiteering.

I simply said that in this period of recession, increases in revenues driven by higher prices would be controversial.

The chief executive of Centrica, Sam Laidlaw, says I am painting a misleading picture - that I failed to point out that British Gas's residential supply business had an unusually weak first half last year, and that profits were therefore returning to nearer the norm.

There is something in this. In the first half of the current year, the margin earned by British Gas - that is profit as a percentage of sales - was 7.2%, compared with 6.9% in the first six months of last year, and 8.9% in the whole of 2010.

Or to put it another way, British Gas is earning lower profits than when many would have accused it of profiteering.

Mr Laidlaw also says that British Gas's margins are comparable to those of many retailers, which - he says - have much lower capital investment needs than Centrica.

To put it another way, Laidlaw says Centrica needs to generate the extra dosh to maintain and improve its supply network.

This is a slightly curious argument, in that - in today's recessionary conditions - most retailers would kill to have British Gas's margins and ability to set prices.

And that is the point. Unlike most retailers, Centrica sells stuff, energy, that we all have to buy.

We don't have to buy it from Centrica. There is competition. But it has significant market power, with 40% of the residential gas market and 25% of the electricity market.

So the question for Centrica's board is really about British Gas's responsibilities in a time of economic stagnation, when millions of people feel their available income is being squeezed.

Is this a period in which it should be showing greater solidarity with hard-pressed customers, by keeping prices lower than it would normally do in more buoyant economic conditions?

This is not about whether Centrica needs to abandon business common-sense and become some kind of philanthropic organisation, but about what pricing strategy will best enhance its reputation - which, after all, is the licence to operate that really matters.

 
Robert Peston, economics editor Article written by Robert Peston Robert Peston Economics editor

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  • rate this
    +7

    Comment number 22.

    Comparing BG's profits with others does not make them look any better. In fact it makes them all look like thieves ! There should be a cap on all major companies' profit margins. They charge whatever they like because they know we need energy. But guess what... NOTHING WILL HAPPEN, BECAUSE NOTHING EVER DOES. The rich get richer, the poor suffer - always !!! And politicians just laugh.

  • rate this
    +2

    Comment number 21.

    18-Aug-2011:- All 6 Energy Companies raise Gas by 18%....
    This scale of increase has become the norm over the last few years, the Government needs to Wake-Up:-
    At 18% per annum, todays £665 bill will be £41,675 in 25 years time, whilst with 2% annual pay rises, todays salary of £25,000 will then be £41,015.... and they expect people to be able to save for their pensions?....
    Wake-Up - NOW!

  • rate this
    +3

    Comment number 20.

    If British Gas had responded to the Today programme, we might be interested in Mr Laidlaw's opinion.
    As it is, he has risked portraying himself as a cowardly but arrogant whinger - not what the Centrica Board might wish, I suspect.

  • rate this
    +1

    Comment number 19.

    Hurrah! Bigger profits mean bigger bonuses!

    What, what? Shareholders? Who're they?

  • rate this
    +3

    Comment number 18.

    Profit is profit. There's no column on the spreadsheet for 'niceness'. We don't need a new sentiment, we need a new system. These are all too-bit-to-fail companies selling things we can't do without. Not fit for market economics.

  • rate this
    +11

    Comment number 17.

    The design of tariffs and products is to make comparisons between suppliers especially difficult and just like the banks there are frequent charges to 'products' ie charging schemes - not real products like premium gas or super electricity. This is a pretend faux market in which the consumer is never victorious for long and the regulating bodies such as consumer focus and Ofgem are toothless.

  • rate this
    +26

    Comment number 16.

    A Government owned company should be set up and enter the market as a not for profit supplier, which who set prices at a fair rate .

    We could all switch to them.

    Nationalisation by the back door? Yes please!

  • rate this
    +2

    Comment number 15.

    One wonders why 'investment in infrastructure' depends on cost increases borne by consumers.
    Why isn't a 'consistent, reliable profit-base' (that as you suggest most companies would 'kill' for) used to make that investment, increasing Centrica/BG's efficiency gains?
    Efficiency and profit at lower margins could yield more reliable dividends over the long term without harming the consumer.

  • rate this
    +18

    Comment number 14.

    Change supplier?what is the point they are running a cartel as far as i am concerned,we are ripped off left right and center and our weak government and so called regulators are happy to accept it."Regulators"is becoming a dirty word in Britain as they only appear to "regulate"in favor of the energy companies.Everything is over priced in Britain.

  • rate this
    +6

    Comment number 13.

    "....the question for Centrica's board is really about British Gas's responsibilities"

    We all know that the law says a company's responsibility is to the shareholders alone.

    In a normal market, such as retail, there is much scope for good and bad PR to influence shareholder value. In the energy market the large players are almost a cartel so the customer comes a poor second.

  • rate this
    +10

    Comment number 12.

    Regulatory philosophy is at fault as it is with the banks.

    It is not just supine regulation it is deliberate regulation to keep the strong & mighty safe from the weak.

    None of the regulators bite the hand that feed them ever - & they will not do so.

    The ONLY solution is to break up every natural monopoly on a regional/county basis and forbid mergers or the forming of cartels on pain of jail.

  • rate this
    +16

    Comment number 11.

    None of the utility companies should have been sold off. It has never translated into competitive markets for these essential services,we have not seen the investment into gas,elec & water infrastructure. Instead we have millions of hardworking people being milked whilst many millions in profits are generated by these businesses, which of course benefit the few. How did we end up in this mess?

  • rate this
    +1

    Comment number 10.

    If BG's employees do not have proper DB pensions, and decent T&Cs then it is too large a profit, and more should be done to address these inequities.

    If they do, then I suppose it depends on to what dividend per share this equates, and whether that's a reasonable risk return for the holders.

  • rate this
    +15

    Comment number 9.

    Centrica (as well as other private supplies of gas and electric) are a private company and their sole objection is to make as much money as they can for their shareholders. To achieve this, Centrica needs to make the gap between how much we pay and how much they buy the gas / electric as big as possible. If they say anything different, then they are lying. Profit is the number one aim.

  • rate this
    0

    Comment number 8.

    No.

    There is competition in the market and if Centrica's customers don't like the prices they can switch, which is what I did last year.

    You cannot blame a company for making healthy profits, it's up to the consumer to judge the price and switch if they think it's too high.

  • rate this
    0

    Comment number 7.

    I don't know about anyone else but my spending on gas & electric decreased over the past twelve months mainly due to the mild winter

    However, if you are unhappy with British Gas then switch. They aren't the cheapest energy supplier by a long chalk.

  • Comment number 6.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • rate this
    +2

    Comment number 5.

    The real question is not for BG but the Coalition. How much are they prepared to tolerate a state fostered energy oligopoly when no value is added to the basic product compared with the past nationalised service. What is the point of Ofgem and consumer focus when they are just toothless clowns jumping up and down on the sidelines of the industry that fleeces low energy uses (see entry tariffs).

  • rate this
    +8

    Comment number 4.

    Privatised utilities have always been a scam

    Water from Scotlands still Nationalised supplier is at least 100% cheaper than in England
    I paid 134 quid for water this year, (unlimited use too)

    Electricity and Gas will be no different
    Wealthy shareholders can add their Centrica dividend to the 21 Trillion of offshore tax dodging accounts

    We're all in this together ! (unless you're rich)

  • rate this
    +7

    Comment number 3.

    The City and its apologists will say - you need to gouge the consumer more to exploit your market position in line with our expectations

    Long term energy planning - forget it. Much better to spend the money on corporate lawyers and political lobbying to keep the world at bay a little longer...

    Then the lights will go out

 

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