The REAL reason so many small energy suppliers have failed - it was inevitable.

Streaky_Bacon

sdmitch said:

I've posted elsewhere that I for one know what share capital is - so please don't go there and insult my intelligence of my professional qualification - I've done my homework on these failed companies - they only took risks with customers funds, never their own.

I assume that you have replied, by mistake, from a sockpuppet account, because you are not the account I replied to and your account has not been used to post elsewhere in the threads.

You've also claimed to be a Chartered Accountant.

Assuming that you are the ihatetrump account also, then this is not a comment that would be made by a Chartered Accountant

"Almost without exception, these suppliers were established only in the last few years as small limited companies, with a very limited (some would say minute) share capital - usually £100 or less - yes, even the largest failure to date - AVRO Energy."

A Chartered Accountant would know that share capital is no reflection of the money invested by an individual, and would also not consider £100 to be "minute". They would instead know that it was a pretty standard amount used for the purposes of share capital.

wild666

sdmitch said:

I've posted elsewhere that I for one know what share capital is - so please don't go there and insult my intelligence of my professional qualification - I've done my homework on these failed companies - they only took risks with customers funds, never their own.

The AVRO administrators initial report makes interesting reading - the Directors throwing in the towel when they realised their own estimates showed they'd need £258 Million by next March just to stay afloat - not to make a profit - there was no way they could get their customers to stump up that kind of cash.

To do that they would have to raise every customers DD by over £37 per month just to stay afloat. As many were only customers because of their rates i.e. 2.5p and 15p per kWh most would have jumped ship as soon as the DD was increased but they couldn't raise their prices because customers were on capped rates.

MWT

wild666 said:

...but they couldn't raise their prices because customers were on capped rates.

Also worthy of note is the statement by the administrators that Avro had no hedging at all, so their risk profile was about as bad as it could get...

... and I suspect the 'capped rates' part is something of a red herring in this case as the majority of their customers would have been on cheap fixed rates... and ironically the capped rates were significantly higher than they were charging anyway...

The real issue was fixed term prices too low and no hedging to secure the rates they had sold at... This one isn't down to Ofgem and the cap.

ihatetrump

 assume that you have replied, by mistake, from a sockpuppet account, because you are not the account I replied to and your account has not been used to post elsewhere in the threads.

Busted ....   

Fake news heh? (btw, I am a Chartered Accountant FYI)

We can argue about the semantics of definitions here but we probably won't agree, so maybe move on? -  put quite simply, in the case of AVRO, the shareholders invested £100, and started their business - they put nothing more into it and just took out year after year - in the end they lost their £100. Time will tell what else they eventually lose if criminal proceedings are eventually brought - trading fraudulently perhaps - they were in trouble over 2 years ago selling energy at 99%+ cost of sales.

In the period to 30/06/2019, they sustained accumulated losses of £27.4M - how was that loss financed? By that time, they'd taken nearly £46M in advance customer payments (i.e cash paid by customers) but only had £18.5M of that cash left in the bank. 

Any normal business with a sound business plan would have financed that loss through bank loans or equity financing (i.e. increased share capital or alternatively shareholder loans) or a combination of all 3. Avro didn't need to just as long as they could tap in to advance customer payments - they fobbed their auditors off with forecast projections so they could get an unqualified report and carried on sucking more and more customers in - nearly 600,000 at last count.

If OFGEM/HM Government really want to get a grip on preventing the sort of practice, try ring-fencing customer cash in much the same was as the legal profession - in AVRO's case, if advance customer payments had been represented by cash held effectively in trust, then their demise would have happened long before the unmitigated disaster it has now become - and would have avoided customers (and shareholders) in other well financed companies from eventually footing the bill. 

MWT

ihatetrump said:

If OFGEM/HM Government really want to get a grip on preventing the sort of practice, try ring-fencing customer cash in much the same was as the legal profession - in AVRO's case, if advance customer payments had been represented by cash held effectively in trust, then their demise would have happened long before the unmitigated disaster it has now become - and would have avoided customers (and shareholders) in other well financed companies from eventually footing the bill. 

I did think about that as well, but there is legitimate need for advance customer payments to fund advance costs like hedging.

I do wonder if there might be a requirement for a certain percentage of hedging to be required before a supplier is allowed to offer fixed tariffs...

The big issue with Avro for example was their complete lack of any hedging yet still offering very cheap fixed contracts, a required hedge percentage would have put a brake on that behaviour as well...

gt94sss2

I believe a lot of energy firms were set up by consultants who were set up multiple firms, got energy licences for them and then did sold them to people who wanted to run them.

MWT

gt94sss2 said:

I believe a lot of energy firms were set up by consultants who were set up multiple firms, got energy licences for them and then did sold them to people who wanted to run them.

The main source of the 'supplier in a box' companies is easy to spot as they used US state names for the placeholders, so you'll see them on a number of the recent failures if you look at their original names on Companies House...

CKhalvashi

gt94sss2 said:

I believe a lot of energy firms were set up by consultants who were set up multiple firms, got energy licences for them and then did sold them to people who wanted to run them.

And as someone who has dealt with a lot of restructuring over the years, that is another completely legitimate form of business.

For the record, I cannot meet all my liabilities at this time if they were to become due now, but in our plan there is enough cash flow to meet all liabilities as they become due, being the main difference between net debt and cashflow.

Naturally as with any decent business there is enough of a margin to gain financing for what is required, although in one case such financing is secured against my ownership of the business which could see me lose effective control in the event of targets not being met, which isn't a bad offer as it's with a strategic partner who will further the interests of the company whatever happens.

Business is about risk and reward and a balance has to be struck in any event.

ihatetrump

I believe a lot of energy firms were set up by consultants who were set up multiple firms, got energy licences for them and then did sold them to people who wanted to run them.

That company was Dyball Associates. Go on Companies House Beta and search Andrew Dyball - all the companies with US State names are all lined up and ready to go - off the shelf cookie cutters with Energy Supply licences thrown in and all the training - and of course the software.

https://www.dyballassociates.co.uk/

Curious though it may be (tongue in cheek!) Jake Brown & his Dad (of AVRO fame) hold directorships and also an ownership/controlling interest via Dyball Holdings and Avro Technology - oh what a wicked web of intrigue they weave!

ihatetrump

@CKhalvashi

Naturally as with any decent business there is enough of a margin

The challenge with AVRO was there was never a margin to speak of - at least as shown by their last filed accounts:

.007% on £390M of turnover - I wonder if they thought James Bond was going to recue them!!!