British Gas price increase – why do they keep on going up?

Over the past 10 years, British Gas prices have increased their prices to the customers by an average of 10.6% every year, or 8.6% per year greater than inflation. In this time, their owner Centrica, have provided a plethora of excuses why these prices have increased: competition, green taxes, changes in retail price and so on.

However, if we take a look at the underlying figures, a lot of these factors seem to contribute very little to a price rise and some, namely the changes in retail price, imply that prices should have actually increased less than inflation. Instead, it would appear that the true reason for British Gas’ increased prices is to improve shareholder value and to reward the executives who provide it.

 

What the papers say

There have been a lot of headlines in the past few weeks regarding the rising prices of energy. Not surprisingly, the most ridiculous come from the Daily Mail:

‘Sammy Two Pools’: British Gas chief plans to build a SECOND swimming pool at his mansion as millions of families struggle to pay energy bills – Daily Mail

British Gas: energy bills price hike turns into PR disaster – The Guardian

Heat or eat: Fury as British Gas hikes energy prices – Daily Express

Millions urged to boycott British Gas – Daily Mail

PM’s Gas link slammed – The Sun

‘British Gas sacked me while I was lying in a hospital bed’: Heart patient was visited by bosses so they could hand him redundancy notice – Daily Mail (this is my favorite headline…)

British Gas faces online backlash over Twitter #AskBG session – Evening Standard

Cameron urges customers to DITCH British Gas after it hikes prices by nearly TEN per cent – Daily Mail

Sammy Two Pools: As families face price rises, British Gas boss splashes out at his luxury home – The Sun

 

 

History of the company

British Gas plc de-merged on 17 February 1997 to form two separate companies: Centrica plc and BG plc. Centrica took over gas sales and gas trading, services and retail businesses.

BG plc was renamed BG Group plc in December 1999. BG Group plc uses the British Gas name overseas but it is a separate company to Centrica and has no involvement with the British Gas retail brand in the UK

In 1998, Centrica’s supplier monopoly for gas came to an end. Centrica maintained the British Gas retail brand but is only allowed to use this brand name in the UK. The electricity market also opened up to competition and, through the British Gas brand, the company started supplying its first domestic electricity customers.

Clear as mud? Yep. Basically, when the headlines refer to “British Gas”, they are referring to Centrica.

British Gas price increases

With so many ever changing tariffs in the energy sector, it is very difficult to actually find a true comparison for year-on-year retail price changes. Therefore, the best I could do was to rely upon BBC news (they have no reason to lie, right), regarding the annual change.

I found the following:

23^rd November 2013:

11^th October 2012:

10^th December 2010:

4^th February 2010:

26^th February 2009

22^nd January 2009

 

So, from all this, I can gather that the annual price changes since the start of 2003 (using 2002 as a basis of 100) are as follows:

So, in 11 years prices have increased by 201% (or around 10.6% every year). This seems monumental. However, unlike the headlines above, this does not tell the whole story.

Inflation

Of course, we need to take inflation into account. Inflation in the same period is as follows (again using 2002 as a basis of 100):

Therefore, our after inflation figures are as follows:

This immediately shows two different stories. Yes, the increase from 2003 is monumental even after inflation. Yes, the increase this year is substantial.

However, notice that prices, since 2008, have pretty much remained in line with inflation.

I don’t remember reading any headlines in the past month which said “SHOCKER: Since the beginning of 2008, British Gas prices have remained generally in line with inflation!”.

 

Changes in cost of raw materials

Obviously, British Gas is also subject to changes in wholesale prices for gas and electric.

Natural gas as a commodity is traded on a market and therefore the price is easily obtainable. Given that we have modified retail prices for inflation, I have done the same with the purchase price of Natural Gas:

Well, now this is really starting to make for very ugly reading indeed. Inflation adjusted retail prices at British gas have increased by 128% in ten years, whereas the inflation adjusted cost of the raw product has decreased by 50%. Take these both into account and the sales price vs cost has actually increased by about 17.7% every single year!

I’m starting to see why everyone is getting a little enraged.

So, who is benefitting from these increases?

 

Share price

Centrica is a publicly listed company in the UK. Therefore, it could be that the shareholders are munching up all of these lovely gains in the form of distributions.

On January 3^rd, 2003, the share price was 170.00 pence per share.

On October 25^th, 2013, the share price was 356.10 pence per share.

This represents an annual increase of 7.0% per year. Therefore, they are doing something to please the shareholders. However, note that this price has no reflection on what the company are actually paying to the shareholders. This comes in the form of dividends.

 

Dividends

Shareholders get dividend payments. In 2002, 3.3p per share was distributed to shareholders, a yield of 1.9%. In 2013, 16.7p per share was distributed to shareholders, a yield of 4.7%. The difference is a 9.5% annual increase in dividends distributed. Therefore, we have a 17.7% increase in price vs cost, and a 9.5% increase in annual dividends.

Is this a good or bad thing?

Well, clearly it is a good thing for the shareholders. However, it is also British Gas’ responsibility. The company is run for the benefit of the shareholders, not the benefit of the nation. Then only way for British Gas to focus on the requirements of the public rather than the shareholders is to nationalize the service.

However, as many of you older readers will remember, this was the case in the past, but on 8^th December 1986, British Gas was privatized by Margaret Thatcher and her Conservative Government. The benefits and disadvantages of having a nationalized energy provider is a whole different post!!

 

Executive bonuses

But, shareholders are not the only people cashing in!

Chris Weston, described by a Daily Mirror article as the “fat cat boss” (I love newspapers!), but probably more accurately titled the managing director reportedly received £2 million in bonuses in 2013. Given that this is the Daily Mirror, I’m not going to use this figure. I looked up his pay in the 2012 annual accounts and his total remuneration for 2012 was £2,941k. Let’s assume it remains unchanged in 2013.

In the 2002 financial statements, his predecessor Mark Clare received total remuneration of £626k in base salary and fees, annual performance bonus and benefits.

After inflation, this represents a 13.5% annual increase.

So, while prices are increasing 17.7% each year, director salaries & bonuses are increasing by almost the same amount! That will account for a lot of it.

 

Who is not cashing in?

Other than the customers, I would also assume that the average employees are also losing out, as highlighted in my real wages vs inflation analysis recently.

 

What do the energy bosses say?

Quite strangely, in my opinion, British Gas has defended their profit margin by saying that they need to obtain a 5% profit margin to operate and pay the 13% increased “green” taxes to the government etc etc.

This confuses me for two reasons:

1) If these fees are so great, and material to the profit amount and margin, why are they not split out as exceptional items or continuing operational expenses in the 2012 income statement.

2) 2012 group gross margin for the year = £5,780m / £23,942m = 24%. 2012 group net margin for the year = 5%. Therefore, the 5% we are referring to is net profit. That is, the profit earned AFTER all the expenses related to environmental taxes or all other excuses British Gas dream up.

It is time for transparency. I understand that the following won’t be taken well by the public, but saying the truth of “we increase our prices to provide value to our shareholders and to remunerate the executives who provide this additional value and we do this because we are a publicly listed organisation” would be much more refreshing to hear than drumming up the same old excuses which are more friendly on the ear, but just don’t seem to be true.

 

How can I save money?

Its getting more and more difficult as all the energy providers are raising their prices together. We all know that energy companies do not reward loyalty. However, they are ALL desperate to win new customers. And they are willing to offer cheaper deals to do so. Therefore, the easiest way to save is to perform an energy comparison and sign up to a cheaper introductory deal. The Energy Helpline offers such a service whereby you can be saving up to £370 on your annual energy bill.

 

What do you think about it all?

Should British Gas be serving the shareholders or the public?

Should the executives be rewarded some generously? They are, after all, doing their job of providing shareholder value remarkably well.

Should the government consider re-privatizing the sector?

 

 

Update: As at 23/01/2014, SSE have announced that profits are up £1.5bn (8.8%) following price increases earlier in the year of 8.2%. Straight from the consumer’s pocket into the shareholders/executives!