Energy companies creaming interest of customers credit balances

wakeupalarm

Cardew said:

This recent Ofgem paper may be of interest:

https://www.ofgem.gov.uk/sites/default/files/docs/2021/03/cmp2_consultation_final.pdf

When you read that report, you can see that Ofgem was aware of the potential car crash about to happen but decided to start another consultation. It was built into the system that suppliers could risk their customers money instead of their own.

2.9. However, as suppliers gain a working capital benefit from credit balances, it means they have access to capital they would otherwise need to seek commercially. This can enable suppliers to take risks like offering loss-making tariffs, particularly if they collect more credit balances than they need to serve their customers (see “surplus credit balances” below). Without the free sources of working capital there would be a check on this as investors and banks would only allow suppliers to pursue such a strategy if they were comfortable with the risk. Currently, suppliers can potentially avoid these types of constraints by using their customers’ money rather than shareholders’ or other investors’. 

QrizB

Cardew said:

This recent Ofgem paper may be of interest:

https://www.ofgem.gov.uk/sites/default/files/docs/2021/03/cmp2_consultation_final.pdf

Thank you for finding that, it's very interesting and shows that Ofgem recognises the role of credit balances in enabling deficit trading. I see the consultation was in the spring of this year; I guess we'll find out eventually how Ofgem intend to address the problem.

ihatetrump

Too late unfortunately, they (OFGEM and HM Government) left the stable door open and the horse has bolted - along with a wadful of cash.

It's borderline criminal that multi million pound companies were started and built often with less than £100 working capital - a win win for the shareholders and eventually a lose lose for Joe Public.

LaHostessAvecLaMostess

ihatetrump said:

Too late unfortunately, they (OFGEM and HM Government) left the stable door open and the horse has bolted - along with a wadful of cash.

It's borderline criminal that multi million pound companies were started and built often with less than £100 working capital - a win win for the shareholders and eventually a lose lose for Joe Public.

It's been going on for years and I simply can't understand why it's been allowed to continue.

I've been from a dodgy supplier (Together Energy) back to British Gas (who to be fair offered me a fantastic deal for the best part of 18 months) back to the rogues because everyone else jacked up their prices.

And everyone else is footing the bill for me going with the rogues, which seems rather unfair.

None of them seem to know their backside from their breast and TE ended up paying me nearly £200 compo on a £30 bill credit because they couldn't seem to understand how to close my account when I left the property.  It's utter madness, and while I hope the Government can now see what an utter faeces-show the energy sector has become through lack of proper regulation, I doubt anything will be done about it.

Thrugelmir

ihatetrump said:

Too late unfortunately, they (OFGEM and HM Government) left the stable door open and the horse has bolted - along with a wadful of cash.

It's borderline criminal that multi million pound companies were started and built often with less than £100 working capital - a win win for the shareholders and eventually a lose lose for Joe Public.

There's no free lunches in this world. If it appears to good to be true than always worth questioning the business model of the organisation providing the service. Amazon has sucked the life out of much of the retail sector over the years while running a loss in the process. They had backers with deep pockets. Punters still love 'em though because it's a convenient service. 

LaHostessAvecLaMostess

Thrugelmir said:

ihatetrump said:

Too late unfortunately, they (OFGEM and HM Government) left the stable door open and the horse has bolted - along with a wadful of cash.

It's borderline criminal that multi million pound companies were started and built often with less than £100 working capital - a win win for the shareholders and eventually a lose lose for Joe Public.

There's no free lunches in this world. If it appears to good to be true than always worth questioning the business model of the organisation providing the service. Amazon has sucked the life out of much of the retail sector over the years while running a loss in the process. They had backers with deep pockets. Punters still love 'em though because it's a convenient service. 

The problem is that there is a free lunch. If you go with the rogues your credit is protected.  Usually by those who stick with the Big 6.

I have said this a few times in the pub, I do feel somewhat bad that those on more reasonable tariffs are footing the bill for me switching and swapping between companies that I know are going to go bust.

ihatetrump

@Thrugelmir

 Amazon has sucked the life out of much of the retail sector over the years while running a loss in the process. They had backers with deep pockets.

Not sure I agree with your analogy with Amazon here - the difference being Amazon did have backers with deep pockets who were prepared to take the risk because they could see the opportunity in the business model (love it or hate it  ) - don't knock it too much however - if you have a pension, odds are you're indirectly one of those backers!

These start-up energy companies almost without exception, didn't have backers - they didn't need them - they had Joe Public who gullibly went with them and paid up front and then allowed them to use the cash as the company saw fit - unfortunately they weren't always spending the money on hedging/buying future energy needs, check out AVRO - spending money on marketing via a company (Sentido) owned by the Directors and even lending money (interest free) to a building company owned again (yes, you guessed it!) by the Directors. In the case of AVRO, Jake put in £100 of his own money - milked millions through various schemes and all he lost when it went belly up was £100!

Cardew

QrizB said:

Cardew said:

This recent Ofgem paper may be of interest:

https://www.ofgem.gov.uk/sites/default/files/docs/2021/03/cmp2_consultation_final.pdf

Thank you for finding that, it's very interesting and shows that Ofgem recognises the role of credit balances in enabling deficit trading. I see the consultation was in the spring of this year; I guess we'll find out eventually how Ofgem intend to address the problem.

A quick fix would be for Ofgem not to allow newly formed companies to have Direct Debit tariffs for, say, one year. Having customers pay quarterly bills in arrears would ensure the backers had deep enough pockets for such a business model.

I would have thought that Ofgem would have learned a lesson after privatisation in 1990 when they opened up the market to competition. Scores of companies jumped on the bandwaggon from 'chancers' to well established respectable firms like Virgin and Sainsburys. It took only a short time for those firms to find out it wasn't a lucrative venture and they effectively folded, the bigger firms 'merging' i.e. lending their name! to one of the Big 6.

Streaky_Bacon

ihatetrump said:

I started a thread here:

https://forums.moneysavingexpert.com/discussion/6309915/the-real-reason-so-many-small-energy-suppliers-have-failed-it-was-inevitable#latest

Virtually without exception, all of the failed energy companies started on a shoestring, most owners put in barely £100 to start them up, grew them on the back of credit from customers - and when they needed more, they simply increased the direct debit - SIMPLES - or as Jake Brown at AVRO famously said, it's simple economics'

Although not a Ponzi scheme in name, the principles were similar - attract more customers (by selling at cost) and attract more cash and grow the business some more - problem with AVRO was they soon realised they needed more cash than even their customers could provide - they needed £258M at last count!

You do not understand what Share Capital is. It is not the money that is put into the company by the shareholders.

It is the money that is raised by selling stock.

It is perfectly common practice for a limited company to issue £100 of stock to its shareholders.

This is so Bob and Carol can start a company and each get £50 of stock, in other words, 50% ownership of the business each.

£100 is common because it is easy to work out the percentages.

This is just how the company ownership is accounted for. It has absolutely nothing to do with how much money Bob and Carol, or anybody else actually puts into the common.

The reason that almost all of the energy companies that you have seen start with £100 share capital, is because almost all limited companies start with £100 share capital.

MWT

Streaky_Bacon said:

This is just how the company ownership is accounted for. It has absolutely nothing to do with how much money Bob and Carol, or anybody else actually puts into the common.

In the case of Avro though, it is entirely accurate as the administrators have confirmed that no funds beyond customer payments were put into the company.