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Centrica profits set to stoke further controversy

Centrica profits set to stoke further controversy

If there is one thing that is predictable about politicians it is the art of deflection to cover up their own inadequacies. It has been particularly notable with the banking sector over the past few years which by and large have quite rightly come under massive scrutiny for significant failures of banking practice as well as an abject failure of regulatory oversight. To listen to politicians lecture and admonish various bank and company bosses, you would have thought that respective governments had no part to play in the various problems afflicting the UK economy over the past few years, as company boss after company boss has been held to account for various policy failures and oversights, in front of various parliamentary select committees. We are now seeing a similar pattern unfold with respect to the energy companies as politicians of all political persuasion line up to criticise the practices of energy companies and the energy market that they helped set-up. There is no doubt that energy companies don’t do themselves any favours with respect to pricing behaviour and there is no question that there are questions to answer regarding energy market transparency. But for politicians to pretend that government policies haven’t helped keep a floor under energy bills is cognitive dissonance at its best, especially when looking at the targets of the Climate Change Act of 2008 brought in by the previous Labour government, which are expected to keep energy bills high relative to inflation for years to come. Shutting down existing power generation capacity before you have a working alternative is the politics of madness and stupidity, green carbon targets notwithstanding. At the same time the same governments then expect the various energy companies to invest in future infrastructure projects for new power generation capacity, while making as little profit as possible for the people who invest in the business. Recently, we’ve seen the heads of all the major energy companies hauled before parliament to explain why they feel the need to raise prices when wholesale prices to all extent and purposes have barely shifted. It’s a valid question but only part of the reason why bills are going up and will probably continue to do so. The shift in the political debate over the past few weeks over energy prices introduces a significant element of political risk to the share prices of all the respective power companies, particularly those listed and based in the UK. We saw the market reaction the day after Labour Leader Ed Miliband’s pledge to cap energy prices from 2017, when Centrica’s share price posted its biggest one week fall in years. We saw a similarly sharp fall in Scottish and Southern energy’s share price, in sharp contrast to EDF’s and E.On’s share price which barely moved. This difference in share price reaction is largely down to the fact that both Centrica and Scottish and Southern are UK based companies, and therefore are much more vulnerable to political interference, while EDF and E.On are not UK based, and if they so wished could simply walk away or pare down their UK investment, if the UK government ever chose to implement such a misguided measure. Quite simply, any price cap would not resolve the underlying problems the UK needs to face with respect to its future energy needs, and would drive much needed investment away. There is no question there is a problem when UK gas and electricity prices have risen 190.5% and 120.5% respectively since 2003, but is capping energy prices really the way to go about it, when an increasing part of the bill is made up of green taxes and VAT. Unless the framework of the debate changes this new political uncertainty could well weigh on the share prices of both Centrica and Scottish and Southern in the coming months, and could also have an effect on the dividend attractions of both stocks, particularly if they struggle to generate returns. Looking at the share price performance of the four biggest energy companies since the beginning of the year we can see that, aside from EDF, which has been very good, share performance has been just about positive, though we can see that before Miliband’s comments in September Centrica shareholders were sitting on nearly a 20% gain, which has now largely disappeared. Even looking at the profitability of the various companies it is hard to see from the published accounts how the UK based companies can be accused of overt profiteering, given that their profits haven’t moved in line with the size of the increases in bills. In 2012, Centrica posted pre-tax profits of £2.4bn; in 2013 it’s on track to generate pre-tax profits of £2.6bn and estimated to generate profits of £2.7bn in 2015. That’s hardly profiteering after tax, and tax revenue for the government is badly needed in these tough times so surely we shouldn’t be penalising companies for making profits, given that utility companies were among the biggest payers in terms of corporation tax into government coffers in 2012. For Scottish and Southern they posted pre-tax profits of £268m in 2012 and £601m in 2013, hardly earth shattering numbers. The concern for UK based companies going forward is likely to revolve around the impact of being used as a political football by politicians who won’t face up to the realities of a potential impending power supply crunch and in an attempt to try and score political points tout populist measures in an attempt to buy short term votes in order to get re-elected. The UK needs a grown up debate about our power generation priorities going forward, unfortunately due to entrenched political short termism we seem unlikely to get it. CMC Markets is an execution only provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.

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