Rachel Fletcher has called for Ofgem to be allowed to requisition hedges from failed suppliers.
Giving evidence at a hearing last week of the Business, Energy and Industrial Strategy (BEIS) committee’s ongoing inquiry into energy prices, the Octopus Energy director of regulation and economics said the company “absolutely” supports giving the energy regulator “stronger powers” to take action against poorly financed companies.
This included powers to allow Ofgem to “lock up” hedges, she said: “The reform that is greatly needed is Ofgem having the power to requisition the hedges that the failed supplier has made, or to require suppliers to make sure that, if they are not hedging, they are holding cash, and to requisition that cash.
“That would remove the moral hazard issue that we see at the moment, where companies can sell their hedges, profit from those sales and leave their retail business to flounder and customers to pick up the tab.”
Hedging accounts for “about 90%” of the cost of supplier failures, Fletcher said: “The lion’s share of the costs of supplier failure that customers are going to be facing is the cost of having to go in and hedge for the customers they have taken on.”
As an example, she said hedging accounts for 96% of Octopus’ claim to Ofgem for the customers that it took on from failed retailer Avro under the supplier of last resort process last autumn.
The former Ofwat chief executive also told the committee that “an over-focus” on credit balances might result in the “big problem” if thinly capitalised structures being missed.
She refuted any suggestion that Octopus uses credit balances as a “major source” of working capital.
Fletcher also listed evidence that Avro had not been looking after its customers properly.
She said the failed retailer was “very far behind” on its smart meter rollout programme, had not compensated customer for failures to meet regulatory performance standards and had not properly back billed for customers.
Octopus had seen evidence of Avro of not complying with the rule that retailers must carry the cost of back bills that build up when they have not read the meter. Fletcher also said the company had taken payments from customers who had never “actively switched” to Avro.
She said the company had been “out of its depth and had grown well beyond its capability to look after customers”.