The prices of shares in energy supply companies such as SSE and Centrica fell sharply last year after Labour threats to impose a price freeze for retail customers. For example SSE was as high as 1675p in May 2013, but fell back to below 1350p by November. It’s 1508p at the time of writing and has shown a steady recovery in the last new months. That recovery arose because both the Government and the companies took steps to minimise future price rises.
For example, on the 26th March SSE announced that it was freezing household energy prices in Great Britain until January 2016. The announcement included a focus on operational and financial efficiencies, including cost cutting and asset disposals. This announcement nicely pre-empted the news the following day from OFGEM that it had asked the Competition and Markets Authority to look into competition in this sector.
To quote from the OFGEM announcement, their concerns are:
– Declining consumer confidence with 43 per cent distrusting energy companies to be open and transparent. This may deter consumers from engaging in the market and prevent them from getting a better deal for their energy;
– Continuing uncertainty over whether the vertical integration of the large energy companies is in consumers’ interests;
– Retail profits increasing from £233 million in 2009 to £1.1 billion in 2012, with no clear evidence of suppliers becoming more efficient in reducing their own costs, although further evidence would be required to determine whether firms have had the opportunity to earn excess profits, and;
– Suppliers consistently setting higher prices for consumers who have not switched.
The essence of the allegations (as Diane Abbott put it succinctly in a recent BBC question time) was that the big energy companies are effectively running a cartel to maintain prices at similar and high levels.
The market reaction in the share price of the companies was minimal, which might be seen as surprising.
SSE welcomed the referral so as to achieve “greater political and regulatory stability” and the Chief Executive of Centrica, Sam Laidlaw, said “Britain’s energy market is highly competitive and we believe that a full independent review by a respected regulatory authority would demonstrate precisely that“. But he also warned that a prolonged period of uncertainty would inhibit new investment in generating capacity – the Daily Mail reported this as creating the risk of “mass blackouts“).
Indeed Tim Yeo M.P. noted that the cut backs at SSE which included cancelling large off-shore wind farm projects were a symptom of future investment shortfalls that would “aggravate the coming crunch in generating capacity and increase the risk of blackouts“.
It would appear that the companies welcome the political gesture of the investigation, expect to get a clean report, but would simply like to get it over with quickly.
In their announcement on the 26th March, SSE reaffirmed their commitment to increases in their dividends for 2014/2015 to at least match RPI inflation, with similar increases in later years. On a forecast p/e of 13 for the year ending March 2014, and a dividend yield of 5.7% (based on the current hare price), one can see why investors still view the shares as attractive for income in comparison with putting cash on deposit, albeit there is some political risk attached.
Comment: although the large energy companies might have benefited from some consumers failing to switch, there are actually quite a range of alternative suppliers who compete on both price and capabilities. At first glance, competition is fairly healthy. It’s also easy to use price comparison web sites to identify the best deals. For example Telecom Plus, trading as The Utility Warehouse, is one growing competitor and investors should bear in mind that if you hold a minimum of 2,500 of their shares for more than a year, you get an additional 10% discount.
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