The Sunday Times - UK (2021-12-19)

10 The Sunday Times December 19, 2021

BUSINESS

O’Shea inherited a company on the decline that was failing to stem the flow of customers walking out the door to sign up with cheaper rivals. At the end of 2013, British Gas was supplying energy to 15.3 million customers. By the end of last year, it had 6.9 million. But his efforts to stabilise and then grow customers numbers has received a boost from the current market chaos. British Gas has picked up more than 400,000 accounts from collapsed suppliers, including People’s Energy, through the Supplier of Last Resort (SoLR) process, where Ofgem hands companies customers left without a supplier.

L

ast month, Bulb collapsed, cutting adrift 1.7 million customers. Ofgem and the government said it was too large to go through the SoLR process and needed to be put into special administration, along with a £1.7 billion bailout to keep it running for six months. Ambitious rivals including Ovo, which in 2019 bought SSE’s energy supply business, were pushing hard to take on Bulb’s customers before it went into special administration. But so was Centrica. Sources said it weighed a deal to buy Bulb. However, it wanted help to do so — and is said to have approached the government about tax- payer support to enable it to secure the energy needed to supply 1.7 million new customers. The proposals were rejected. Centrica declined to comment. Others interested in Bulb before its collapse included Masdar, Abu Dhabi’s state- owned clean energy company. Whether Centrica, which has 23,000 staff, returns later in the administration process to swoop on Bulb or collects some of its customers remains to be seen. Either way, the British Gas owner is steering clear of the PR disasters that have dogged it for years. Stories about big paydays for British Gas bosses while energy prices soared had become com- monplace. In 2008, British Gas organised an infamous conference for its sales team. Drunken behaviour and brawls were reported by The Sun; the company had raised prices for customers that day. Columbia Threadneedle’s Colwell said: “In the bad old days, Centrica would be front page: ‘The bastard who’s screw- ing customers.’ So it’s good that so far they’ve navigated away from that and they’re part of the solution.” One source, however, said that while Centrica had come out publicly in support of the energy price cap recently, defying its previous stance, it was lobby- ing Ofgem behind the scenes for it to raise the cap “dramatically” in the spring. They said: “Publicly, you’ve got a company siding with the consumer. Privately, it’s trying to make sure that price cap is as fat as possible.” Centrica denied this. As the government looks at how to pay for the inevitable cost of the energy crisis, utility companies such as Centrica are wary it will not be plain sailing for them. Bills will rise, and so could taxes for households and energy suppliers. And those customers who were moved to Centrica when their supplier went bust may abandon British Gas again next year. Nevertheless, a return for the dividend is just a matter of time. RWC’s Lance, who predicts the crisis will result in a new big six dominating the market within months, said: “They have to balance the political with the economic. You can imagine the headline when they reinstate the dividend at a reasonable level and then, on the same day, people’s gas bills go another 30 per cent higher.” The company is also hoping it will play a major role in fitting Britain’s homes with hydrogen boilers — part of the government’s target to hit net zero by 2050. Colwell, who reckons the market will settle at around ten suppliers, said Colum- bia Threadneedle applauded O’Shea for the progress being made. But he added cautiously: “You can’t do a lap of honour with the shares where they are.”

and grappling with oil prices that were much lower than in Laidlaw’s tenure. Theresa May stunned the market when she unveiled plans in October 2017 to cap energy prices for consumers. It limited bills for households, but slowed Conn’s attempts to steady the ship. O’Shea joined Centrica in November 2018 as chief financial officer from engi- neering company Smiths Group, but took over as chief executive just as the pandemic struck in March last year. In the short time since, he has ticked a number of boxes for shareholders, sim- plifying the business and strengthening the balance sheet. Having offloaded its US energy supply arm Direct Energy for

$3.6 billion (£2.7 billion) this year, O’Shea unveiled plans this month for an £800 million sale of the Norwegian oil and gas assets of Spirit Energy, the North Sea oil company it owns. The Spirit deal also included passing on £830 million of decommissioning liabilities. He is still weighing whether to sell its 20 per cent stake in British Energy, the EDF-owned fleet of operational nuclear power plants. O’Shea also went through painful negotiations with unions over terms for staff Centrica wanted to “fire and rehire”. The company said the changes meant it was now able to compete. But they did not make O’Shea popular: his family received a letter filled with excrement.

Transport’s

poster child

has come

unstuck

Once a model for bus and rail funding, London’s public transport system has ended up in desperate need of cash, write Jon Yeomans and Nicholas Hellen

The pandemic has upended all of that — but leaving TfL in the lurch is not an option. London’s transport system drives its economy, which helps drive the UK. John Dickie, chief executive of lobby group London First, noted that commuters travelling into London help generate 10 per cent of the nation’s wealth, a phenomenon he described as “extreme agglomeration” and dependent on a public transport system capable of shuttling vast numbers. The government has indicated that this agglomeration effect can be replicated elsewhere, by tying together the cities of the north and the Midlands through its integrated rail plan. TfL’s model of tight regulation over transport is one it wants in other cities. The National Bus Strategy, announced this year, cements the ability of local authorities to adopt franchising powers if they wish. This month, Andy Burnham, mayor of Greater Manchester, began a formal process to bring buses back under public control as part of a franchised system. How, then, did TfL — seemingly a poster child for the government’s ambitions —

say they can work profitably in a regulated system. “We’re comfortable with either environment,” said Martin Dean, business development manager at Go-Ahead Group, which operates buses in London and elsewhere. “[In bidding for new contracts] we would have to take into account, what is it that the transport authority wants? What does the balance of risk and reward look like?” Private sector firms are keen to note that they champion innovation in the sector. Alistair Hands, commercial director of Arriva’s UK buses, said it was exploring demand responsive transport (DRT), which could lead to passengers in quieter areas using an app to call up a minibus to supplement their scheduled services. “The key is looking at the [bus] network holistically: understanding where it can stand commercially on its own two feet and where it needs a different solution.” One question remains, however. Just how many people will return to public transport post-Omicron? Cutting services and raising fares at the wrong moment could kill that recovery. Not what Khan would want.

Khan mooted the idea of charging motorists who live outside Greater London up to £5.50 a day to come in. The mayor has also been pushed to introduce driverless Tube trains, but costs might be prohibitive — work by TfL showed it would cost £910 million to upgrade the Piccadilly line alone. The nub of next year’s negotiations will be around capital expenditure on the Tube: how much new rolling stock will it need when passenger demand post- Covid is uncertain? TfL’s travails come in the context of a post-Covid upheaval in public transport. Operators are adjusting to a new era of public-private partnership. Franchises have been abolished on the trains and companies are now paid contractors of the state. This could spread to buses, too, with 1980s-style deregulation giving way to tighter local authority control. The franchising model is tricky to deliver but “much better for transport authorities in the end”, said Paul Swinney of Centre for Cities. Imposing greater control on the buses has not always gone down well with operators. However, many

entire Tube line to help close an estimated £2 billion funding gap. Whitehall is not convinced by Khan’s claims that “the sole cause of TfL’s financial problems is Covid- 19”. Crossrail has suffered cost overruns of £4 billion on its £14.8 billion budget, and in the good times Khan froze fares to win votes, with £600 million in revenue foregone over four years. It has been estimated that he gave up £600 million in fares with a discount offer for buses, and £200 million through overmanning. The search for savings has become ever more desperate.

For years, Transport for London has been held up as the blueprint for the future funding of public trains and buses. The model of heavy subsidies and strict central control over its contractors is being echoed in other cities across the UK. Yet now the organisation chaired by mayor Sadiq Khan finds itself a busted flush, facing huge losses. It has been locked in desperate negotiations with ministers over a funding settlement. On Friday, it won an eleventh-hour extension of funds until February, but the battle over who pays for the network and how rumbles on. Its troubles are being closely watched by the industry around the UK. TfL has had £4.1 billion in central government support during the pandemic to compensate for the fall in ticket revenues. Before Covid it had been working towards breaking even, with fares making up 70 per cent of turnover — far more than New York or Paris. Government grants were cut to zero and Khan could tap business rates and other levies for support. TfL also borrowed heavily for projects such as Crossrail; its debt stands at £13 billion. Mayor Sadiq Khan has threatened to close a Tube line

find itself on yet another financial cliff edge? Last week Khan was forced to offer a ragbag of money-raising offers just to earn himself a position at the negotiating table, including imposing a £20 council tax rise on all London households and reducing the concession that allows 60-year-olds — even those in high-earning jobs — free travel in the capital. There is clearly no love lost between the Labour mayor and Tory ministers, who were irritated by his claims that TfL was facing “managed decline”; Khan even dangled the possibility of closing an

Centrica’s shares have reflected the increased optimism, having surged nearly 50 per cent since July. It has been a rare purple patch for Centrica’s long-suffering shareholders. Despite the recent spike, the share price is still 83 per cent below where it was in September 2013. Under former chief executive Sam Laidlaw, Centrica embarked on a plan of global domination, expanding further into oil and gas and into electricity and gas supply in North America — despite having its own problems at home with British Gas. Iain Conn, who took over in 2015, attempted to stabilise the company, which was losing customers at British Gas

Chris O’Shea inherited a company in decline but after taking tough decisions the share price is on the rise, while PR disasters have, so far, been avoided

ILLUSTRATION: JAMES COWEN

How Centrica is getting its halo back

I

t was mid-October, and investors in British Gas owner Centrica received a fright. Wholesale gas prices were soaring, households were facing a tough winter and bigger bills, and energy suppliers were dropping like flies. Into this mael- strom pitched up Centrica boss Chris O’Shea to declare that he was scrapping Centrica’s long-planned capital markets day the following month. These days are typically a chance for companies to talk up their growth plans and show what treats they have in store for shareholders. Investors feared that pulling the plug on the event meant the chaos was taking its toll on Britain’s big- gest energy supplier too. The opposite was true. As the energy crisis played out around it, business was good at Centrica. But the perennial pan- tomime villain of British business — a reg- ular of tabloid front pages about “fat cat” excess — was keeping its head down. “They basically said of the optics: ‘Just as a load of customers are getting a lot of grief from their energy bills spiking or their provider going bust, they won’t want Centrica standing up on a podium and saying we’re reinstating the dividend.’ That would not have been a good look,” said Richard Colwell, head of UK equities at Columbia Threadneedle, a top-five shareholder. Ian Lance, a fund manager at RWC Partners, a top-ten shareholder, added: “Undoubtedly they would’ve been giving their shareholders quite good news. That would have looked terrible when energy bills are going through the roof.” The energy market crisis has been spurred by soaring global demand for gas and a lack of domestic supply and stor- age, resulting in record jumps in the price of natural gas. It has left reputations in tatters — and fingers are being pointed in all directions. For once, Centrica has avoided being in the firing line. British Gas has been a closely followed stock since its privatisation in the 1980s, when a TV ad campaign exhorted Britons to “tell Sid” about the share sale. To this day, Centrica (a name that appeared in 1997) has an estimated 500,000 retail investors on its books. But by the 2000s it was the leader of the “big six” energy giants that held sway over the market. Successive governments encouraged Ofgem, the energy regulator, to open up the sector to competition. At its peak, 60-odd suppliers entered the market, but recent years have shown that their foun- dations were built on sand. Upstart energy suppliers have collapsed — 28 failures this year alone. They have come under fire for not hedging against rising wholesale energy prices, which meant they were brutally exposed to a surge in the cost of gas. Ofgem, already facing criticism for how it ushered in dozens of new players to the market, last week unveiled a plan to begin stress-testing energy suppliers to help weed out the cowboys. But its plan was criticised as being light on substance after it emerged that the tests would be nowhere near as thorough as the sort imposed on the banking sector. Amid the chaos, analysts wonder whether the crisis would turbocharge O’Shea’s turnaround of the energy giant. Martin Young at Investec said that a more stable energy market would be “beneficial for the likes of Centrica”. “Tightening up on the ability of [commercial rivals] to come into the market and offer unsustainable tariffs — and per- haps not have sufficient financial strength — tilts the market back towards large suppliers, so sunnier times lie ahead for Centrica,” Young predicted.

JAMIE NIMMO

Customer numbers got a boost from the energy market chaos

Chris O’Shea is turning round the British Gas owner by siding with the consumer — in public, at least

The Sunday Times - UK (2021-12-19)

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