The see saw of corporate profit

Posted on 02 May 2012 by James Constant

Yesterday, Ofgem release its consultation on Improving the Reporting Transparency of Large Energy Suppliers. James Constant takes a look at the consultation and what it means for transparency on energy supplier profits.

When the transfer price the supply business pays the generation business shifts, so does the picture on profits.

We’ve said before that, working in the B2B sector, naturally we want to see businesses do well and make a profit to provide reward for their staff, investors and customers. However, we also believe that transparency on profits is essential, a fact that has previously been recognised by Ofgem, which has mandated that the Big Six energy supplier should publish their accounts.

 
The problem is that their accounts probably aren't as simple as yours and ours. These businesses are 'vertically integrated', which means that they both generate and supply energy, so they can make money at one end even when the other side of the business reports hard times
 
Ofgem recognised this and also what it perceived to be anomalies and inconsistencies in the data being published, and specifically, it raised concerns about the internal transfer price that the supply side pays the generation side for their energy. Set it too high and it depresses ‘supply’ profits, set it too low and it depresses ‘generation’ profits.
 
In order to address this, as part of the Retail Market Review, Ofgem proposed to place a greater level of scrutiny on the data and a more thorough format of presentation.
 
Sadly though, a few short months later and the landscape has changed.
 
In January, Ofgem recommended that:
  • all suppliers should report to the same year end to ensure transparency of comparison. Ofgem now does ‘not intend to take forward this recommendation’.
  • an independent auditor should provide opinion on the statements. Ofgem now will get an opinion, albeit not from auditors and maybe just for the initial year.
  • the statements be reconciled to IFRS (International Financial Reporting Standards). Ofgem now only requires that the supplier statements mirror their group accounts.
  • the businesses recognise sources of additional potential profit by reporting trading and risk results. Ofgem now only requires the suppliers to fill out a checklist of activities they undertake.
  • it would undertake further work to understand the critical issue of the transfer price between the generation and retail arms of the vertically integrated business. Ofgem now does ‘not intend to take forward this recommendation’.
  • exceptional items on the supplier’s account were given greater definition. Ofgem now will settle for the information held in the suppliers’ group accounts.
  • a consistent profit base for reconciliation was created. Ofgem now only requires the information held in the suppliers’ group accounts.
Ofgem says it believes ‘that these proposals improve cross-company comparability where possible and improve transparency elsewhere’.
 
It is difficult to see how this is being achieved. Ofgem’s concern on the transparency of information being reported is well known, nothing I see here suggests to me that if they are genuinely concerned about this transparency that any of these final ‘recommendations’ will bring about the clarity they seek.
 
Back to my original point, this isn’t about suppliers or any business for that matter making profit, it is about a regulator who raises concern and then raises the white flag. Leaving suspicion to abound and reinforcing the perception that reforming the market isn’t going to be helped by the participants within it. 

Posted in Business energy

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