By Paul Dobson
Feb. 19 (Bloomberg) -- Centrica Plc will kick-off a round of price cuts by U.K. utilities today with a reduction in natural- gas bills. It’s keeping power rates unchanged to maintain profits as politicians press for greater discounts.
Centrica, Britain’s largest supplier, will lower gas prices by 10 percent for more than 7.5 million customers, the largest reduction announced this year. Recession-hit consumers need more, members of parliament say, because suppliers raised retail rates for power and gas an average 42 percent last year and wholesale prices are now at their lowest in 16 months.
“Prices are beginning to come down, but they’re not coming down quickly enough or big enough,” said Paddy Tipping, an MP in the ruling Labour party who sits on a committee that scrutinizes energy policy. Affordability has “come to the top of the political agenda.”
Utilities including Scottish & Southern Energy Plc and Iberdrola SA’s Scottish Power say they need sufficient margins to finance 100 billion pounds ($142 billion) of investment in power stations. The ability to maintain profits may help them outperform the wider stock market. Reading-based Centrica is up 1.7 percent this year, one of only 24 companies in London’s 102- member benchmark index to have advanced.
“There’s a balance between the political pressure to lower tariffs for customers that are struggling in the economic slowdown and the political objective of security of supply,” said Tina Cook, an analyst at brokerage Charles Stanley in London. The companies “need to balance the needs of the consumer with the needs of the business.”
Retain Customers
Three of the five-biggest competitors of Centrica’s British Gas retail unit will reduce prices at the end of next month, seeking to retain customers that are free to choose a supplier.
Perth, Scotland-based Scottish & Southern, the second- biggest retailer in customer numbers, will cut power rates by 9 percent and gas prices by 4 percent. The U.K. unit of E.ON AG, Germany’s biggest utility, and Electricite de France SA will each reduce power charges by about 9 percent.
Scottish Power will discuss price cuts at a board meeting this week. RWE AG’s Npower said yesterday it “will continue to review” its prices.
The average household bill for a customer buying gas and power from British Gas will drop to 1,240 pounds a year from 1,328 pounds, according to E.W. Scripps Co.’s Uswitch, a Web site that makes money when consumers use it to change energy supplier. It was 912 pounds on Jan. 1, 2008.
Regulatory Probe
Each supplier raised prices on two occasions last year, prompting probes by the regulator, known as the Office of Gas & Electricity Markets, and a parliamentary committee.
The regulator’s investigation, which found no evidence of a cartel proposed ending “unfair” difference in charges to some groups of customers based on location and payment method. The utilities have until the end of this week to respond to its suggested remedies.
The probe showed how the utilities buy energy in the forward market, creating a lag behind between wholesale market movements and household prices.
Rolling one-year-ahead wholesale gas prices show costs at about 44 pence a therm on Feb. 16, the lowest since October 2007. Prices peaked at 99 pence a therm on July 3.
The retailers say they struggle to profit from energy supplies. E.ON said Jan. 29 it will cut 450 jobs, 2.5 percent of its U.K. workforce, to reduce costs after making a loss from supplying power and gas in the past two years.
Eroding Profits
Lower wholesale prices are eroding profits from gas and electricity production. That makes it more important to ensure supply activities make money, analysts say.
“The important issue for investors is that the industry continues to demonstrate considerable pricing discipline despite the political pressure,” Citigroup Inc. analyst Peter Atherton said in an investor note Feb. 13. “It is crucial that supply businesses return to profit in 2009.”
The utilities face pressure to replace older plants and meet government targets for emissions reductions. The country’s Association of Electricity Producers puts the cost of new capacity at 100 billion pounds.
Ministers must step in to ensure they build required energy infrastructure, the parliamentary Business and Enterprise Committee said in a report Dec. 12. The utilities should also cut prices as soon as possible, it said.
Last year, “we were being demonized for raising prices and we were being chastised for underinvesting,” Ian Marchant, the chief executive officer of Scottish & Southern, told a panel of lawmakers including 4Tipping last week.
The utilities agreed in 2008 to a government-brokered deal to subsidize energy prices for the poorest households.
Fuel Poverty
More than 5 million homes are in so-called fuel poverty, where more than 10 percent of income is spent on home heating, watchdog Consumer Focus estimates. Meanwhile unemployment is rising as the country endures a recession.
The government detailed plans Feb. 12 for 350 million pounds to be paid by energy producers and suppliers to improve energy efficiency and cut bills in homes.
“I query whether the burden is too great on our industry,” Marchant said.
To contact the reporter on this story: Paul Dobson in London at pdobson2@bloomberg.net
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