Centrica CEO Says Energy Price Limits Might Backfire on U.K.

  • Price caps seen discouraging cheaper fixed-rate offers
  • Rule restricting tariff numbers hurt competition, Conn says

Imposing new limits on U.K. power and gas bills may backfire on the government by discouraging utilities from offering cheap deals and suppressing competition, according to the head of Britain’s biggest household energy provider.

A cap on variable tariffs would probably prompt suppliers to raise all their cheaper fixed-price deals toward the price limit, Iain Conn, chief executive officer of Centrica Plc, said in an interview in London.

“This industry has been littered with unintended consequences,” Conn said.

Iain Conn, chief executive officer of Centrica Plc, speaks during the World Economic Forum (WEF)

Photographer: Qilai Shen/Bloomberg

In April, the government will introduce price caps for consumers on prepayment meters for the first time after a two-year investigation into the U.K.’s energy market by the Competition and Markets Authority. The measure was watered down to affect fewer households. Prime Minister Theresa May’s government signaled this month that it’s prepared to intervene further to ensure gas and power consumers are being treated fairly.  

“It won’t necessarily mean that the standard tariffs are going to come down -- it’s probably quite the opposite,” Conn said.

The CMA started investigating suppliers in 2014 after the U.K.’s Office of Gas and Electricity Markets raised concerns that utilities used their market power to boost prices.

“The government is prepared to act wherever markets are not working for consumers,” Business and Energy Secretary Greg Clark said by e-mail. “My clear expectation is that energy companies should treat all their customers fairly.”

Fuel Tariffs

Average variable tariffs for gas and power offered by the six biggest providers dropped about 4 percent from January 2014 to April 2016, according to regulator Ofgem. Still, they’re about 6 percent higher than they were at the beginning of 2012.

The government wouldn’t be alone in squeezing Conn. Investors are, too. Centrica shares dropped the most since June on Feb. 23 after the utility decided to keep its dividend steady instead of increasing it. Centrica’s also under pressure to keep credit rating firms happy and deal with advancing pension costs.

The shares were little changed Monday at 225.8 pence in London at 11:45 a.m. They’ve dropped 3.6% so far this year, versus a 2.4 percent gain in the Stoxx Europe 600 Index.

Simpler Prices

CMA has pulled back from a previous rule that limited the number of contracts suppliers can offer customers, which was intended to simplify prices. Utilities complained it reduced their ability to compete.

“What they were trying to do is tidy the market up for consumers so they weren’t getting confused, but actually it had a detrimental effect,” Conn said.

Centrica has proven it’s willing to compete and offer better value to customers by freezing prices through August and starting a customer loyalty program, he said. 

“I find it a little bit amusing that maybe people just haven’t caught up with the fact that we’re offering prices that are rather better than they used to be,” Conn told analysts and investors in London.

Centrica has some flexibility to react if the U.K. intervenes on customer pricing as its return on capital is 16 percent, or 4 points above target, the company said. Centrica might appeal the government’s decision or change its business model, Conn said.

“What they don’t want to do is to become the price-setting mechanism,” he said. “If they do, where do they stop?”

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