Short nationalization of Bulb Energy is easy but getting out of it may be the hardest Nils Pratley
sPlace your bets: How long do you think the government will be in the business of running a retail energy supply company? In other words, is Bulb Energy’s “special management” a quick fix or a long haul?
Kwasi Quarting, the business secretary, was careful not to answer that question in the House of Commons this week. “The house should understand that we don’t want this company to be in this temporary state for much longer than is absolutely necessary,” he said, offering no hint of what he might consider a reasonable schedule.
six months? This is the period covered by the government’s advance of £1.7 billion of public funds to be used as working capital by officials – the consultancy Teneo – to ensure Bulb’s 1.7 million customers have access to gas and electricity. But, of course, a second advance is always possible if flipping the work proves to be more complex than expected.
One senior industry executive says complexity is really the way to bet. The key point in the “special management” process, he says, is that Ofgem has relinquished an element of control. All of the other 23 companies’ failures were handled under a “supplier of last resort” system, or SoLR, which allows the regulator to enforce customer relocation if necessary. Under management, firms are not obligated to accept customers. And since Bulb is subsidized by the government, there is less sense of urgency: Operations continue and customer supply will continue.
Then there’s the fact that Ofgem itself doesn’t seem to have a clear plan, or at least no plan to announce. CEO Jonathan Brierley’s letter to Kwarteng claiming Bulb’s management provided three arguments in favor. No quick fix was suggested.
First, there was the fact that “industry regulations are already under great stress” from managing the transfer of clients to smaller companies that have gone bankrupt. It is unlikely that this burden will ease soon: two more companies failed on Thursday.
Second, Ofgem was concerned about competition issues if a major supplier to Bulb’s clients was given too many jobs. Brierley wrote that the administration “will provide time to consider these issues.”
His third point was that the use of SoLR “is likely to lead to an industry tax claim that will be passed to market in the coming regulatory year.” This tax allows new suppliers to recoup the costs of supplying new customers and add them to each household’s bills. At current wholesale prices, a bulb premium, if taken in one fell swoop, could mean £90 on bills, analysts say. Brierley wrote that the administration allows “freedom to act on timing.”
we will see. A quick auction of Bulb is clearly possible, and Sky reported this week that Lazards will be hired in town for this. But, given the crucial interaction between Ofgem’s price cap, wholesale price and tax, one has to assume that any acquirer of 1.7 million accounts wants a cast-iron guarantee that they won’t lose money on the deal. Temporary nationalization is easy. Exits can be more difficult.
Cost inflation may be the 2022 story for the hospitality sector, despite the resilience of Mitchells and Butlers
Mitchells & Butlers, with 1,600 pubs under brands like Harvester, All Bar One, and Nicholson’s, is clearly one of the industry’s survivors. In fact, despite losing £42m before tax in the last financial year, CEO Phil Urban was able to look somewhat elated. Trading is now back from pre-pandemic levels, gamblers are booking Christmas parties and, at the operating level, M&B has posted a profit of £81m.
However, Orban’s parallel warning about cost inflation is a little he should focus on. For the hospitality industry as a whole, it looks likely to be the story of 2022. Aside from energy bills, which will inevitably rise sharply, M&B puts food and beverage inflation at 7% while labor costs are expected to be 6.6% higher when it rises. National living wage next April. Only property costs offer no convenience.
In a normal year, the company expects an overall inflationary increase in the cost base of 3.5%. This time he is preparing at 6%, a figure that the Bank of England should probably note. It points to price hikes on the right track, even before value-added tax (VAT) returns to a pre-Covid level of 20% next April for big bar operators.
To reiterate, M&B is well positioned to overcome what it calls “key challenges” on costs. But the broader picture is an 8.6% drop in the number of licensed buildings in the UK since the start of the pandemic in March 2020. The worst may be over, but life doesn’t look easy in the pub game.