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About three hours after Bulb announced to the world, including its 1.7 million household customers, that it had gone bust, Ofgem confirmed the fact. Slow reactions, sadly, have typified the regulator’s struggle to keep pace with events in the energy crisis. Even now, after the biggest company failure, one can discern only an outline of a plan for reforming the retail market to ensure it can withstand future storms.
Still, “special administration”, or nationalisation, was the only practical short-term solution for Bulb. It would have been impossible to oblige another supplier to swallow so many customers in one gulp. The financial pain of loss-making supply contracts would merely have been shifted along the line.
The special administration regime is untested in the energy market, but similar arrangements have worked for more complex businesses in the past – Railtrack in 2001, for example. The critical necessary ingredient is capital to underwrite energy-purchase and hedging contracts. That comes courtesy of the Treasury, which will be on the hook for Bulb’s losses until a permanent solution is found.
So, in effect, the financial hit is being taken via the public purse rather than spread among everybody’s energy bills via the industry-wide levy system. Given how far bills will rise anyway next April when Ofgem next adjusts the price cap – £500, possibly, if the methodology is applied strictly – burying Bulb among general government expenditure probably represents good short-term politics.
The longer-term, though, is the bit to worry about. The business department and Ofgem have stuck to their mantra that “protecting customers” is their priority and companies should bear the consequences of inadequate hedging policies. Those broad principles are correct, but we’re now at a point where the retail market is in danger of shrinking to an oligopoly of old, which is also a grim prospect for consumers.
A reformed regulatory set-up will inevitably involving changing the price cap more frequently than every six months, and ensuring companies have the financial muscle to survive shocks. On the latter score, Ofgem was grossly naive in allowing so many undercapitalised start-ups to try their luck by taking a punt on wholesale prices. Life will be different in future, the regulator now says – last week it launched a consultation on the cap. Really, though, it’s time for some action.
As it is, the clean-up costs of the pre-Bulb failures will probably be felt in bills into 2023. A sustainable market is essential before then. The survivors, remember, are the companies the government is relying upon to install heat pumps and the rest of the retail-facing green agenda. The firms need to know the new rules of the retail energy game; and consumers need to be confident there will still be competition. Get on with the reforms.
Mutual interest in LV=
That the beleaguered (but well-remunerated) board of Liverpool Victoria, or LV=, has made a mess of communicating the supposed benefits of a £530m takeover by the private equity firm Bain Capital is beyond dispute. A competent approach would not require increasingly desperate pleas to members ahead of next month’s vote.
Monday’s missive from the bunker contained one fair point, however: for with-profits members, as opposed to those who merely hold life insurance policies and suchlike, the payout under the Bain deal will be better than than the basic, and basically underwhelming, £100 a head.
There would be a total of £616m to be divvied out to members once one includes the £404m that remains from LV’s past sales of its general insurance activities. If £80m is required to fund £100 payments to 800,000 members outside the with-profits fund, then the pie for the 271,000 members within the fund would still contain gravy. An average distribution for with-profits members would be close to £2,000, with actual sums dictated by value of investment.
The figures, though, would have been roughly similar (just a tad less) if LV= had decided to sell itself to the fellow mutual Royal London rather than Bain a year ago. So the latest presentation probably won’t win over those members who don’t wish to take private equity’s shilling and would prefer a mutual solution. Under a proposal that requires 75% backing from members of all stripes, the possibility of rejection is real.
Therein lies the conundrum for LV’s board. If it loses the vote it is an even bigger mess. Even at this late stage it might be a wise to invite Royal London to make a politically palatable counteroffer. At the very least, the would-be white knight would be forced to clarify its intentions. Despite much whispering in the wings, it’s hard to tell what alternative it is proposing.
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