uSwitch: British Gas results - price rises saved the day

Price rises bolster British Gas Residential turnover from GBP3 to GBP7.1 billion in the second half of the year - a 131% increase1

British Gas Residential operating profit went up substantially in the second half of 2006 from a GBP143 million loss to a GBP238 million profit1 due to tariff increases taking effect and reduced Q4 wholesale costs, improving margins across the customer base Shareholders: Dividends up by 13%2 - dividend payments of GBP384 million1 Customers: 2006 Fuel bills rocket by GBP299 or 36%3, wholesale gas prices plummet by 50% in the same period4, and yet overdue price decreases only offset bills by 56% or GBP1675 British Gas Residential highlights from 2006/07 results: Made GBP95 million in profits1 but added GBP2.4 billion to customers' bills in total during 20066 as annual energy bill soared to GBP11203andnbsp; Lost 1.029 million customer accounts - one every 20 seconds7 Saw its gas market share fall below 50% to 49%1 for the first time from 70% a decade ago8 Announced price cuts to kick in on 12th March 2007 - but fell short of reducing by the 22.1% for gas and 20.5% for electricity needed to pass on the full benefit of wholesale gas price reductions to customers9 Spent over GBP52 million on advertising during 2006, which equates to GBP99 for every new customer - more than EDF Energy, npower, Powergen and Scottish and Southern Energy combined: the same amount could have protected over 175,000 British Gas households from price rises during 200610.

Estimated to have pushed almost 475,000 people into fuel poverty with its 2006 price rises11 Centrica's results today all but admit how much of a money-spinner the fall in wholesale gas prices coupled with increased customer prices have been for British Gas, says uSwitch.com, the independent, online switching and comparison service.

Both contributed directly to increased profits and turnover in British Gas Residential and British Gas Business, leading to British Gas returning from a loss in the first half of 2006 to delivering a profit in the second half.

Overall its 2006 profit was up from GBP90 million in 2005 to GBP95 million in 2006 - a 6% increase.1 Centrica clearly acknowledges within its report that this profit was due to the price increases British Gas made in September, its second increase that year, coupled with the fall in wholesale costs.

It also points out the effect this has had on customer attrition.

Sam Laidlaw, Chief Executive, Centrica, says: "The price increase in British Gas Residential announced in July was followed later in the year by a softening in wholesale gas and power prices: this has returned this business to profit." He also acknowledges that British Gas: "Delivered less than satisfactory customer service..." and points out that "the quantity and magnitude of tariff increases across all suppliers hit consumer sentiment and resulted in high levels of customer switching." In fact, British Gas lost over a million customers.

Other excerpts from the report say: "Operating profit for the year increased by 6% to GBP95 million as operating margins recovered strongly in the second half" and "overall gross margin increased by GBP59 million as the increase in turnover more than offset the higher commodity costs and the increase in transportation and distribution charges per customer." Today's results are not all good news for British Gas as they reveal that the energy giant lost 868,000 million gas and 161,000 electricity customers last year.1 Despite spending more than GBP52 million on advertising - GBP99 for every new customer10 - it saw its market share plummet below 50%, to 49%, for the first time.8 British Gas' action plan for managing customer retention last year focused on high profile marketing campaigns, an increased sales force and the introduction of new fixed price products and "price freezes" on discounted online tariffs.

In the light of successive price increases the market was ripe for such products as customers sought to protect themselves from any further price rises.

In September 2006, after its second wave of price increases, British Gas introduced its most expensive product - Fix and Fall.

It sold 500,000 customer accounts, which helped maintain sales at around 60,000 per week, and it currently has an annual bill size of GBP1,028, which will fall to GBP980 in December this year12.

This is currently GBP247 or 32% more expensive than npower's Sign Online tariff and will still be GBP199 or 25% more expensive, even after the 'fall' in December.13 British Gas also came under mounting pressure to cut prices after putting them up by 36% during 20063 even though gas wholesale prices fell by 50%4 during the same period.

Finally, in the run up to today's results announcement and after almost seven years of no price cuts14, it caved in and lowered its prices.

The move came after questions were raised in parliament during Prime Minister's Question Time.

However, despite paying out GBP384 million in dividends to shareholders for 20061, British Gas has still refused to pass on the full drop in wholesale prices to customers.

To do this it needs to cut its gas prices by 22.1% and electricity by 20.5%9, but so far has settled for 17% and 11% respectively.

The cuts do not kick-in until 12th March though, so British Gas will be able to enjoy inflated profits for another month and customers will not see any impact on this winter's fuel bill.

While consumers have had to fight for a good deal, Centrica has been more generous to its shareholders who received an increase in dividends of 13%2.

This could be viewed by consumers as a slap in the face if they see a correlation between the 36%3 price increases suffered by customers last year with the 13%14 increase in dividend payments enjoyed by shareholders.

Ann Robinson, consumer policy director at uSwitch.com, says: "These results really drive home exactly how cynical British Gas and its parent company have become".

"Centrica continues to place shareholder value rather than customers at the heart of its business, which is why its customers have left in droves".

"Rather than trying to turn the tide with multi-million advertising campaigns it would do better to invest its time, money and creativity in getting the basics of its business right - a good product, at a good price, delivered with good customer service".

""British Gas is guilty of robbing Peter to pay Paul.

On the one hand, through its 2006 price rises, it squeezed on average an extra GBP299 out of its customers; on the other hand it has increased its dividend payout to shareholders by 13%2.

This is by no means a level playing field and they need to strike more of a balance between the two stakeholders.

It is reassuring that they acknowledge this imbalance and say that it is their 'intention to strike a fair balance between lower prices and sustainable profits in order to reward both our customers and shareholders'.

"The results announced today come as no surprise".

"2006 was an unforgettable year in the energy market as retail prices soared to record levels contributing in no small part to today's results".

"No other product or commodity has risen in price so steeply during that period, and energy is not a luxury; it is a necessity".

"When balanced against the consumer misery and the rising spectre of fuel poverty in this country caused by these inflated prices, it can't help but leave a bitter taste in the mouth".

""Customer frustration has reached boiling point and could cause British Gas serious damage if it doesn't start tackling these issues decisively.

According to Ofgem four million people switched their energy provider in the first 10 months of last year15 - today's results show that British Gas lost 1.029 million customers over the whole of 2006.

Energywatch also confirmed that complaints against the energy giant were up 93%.16 "While we applaud the fact that British Gas made the first move to cut prices, 2007 must be a year of change: the market is becoming much more competitive which is great news for consumers, who are becoming increasingly aware that better deals are there for the taking." Robinson concludes: "British Gas now for the first time ever supplies less than half of the domestic gas market, but there are still 10.3 million gas customers who have failed to wake up to the benefits of switching to a cheaper supplier.1 It is time those customers defied the marketing men and let their feet do the talking." As well as concerns over its failure to balance the interests of customers and shareholders, there are also grave doubts over its commitment to those suffering fuel poverty.

British Gas price rises in 2006 are estimated to have pushed almost 475,000 people into fuel poverty.11 Estimates suggest that every 1% decrease in its gas prices will pull just over 12,000 customers out of the fuel poverty pit, while every 1% decrease in its electricity costs will help just over 4,000 people out of fuel poverty.17 In order to rectify the damage inflicted by the company to over 400,000 people by last year's soaring fuel bills British Gas would need to drop its overall prices by 22% this year in total.17 For more information visit uSwitch.com or call 0800 093 06 07.

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