British Gas may be split up as government chides sector on prices

LONDON Mon Feb 10, 2014 9:33am EST

Workers leave a British Gas facility in Leicester, central England July 28, 2010. REUTERS/Darren Staples

Workers leave a British Gas facility in Leicester, central England July 28, 2010.

Credit: Reuters/Darren Staples

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LONDON (Reuters) - Former gas monopoly British Gas might be broken up to put a stop to excessive profit margins charged by Britain's biggest gas supplier, Energy Secretary Ed Davey said on Monday, responding to an industry review by regulators.

Soaring energy costs have become a big political issue in Britain since opposition Labor leader Ed Miliband said in September he would freeze consumers' bills for 20 months if he wins the next national election in 2015.

"There is 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 3 years, and has been on average the most profitable," Liberal Democrat Davey said in a letter to the head of energy regulator Ofgem.

Britain was considering options to overcome any pricing unfairness "including a break up of any companies found to have monopoly power to the detriment of the consumer", he said.

The Liberal Democrat party, junior partner in Britain's two-party coalition, is trying to position itself between Prime Minister David Cameron's center-right Conservatives, and avoid what it says is the more left-leaning, anti-business Labor.

Miliband says a price freeze would ease the strangehold the top six suppliers - Centrica-owned (CNA.L) British Gas, SSE (SSE.L), EDF (EDF.PA), RWE npower (RWEG.DE), E.ON (EONGn.DE) and Scottish Power (IBE.MC) - have on the market.

Ofgem, the Office for Fair Trading and the Competition and Markets Authority are carrying out an investigation into competition in Britain's energy retail market.

British Gas said its average 5 percent profit margin was necessary to make investments and secure energy supply.

Shares in its parent company Centrica fell were down 2.2 percent at 307 pence by 9.03 a.m. EDT, having sunk as low as 302-1/2p, their lowest since June 2012.

Analysts said gas supply margins cited by Davey were not new and have been in the public domain for several years.

"Margins in gas supply for both Centrica and SSE have been relatively high since 2009/10 with no particular push back from Ofgem," Liberum Capital analysts said.

"Mr Davey's letter, no doubt intentionally, raises the political temperature once again around UK energy supply. It is very difficult for investors to price in political risk for UK utilities at this time," they said.

Davey's Department of Energy and Climate Change has analyzed figures from energy regulator Ofgem last year which show that gas profits at some of Britain's biggest suppliers are more than 5 times higher than profits from electricity.

The government started an annual energy market competition investigation last year to address consumer complaints over increasing energy bills.

The first report conclusions are due at the end of March.

"We will be looking at all available evidence when producing this report, until we have completed it we will not comment further," a spokesman for Ofgem said.

In recent weeks, utilities have said they would cut energy prices following a government concession to move environmental levies away from energy bills and add them to general taxation.

Such measures have been touted as cutting average bills by about 50 pounds ($82) a year.

(Additional reporting by Richa Naidu in Bangalore, with Nina Chestney, Andrew Osborn and Limei Hoang in London; Editing by Louise Ireland)

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