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
    +4

    Comment number 102.

    Robert is being too kind and diplomatic! Centrica are guilty of profiteering on the backs of mainly decent hard working people at one of the most difficult times. This greed is driven by their blatant addiction to cash which appers to be a worse addiction than heroin or cocaine! No I'm not a socialist and I don't resent essential profits but I dispise what these multi-national thieves are doing.

  • rate this
    +3

    Comment number 101.

    "HMRC is a shambles at the moment, why is public better?"

    HMRC was bashed into a single organisation as a result of some extremely bizarre private sector consultancy advice. There have been massive staff lay-offs (ditto) and huge private sector outsourcing and IT disasters.

    Left as it was it would have been cheaper, more efficient, and answerable to us

  • rate this
    +4

    Comment number 100.

    @89 For capitalism to be efficient it must have competition in as many parts of the process as possible. Its the theory that makes it dynamic and constantly pushing forward. That isn't what we have in many sectors with demand actually being controlled by the provider through their control of the supply. Super large companies are as inefficient as super large nationalised ones for the same reasons

  • rate this
    +2

    Comment number 99.

    `....but about what pricing strategy will best enhance its reputation..'

    A very good point. At the moment most managements do not appear to be concerned as to reputation probably because it doesn't pay any bonus.

    In a market will little or no growth this will inevitably change as who wants to buy from or work for a bunch of bandits.

  • rate this
    +1

    Comment number 98.

    JTF

    National assets? what have we done with our national gas? peed it away, do the Malaysians, Norwegians have rights to their national gas? whilst we pee theirs away as well? Let's shut off the pipe to Europe and close the LNG terminals, then what? then we'll all freeze to death. What system allows us to purchase gas from overseas?

    We live in a global economy not a hamlet.

  • rate this
    +3

    Comment number 97.

    When I was at school, 'profit' was what you had left once you'd paid all your bills, INCLUDING any capital investment, infrastructure projects etc. So why is it the that the first defence a CEO trots out is always the need to spend money on infrastructure? Clearly they're not spending enough if they still have that much left over.

  • rate this
    +2

    Comment number 96.

    POSITIVE: Centrica announced £1.4B investment with GDF Suez = begin work coast of Norfolk - large N. Sea gas field. Job creation @ 4,000 jobs. Largest discovery of new gas field in southern part of N. Sea in 25 years. Finally, British Gas some good PR! My last words: CONFUSION, NO PLAN, LITTLE CONTROL, WITH Q. Will consumers take a stand or is this "fair pricing" just too incomprehensible?

  • rate this
    +1

    Comment number 95.

    77. EG. The commoditisation of national assets is a crime against the population. It is not us who have to wake up but more put neo-lib rhetoric like yours to sleep.

    85. MR. Erm, the profits go to the institutional shareholders, staff have already lost jobs and livelihoods by the rampant sell off of divisions to private sub-contractors. So your apparent choice is false.

    "Free market".. sure.

  • rate this
    +2

    Comment number 94.

    85 - Presumably you jeer at crime victims in precisely the same way - "They're burglars, what do you expect"

    This whole abject industry was set up and allegedly regulated on our behalf in order for Thatcher to give back a couple of pence on income tax. Its always been a completely artifical arrangement that doesn't even resemble a free market

    Its extortion - merely state protected plunder

  • rate this
    +3

    Comment number 93.

    As Galbraith rightly pointed out decades ago, there is no free market in the corporate sector and that includes this oligopoly.

    In my opinion, nationalised industries are preferable to a few corporations controlling a market for their own profit (which it has to do legally).

    The French actually restricted energy and water price rises after the 2008 crash.....because they are still nationalised.

  • rate this
    +3

    Comment number 92.

    So whatever happened to the idea of 'competition' as spewed out by the Tories as the main benefit of privatisation? There isn't any is there?it's another cartel. They all charge the same (dressed up as being cheaper) therefore you can't go anywhere else. Another Tory legalised theft scheme that contributes to the destruction of the UK economy.

  • rate this
    0

    Comment number 91.

    Various reports say that British Gas have some 17 million customers. Their total profit therefore works out at around £20 from each customer.

    If you have a large customer base and make a little bit from each one then inevitably a large profit is the result. This is just primary school maths.

  • rate this
    +2

    Comment number 90.

    @85 Monica Rowe "If you don't like it move on". I've saved £250 a year by switching to a fixed rate tariff at another supplier, and that's before additional price rises over the next year that BG have already said they will implement so I expect that £250 saving to get even better! They've also taken nearly a month to refund my credit balances to me when I closed my account with them.

  • rate this
    +1

    Comment number 89.

    82

    If it were nationalised there'd be twice as many people working for it and directly / indirectly we'd be paying a hell of a lot of taxes to support it. The profit point would be irrelevant as they would be run completely differently.

    If you were an economist you'd know better than to compare a private corporation with a public one...?

    HMRC is a shambles at the moment, why is public better?

  • rate this
    +2

    Comment number 88.

    "Centrica are running a business not a charity. What would you prefer, less profits & the cutting of staff?"

    Renationalization would seem best, given the massive failure of privatization to do any good for consumers or the public. Obviously this would lead to a massive loss to the government/public as the utilities were sold off for a fraction of their value, but we know who to blame for that.

  • rate this
    +3

    Comment number 87.

    What we have is a long term product run by companies who live by short term results namely share price. Is it any wonder that the necessary long term decisions are shelved in favour of short term results. This leads to a shortfall in long term investment and a squeezing of the consumer for every penny they can get away with?

  • rate this
    +3

    Comment number 86.

    "Why dont the energy companies properly diversify into renewables, instead of treating it as the enemy"

    What possible incentive do they have to do that?

    Successive goverments have tried to pour taxpayer money into this area, to the rage and derision of the Right

    Energy is a brutal cartel which will be gouging deeper every passing year.

    Use less

  • rate this
    -8

    Comment number 85.

    Centrica are running a business not a charity. What would you prefer, less profits & the cutting of staff?
    If you don't like it move on (although I suspect many of you won't)

  • rate this
    0

    Comment number 84.

    UK Govt publications show its forecasts (newspeak for what it intends to apply) for "carbon prices" - target of 80% decarbonized energy by about 2032 (& 100% low carbon electricity): UK Govt forecasts go as high as 500 GBP or $750 per ton of CO2. In simple terms this would mean and need a $7 or $8 tax added to the price of every gallon of car/industrial fuel used in the UK.

  • rate this
    +1

    Comment number 83.

    I think the public now understands only too well that 'switching supplier' in energy is about as pointless as switching between major banks.

    And what of British Gas' latest TV advert? An airhead projects his van into a parallel universe which only British Gas executives inhabit.

    They have nothing but contempt for us.

 

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