Centrica’s response to Prime Minister’s Party Conference Speech

Last week, Centrica Chief Executive Iain Conn, spoke to BBC Radio 4 in response to the Prime Minister’s party conference speech. Below  is the conversation between Conn and BBC Radio 4 presenter, Justin Webb.

Justin Webb, presenter: The energy price cap is back on. In her speech, Theresa May was pretty blunt about the monopolies and vested interests, who she said held people back and one of the greatest examples, she said, was the energy industry. Britain’s biggest energy supplier is Centrica, the company that owns British Gas. Iain Conn is their chief executive and is on the line now.

Good morning to you.

Iain Conn, CEO, Centrica: Good morning, Justin.

JW: How disappointed are you?

IC: Well, my main concern in all this is for our customers as well as for other stakeholders. It creates exaggerated uncertainty and we’ve got to remember this is a draft bill aimed at giving the regulator more powers rather than actually legislating a cap. We do agree the market needs further structural changes and we also agree the Government and regulator need to enable that change. We just don’t support price caps.

JW: Why not?

IC: Well, there is clear evidence that they don’t work. In New Zealand, in Spain, in California, in Ontario, they tend to limit choice, reduce competition, and prices tend to bunch around the cap and, in fact, we’ve seen that this year in the U.K. with a new prepayment metre cap where most prices are within £2 of each other.

JW: Is it likely that there will be fewer cheap fixed offers in order to pay for the cap?

IC: Well, look, I think the problem with… one of the problems with the market today is it’s possible to offer a really cheap deal, possibly even making a loss for the supplier, and when a proportion of the customers come to the end of that fixed deal, if they’re not watching, they can be bounced straight onto a very high priced standard variable tariff price. All standard tariffs are not expensive. Ours is cheaper than 85% in the market.

JW: But hold on a second. My question is whether those very cheap deals will go as a result of this.

IC: I think that’s one of the real risks. We’ve seen it in many markets where the cheap deals go because the mechanism for people to make money out of the market has changed and that’s what I was trying to explain.

JW: But possibly… I mean, it could well be though that people accept that that is going to be a price to pay if you don’t have people who are trapped, if you don’t have people who are… who don’t have the time or don’t have the inclination or don’t have the ability to sort themselves out in the market, if those people are protected then that is a price worth paying.

IC: So we agree some people need to be protected and in fact have done a significant amount voluntarily to protect groups of customers. The main problem with the market, if I may Justin, is the standard variable tariff and rather than cap them, which will ironically keep them going, we believe the standard variable tariff should come to an end for good. We think it is better for the long-term and it will solve these problems.

JW: Well, how would that work?

IC: Basically, what you do is the regulator would need to regulate that contracts that go on and on forever can’t happen anymore. They have got to have a fixed term, and secondly, this mechanism which is in the regulation that at the end of your fixed contract, you can be pushed onto a standard tariff, that can be changed. This would change the behaviour in the market.

JW: You have only got yourselves to blame, though, haven’t you in the big companies. You have got the Competition and Markets Authority saying that he six large firms together, people have paid an average of, I think, it is ₤1.5 billion more than they would have done under a well-functioning market over a recent period. You have got your own company making a decent amount of money. You have got your own salary hugely boosted recently. I think your total package is more than ₤4 million a year. There is just this sense, isn’t there, that politically you have messed up.

IC: I have only been in this business for the last few years, but I certainly think our industry has an element of the blame in how this market has evolved. But on this point about this overcharging by ₤1.4 billion, I just want to be clear, although the CMA came up with this, it clearly isn’t right. It is more than the entire profits made in the whole market.

JW: Again, it is your word against theirs and politically, it is quite a difficult place for you to be in, isn’t it now, because you have got Labour and you have got the Conservatives, and you have got an awful lot of your own consumers saying something has to be done.

IC: We agree, something has to be done, absolutely agree and, in fact, the regulator was consulting on this at the very request of the Government and they haven’t quite reported out yet. Just to be clear, we have been working hard with the Government and Ofgem on all of this and we have our own plans to improve this market once we hear from the regulator.

JW: In a word, your message to the Government this morning is, ‘wait, don’t go ahead with this’?

IC: Our message is, ‘wait don’t go ahead with price caps, there is a much better way of solving this market for the long run.’

JW: Ian Conn, Chief Executive of Centrica, thanks very much. Dom, our business JW was listening. Interesting idea, actually, isn’t it, Dominic that you just get rid of the whole of the variable rates.

Dominic O’Connell, business JW: This is the energy industry trying to pre-empt what Theresa May is going to do and I suspect it probably won’t be enough. Once you have a Prime Minister saying, having gone back a number of times that there is going to be price caps and there is probably going to be price caps. Having said that, we don’t quite know what form the price caps will take. We have got a draft bill next week and what Ofgem, the regulator itself proposes, and Centrica’s idea will undoubtedly form part of what that cap finally takes, what form the cap finally takes. But Conn does make a very good point in that is the structure of the regulation that has in part created this market where you go onto standard variable tariffs and they end up being expensive.

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