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
    +3

    Comment number 42.

    After representative no show on the Radio by British Gas this morning to explain why they are making such large profits, while indicating that prices might have to go up again before winter ... I will be switching away from them.

    ...to another one in the cartel no doubt!

    Nationalisation please!

  • rate this
    +3

    Comment number 41.

    35 Its worse than that. British Gas only buys from Centrica. There are any number of ways BG can be set up to depress its apparent profits to make it more 'tax efficient'.

    The thing they can't disguise is useage - wholesale prices - profit. All the rest is flannel

    Happens all the time - UK companies move HQ to another tax regime then take punitive loans from their parent to wipe out liabilities

  • rate this
    -1

    Comment number 40.

    There is nothing remotely curious about Laidlaw's comment that BG's profits and margins need to be seen in context of the scale of capital invested in the business and that needs to be invested in the future. What is astounding is that a BBC 'business' correspondent could seem to miss the basic economics behind this.

  • rate this
    +1

    Comment number 39.

    Why all the complaints? All this extra lucre is just evidence that Centrica is yet another great British success stories!

    We should be prostrating ourselves are the feet of the executives and happy to contribute extortionate amounts to another fine business modelled on sound consumer-shafting corporate principles.

    What's more, let's knight the board!

  • rate this
    0

    Comment number 38.

    Just changed gas and electricity suppliers, BG & EDF, thanks to a little help from "The Big Switch" campaign by Which Mag for the first time ever. I wouldn't have done this if it had not been for the appalling manner in which both treated requests for xplanation of how they had calculated my revised mthly DD pays, they just were not going to go into details or change the amounts. Dreadful service!

  • rate this
    -2

    Comment number 37.

    Well you all voted for this so you really can't complain

    (p.s. Don't forget to tell Sid)

  • rate this
    +1

    Comment number 36.

    Water, gas, electricity, fuel are all the same - we are being ripped off. The companies involved try to obscure the rip-off but every quarter their profits grow ever bigger.

    Because these companies are safe and there is little competition they can afford to waste money safe in the knowledge that all they need to do to maintain profits is to raise prices

  • rate this
    +3

    Comment number 35.

    29. EazilyGrizly
    4 MINUTES AGO
    Revenues £4.8bn, operating profits £345m, 7.2%.

    On the face of it what's the problem?
    *****
    If (IF) those profits had been earned by virtue of innovation etc in a competitive market, then fair enough. But they are the result of being a quasi monopoly supplier of an essential good. There, that's the problem. Understand?

  • rate this
    +1

    Comment number 34.

    I am not surprised that BG have increased their profits. We had a service contract with them which we cancelled when they could not justify a 15% increase in the charge over last year, 5 times the current rate of inflation. Government intervention required I would suggest.

  • rate this
    0

    Comment number 33.

    The profit isnt that big when you think about how many people they serve, income, etc but the Gov should come up with a plan to make sure they there is far more competition, and ALL energy companies MUST automatically switch coustomers onto the best deal every six months. If its found that they dont, there should be big fines and full refunds to the coustomer.!!

  • rate this
    +3

    Comment number 32.

    There is no transparency in the wholesale prices that energy companies have to pay for gas & electricity. Until we have this there is in effect a private cartel..shades of Liebor and a rigged market?

  • rate this
    -1

    Comment number 31.

    The reason British Gas can put up its prices with impunity is because 60% of its customers have never changed supplier.

    I recently suggested and helped my elderly parents switch for the 1st time and saved them £300 a year.

    So stop moaning about British Gas's high profits and stop contributing to them by finding a cheaper supplier.

  • rate this
    +1

    Comment number 30.

    What is the role of a "regulator" in this country?

    To represent the consumer?

    Or to erect barriers to entry into any market which is a neccessity of life?

    If the latter then they serve only to reinforce the cartel which seems inevitably to occur in this country shortly after "competition" is introduced via privatisation.

  • rate this
    -5

    Comment number 29.

    Revenues £4.8bn, operating profits £345m, 7.2%.

    On the face of it what's the problem?

    Nationalise? so what we can pour millions and millions of public purse into it?

  • rate this
    +10

    Comment number 28.

    "I did not suggest, for example, that Centrica is profiteering."

    You don't have to it's blatantly obvious that they are.
    As for not having to buy from Centrica seeing as British Gas is at the heart of the supply of gas they should be cheaper than anyone else but the reverse is usually true because of the extortionate profit margin they put on gas.
    Ultimately it amounts to a rip off industry.

  • rate this
    +3

    Comment number 27.

    If you think about it most privatisations of the Eighties and Nineties are still running sores on the body party politic, including BT!

  • rate this
    +2

    Comment number 26.

    16.duck off

    "...A Government owned company should be set up...We could all switch to them..."

    ===

    No. That would be contrary to the tory doctrine of Extending The Denial Of Choice.

    Heaven forbid, jobseekers could even apply to work for it too...

  • rate this
    0

    Comment number 25.

    Ugh! Just use a smaller amount!

    Don’t use any gas in August :)

    What would happen if British Gas sales fell by 50%?

  • rate this
    0

    Comment number 24.

    17. watriler
    5 MINUTES AGO
    ************************
    Excellent post. Cogent, and flawless spelling - a very unusual combination on HYS.

  • rate this
    +7

    Comment number 23.

    When everyone's prices are the same and they all go up at the same time then it's a cartel and everyone knows it. If it were a drug cartel the government would do something about it.
    We are all in it together?

 

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