The power players and their prices

Ofgem, the energy regulator, is launching an investigation into the electricity and gas market as the row over the record profits announced today by British Gas-owner Centrica reached fever pitch.

The watchdog will examine energy suppliers to households and small businesses, and said: “The decision to conduct the probe is in response to public concern about whether the market is working effectively.”

Centrica was under renewed attack today after it reported pre-tax profits up 50 per cent to £1.8 billion, just weeks after raising gas and electricity prices for 16 million British Gas customers by 15 per cent.

Richard Lambert, CBI director-general, today took the unprecedented step of wading into the fight on behalf of Centrica, defending its right to make profit for reinvestment.

Previously, the CBI has only fought on behalf of profits made by banks and oil companies on a sector-wide basis.

A spokesman for Ofgem insisted that the launch of the investigation had not been prompted by Centrica’s results, and the regulator’s board already been considering whether to start a probe into energy suppliers.

He said: “The final decision had to be made by the board which has a regular monthly meeting. It just so happens that the meeting coincided with Centrica’s results.”

More than half of Centrica’s profits came from its British Gas residential business, where operating profits leapt more than six fold, from £95m to £571 million.

Last month, Centrica was one of a number of businesses to hike household prices on gas and electricity, blaming the increases on the rising cost of energy in the wholesale market.

In January, Ofgem said that it did not believe there was any collusion between energy suppliers on the new prices.

The regulator said today that it would use its powers under the Enterprise Act to seek information from companies as part of the investigation. Depending on Ofgem’s findings, companies could be referred to the Competition Commission.

Sam Laidlaw, chief executive of Centrica, defended the price increases saying that they were necessary if the company was to sustain investment in wind farms and upstream gas assets, so that it was less exposed to the volatility of wholesale gas markets.

He said: “We understand that these prices rises have been difficult for many customers but our prices are very competitive and still lower than they were a year ago.”

However, Mr Laidlaw insisted that the UK market was not rigged or ripping off customers. “This is a market that has some of the cheapest energy prices in Europe. Five million people switch supplier every year, which is the highest level of switching in the world – clearly it is a very competitive market,” he said.

Just prior to the emergence of the Ofgem probe, the CBI’s Mr Lambert said: "It is not the job of the CBI to comment on individual companies' profits but given the reaction by some NGOs [non-government organisations] to Centrica's profits, there are three points worth making.

"One, volatile gas prices led to a big swing in reported profits. The first half of 2007 show a £676 million shift from loss to profit in British Gas Residential's operating results. In the second half of the year, as gas prices rose, profits fell to just £38 million.

"Two, operating profits at British Gas of £571m for the year need to be put in context of sales of £6.45 billion. This is a very big company.

"Three, massive investment in power will be necessary over the next 25 years if the UK is to shift to a low carbon economy and achieve its goals of energy security.

"Companies need to make profits in order to invest."

In contrast, Energywatch, the consumer body, criticised Centrica for rewarding shareholders and penalising consumers. Centrica is increasing its full-year dividend to shareholders by 17 per cent to 13 pence per share.

Adam Scorer, Energywatch director of campaigns said: "It is perfectly true that there is volatility in wholesale energy markets. But it seems equally true that such volatility hits consumers not shareholders."

"Consumers will feel justified in claiming that they are being taken for a very rough ride by energy companies," he added.

Energywatch has already called for a Competition Commission investigation into energy supply, claiming that energy companies did not pass on the full decline in wholesale prices to customers.

The Business, Enterprise and Regulatory Reform select committee of MPs is currently looking at the competitiveness of UK’s energy markets and has quizzed energy companies about their steep price increases

Centrica said that most of its profits were made in the first half of 2007, when wholesale energy prices dropped sharply, allowing the company to make significant margins and temporarily lower prices for its customers.

Since last summer, however, wholesale prices have climbed sharply, tracking the oil price, prompting the company to impose double-digit price increases last month.

British Gas’s price cuts last spring attracted 200,000 customers back to the company, taking its total number of customer accounts back to 16 million, from an all-time low of 15.8 million.

Mr Laidlaw said it was too soon to see whether the recent price increases would drive customers away again. It is thought that many customers are waiting to see if there are any further increases from other companies before switching.

Overall, the number of gas customers fell in 2007 by 2.4 per cent to just over 10 million, while the number of electricity customers rose by 4.5 per cent to just over six million.

Mr Laidlaw said that British Gas residential margins fell to just 1 per cent in the second half of 2007, compared with an average of 8.3 per cent for the full year. By the end of the year the residential business was loss making after a 50 per cent rise in forward wholesale prices for 2008, he said.

He also gave warning that the dramatic improvement in profits achieved in 2007 would not continue into 2008 if wholesale energy prices remain high.

“The favorable commodity picture we experienced in the first half of the year, which drove higher profits in the residential supply business and which was behind the stronger 2007 earnings, is unlikely to be repeated in 2008. While the current forward market gas price provides a more positive outlook for our gas production business it would make the legacy industrial and commercial contracts loss making.”

Operating profit at Centrica climbed 40 per cent in the year to 31 December to £1.9 billion, on the back of flat revenues of £16.3 billion.

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