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

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  • rate this
    0

    Comment number 182.

    Mr Peston's article here gives a rounded picture. Not so all the Radio 4 news bulletins I heard yesterday. Not one of them put the story into perspective by mentioning profit margins. How many of the BBC's listeners would have gathered that the profit margin is only around 7% of sales? Do they think we are economically illiterate?

  • rate this
    -1

    Comment number 181.

    "f you support the capitalist system then excessive profits is impossible as you must charge all the market will bear, yet no one really wants communist state controlled everything."

    Perhaps you'd like to explain which bits of the privatised utility/transport market is 'capitalism'.

    vs a disgraceful con job allowing big corporations a free run at captive consumers while gouging the public purse

  • rate this
    0

    Comment number 180.

    This story demonstrates the reality of the energy market.
    The government and consumer groups bleat on about switching accounts, energy efficiency measures and online metering (be wary of this as it does nothing but give priceless data to the energy companies).
    All of this can be done and when it's done what happens?, the energy company's just put up the tariffs to maintain profits!

  • rate this
    0

    Comment number 179.

    Centricas profit for the whole group was £1.45 billion for first 6 months (thats all the international businesses included) British gas profit was up due to a cooler start to this year and last year and is based on 17 million customers, 345million divided by 17 million equals £20.29p profit per customer hardly excessive!

  • rate this
    0

    Comment number 178.

    Before you retire, you call this a dividend.
    After you retire, you call this your pension
    ---

    I call it my locked in annuity yielding about 3%
    You get no choices with a pension

    So now the annuity cartel gets your hard earned, and if yields are rubbish, tough.

  • rate this
    +2

    Comment number 177.

    A UK company outsources part of its workforce,
    The people in the UK get made redundant,
    They no longer have wages to spend or pay taxes, some might even start claiming benefits.
    Meanwhile over in India where the jobs have been outsourced to, the newly employed Indians spend their money in India not the UK, they also pay taxes in India not the UK.

    The chancellor should outlaw outsourcing

  • rate this
    +2

    Comment number 176.

    Privatised monopolies with customers captured
    Profits not adequately put back into infrastructure. Used to pay enormous salaries and keep shareholders happy
    Water companies sell off reservoirs and pay lip service to repairing leaks
    The grid is creaking. Our supply of elecricity fails periodically
    Gas mains leak. House blew up in Wales, family died. Blamed on DIY father. Media lied. Wonder why?

  • rate this
    +2

    Comment number 175.

    BG/Centrica are no different to any of the other players in the game.

    The cost of the energy bears no relation to what customers pay anymore.

    Producer cost +transportation cost + carbon tax + vat + renewable tax + trading costs + speculators et al.
    Everything we require to live is now inflated by speculators in our beloved and protected CoL shame we dont have the lobbying power they have...

  • rate this
    +2

    Comment number 174.

    173. Once a long long time ago perhaps. Since the late 1990s companies this size pay their senior employees fantastically large sums but are very rough on their owners.

    Companies in the privatised utility sector also have free run at their customers

    Pension managers have had their shovels deep into the till as well

    Lectures on how capitalism works are irrelevant - thanks all the same

  • rate this
    0

    Comment number 173.

    Companies that make large profits pay this back to shareholders.

    Before you retire, you call this a dividend.

    After you retire, you call this your pension.

  • rate this
    0

    Comment number 172.

    166

    "If you have gas, you don't need reputation."

    Quite right, you need deflatine.

  • rate this
    0

    Comment number 171.

    169. treacle_01
    12 MINUTES AGO
    @164.Truthspeak
    15 Minutes ago
    There is indeed no competition. Based upon reliable inside information energy prices are set in consultation,
    ---

    Source please.

    If you can't quote the source, then it is unreliable.
    ***
    To turn the argument round; you believe that the competition in the energy market is like the competition between Asda and Tesco? Source please.

  • rate this
    +1

    Comment number 170.

    Privatisation is the Enclosures of our time with the same result - assured wealth for the 1% class and higher prices for us plebs.

    This current regime went straight for the NHS - the last remaining gold mine - for the 1% to plunder. Free at the point of use will be a fond memory within a decade and, if the USA is anything to go by, the results will be disastrous for the majority.

  • rate this
    0

    Comment number 169.

    @164.Truthspeak
    15 Minutes ago
    There is indeed no competition. Based upon reliable inside information energy prices are set in consultation,
    ---

    Source please.

    If you can't quote the source, then it is unreliable.

  • rate this
    +1

    Comment number 168.

    We were sold the benefits of privatisation it would bring the costs to us down by competition. Has anyone run the analysis since privatisation, the overall costs to us must include the unemployment benefits of those who were regarded as surplus at privatisation now referred to as the under class.
    I suspect we have been done as energy is a natural monopoly and the gas price is a commodity.

  • rate this
    0

    Comment number 167.

    Unregulated private businesses struggling, as consumers feel the pinch of austerity:

    http://www.bbc.co.uk/news/health-18996139

  • rate this
    0

    Comment number 166.

    "but about what pricing strategy will best enhance its reputation - which, after all, is the licence to operate that really matters."


    If you have gas, you don't need reputation.

  • rate this
    +3

    Comment number 165.

    Have I got this right

    They have 8m customers (40% of 20m homes)

    They made £325m on those accounts

    Thats £40 profit per household for providing the energy supply

    Same margin Tesco charge on your shopping

    Big numbers but lots of people

  • rate this
    +1

    Comment number 164.

    There is indeed no competition. Based upon reliable inside information energy prices are set in consultation, one energy supplier with another on a sort of 'rota system' but with that energy having been purchased years in advance. Something is not right and methinks time to give it all to the press and have another scandal to rival the other big ones.

  • rate this
    +2

    Comment number 163.

    109.Iwannabehappy
    This is an important point on "excessive" profit levels. It is time for these near monopoly companies to realize that they cannot continue in a vein that is based on prices and profit levels harking back to the "good old days" of pre 2007.

    ---------- But they CAN continue in this view, nobody will stop them and we have to use their products. That's the problem.

 

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