Ofgem wants to close the stable door after the horse has bolted. The regulator now feels it would be an excellent idea if the retail energy market was not littered with failed companies – 26 at the last count, in the space of three brutal months. It wants to ensure such a thing can not happen again.
The ingredients of reform are not hard to identify: outsiders have been telling Ofgem about them for months, or years. And, to be fair to the regulator, a loose version of most can be found in the draft proposals it published on Wednesday.
Suppliers will be subjected to “stress testing” to ensure they are “adequately hedged or hold sufficient capital to manage a wide range of scenarios”. There will be “enhanced monitoring” of companies. Key individuals at companies will have to pass fit and proper tests. Consumers’ credit balances will be better protected to stop them being used for general financing purposes. And the price cap will probably be reformed; one option is to switch to quarterly adjustments rather than six-monthly.
All worthwhile ideas, but the big worry is Ofgem’s ability to make the reforms stick and to enforce them. Confidence is not improved by its chief executive, Jonathan Brearley’s, tiresome habit of talking endlessly about the “unprecedented” rise in global energy prices while glossing over Ofgem’s failure to model for extreme events (which have always happened in commodity markets). Come on, the crisis was a gross failure of regulation. Ofgem, undoubtedly under pressure to increase competition, counted success by the number of new entrants. It missed the wider picture.
Even now, Ofgem’s four-paragraph description of its proposed stress tests – the critical idea, borrowed from the banking sector – reads sketchily. A series of “what if” scenarios is fine in outline but the regulator candidly admits it will be “learning lessons and adapting over time”, which doesn’t sound as if it has the details nailed down. As with the banks, the skill lies in ensuring the system cannot be gamed.
Maybe the details will be in place for the final version in January, but the comparison to the banking sector is instructive. After the financial crash of 2007-09, the Financial Services Authority was swept away, discredited by its loose-touch approach, its timidity and its failure to anticipate events.
The stakes are smaller in retail energy regulation, even if an estimated clean-up bill from company failures of £90 or so for each household is chunky, but the question needs to be asked: is the regulator up to the job of ensuring the desired “resilient” market? All the latest proposals, remember, could have been adopted at any time. Indeed, Ofgem conducted a review of its licensing regime as recently as 2019 but opted for tweaks rather than a thorough job.
If one studies Brearley’s words carefully, one can find a couple of gentle references to how Ofgem will adapt its “organisational approach” in response to the crisis. None of it, though, screams radicalism or urgency. A question of credibility hangs over these reforms.
Twist in the plot for Cineworld
“The directors are of the view that no material liability will arise in respect of this claim,” said Cineworld the last time it spoke about the litigation from Cineplex, the Canadian rival it was trying to buy – and then, crucially, didn’t – as the pandemic struck.
If the directors believed that, they were presumably dumb-founded by Tuesday’s twist in the plot. The Ontario superior court of justice has ruled that Cineworld must pay its rival C$1.23bn, or £720m. That definitely counts as a material liability. Cineworld’s market capitalisation was £622m before the judgment. After it, it was 39% less.
Cineworld will appeal the ruling, and understandably so. As the company relates the tale, the award of damages to Cineplex is based on “lost synergies”. This seems an odd way to view events since the aborted C$2.8bn (£1.6bn) bid was in cash.
The appeal will take a year or so, and in the interim Cineworld expects to pay nothing. That is scant consolation, however. The company entered the pandemic in a hideously over-borrowed state – a function of the acquisitions it did complete – and still had net debt of $8.4bn (£6.3bn) at its last balance sheet, once lease liabilities are included.
Before yesterday, Omicron’s threat to the revival in cinema-going habits was the chief risk. Now Cineworld has become a litigation play.