Energy companies hid behind hedges to keep prices high. Now the hedges have gone, what's their excuse?

Regulators in Britain, including OFGEM (energy companies) and the FCA (financial companies), are powerless to stop many rip-offs because Parliament has made them that way. 
Regulators have about as much right to stop bad behaviour as a cop has to pull you over for doing 29 mph in a 30 mph zone. You'd need to be shooting at pedestrians with one hand, leaving just your other hand on the steering wheel, for them to do that. Even then, if a British regulator was prosecuting, you wouldn't be done for the civilian casualties but would get a £100 fine for driving while distracted (by shooting at people) as if you were using a mobile phone.

Regulators are impotent because consumer law passed and maintained by successive parliaments, Conservative and Con-Dem and Labour, make it quite legal for traders to rip off the 'less than average' 50% of their customers. This premise forms the bedrock of British commercial culture from banks to pensions to mobile phones to estate agents to broadband packages. The Office of Fair Trading (OFT) even provides a helpful roadmap to guide crooked traders on reaching the below average consumers (our annotations are in red (and this chart really is an OFT roadmap, not us being satirical)):



Energy companies, for example, have traditionally hidden behind hedges to carry out their mischief. These are not the leafy hedges prized by small children with catapults. The hedges the energy companies lurk behind are financial. So what are these financial hedges about?

There are legitimate reasons to take shelter behind a financial hedge. For example, the average refrigerator contains 123 pounds of steel. When a fridge manufacturer publishes a catalogue of prices for the next year, it wants to be sure the cost of the steel it uses doesn't shoot up leaving it making losses on the fridges it sells (or having to randomly hike their prices). The fridge maker can hedge this risk by contracting to buy all the steel up front, but only to be delivered and paid for at various times in the future during the year (a "futures contract"). The steel can be delivered to the fridge factory monthly, just in time for it to be fashioned into that month's quota of fridges.

As a result of the hedging the fridge manufacturer won't suffer if the actual price of steel goes up, but neither will it benefit if the actual price of the steel goes down. It will just pay the price it agreed when it signed up to the futures contract hedge.

Energy companies, who generate and sell electricity and gas to households and industry, can also 'hedge' their purchases of the fuels they use: oil; gas; coal; uranium.

In January 2016 David Cameron complained again about energy companies, scolding them for not cutting their household bills at a time oil prices had plummeted. 18 months before Cameron's passing winge, in June 2014 Mr. Dermot Nolan, CEO of OFGEM, wrote a “letter calling on large energy suppliers to explain the impact of falling wholesale prices on customer bills.”


This resulted in a series of "Dear Dermot" letters. The Big Six consensus being that due to hedging it would be at least 18 months before wholesale prices would have any impact on retail energy bills to households and businesses. Scottish Power stated in its letter:

"Dear Dermot,....
we buy our fuel ahead in order to avoid price shocks from instability in the wholesale markets. This means that movements in wholesale spot markets up or down, are not immediately passed into our cost base: the majority of our energy for 2014 was bought before the start of the year. Unfortunately, the energy we are mainly buying now – for delivery in 2015 and later – is not falling much in price.”


The energy companies thought the drop in oil prices would be temporary. They thought oil prices would surely be back up well within 18 months. In its own Dear Dermot letter, NPower said:
 
"Dear Dermot...
The primary reason for the fall in [wholesale] prices is the exceptionally mild winter we have had" [i.e. the winter of 2013-14].

Low prices caused by the exceptionally mild winter in 2013-14? They never for a moment thought the price would still be low 18 months later, blowing away their 18 month deep smokescreen and ripping off all the 18 veils they were prancing behind.

To better understand what they were talking about, take a look at the graph below of the price of a futures contract to deliver crude oil in January 2016. The price of a barrel of oil delivered to your power station in January 2016 depended on when you bought your futures contract:

• If you bought the futures contract in 2013 it would have cost around US$95.  
• If you bought the same contract in mid 2014 it would have cost about US$100. 
• From mid 2014 the price crashed. 
• In January 2015 the price was down to US$60. 
• By the middle of 2015 this futures contract for delivery of oil in January 2016 was down to US$50. For the remainder of 2015 the price continued to fall towards US$40.

https://www.quandl.com/data/ICE/BF2016-Brent-Crude-Futures-January-2016-BF2016

The next graph shows the price of futures contracts for delivery of oil in July 2017.

https://www.quandl.com/data/ICE/BN2017-Brent-Crude-Futures-July-2017-BN2017

With prices so low, the energy companies should be filling their boots with oil futures for as far into the future as possible. They should be promising households and employers much lower energy bills for at least 18 months. Sadly, past experience shows when oil prices go up households and employers will pay more pretty quickly.

Oil prices will go back up. The price can be moved on the whim of a small group of men in countries round the World not subject to shareholders nor democracy nor supply nor demand. Just as energy companies claim to have been stuck with high prices for 18 months after prices crashed, they should also be stuck with low prices for 18 months after the oil price rebounds.

Will our household energy bills stay low for that 18 months? OFGEM did once try to expose the energy companies' shenanigans by publishing wholesale and retail prices. However, they were quickly slapped down, presumably by OFGEM's political masters. The Daily Mail reported in January 2016:
"Power giants have won a secret battle to hide the scale of the profits they are making by refusing to cut prices.

Money Mail can reveal that last April the energy watchdog was bullied into ditching data that show whether households are getting a good deal.

These vital figures used to be published monthly. They showed the difference between what power firms were paying [wholesale] to supply energy to your home and what they were charging you on your bill."

Dear Dermot, OFGEM CEO, responded to the Mail's allegation saying it's not true any secret deal was done. Dermot completely avoided the question of why OFGEM stopped publishing these figures.

History shows that when oil prices go up consumer energy prices go up straight away. But when oil prices go down, even when they collapse, consumer energy prices just trickle down. In February 2016, following the oil price crash 18 months earlier, energy companies reduced prices by a puny 5%.

Whichever way oil goes the energy companies continue business as usual, barely able to stifle their chuckles. They are confident that those who can do something won't, and those who want to do something can't.

Which leaves poor old OFGEM standing impotently by looking to British consumers very much like buffoons.

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Tory flood defence cuts is a long way from “fixing the roof while the sun is shining”

SOURCE TELEGRAPH: Storm Desmond Floods 'made worse after hundreds of flood defence schemes shelved'

Flooding which brought chaos to Britain and saw thousands of people evacuated from their homes may have been avoided if the Government had not cancelled hundreds of defence schemes. Hundreds of families are spending the night in Red Cross Shelters after Storm Desmond brought record levels of rainfall to the North of England and Scotland, causing already swollen rivers to burst their banks, deluging towns, flooding 2,000 properties and leaving 60,000 homes without power. In Cumbria water rose to first floor windows and the army was mobilised to rescue trapped householders as David Cameron convened Cobra to deal with the growing crisis. Lib Dem leader Tim Farron, whose constituency Westmoreland and Lonsdale was severely affected by flooding said that the situation had been made worse because nearly 300 flood defence schemes had been dubbed "low priority" and shelved in recent years. They included a plan for the River Kent in Kendal, where an elderly man is feared drowned. Unprecedented levels of rain has fallen on Britain over the weekend, with rivers across the North of England reaching record heights and Honister in Cumbria recording 13.4 inches of rain in 24 hours, the most rain to ever fall over a 24 hour period. The River Eden in Carlisle reached 20.3 feet, nearly five foot higher than previous records.

SOURCE EXPRESS: £500m and rising – that's the cost of Storm Desmond

The general insurance leader at PwC UK, Mohammad Khan, said: “Our current estimate of the damage caused by Storm Desmond is £400million to £500million with the insurance industry paying out between £250million and £325million. “This compares to an economic cost of £275million and insurer costs of £175million in the 2009 floods. “Clearly these are initial estimates as there is still uncertainty as to the number of properties and businesses affected. If the storm continues, the damage - and therefore the costs - could be significantly worse. Critics have claimed that the Government has cut spending on flood defences, with £810million spent last year compared to £695million last year. In response, the Department for Environment, Food and Rural Affairs said the higher spending last year reflected an emergency injection of cash to help cope with the aftermath of the 2013-14 floods. But Lancaster University professor Gail Whitman, a sustainability expert, said: “Liz Truss’ comment about how the flood defences in Cumbria were only breached because of extreme weather conditions is rather short sighted. Thanks to climate change, extreme weather is the new normal. And that is hugely problematic.”

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Graphs at a glance: Will fracking bring cheap energy to Britain? The evidence suggest not.

There has been a lot of talk about fracking the UK. Our government is so keen it has considered changing the law on trespass to make it easier for companies to frack under our properties. 

Would it be a good thing? Even if there is absolutely no risk bits of our green and pleasant land  may disappear down multiple sinkholes?


The graph below from a parliamentary report, "The Impact of Shale Gas on Energy Markets", shows how fracking caused the price of gas to plummet in the USA. Benchmark natural gas prices in the USA (Henry Hub) and the UK (National Base Point (NBP)) were about the same until the Americans got down to some serious fracking.

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Graphs at a glance: What else will be washed away in the flood of public spending cuts?

It has to be said that David Cameron had a heavy dose of bad luck with the floods in the first part of 2014. If only the flooding had waited another two years then his party's performance at the 2014 local elections and the 2015 General Election would have been better.

Cameron's government took the bet that cutting spending on flood defences would not be noticed during his term in office. Rather like a man who reckons he won't get caught driving without insurance so long as he doesn't get into a crash. 

A gambling man would say it was a good bet. A gambling man would look at the statistics from the Met Office to see there hasn't been such a deluge in over 60 years since the 1940s. Chances were it wouldn't happen, but chancers usually get caught out in the end.

Cameron, in a Louis XV of France "Après moi, le déluge" moment, gambled on the deluge coming only after he had gone. Louis XV's prediction came true after he had handed over to his son Louix XVI who lost his head in the French Revolution. For Cameron the deluge came early.

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The £50 saving from cutting the ECO green levy may be gobbled up by a small rise in the wholesale gas price

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Graphs at a glance: OFGEM finally does something useful by publishing wholesale energy prices! See energy companies' bogus reason for hiking prices exposed!

This is no laughing matter, so lets skip the levity. OFGEM, one of the few organisations in Britain that manages to make the FCA (formerly the FSA) not look uniquely cowardly and incompetent, has published some useful data! 

Is it OFGEM's Wikileaks moment? Is it a fat-finger accident? Or did they actually mean to publish this useful information?

We like to think the best of everybody (we really do!) so lets assume they did this intentionally.


Anyway, for the first time OFGEM is explicitly publishing wholesale energy cost data. The data explicitly and independently shows the energy companies have been telling porkies about the rise in open market wholesale prices in recent years.

OFGEM data for the period September 2011 to October 2013 shows that since September 2011

• Wholesale electricity price has gone up by just over 2%. NPower and British Gas have raised prices by nearly 30%
• Wholesale gas price has gone up by 8%. NPower and British Gas have raised prices by upto 35%.

To add insult to penury, because the wholesale cost makes up half the bill the mathematics says the percentage increase in bills should be half the percentage increase in wholesale cost.  i.e. over the last 2 years wholesale costs would justify an extra 1% for electricity and 4% for gas.

As the director of OVO, one of those teensy independent energy companies, said about the Big Six in a BBC interview in October 2013:

"If they're buying more expensive gas, more expensive electricity, in a large part we think this is because they're selling it to themselves".

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Graphs at a glance: Energy companies' price hike tactics make switching futile

The government's answer to gouging energy companies is to switch. In David Cameron's words:

“There is something everyone can do, which is look to switch their electricity or gas bill from one supplier to another.”

Cameron, washing his hands of the matter, says you're on your own - run for it! He would have us jump from one frying pan into another frying pan! 

Information on price rises from the Consumer Futures website reveals the futility of switching. The cheapest electricity provider is hardly ever also the cheapest gas provider. And while British Gas has offered the least shocking deal on electricity most of the time in recent years their suffocating gas tariff will have given you a right roasting overall. Taking gas and electricity prices separately there is a hundred or so pounds difference a year between lowest and highest. But taking both together the Big Six march a very disciplined pricing goosestep. Whoever you are with you will get a kicking.

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Graphs at a glance: how electricity and gas bill promises from Miliband and Cameron are just yet more hot air and flatulence

Did Ed Miliband, speaking at the 2013 Labour Party Conference, actually believe his promise to freeze the price of electricity and gas would help anybody other than himself and his electoral (and leadership) prospects? 

Any more than David Cameron believed in his own unequivocal promise to stop energy companies ripping off Britons by making it law that we should be paying the lowest tariffs? A promise Cameron made so clearly, so concisely, so undeniably that we reproduce his words directly from Hansard (Parliament’s minutes):

“I can announce, which I am sure the hon. Gentleman will welcome, that we will be legislating so that energy companies have to give the lowest tariff to their customers—something that Labour did not do in 13 years, even though the Leader of the Labour party could have done it because he had the job.”

David Cameron during Prime Minister’s Questions on 17^th October 2012 shortly before lunch (thus presumed sober).

Cameron never did legislate as he had so clearly promised. And with Miliband giving the energy companies over a year's notice to pump up the price in preparation for any price freeze, he won't either. After all, Miliband didn't promise to lower the price, just to freeze it.

By focusing on the retail price of energy both men succeed in missing the real point: it's the wholesale price, stupid. The CEO of SSE, one of the 'big six' energy companies, bleated in his blog:

"we showed a profit margin of just 1.5 per cent from supplying energy. That’s lower than many other essential services, like supermarkets or mobile phones, for example."

And he is right! Retail energy companies say their profit margins are so low because they have to pay a high price for the energy they buy wholesale to sell to us retail. They scuttle over the fact that the gouging wholesalers they complain about are in fact themselves. The companies that provide the wholesale electricity and gas are the retailers’ own conjoined twins. Each of the ‘big six’ are now able to supply virtually all their own needs. 

Energy companies can pull this scam off because they are permitted to be 'vertically integrated' - i.e. they own both the wholesale and the retail businesses. The graph below, from an OFGEM report, shows how from 2005 energy companies shifted the profits from the Retail to the Wholesale end of their businesses, by putting up the wholesale price they make them pay to themselves. This allows them to claim their profit margins are puny when selling to their customers.

The Parliamentary Committee on Energy & Climate Change reported in July 2013 that while energy companies could claim a measly 1.5% profit margin on supplying domestic electricity, this was covering up a more than 20% profit margin taken by the wholesale generating end of these same companies.

Profit margins	2011 aggregate margin	2010 aggregate margin	2009 aggregate margin
All segments	7.6%	7.2%	5.8%
Generation	24.4%	21.9%	22.5%
Supply	3.1%	3.8%	1.8%
Electricity - Domestic	1.5%	0.3%	2.1%
Electricity - non-Domestic	3.3%	4.7%	4.0%
Gas - Domestic	4.3%	5.7%	-0.4%
Gas - non-domestic	6.5%	6.2%	-0.5%

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Huhne energy blackout

The gang ponder what Chris Huhne's energy policy may mean for them

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Fairtrade - the good reason, and the real reason

“A man always has two reasons for doing anything: a good reason and the real reason.” 

J. P. Morgan (1837-1913), banker

Fairtrade products cost more. But what happens to that extra you pay to be Fair? The supermarkets want you to think it goes like this:

You don’t have to be a bleeding heart to believe in fair trade. Fair trade isn’t in itself just about charitable giving. Of course, charity can be an element in any decision. An OFGEM survey on why people swapped energy supplier showed 9% of switchers over 65 years old did so in part because they wanted to do the salesman a favour. Even the Fairtrade Foundation states that its mission is not just about charity – it is about being Fair. But what does “Fair” mean? Does it mean it pays enough for a farmer to bring up and educate his family in good health regardless of the value the market puts on his produce? Or does it mean ensuring the farmer doesn’t get ripped-off by local agents, wholesalers and supermarkets? All that debate is important and is complicated, but not central to the subject of getting more cash to the farmers. For ordinary Fairtrade buying Britons, it is principally about getting more money to the farmers for whatever reason, just as Free-Range is about getting better conditions for chickens. If that motivates you, then you should be pretty grumpy about what is actually going on. Even if you don’t care much about our rural brethren, be they animal or vegetable, conscience driven products are easing food prices up in the UK marketplace. With about half of all eggs sold being free-range, barn or organically raised, and a fifth of all coffee and bananas being Fairtrade certified you are paying extra whatever the state of your conscience. When you know where all the extra pennies and pounds you are paying go to, regardless of your “Fair” sympathies, then you may sit less easily of a morning in your cotton pyjamas, downing your scrambled eggs and coffee whatever their origin.

Take the coffee industry as an example. Fairtrade promises farmers a minimum price for their coffee. When the price falls beneath this level, farmers on the Fairtrade scheme get paid the ‘Fairtrade Minimum Price’. When the market price is higher, they get paid that higher price. The pact with the consumer is that you pay more not for the flavour, the quantity, the quality, nor the environment, but you pay more for the farmer. And many consumers are willing to sign up to this pact, as can be seen from the supermarket shelf space allocated to Fairtrade Coffee. Going from a few token bottles just a few years ago, Fairtrade now fills up to half the instant coffee shelf space in some supermarkets. In February 2011, the price of Tesco’s own brand 100g bottles of instant coffee were £1.69 for “Gold” and £2.73 for “Fair Trade”. A difference of £1.04.

So if that extra pound is going to the farmer, then it’s money well spent. Isn’t it?

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Saving the planet carrot by carrot

KJ and Fee on individual efforts to combat global warming

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