February 19, 2010 10:23 pm

Centrica braced for outcry over profits

Centrica is to face calls for a competition inquiry into gas prices next week when it reports near-record profits at British Gas.

The company is braced for a public outcry amid fears that falls in wholesale prices have not been passed to consumers.

Helped by strong demand for gas during the cold weather in December, profits at Centrica’s retail business could beat the record of £571m set in 2007.

Energy companies are facing a demand for £200bn of investment over the coming decade, but are under pressure from politicians and regulators not to earn excess returns.

Consumer Focus, the government-backed campaign group, is expected to accuse British Gas of making large profits by not passing on cuts in wholesale energy costs. It will call for a Competition Commission inquiry.

Since the summer of 2008, the cost of gas and electricity in wholesale markets has roughly halved, while household bills have risen, according to the official consumer price index.

Alistair Buchanan, chief executive of energy regulator Ofgem, recently warned that “while firms need to earn returns to invest in our future, this cannot be used as a fig leaf for excessive profiteering”.

British Gas announced a 7 per cent cut in its retail gas price earlier this month and the government has called on other suppliers to follow its lead.

Suppliers point out that they smooth out the volatility of wholesale markets in prices charged to customers and that their profits were squeezed in 2008 when household bills did not rise in line with wholesale prices, but this has not satisfy the industry’s critics.

The Conservatives have pledged to order an inquiry that would focus on the relationship between wholesale and retail prices.

Although British Gas is among the cheapest household gas and electricity suppliers, it still tends to be the focus of attention because it has the largest market share.

Analysts expect that operating profits for the Centrica group will be down about 7 per cent at £1.82bn, and earnings per share down about 3 per cent at 20.8p.

However, that fall will be largely the result of a fall in revenues from Centrica’s gas fields, including the Morecambe fields in the Irish Sea, which have been hit by lower prices and a cut in production volumes.

The British Gas retail business is forecast to make an operating profit of about £554m, up 46 per cent from 2008, but is likely to benefit from additional demand during December that could add another £30m to its profits.

Centrica plans to invest £15bn over the next decade, and in the next two years will take decisions on projects including large new gas stores and its share in new nuclear power stations.

At 278p last night, Centrica’s shares are well below their peak of more than 350p in 2007.

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