Government threatens British Gas break-up

Energy secretary Ed Davey has written an open letter to Ofgem claiming British Gas' gas margins are suspiciously high.

by Rachel Savage
Last Updated: 30 Jul 2015

Just when energy companies were thinking it might be safe to poke their heads above the parapet, the government has chucked them out in the cold. Again.

British Gas are going to be feeling especially shivery, as energy secretary Ed Davey has made the not-so-subtle suggestion to the independent energy regulator Ofgem that they might want to break the company up. A handy distraction as floodwaters continue to rise around the country.

Davey questioned profit margins made on gas bills in a letter to Ofgem, pointing out that they were as high as five times the average profit made on supplying electricity. Centrica, which owns British Gas, made a margin of 11.2% in 2012, according to the regulator’s own data cited by Davey.

However, the energy company hit back, saying it ‘does more than any other organisation to secure gas and power for British customer’, and that its profit margins after tax averaged 5%.

Davey, a Lib Dem, helpfully pointed out to the watchdog that British Gas has a 41% share of the gas market, compared to its nearest rival SSE, which makes up 16% of gas sales on a margin of 11.4%. Obviously, Ofgem were completely unaware of its own publicly-available figures.

‘Clearly you will wish to consider whether this is prima facie evidence of an issue in the market,’ Davey said sternly, suggesting that Ofgem, which is bringing out its first yearly review of competition in the energy market next month, could go as far as ‘a break up of any companies found to have monopoly power to the detriment of the consumer.’

‘As we discussed it is vital that your work is clearly independent and I want to reiterate that I want you to feel that you can recommend any one of a range of things ranging from no action to a full market investigation,’ Davey said. Independence schmendence - nothing like the bully pulpit eh?

Davey said two-thirds of energy bills are down to gas for the 85% of houses connected to the gas grid, and claimed that households could save up to £40 if profit margins were same as on electricity bills. However, if British Gas were broken up, its economies of scale would also shatter, likely leaving the consumer no better off than before.

British Gas managing director Chris Weston pointed out that it employs 30,000 people, was ‘one of Britain’s biggest corporate tax-payers’, with an annual bill of around £1bn, and has ‘commitments’ of more than £60bn.

‘We can only shoulder responsibilities on this scale if we are a profitable business,’ he said in a statement. ‘The current assessment of the energy market will be essential to rebuilding trust in the sector. We strongly support a proper, thorough and independent examination of the issues during this process.’

Energy companies have been political footballs ever since Labour leader Ed Miliband scored with the masses by announcing he would freeze energy prices for 20 months if voted in. A veritable flood of popular anger at the so-called ‘Big Six’ followed, as they proceeded to announce above-inflation price hikes. Breaking up British Gas would be another game altogether though.

The company’s gas profits have been looking on the fat side for several years, posting a margin of 7.4% in 2009 when its competitors were making losses. However, if this really was so outrageous, then why didn’t Ofgem make a fuss four years ago?

Scottish Power and SSE margins have also been high for the last couple of years, although they are smaller in the gas game. If you look at combined gas and electricity margins, though, British Gas is only a touch ahead of its rivals and its advantage has been narrowing. The case for a monopoly, then, is rather muddier than Davey’s letter claims.

If Davey wants to set foreign investors, whose money has been keeping the lights on since privatisation 25-odd years ago, fleeing from Britain’s energy market then he’s going the right way about it. Spooked shareholders sent British Gas shares down almost 3% this morning, wiping a few hundred million of the company’s value.

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