Centrica shares fall as Ed Davey hints at British Gas break-up

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Shares in Centrica fell on Monday on investor concerns over a warning by the UK energy secretary that the group’s subsidiary British Gas might need to be broken up to tackle the gas supplier’s market dominance.

Centrica slid 3.3 per cent to 303.9p as of 12:25am in London after Ed Davey intensified calls for a full investigation into the largest gas suppliers profits. Scottish and Southern Energy declined 1.42 per cent.

In a letter to Ofgem and the Competition and Markets Authority, Mr Davey pointed out that profit margins for the gas supply businesses of the big energy companies were too high. He singled out British Gas, saying it charged the highest prices and had been the most profitable.

“I want (regulators) to think radically,” Mr Davey told the BBC’s Today show on Monday. “It’s an independent process: they could decide to take no action or they could decide for a full-scale investigation. There could be a number of remedies if they go down that route including the breaking up of some of those companies if they are shown to have abused their market power.

Mr Davey’s move follows strong campaigning from Labour on the contentious issue of fuel prices.

“The risk of political interference for Centrica and for the industry remains elevated,” Ashley Thomas, an analyst at Société Générale, said. “Given the level of political pressure, regulators will find it more difficult to give a clean bill of health to the industry.”

Mr Davey’s letter, revealed on Sunday, comes amid an independent market assessment of energy pricing by the Office of Fair Trading, Ofgem and the CMA. Ofgem said on Monday it would be “looking at all available evidence when producing this report, until we have completed it we will not comment further”.

A person close to Centrica said there was “obvious concern” about perceived political interference in what is supposed to be an independent regulatory process. He noted that the data Mr Davey referred to in his letter to Ofgem had been in the public domain since June last year and referred to 2012: figures for market share and profit margins in 2013 might be significantly different.

The person also noted that it was wrong to look at the gas business in isolation. “Gas and electricity is a dual fuel business,” he said. “Centrica’s net margin on supplying dual fuel customers has averaged around 5 per cent over the past six years.”

Chris Weston, managing director at British Gas, rejected concerns about the market share of the company and its profits.

“Britain has one of the most competitive energy markets in the world, with gas and electricity prices among the lowest in western Europe. Around 80 per cent of British Gas customers have switched their tariff or supplier at least once,” he said in a statement.

“About two thirds of British Gas customers are dual fuel customers, taking both gas and electricity, and the price of the gas is the same for all customers whether they are a gas-only customer or on a dual fuel tariff. British Gas’ profit margins are on average 5 per cent after tax.”

In an apparent reference to comments by the government and opposition on the regulatory review, Mr Weston said: “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.”

The issue of energy costs moved to the top of the political agenda last year after Ed Miliband said Labour would freeze gas and electricity prices for 20 months if it won the 2015 election. The issue grew more acute after the big six energy suppliers announced inflation-busting price rises, triggering consumer fury.

The government persuaded the companies to reduce the price increases after agreeing to make changes to a green levy used to fund an energy-efficiency scheme called ECO.

One Whitehall insider said it was “pretty extraordinary stuff” for a secretary of state to write to a regulator mid-review to demand that it consider certain evidence. Mr Davey took the decision to write to the regulator after a meeting on Monday last week.

Jonathan Reynolds, Labour’s shadow energy and climate change minister, said that “ for months” Mr Davey had been defending the big energy companies, “in spite of all the evidence showing they have been overcharging”.

He added: “If the government wants to be taken seriously on energy bills, nothing less than a price freeze and action to stop these firms from overcharging in the future, as Labour has proposed, will do.”

In his letter, Mr Davey said the debate on energy prices had centred mainly on the electricity market. But for the 85 per cent of households that are connected to the gas grid, he said, two-thirds of their energy was accounted for by gas rather than electricity.

“Analysis of the profit margins of the energy companies shows that the average profit margin for gas is around three times that of electricity,” the letter said. “For some companies the profit margin is actually more than five times the average profit being made on supplying household electricity.”

He said there was evidence that British Gas, which has the largest share of the gas supply market, “has tended to charge one of the highest prices over the past three years, and has been on average the most profitable”.

He said that if the profit margins in the domestic gas supply market were similar to the domestic electricity market, the average saving for each household “could be up to £40” a year.

In a statement, British Gas noted the market assessment and said it had complied with all requests for data. It said the data in Mr Davey’s letter had been “fully disclosed and in the public domain for a number of months”.

Mr Reynolds dismissed Mr Davey’s letter.

“For months the energy secretary has been defending the big energy companies, in spite of all the evidence showing they have been overcharging,” he said. “Actions speak louder than words – and this government has let the energy companies get away with increasing their profits on the back of spiralling bills for hard-pressed consumers.”

One insider in the energy department said Mr Davey wanted the regulator to consider the evidence as part of its competition assessment and said the energy secretary was concerned that two companies – British Gas and SSE – seemed to be making double digit margins on gas supply.

“The margins on the average gas and electricity bill are broadly in line with supermarkets but when you split out energy and gas, the gas margin is running at 6.7 per cent: that’s three times more than the average electricity margin of 1.8 per cent,” the person said.

Tables accompanying Mr Davey’s letter showed that Centrica saw profit margins of 11.2 per cent in 2012 and a 41 per cent share of the gas market.

SSE also has a high profit margin of 11.4 per cent but a much smaller market share: rival EDF made a 4.1 per cent loss on gas in 2012.

The analysis compares this with the profit margins of supermarkets that typically range from 3.5 per cent to 5 per cent.

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