Whenever you hear about utility companies making a lot of money you might wonder where it all goes.  In fact, it can be difficult to justify giving them so much money without understanding what they are spending it all on.    

British Gas is one of the biggest utility companies in the UK and one of the things that it is currently investing in is the Warm Homes Discount, a scheme which is intended to help those who are having financial difficulties.  However, this is only a small part of the revenue which is taken in from consumers.      

Low Profit Margins?

The company has stated that it makes only a 5% profit on the revenue taken in and this scheme is paid for from that figure, although this is disputed.  So where does the rest of the money go?

Utility companies do have large overheads.  Between 2009 and 2011 figures released by British Gas show that on the average gas bill around 52% of the total is used for the cost of buying in wholesale gas. 

A further 22% is the cost of delivering it to your home and charges levied by the government account for a further 11%.  Operating costs of the company, including wages are around 9% leaving a profit in the region of 6%.

There are a number of schemes in which the company is obliged to invest.  These include promoting and improving energy efficiency in homes and they also have to invest in the production of greener energy sources in line with government targets and guidelines.  This applies to all utility companies, not just British Gas.

The Warm Homes Discount is actually a government scheme and despite claims from British Gas that the monies invested in this actually come from its own profits, this falls under the heading of government charges, so the 6% profit that the company makes will not be dented by this expense.    

Where Do the Profits Go?

British Gas is part of a larger company called Centrica and profits from British Gas are merged with those from other areas of operations within the Centrica group.  Some monies are distributed to shareholders and others are reinvested into the business to help to generate work opportunities and improve systems.

Over the last few years shareholders in Centrica and British Gas have seen their dividends rise which is very nice for them but not so much for the people paying it through their bills.

Price Rises

When prices rise the company usually places the blame with the wholesale price of gas, but users do not know how to access this information to check if it is true and even when the prices fall, this information is not passed on to the customer – nor are the savings! 

The most recent rise has drawn a very complicated explanation from British Gas.  A statement from the company shows that they are basing the increase on average prices and estimates of future prices. 

Strange Accounting

There is still no clarity on what they have actually paid for the gas so the figures given for the percentage of each bill given over to wholesale prices are just estimates if the statement from the company is to be taken at face value.  

The whole accounting basis seems to change all the time, and it is never the customer who benefits.

British Gas is not alone in not being specific about how much gas actually costs them to buy.  The consumer is simply expected to trust them when they say that prices have risen.

Research shows that over the last year the increase in wholesale gas prices has been minimal and in some areas this has actually fallen, raising the question of how the company can justify its recent increases.