The Lie In Libor - Bloomberg

Big Six mounts offensive against Labour – just don’t mention Libor!

Day Two of the Big Six‘s powerful lobbying offensive against Labour started in stealth mode this morning with The Telegraph implanting the suggestion that government policies, put in place by Ed Miliband when he was Energy Secretary, are responsible for rising energy prices, with the headline: Energy bill breakdown: the government gets more in tax than suppliers make in profit

The bill breakdown supplied by Centrica, the owners of British Gas, backs up what Energy UK’s chief lobbyist, Angela Knight, told Channel 4 News yesterday evening and solves the mystery of the missing 23%:

British Gas Average Duel Fuel Bill

To compare those numbers with Energy UK, first we need to convert them to percentages:

BRITISH GAS: COST OF AVERAGE DUAL FUEL BILL
Cost %
Wholesale Energy £568.00 47.81%
Network Delivery £283.00 23.82%
Operating Costs £104.00 8.75%
Social & Environmental £112.00 9.43%
Profit £49.00 4.13%
Taxes £72.00 6.06%
Total £1,188.00 100%

 
Now we can see how they compare with Energy UK‘s breakdown:

COST BREAKDOWN OF AVERAGE DUAL FUEL BILL (%)
Br. Gas Energy UK
Wholesale Energy 47.81 47.00
Network Delivery 23.82 20.00
Operating Costs 8.75
Social & Environmental 9.43
Investment 10.00
Profit 4.13
Taxes 6.06
Total 100.00 77.00

 
Which is the first problem. A central pillar of Energy UK‘s message is that a price freeze would mean cutting investment in new power plants. Unfortunately Centrica don’t seem to do investment.  Instead they have “Environmental and Social policies” and “Operating Costs.” So what happened to investment in Centrica‘s energy bill breakdown?

On Channel 4 News, Siobhan Kennedy said:

“10% and rising of costs in bills is made up of investment the government mandates these energy firms make to roll-out new green technologies … and also to invest in urgently needed new power stations.”

OK. So the 10%  Energy UK says is “investment the government mandates” is probably what Centrica are calling “Environmental and Social policies” Which is already pretty confusing, and it still doesn’t solve the mystery of what happened to Energy UK‘s missing 23%.

Assuming 5% of that is VAT, that leaves 18% to divide between the only two categories left in Centrica‘s bill breakdown: Operating Costs and Profit.

As Angela explained to Krishnan Guru-Murthy last night:

“something less than 20% is actually within the control of the energy company. And that is the 20% which they use to run the power stations, to employ the people.”

Operating Costs and Profit are both under their control. And Centrica’s add up to 14.81%. Which you could say is “something” less than 20%. Well, quite a lot less actually!

So Energy UK‘s numbers do add up – sort of. But they’re not what you’d call “transparent”. If we’re to have the kind of “proper”, “clear”, “honest”, “adult” discussion Angela Knight says we need, then this is hardly the best place to start.

But at least we’ve managed to clear up the mystery of Energy UK‘s missing 23%, which leaves an even bigger mystery lurking behind. If the government mandates the investment, and it’s not under the energy companies’ control, then how on earth can they cut that?

Now we can start to see why Angela wouldn’t want operating costs and profit shown on the Channel 4 graphic. Because then she might have been asked questions about it. Executive and lobbyists’ salaries and bonuses could be classed as operating costs. And if these are the only things under the companies’ control, they’re the only things they can cut. So no mystery why Angela wouldn’t want to talk about any of that. But why Channel Four News would want to let her get away with it? That’s the mystery we have to crack next!

Come, Watson, come. The game is afoot!

Centrica

The Sherlock Holmes Prize for investigator of the month has to go to Damian Carrington  for this most beautifully written piece in The Guardian this evening: Energy firms begin lobbying operation against Miliband price-freeze plan:

We couldn’t recommend it more highly. In fact we’d urge you to print it out and pin it on your wall – right next to your energy meter!

The UK’s big six energy companies have already begun deploying a powerful and multi-pronged lobbying operation against Ed Miliband’s pledge of a 20-month freeze on consumer bills, according to insiders.

The firms will use the employees they have already placed on secondments in the heart of government, friendly media and their scores of public affairs experts, sources said, to reinforce the carefully cultivated impression that they are indispensable to the government’s plans to create a low-carbon energy system.

Between 2008 and 2011, at least 50 staff from the big six and other companies were seconded into government to work on energy issues and by the end of 2012 almost two dozen were in place in the energy department.

You WHAAAT! At least 50 energy company staff seconded into government! Two dozen “placed” in the energy department alone! Isn’t that what they used to call “infiltration” and “subversion”? Isn’t that illegal? Isn’t it a real, actual, genuine, 100%, no-doubt-about-it, plain as the nose on your face, full-on conspiracy? But it gets worse:

“The secondments are pernicious, but the real power is how they shape the discourse through the media – that is where their many lobbyists do their real work. They constantly feed hard-pressed journalists lines their editors will like.”

The energy company trade body, Energy UK, hired high-powered lobbyist and former Conservative minister Angela Knight in 2012 to represent the industry and Knight has done dozens of interviews since the Miliband announcement.

Ah ha. That would explain why Channel 4 News swallowed Angela’s spinners hook, line and sinker. Why Angela was warm and cosy in the studio while Caroline Flint was standing in the dark and cold on the seafront at Brighton. And why Krishnan followed Angela’s lead and gave Caroline such a hard time for Labour’s plans not making sense. Because Krishnan and Siobhan are hard-pressed journalists and Energy UK is one of those lobbying organizations that constantly feed them lines their editors will like.

The Guardian piece was half a day away from publication when the BBC’s Daily Politics aired this lunchtime. But the Westminster village is such a small bubble, they’re all on essentially the same loop. So no surprise that when Angela Knight came into the studio to spin Energy UK‘s line on Labour’s price freeze plans, Jo Coburn and Andrew Neil weren’t swallowing it so easily:

Jo Coburn’s opening question: “Ed Miliband’s right, isn’t he, to say, in the first instance that the energy market isn’t functioning properly?” hits the nail right on the head. Angela replies in that faux sympathetic, matronly tone she does so well:

“No I don’t think he is.  The gas market works extremely well. The electricity market, well there’s been a lot of interventions. Some of the interventions that have taken place, some of the policy issues, have rather skewed the market. And the questions that I think we have to ask and answer, and actually there’s some work on this going on right now, is how can one improve the markets. It’s very easy to say they’re bust. They’re not bust. But what improvements can be made?

Way to go Angela. It’s a double whammy. Not only have you managed to implant exactly the same suggestion as this morning’s Telegraph only 15 seconds into the interview, but you’ve ended up lecturing the interviewer on what questions she should be asking.

Don’t you just love the way Angela talks down to Jo Coburn in that sanctimonious, Thatcheresque tone? Like a headmistress chastising a naughty schoolgirl who’s been gazing out the window and doesn’t know what page we’re on.  But Jo isn’t having any of it and keeps pressing the point that the Big Six have a stranglehold on the market.

“No,” replies Angela firmly.

“There’s a wholesale market price, it’s out there, It’s available. It’s published. It’s open.”

Oh come off it Angela! You could have said exactly the same thing about the Libor market. As in fact you did! Four years before it turned into the biggest financial scam in history. You know. When you held exactly the same position in the organization that ran the Libor market, the  British Bankers’ Association, as you hold at Energy UK now.

Don’t you wish Andrew Neil could have stopped playing with his Daily Politics mug and said something like that? For a moment it looked like Jo Coburn might raise her hand and interrupt, but of course she couldn’t. Not unless she wanted to spend the rest of her life in some dead-end job on a zero hours contract that is.

It’s not that she’s been told not to mention Libor. It’s very much subtler than that. It’s more to do with a sense of aesthetics and the laws of evolution. Aesthetics because it would be ugly. Angela would quite likely be deeply upset and may even storm out of the studio in tears, and that wouldn’t be cricket. Having the good sense not to frighten the horseys is top of the list of job requirements at the BBC.

But Jo knows what her job is worth, so she lets Angela wriggle through a housewifely analogy about supermarkets and farms before getting back into her stride lecturing Jo on the questions she should be asking:

What is absolutely required is- yes – good strong transparency – that’s fine. Accounting in the separate parts of the organisations – which they do. The numbers are made public – which they are – on the er – to Ofgem… And increasingly new suppliers are coming into the market too. You don’t have that  if a market doesn’t work. So the question is let’s make it work better, not pretend it’s broken.

There was a moment in the middle of that when it felt like Jo had had more than she could take and could easily have let rip, like Caroline Flint did on Channel 4 News yesterday, telling Angela she wasn’t taking any lectures from someone who represented the big banks and defended Libor. But that’s where the laws of evolution kick in. If you’re not naturally inclined to keep your mouth shut when teacher is talking, you get weeded out long before you get to Jo’s position. That’s the law of natural selection for you!

Nevertheless, some kind of recessive gene of journalistic pride seems to have been struggling deep in Jo’s soul. She might not be able to knock the wind out of Angela’s sails with a jibe about Libor, but she can still mention the reaction of consumer focus groups:

It was stratospheric. You’ve lost the trust of the public. Consumers are against you almost 98%. So they don’t believe you. Whether or not it’s right. They don’t believe you.

Angela says she has to agree. Which gives Jo just enough confidence to ask why the Big Six‘s profits have risen so much in recent years?

Angela does exactly the same as she did on Channel 4 last night. She smiles, nods her head vigorously and tries to divert attention away from the Big Six onto all the other smaller companies Energy UK also represents. But Jo isn’t such a sweetie as Krishnan Guru-Murthy and isn’t having any of it. So Angela is forced to fall back onto Plan B. Blind them with science:

The profits that have risen actually aren’t the profits, it’s the operating margin. It’s the amount of money you make before you pay for the investment. The actual profit itself is around the 5% mark. The return on capital employed is not high. They invested some, what, 11 billion pounds last year. It has to be paid for. And unless we recognise that you’ve got to make some money in order to pay for it, you don’t get the investment. So let’s get into some real numbers.

Er, excuse me Angela, but getting into some “real numbers” is what we’ve been trying to do all along. But how can we do that when you won’t tell us what those numbers are?

I know you started out as as a chemical engineer so you know how to juggle equations and are betting Jo Coburn and Andrew Neil don’t. But if you really want a proper, honest, transparent, adult discussion then we need to get a few things straight.

What you call “the amount of money you make before you pay for the investment” is what everybody else calls operating profit, commonly known as just profit. The operating margin isn’t an amount. It’s the ratio or fraction of the profit compared to the total money you get from the bills, which is usually expressed as a percent. So 5% isn’t “the actual PROFIT”, it’s the actual operating MARGIN. Which is actually the opposite of what you actually said.

And the return on capital employed (ROCE) isn’t an amount either. It’s also a ratio or fraction of the profit compared to the amount of capital used to make the profit. As one of the most capital intensive industries on the planet, the capital employed in the energy industry compared to, say, a supermarket chain is more like the cost of a nuclear reactor compared with the average prefabricated warehouse shed. So no surprise the return on capital employed would be tiny in comparison with the average grocery store.

So let’s get real here Angela. Even though energy is one of the most capital intensive businesses on the planet, and the return on capital is so low, the energy companies still managed to make enough profit to invest £11 billion of their capital in assets last year and still make a healthy 5% operating or profit margin from whatever capital remained to be employed in their day-to-day operations. Which is ten times more than what the rest of us are getting from whatever capital we have remaining to employ in our savings accounts.

And while we’re at it, what exactly are the energy companies “investing” in? Picassos for their executive suites? Endowments for their pension pots? Company yachts? Ferraris? Executive jets? Bottles of vintage champagne? French Châteaus? Castles in Tuscany? Islands in the Caribbean perhaps? Or what about those complex financial investments? You know, the ones where you employ your capital to speculate on the energy markets, levering up wholesale prices and creaming off an even bigger profit margin. Which appears on the books of the energy companies’ financial associates, not in the profit and loss accounts of the energy companies themselves.

And while we’re talking about accounting, what account does the hundreds of millions the Big Six‘s made-men cream off in salaries and bonuses go into? Is that called profit, or is it an operating expense? If we put them on the same zero hours contracts as they are pushing on the rest us, what effect would that have on our bills?

Unfortunately Joe doesn’t think to ask any of that. Maybe it’s the heat of the moment. Maybe she doesn’t know much about accounting. Maybe the producer talking in her earpiece thinks it’s already got too boring and too much over the heads of the rest of us plebs sitting munching crisps at home on our sofas, worrying about paying our bills.

You could say Jo Coburn and Andrew Neil gave Angela a bit of a rough ride. But nothing she won’t have recover from by the time she leaves the Green Room on her way to the next gig in the dozens she’s already done since Miliband’s announcement.

What they did do was feed her with the oxygen of publicity. What they didn’t do is subject to a no-holds-barred rigorous cross-examination and show her message up for what it really is.

Those of us sitting at home who have neither the time nor the resources to analyse all the nuances of the message, like the difference between profit and profit margin for instance, base our judgements mainly on the reactions of the people we trust most in the drama – the BBC journalists and presenters in this case. If they react with disgust, like they might do with a member of the EDL for instance, then we know the message is beyond the pale. But if they accept the message with only moderate disagreement, then we accept it too.

As usual, Angela has the last word. “Why can’t we discuss it properly?” she pleads at the end.

Chance would be a fine thing Angela. But how can we discuss anything properly if what you think is a proper, clear, honest, adult discussion means throwing everything we’ve learned since primary school out the window and playing by your rules instead: where words mean the opposite of what we were taught they meant and two and two don’t add up to four, but to whatever you want, depending on what yarn you’re spinning today.

For the rest of us who hadn’t heard of Libor before it first hit the headlines in July last year it’s interesting to note that, according to MIT Professor of Finance, Andrew Lo:

“[The Libor scandal] dwarfs by orders of magnitude any financial scam in the history of markets.”

Before Angela gets around to redefining what that means, let’s try to remember that orders of magnitude means multiplied by powers of 10 – like 100, 1,000 or more. To dwarf all other financial scams in the history of markets by that kind of margin isn’t a small achievement, it’s an historical event!

And it didn’t just start when the news that Barclays Bank had been caught rigging it hit the headlines last July. Nor did it end when Barclays‘ chief executive, Bob Diamond, was paid off as the fall-guy a week or too later.

As this in-depth investigation by Bloomberg Markets Magazine in January 2013 showed, it had been bubbling under for years.

And it wasn’t just some here-today-gone-tomorrow politician trying to win votes who called time on the market on that occasion. It was the President of the New York Fed, Tim Geithner, and the Governor of the Bank of England, Sir Mervyn King, in June 2008.

So who was chief executive of the organization that not only lobbied for the banks but was also responsible for setting the Libor rate, which the Deputy Governor of the Bank of England, Paul Tucker, compared to a “cesspit of dishonesty” in July 2012? And who was it that said back in December 2008 that the Libor market wasn’t broken and that Libor could be trusted as “a reliable benchmark“?

Yep , you guessed it. Energy UK‘s very own Angela Knight. Who resigned as chief executive of the British Bankers’ Association in April last year, and was appointed as chief executive of Energy UK just one month later. If only she hadn’t promised she would stay at the BBA until they found a replacement she would have been home and dry by the time the Libor scandal broke in July and would have avoided having to do this interview with Jon Snow on Channel 4 News:

But a couple of weeks after that interview she was back in full swing in her new office at Energy UK feeding exactly the same friendly media exactly the same lines about the energy companies as she’d been feeding them about the banks.

So when Angela Knight assures us that the energy market isn’t broken and is in fact working “extremely well”, can we believe her? Of course we can. As much as we believed her about the banks. And that went well, didn’t it? So why shouldn’t we believe her now?

As Angela has always said, the solution to both our banking and energy problems isn’t more regulation, it’s less. And to keep on having that proper, open, honest, transparent, adult discussion until we finally get the message that there really is no alternative. Big Sister and the Big Six know what’s best for us. Profit means loss, freedom means slavery, ignorance means strength and, actually, two and two do, actually, add up to five.

Why Angela would want to keep pushing this message and why the global bank and energy corporations would want to pay her so handsomely to keep doing it isn’t a mystery. The more we, their customers and employees, accept it, the bigger profits, executive salaries and bonuses they take.

Why the global news corporations, like Fox of News International for example, would want to push that message isn’t a mystery either. All global corporations are funded by exactly the same global banking system. They’re all in each other’s pockets, as you might say.

The great mystery still left to uncover is why a publicly funded organization like the BBC and a publicly funded government would not only want to play along with them, but would want to push even more of the little that’s left of the public’s money their way? We pay the BBC and the government handsomely to look after the public’s interest, even if it does mean frightening the horseys occasionally. So why do they seem to be doing less and less of it each day?

That’s the mystery we have to solve next. Come, Watson, come. The game is afoot!

2 thoughts on “Big Six mounts offensive against Labour – just don’t mention Libor!

Leave a Reply

Your email address will not be published. Required fields are marked *