Energy firms' gas profit margins questioned by minister

The profit margins made by the "Big Six" energy companies when supplying gas are much higher than previously thought, the energy secretary has said.

In a letter to regulators seen by the BBC, Ed Davey specifically questions the dominance of British Gas.

He says its profit margin is one of the industry's highest and, with 41% of the market, it has the largest share.

British Gas said the data had already been fully disclosed and that it would participate in further discussions.

Mr Davey has asked the competition authorities to investigate the profit margins as part of an ongoing review.

He has written to the energy regulator, Ofgem, as well as the Competition and Markets Authority, asking them to consider all possible remedies "including a break-up of any companies found to have monopoly power to the detriment of the consumer."

The cost of energy has been a big debate since Labour leader Ed Miliband pledged to freeze energy prices for 20 months if he was elected.

A series of above-inflation price hikes by the major energy suppliers has also sparked consumer anger.
Ed Davey Ed Davey indicated the energy prices debate should concentrate more on gas rather than electricity

Mr Davey said that so far the debate on energy prices had centred mainly on the electricity market, but that gas accounted for two thirds of an energy bill for most households.

'Monopoly position?'

"Analysis of the profit margins of the energy companies shows that the average profit margin for gas is around three times that of electricity," his letter says.

"There is also evidence that British Gas, the company with the largest share of the gas domestic 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 adds.

And in an accompanying analysis note he says: "Does this indicate that British Gas has a strong monopoly position which enables it to generate high profit margins?".
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Mr Davey estimates that if margins in gas were similar to electricity, the average saving per household could be up to £40 a year.

In its statement, British Gas said: "There is an ongoing independent market assessment being conducted by the Office of Fair Trading, Ofgem and the Competition & Markets Authority.

"We welcome this and have complied with all the requests for data which we have received.

"The data referred to in the Secretary of State's letter has already been fully disclosed and in the public domain for a number of weeks."
Fruit on display in a supermarket The letters compared the profit margins of the gas industry with the supermarket industry

'Hugely significant'

The BBC's John Moylan said that, given that the information had been publicly available for months, it raised questions as to why the regulator, Ofgem, hadn't already acted.

Richard Lloyd, the executive director of the consumer rights group Which?, said the intervention was "hugely significant" and that it implied that Ed Davey agreed with Which? "that the structure of the biggest energy companies is partly to blame for the price hikes that millions of squeezed customers have been struggling with."

"It will now put huge pressure on the regulators, in a matter of weeks, to announce that they're taking the first steps towards potentially breaking up the very biggest of the big energy companies," he added.

Tables accompanying Mr Davey's letters show that Centrica, which owns British Gas, saw profit margins of 11.2% for its gas business in 2012 and a 41% share of the gas market.

SSE also has a high profit margin of 11.4% but a much smaller market share; therefore this was not seen as such a problem.

Rival EDF made a 4.1% loss on gas in 2012.

The analysis compares this with the profit margins of supermarkets which typically range from 3.5% to 5%.

There has been much discussion and anger in recent months over energy price rises.

Last year, the government changed its plan for a green levy on the industry in order to persuade the major energy companies to reduce the proposed increase in bill prices.

That followed Labour's pledge to freeze energy prices for 20 months for every home and business if it won the 2015 election.

http://www.bbc.co.uk/news/business-26112330

I doubt anything will come of it.