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 Article written by Robert Peston Robert Peston Economics editor

Which budget will matter?

As and when decisions on income taxes, welfare and public spending are devolved to the nations, will the budgets for England, Scotland, Wales and Northern Ireland become more important than the UK's famous budget?

Read full article

More on This Story

More from Robert

Comments

This entry is now closed for comments

Jump to comments pagination
 
  • rate this
    -4

    Comment number 62.

    People need to open the curtains and look out of the window, gas is a traded commodity, you can't buy it cheap unless you subsidise it via the taxpayer or have access to masses of it, in which case you are subsidising indirectly by losing revenue from not selling on the market.

    People moan about capitalism etc but is that any worse than half baked, knee jerk, pink flag socialism?

  • rate this
    +2

    Comment number 61.

    45 makes an interesting comment.

    Many points to make here.

    1. Privatisation has failed to deliver genuine competition for consumers and has led to windfall profits for privatised utilities and has not brought the required investment in networks and generation. This now means an effective bailout by subsidy. This failure is as true in the energy sector as it is in other privatisations (eg rail)

  • rate this
    +7

    Comment number 60.

    Ah, the joys of privatisation! The biggest con trick ever perpetrated on the British public. If they couldn't make a huge profit from operating within a cartel then they would be the most incompetent business on the planet. Too many cartels operate in the UK, Gas, electricity, water, banking, insurance, transport to name but a few. All more expensive and providing a worse service than Gov owned

  • rate this
    +3

    Comment number 59.

    All essential services should be nationalised and the profiteering sha reholders and foreign owners sent packing. The money raised would then get us out of of the mire we are now in. If Venezuala can do it so can we.

  • rate this
    +1

    Comment number 58.

    Electricity consumption fell 0.1% but profits rose 10% - suggests firm is benefiting from falling wholesale prices.
    Excuse: Centrica says squeezing more profit is important for British Gas because new regulations coming - new rules about carbon allowances will cause large part of its gas-fired power stations to become unprofitable by next year.

  • rate this
    +5

    Comment number 57.

    Re 54 'If we all switched annually to the cheapest supplier at the time, it would quickly force down prices'.

    Utter rubbish. Switching just makes commissions for switching websites. It has never lowered prices - ever.

  • rate this
    +4

    Comment number 56.

    44
    Who can blame them? I can, watch me.
    They are in it to make money, so who can blame them. Its people like that and apologists for their moraless behaviour like you that are whats wrong with the economy at present.
    I blame them as they are fleecing people. They are causing the deaths of pensioners and other vulnerable people via their rampant profiteering.
    Who can blame them?

  • rate this
    -1

    Comment number 55.

    Overcharging as ever. When will people learn that if you pay BG for a heating system upgrade you are paying them to send a contractor to you. Just find a local Gas Safe engineer and cut out the middleman.

    Sadly it seems to be the elderly that use BG. The lady I bought my house from who paid nearly £5k for a new system, smallest boiler on the market too and the flue wasn't supported right.

  • rate this
    -4

    Comment number 54.

    Don't like British Gas making big profits?

    Then don't use them!

    Stop moaning about it and ask why are you contributing towards their excessive profits?

    If we all switched annually to the cheapest supplier at the time, it would quickly force down prices.

  • rate this
    +1

    Comment number 53.

    Maybe we should nationalise "British Gas"?

    Then the profit's could supplement the deficit?

  • rate this
    +1

    Comment number 52.

    44. EG Obfuscation, the real issue is profiteering by 'too necessary to fail' energy companies. That they are not co-operatives or national companies is testament to the neo-liberal fraud perpetrated on the population. Yours is a typical response from someone hanging on to a system that has proved to be flawed and detrimental to the large proportion of households in the UK.

  • rate this
    +3

    Comment number 51.

    Centrica, owner of British Gas, makes £1.9M profit PER DAY. Shareholders are delighted; consumers feel squeezed. Consumer groups said British Gas has been gouging consumers because of its dominant position. Centrica did lower electricity prices by 5% earlier this year - after it raised gas & electricity prices by 18% & 16% respectively in August last year.
    Looks like a gouge to me.

  • rate this
    +3

    Comment number 50.

    Re-nationalise the gas network as it is a national asset, built by the state for the benefit of the people.

    Unfortunately profiteering is what happens when things get sold to the private sector

  • rate this
    +1

    Comment number 49.

    yes make a profit by all means but not at the customers expense ie ripping them off and taking advantage of the recession,which to be fair most industry does. whats the govt watchdog doiing about it? answer = nothing.

  • rate this
    +2

    Comment number 48.

    Switch Suppliers??? lol
    Energy supply in the UK is a privatised cartel
    A cabal of private companies with no competition

    A Nationalised energy supplier should enter the market to keep them all on their toes
    Otherwise billions of pounds will be wasted through overcharging by private utilities

    A 21% rise in profits !

    A bunch of Legalised Crooks

  • rate this
    +1

    Comment number 47.

    The whole market is a rip off.

    Too many people who have nothing to do with the supply of energy are allowed to trade in it .

    Prices will never drop, they never do, its in none of the cartels and traders interests for that to happen.

    The regulator is a sham to oversight, but as soon as investment is required like new high power transmission lines its not these people who pay its us again....

  • rate this
    +1

    Comment number 46.

    This just shows again what a liar Thatcher was. All that guff about consumer choice, more efficient, lower prices etc etc. Privatisation means one thing. Huge profits going to private bank accounts.

    To rub salt in the would this patriotic lady forgot to stop overseas utilities buying our utilities. Treason!

  • rate this
    -1

    Comment number 45.

    40. Farks

    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 ..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.
    ****
    So the dividend will be reduced to enable future investment? Er, doubt it.

  • rate this
    -1

    Comment number 44.

    35

    It's not a cooperative, it's a business. You can't blame it for making profit, which as pointed out below for a company in such a strong competitive position I would suggest are actually very low. So something must be working?

    The real issue is energy prices and the way that we all p**s so much energy out of the window.

    Typical Pesto piece of stick poking journalism, and typical responses

  • rate this
    +2

    Comment number 43.

    So what do you call making an obscene profit in times when people struggle to pay their everyday bills?
    British Gas attacking a reporter for telling the truth. What's next?

 

Page 7 of 10

 

Features

  • HandshakeKiss and make up

    A marriage counsellor on healing the referendum hurt


  • Pellet of plutoniumRed alert

    The scary element that helped save the crew of Apollo 13


  • Burnt section of the Umayyad Mosque in the old city of AleppoBefore and after

    Satellite images reveal Syria's heritage trashed by war


  • Woman on the phone in office10 Things

    The most efficient break is 17 minutes, and more nuggets


  • Amir TaakiDark market

    The bitcoin wallet with controversial users


BBC © 2014 The BBC is not responsible for the content of external sites. Read more.

This page is best viewed in an up-to-date web browser with style sheets (CSS) enabled. While you will be able to view the content of this page in your current browser, you will not be able to get the full visual experience. Please consider upgrading your browser software or enabling style sheets (CSS) if you are able to do so.