Should companies be allowed to make profits?

There has been much outrage at Centrica's record profits. But is the howling from politicians and the media justified?

***Should companies be allowed to make profits?

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Should companies be allowed to make profits?

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It sounds like a stupid question, but judging by recent headlines, it's one that needs to be asked. As you may have heard, British Gas owner Centrica has posted record profits for 2005. The news comes barely a week after it announced that prices for its residential customers will jump by 22% from March 1st.

'Anger as gas chiefs reveal record profits,' barked the Scotsman. 'Centrica fuels outrage with £1.51bn profit,' stormed the Daily Mail.

So do they have a point?

British Gas owner Centrica made pre-tax profit of £1.51bn during 2005. And yet British Gas still plans to hike energy bills for its 17m customers by 22% from March 1st. Why?

One of the problems facing Centrica is that one part of the business produces and sells gas. That side has profited from the soaring wholesale price of gas. Profits at this 'upstream' division rose £130m to £903m.

But the other part of the business, the British Gas side, has to buy the wholesale gas which it then sells to consumers. It lost £75m in the second half of last year, because it has been unable to pass on all of the increase in wholesale gas prices to its customers. Over the whole year, British Gas profit came in at £90m from £242m in 2004. Centrica's chief executive Sir Roy Gardener said: 'British Gas as a stand-alone business would not survive.'

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Of course, one shouldn't let facts get in the way of a bit of rabble rousing. The Scottish National Party's Energy Spokesman summed up the general anti-capitalist mood. Mike Weir MP said: 'Once again customers feel the pain whilst shareholders reap the gain. This lays bare the fact that these price rises were purely to protect the huge profits being made by Centrica.

'If rising prices are the true effect of increasing wholesale prices then surely the shareholders should also take some of the pain instead of it all being heaped on long suffering customers.'

Mr Weir seems to have discounted the possibility that some of Centrica's shareholders might actually be British Gas customers themselves. Presumably he believes that the kind of people who own shares are so rich that they heat their homes by throwing piles of cash onto open fires.

We're not saying that shareholder capitalism is a perfect system. But much like democracy, it's the best one we've found so far.

Who else should run the utilities? The Government? It's the Government's fault that gas prices are soaring in the first place. A short-sighted energy policy has left the UK reliant on foreign supplies as gas reserves in the North Sea run out.

We're not necessarily saying that British Gas is right to raise its prices. It's a business decision it may come to regret. And that's because there is something you can do about it if you are a British Gas customer - switch suppliers. Ignore those annoying adverts where the little blue flames try to con you into believing there's no point in taking your custom somewhere else. If you can get your gas cheaper from another company, then do it.

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There are plenty of websites out there that take most of the hassle (including switching your direct debits) out of making the change. While you're at it, check if you can get your phone bill for less too.

And don't listen to British Gas's other ploy. They're offering customers the chance to fix their energy bills for three years from March 1st. Now, unless you absolutely need to know that your gas bill isn't going to rise between now and 2009, we don't think this is a good deal.

What the adverts don't point out is that within the next two years, a lot of new supply is expected to come online, via a new pipeline from Norway and increased imports of Liquefied Natural Gas. So if you fix now, you could well end up paying a lot more over the course of the next three years than if you don't fix.

And if you believe that Centrica is making too much profit, you should buy shares in the company - it's clearly undervalued, and those dividends might help make up for your higher energy bills. Just remember that not every shareholder is as optimistic on the group's prospects - shares dropped 4% after its annual results to 285.75p.

Turning to the wider stock markets

The FTSE 100 fell 36 points to 5,836. Financial news provider Reuters was the main faller, down 11% to 399.5p on disappointing growth forecasts. Meanwhile defence group BAE Systems fell 6% to 421.75p on a bigger-than-expected pension deficit. For a full market report, see: London market close.

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Over in continental Europe, the Paris Cac 40 closed 1 point lower at 5,040, while the German Dax fell 4 to close at 5,857.

Across the Atlantic, US stocks fell as lower-than-expected jobless claims raised fears that the strengthening labour market may add to inflationary pressures. The Dow Jones closed down 67 points at 11,069, while the S&P 500 dropped 4 to 1,287. The tech-heavy Nasdaq fell 3 points to 2,279.

In Asian trading hours, oil headed higher, trading at around $61.30 a barrel in New York. Brent crude was trading at around $58.90. Meanwhile, spot gold was trading at around $552 an ounce.

In Asian stock markets, the Nikkei 225 rose 5 points to 16,101. But exporters were in the doldrums as the yen had its biggest gain against the dollar in almost two months. The rise came as the Bank of Japan said conditions for a change in the bank's near-zero interest rate policy are 'being met.' That suggests rates may rise soon.

And in the UK this morning, Lloyds TSB reports that profits rose 4% in 2005 to £2.5bn. As with rival Barclays, gains in corporate banking more than offset a weak performance in its consumer banking division.

And our two recommended articles for today...

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Why you should buy into Russia - Foreign investors have been put off investing in Russia by the uncertainty surrounding the political situation in the country. But they shouldn't be, says Sven Lorenz in The Daily Reckoning. The Kremlin is keen to keep foreign investors onside, and there is a whole country of debt-free potential customers out there, just waiting to gain access to credit cards, mortgages and consumer goods. Find out how to profit, by clicking here: Why you should buy into Russia

Has the bull market in gold peaked? - Will gold keep rising? Or has the bull market peaked? Gold commentator Paul van Eeden reckons gold has much further to go - but it is going to trade sideways for a while. To find out what it will take to get the gold bull up and running again, click here: Has the bull market in gold peaked?




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