Ofgem’s muscular image jolted by an obstinate ‘no’

Naming and shaming is a lesser-used implement in the energy regulator’s tool box but Ofgem chief executive Dermot Nolan seems to have concluded that nothing else has worked with Cheung Kong Infrastructure, or CKI.

What is CKI? It’s a big Hong Kong-based investment fund with a surprisingly large collection of stakes in UK infrastructure – Northumbrian Water, Southern Water, one of the three big train rolling stock companies and a power distribution company in London and the south-east.

The CKI investments on Nolan’s radar are two gas distribution business – Northern Gas Networks and Wales & West Utilities, which between them manage a decent chunk of the nation’s gas pipes. They are two of the companies whose charges contribute to the “network costs” line on your household energy bill. Those costs are typically £250 on a dual-fuel bill and were subject to a blistering Citizens Advice report last year that accused energy network companies of exploiting UK consumers to make “sky high” profits.

Ofgem didn’t accept CA’s numbers at the time but now seems to have conceded that the general thrust was correct. While the network firms kept gas and electricity flowing efficiently, they also got supremely lucky as interest rates, and thus financing costs, turned out to be lower than assumed in official models. Automatic sharing mechanisms ensure some of the windfall gains will be returned in the form of lower energy bills. But the regulator wanted more – extra voluntary contributions to ensure fair treatment of consumers.

Most operators, including National Grid, SSE and Scottish Power, took the hint and an extra £650m has been produced. But there is one hold-out – CKI. It has “yet to step up”, Nolan wrote in the FT on Wednesday. But he said the same thing in a piece for the Sun last November. CKI, it seems, either has a tin ear or doesn’t care about being seen as profiteering.

The row comes at a sensitive moment. CKI’s belligerence took the shine off Ofgem’s latest price review for network companies, which it (and the government) is keen to promote as the toughest ever, delivering savings on energy bills of up to £25 per household. Meanwhile, Labour has argued for nationalisation as a cure-all.

Those nationalisation calls won’t be quietened as long as the embarrassing stand-off with CKI continues. There is something desperate, or pathetic, about a supposedly muscular UK regulator writing opinion pieces, or begging letters, in national newspapers to try to shame a rich Chinese owner of UK gas pipes into coughing up a few quid. That cannot be how the system is supposed to work.

Clear skies ahead for Rolls

Rolls-Royce – finally – seems to be turning the corner. Chief executive Warren East came bearing bad news about the cost of replacing worn turbine blades in two Trent jet engines, but the City didn’t mind. The share price improved 11% as Rolls produced £273m of cash in 2017, more than twice the sum for the previous year. Pre-tax profits, ignoring the enormous swings from currency hedges, rose by a quarter to £1.07bn.

The cash-generation figure, as East freely concedes, is still tiny in the context of a company with annual turnover of £15bn. But it was better than forecast and gives confidence that Rolls will deliver East’s target of producing £1bn a year by around 2020. More importantly, the company is sticking to that ambition despite the cost of fixing the turbines, which was £170m in 2017 and will be twice as much this year.

East complained of “accounting fog” on arrival in 2015, and subsequently had to deal with Rolls’ £671m whack from settling bribery and corruption allegations, but the picture is clearer now. The various efforts to restructure and simplify operation, and remove costs, are plainly having an effect.

It is probably time to concede that Rolls’ decision to give a representative of ValueAct, the US activist fund with an 11% stake, a seat on the board was reasonable. The move was controversial at the time and ValueAct’s real contribution is impossible for outsiders to judge – but life has run better for Rolls since the peace deal was agreed two years ago.

Time to bring the accountants to account

One conclusion from the post-mortem on Carillion seems clear: it’s time for a competition inquiry into an auditing profession dominated by just four big firms. Stephen Haddrill, chief executive of auditing watchdog the Financial Reporting Council, said as much in January. City fund managers, appearing before the same committee on MPs on Wednesday, agreed. Would the government, please, hurry up and tell the Competition and Markets Authority to get on the job.