Directive/2004/38/EC wrote:... They pretty much told the UK that they should not charge more than a comparable domestic document.
The minister does not dispute this, but the fundamental question is what qualifies as a comparable domestic document
(or similar document
, the wording used in the directive).
The wording in the directive is, probably deliberately, quite vague and I guess only a court case will provide more clarity.
I can't see why a UK national would ever apply for a British Nationality Status Letter, when it is cheaper to get a passport.
So that leaves (from the list in the minister's letter) only the passport as a reference, and to me it seems that the UK government has a very weak position here.