Erm, no, I don\’t think this is true

Before privatisation, it used to be simple: British Gas supplied gas while electricity came from the regional electricity boards. But whereas greater competition should have forced prices down, it is now dominated by half a dozen major players. And the way they are behaving has many of the characteristics of a price-fixing cartel — though, of course, it can’t be because that would be illegal. The fact they each make average profits of about £125 per customer is just a coincidence.

I think the figure is actually £125 gross profit per customer, isn\’t it? As per the Ofgem report?

There are 25 millionish households, so assume that many accounts. So at £125 per account profit we\’d be expecting £31 billion in profits a year from those big six companies. Don\’t forget, this is entirely ignoring any industrial or commercial supplies.

Not all are listed but one of them is Centrica and they make £1.9 billion a year. Scottish and Southern £1.2 billion.

So if one third of the industry is making £3 billion a year in profits we might expect (I know, very rough) the industry as a whole to be making £9 billion.

And this number will include any profit from industrial and or commercial supplies as well as domestic. Let\’s purely on the back of a fag packet basis, say that domestic is 50% of the business. £4.5 billion profit made out of it then, with 25 million households, looks like profit is more like £18 an account then.

Now, yes, I know, all very sketchy, but I think we have shown that it just ain\’t true that the energy companies are making £125 per customer in profit, are they?

It\’s another one of those political statistics. Report comes out saying £125 blah blink and you\’ll miss it qualifications profit and everyone leaps about saying £125 profit leaving out the blah blink and you\’ll miss it qualifications.

Job done, hugely misleading number now fixed in the public memory.

Lying bastards.

Turning to the Ofgem report, we find that:

It provides an indicator of the margin earned for supplying energy to a typical standard tariff customer, rather than an estimate of energy supply company profits.

OK, as I said, they\’re not measuring net profit.

The area between the customer bill and the combined wholesale and other costs lines represents gross margin. Subtracting operating costs from the gross margin gives the net margin, represented by the green line. Operating costs include: staff costs, IT costs and overheads. They also include discretionary elements (such as sales and marketing costs) and bad debt costs. These costs were updated as part of our Retail Market Review work.

Oh. It looks like they\’ve left out capital costs there then. Which, in a capital heavy industry like gas and \’leccie gives us our really very misleading figures, doesn\’t it?

Aha! Update: and of course in the comments I see where my error is. £100 per household is £2.5 billion with 25 million households.

Oh dear, egg on face or what? Blog after the coffee, not before, eh?

10 thoughts on “Erm, no, I don\’t think this is true”

  1. There’s also the point that in a competitive market with an undifferentiated product, *of course everyone’s going to charge about the same*, whether or not they’re colluding – basic economics, as well as being one of the bits of basic economics that’s obvious.

  2. Um, aren’t you an order of magnitude out? 25 million households, £100 per household = 2.5 billion? I’m going to be _really_ embarrassed if I screwed that maths up…

  3. I think Stuart is right, so the number does stack up.

    I’ve only been able to scan the report – but it does look like they are trying to get to something approximating the true net profit. Have they accounted for capital? Well I don’t know if depreciation charges are in there. Or RnD as these companies invest in finding ways to provide energy for the future.

    Of course, even if the figures are bang on.. £125 profit on a £1,300 bill is not exactly out of this world, especially given that the same dataset shows that this is a high point after years of lower (and negative) margins.

    If, from that 10% return, they are also supposed to be building new generation capacity and the likes, then it’s not really a lot at all.

  4. @TTG your circa 10% = return on sales.

    Interested to know their ROCE. This is what would drive investment, I assume.

  5. A 10% profit margin on retailing stuff that comes through existing pipes and wires is pretty damn good. The investment in generating capacity (what investment in generating capacity???) supposedly comes out of the profits the generators make and pass on to the distributors as wholesale cost.

    Fortunately, I lived in the UK through the privatisation of the gas and electricity retail markets, in the NORWEB region. So what happened is that, at the beginning, everyone’s contracts were basically shipped to the default regional supplier. What those suppliers did, knowing that 90% of people wouldn’t bother to change, was to charge high prices in their own region, and lower prices to customers in other regions, to get the trade. A cross-subsidy from the lazy if you like. I ended up buying mine from Scottish Power, and noted that in Scotland they were pricier, and NORWEB cheaper.

  6. Nobody has calculated the cost of not having competition. I bet the CEGB and regional boards wasted a helluva lot more than £125 per customer and not to mention the outrageous customer service.

    I’m sure that I remember hearing that the average UK household pays a lot less than, say, France with its non-competitive nationalised system.

  7. Nobody has calculated the cost of not having competition. I bet the CEGB and regional boards wasted a helluva lot more than £125 per customer and not to mention the outrageous customer service.

    In those days you were called a consumer and got what you were given.

    With the GPO that could mean a 6 month wait for a phone line and if you were lucky it wasn’t a party line.

  8. Ukliberty is right. Also, when oil (and hence gas) was cheap, we were among the cheapest for ‘leccy – obviously, the rise in oil prices has made the French dependence on nukes look cleverer than it did for most of the 2000s.

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