Interview: Ian Peters, Managing director, residential energy, British Gas

“We are planning to radically rethink how we communicate to our customers. It’s around the theme of simplicity and transparency.”

Ian Peters is the acceptable face of British Gas. Right now, you could almost say he’s the only face of British Gas – as the leadership at the very top of its parent company Centrica changes hands, managing director Peters provides continuity, appearing before select committees and crucially running the company’s response to the Competition and Markets Authority (CMA). It falls to him to defend vertical integration; competition within the energy market; British Gas itself, and its record of delivering for customers.

It’s a task he performs well. Today, in British Gas’s Staines headquarters, Peters is friendly and welcoming, cracking the odd joke before settling down to business. “As it’s Friday, my voice isn’t in the best shape,” he warns. “I’ve talked myself to a standstill this week.” With British Gas at the centre of the storm over energy bills, despite its own profits falling by 26 per cent last year, there’s plenty of talking to do. The company’s strategy is a mixture of the defensive – arguing competition isn’t broken, smaller suppliers are on the up and prices are fair – and the offensive – an aggressive rollout of smart meters in a bid to change the dynamics between supplier and customer.

Change is the order of the day. A flurry of departures from parent company Centrica over the past year, including financial director Nick Luff and downstream managing director Chris Weston, has been coupled with long-running speculation about the exit of chief executive Sam Laidlaw. In the summer, Laidlaw’s retirement and replacement with former BP boss Ian Conn, who joins in January 2015, were confirmed on the same day that a 35 per cent tumble in group profits was announced. Within this, British Gas residential operating profits – Peters’ domain – were down 26 per cent. How come?

“Weather,” he replies simply, in reference to the warm summer. Will next year see a new era ushered in for the UK’s largest energy company? “We have a very clear strategy. I’m happy it’s the right strategy, and have no compelling reason to change it. Do I expect the new leadership to change it? No. Can I guarantee that? No.”

As if this wasn’t enough, the entire landscape of energy is under scrutiny by the CMA. Will everything be different in two years’ time? Peters thinks so, but not for the reasons you might expect. “If the CMA was not undertaking its review, would the market be fundamentally different anyway? My answer to that is it could be significantly different.”

How so? Well, despite the small suppliers’ vocal and visceral resentment of British Gas, the market leader remains benignly supportive of them, in words at least. Peters reports: “When the next market share data comes out, I think they may be around six per cent, which is three times what they were a year ago. We had 19 new suppliers in the market last time I counted. There are more entrants coming in all the time with a range of different propositions. Most of them clearly have a price advantage by dint of the small suppliers’ exemptions and they’re growing strongly. I see no reason why that shouldn’t continue over the next couple of years.”

Meanwhile, smart meters will change the game, Peters reckons. British Gas has firmly staked its hand on the success of the new technology, having rolled out more than a million domestic smart meters ahead of the start of the official programme, and owning around 70 per cent of the market. This, says Peters, is already paying dividends, with calls and complaints lower by one-fifth among smart metered customers, compared with British Gas’s other customers.

Peters is a smart meter evangelist. He believes the root of the public’s problem with energy companies is in the bill – “understandably so, you wouldn’t pay for your groceries based on an estimate” – and hopes the accurate, transparent billing provided by smart meters will change this dynamic. It will create informed customers who can work with their supplier to manage down their energy bill. Peters quotes British Gas’s partnership with remote thermostat provider Hive: “A typical UK householder will change their thermostat twice a year, a Hive customer changes it twice a day. What is staggering is customers with Hive – and we have over 100,000 now – are 40 percentage points more satisfied than those without. It speaks right to the heart of this choice and control issue.”

If the market is fixing itself, does Peters believe the CMA inquiry is unnecessary? “No, it’s not unnecessary. The industry has been subject to a massive amount of media and political commentary over the past two or three years, some of which is fair, some unfair. To have the CMA look at this in a data-driven, hard-nosed way is something we all welcome.”

Peters, who himself has been subject to aggressive coverage by the tabloid press, will not be drawn on the CMA’s potential findings (“it’s far too early”). He does take a moment to note that of the inquiry’s four theories of harm, three relate to vertical integration. Peters says the industry “has not done itself any favours” with opaque reporting around vertical integration – a message he is all the more eager to deliver since British Gas changed its reporting two years ago, to include self-supply figures, profits by fuel type and trading profits. “I would absolutely urge all the industry to get to that level of disclosure.” He is also keen to emphasise British Gas’s active role in the markets – last year, it self-supplied just 14 per cent of its power.

Peters puts an eloquent defence, but with the industry’s reputation in tatters, will the market leader admit to any mistakes? Like the politicians to whom he has to answer, Peters doesn’t like the word ‘mistakes’, but will admit to historical failings on customer service: “We’ve not been as good as we should have been consistently at the very basics of customer service.”

He also acknowledges the baffling complexity of tariffs that led to Ofgem’s intervention with the retail market review (RMR): “Two or three years ago, we had a lot of products in the market. From that point of view, the Ofgem intervention on narrowing the product range in principle was the right thing to do.”

Back to the mistakes – though Peters prefers the term “challenge and opportunity” for this one: “The way we have explained price changes has not been as good and compelling as it probably could have been. We’ve got better over the years, but the very fact that people take out of the price increases that it’s about putting profits up, which in our case is palpably not true, must say we could do better job on communication. We are planning to do something about that shortly by radically rethinking how we communicate to our customers.” Tell us more? “Watch this space. It’s around the theme of simplicity and transparency.”

Peters elects not to mention what comes up in later questioning – the mis-selling of British Gas products by Sainsbury’s that led to a public mea culpa and a £1 million compensation package this summer. The market leader had been proud of being the only one of the big six to escape the mis-selling scandal – how did it feel to have to put their hands up?

“I was hugely disappointed, and yes, it was a surprise. What we then did, in terms of mounting a full and thorough investigation, says a lot about how we behave.” As market leader, does British Gas hold itself to a higher standard of responsibility? “To a degree, yes. We set our own bar pretty high, and we think it’s right that we should.”

As British Gas acknowledges in its CMA submission, the heart of the public’s problem with energy companies is the spiralling price – fix that and the rest is noise. It’s become all the more heated this summer, as the price of wholesale gas has fallen significantly, yet customer bills remain high because the major energy companies buy their supply on long-term fixed price contracts, which hedge their risk. Is that in customers’ best interests?

“It is clearly a statement of fact that the wholesale price of gas in the spot market has been falling through 2014. Yes, we hedge, and we all hedge in different ways and in different lengths. Why we do that is for two reasons, both for the benefit of the consumer. One is to secure supply, that’s about the physical hedging, and when you’ve got the best part of eight million customers using gas, it’s important you secure supply for the longer term; second is to smooth out price volatility, because this works both ways. In the contra-example to what’s happening now, in Easter last year, for a variety of reasons, wholesale gas doubled, and we had something looming in terms of a gas shortage. Despite wholesale prices doubling, retail prices didn’t change.”

Shouldn’t customers have the choice to reflect the cycle? “Sure – we have tried on three occasions since I’ve been doing this job in 2007 to launch tracker products and some of our competitors have also tried. They have never worked on any scale. I wouldn’t give up on it, but the reasons they have struggled to work are still there.”

British Gas has had some success with a “fix and fall” tracker product, but Peters says trying to find room for this inside the four tariffs allowed by RMR is difficult. “You’re going to ask me what the right number is now, aren’t you?” he anticipates. “I’d probably say six. Not ten.” Will RMR have to be reviewed? “Inevitably.”

Meanwhile, Ofgem and the industry are in a “learning phase” over exemptions and derogations, with white label arrangements such as British Gas’s massive Sainsbury’s deal, for example, currently exempt and looking ever more likely to win a permanent exemption.

On to British Gas’s legacy customers. As the market leader and the former monopoly, it has the greatest number of customers who have never switched: one figure quoted in the market is 42 per cent.

Not so, says Peters emphatically: “If you work through what’s happened with switching since the market got
liberalised in 1997, you get down to a number quite quickly where less than seven per cent of our customers are in the same state they were a few years ago. The 42 per cent I think is an Ofgem number, which is palpably untrue.”

Ironically, such disputes over figures are one of the biggest barriers to trust in the market. The unholy row every time Ofgem releases its supply market indicators doesn’t help anyone. Another battle of claim and counter-claim is being fought with the networks. British Gas wanted network costs included in the CMA inquiry, and insists they are going up. Peters warns against the official numbers from the Department of Energy and Climate Change and Ofgem, which have them falling, saying this is in real terms, taking into account inflation. The next network price control for electricity distribution sees costs coming down, again in real terms, but Peters says this is only part of the picture. The networks furiously disagree: they were up in arms at British Gas’s attempts to pull them into the inquiry.

Peters fights such battles well; he has a difficult case to make, and remains plausible and likeable in doing so. Whether that will be enough for the CMA remains to be seen.