Utility Accounts In Credit

This is an age old complaint, but worth repeating in these troubled times.

My gas and electricity supplier does not allow payment of its bills by variable direct debit, like the telecoms providers do. Instead, it insists on a direct debit of the same amount throughout the year, regardless of my creditworthiness. In this way, the supplier ensures that it builds up a nice credit ahead of the main winter bills in October, January and April. In my case, that's a credit of over £500 in June, and over £1,000 by the end of August. 

That credit arrangement has nothing to do with supplying energy to me directly, because it hasn't supplied me with the energy yet - hence my 'account' is in credit. In fact, if I was paying by credit card or debit card, they wouldn't be able to charge me because they haven't yet performed the service. But they would sure find a way to recoup the 'lost' value of the credit arrangement in the prices they charged me for paying as the energy is used.

Meanwhile, the need to provide 0% up-front finance for energy companies operates as a steady drag on consumers' cashflow - particularly for those in the 'squeezed middle', who can afford the bills when they come around, but need to minimise interest on credit cards etc in the meantime.

So why should the supplier be allowed to build up so much credit? 

Why can't they be obliged to use variable direct debits, except perhaps where missed payments have occurred?

And if it is allowed to build up credit, why shouldn't the supplier be obliged to segregate the funds it is holding against my future bills from its own money, and account to me for interest received? 

Of course, the same can be said for the funds taken on direct debit by the TV licensing authority.

The government needs to start thinking like a citizen rather than a supplier.

Linked Data: An Energy Credit Rating?

I received a love letter from EON recently, telling me they love me so much they're going to increase my direct debit. That way, I will "build up a credit over summer" and enable EON to spread its bill over the year.

Sadly, this is a case of unrequited love. I do not want to leave any surplus cash with EON, especially when they haven't mentioned paying me any interest on the credit - or even putting the interest toward my bill.

But on the upside, EON's letter did prompt me to call @Oikonomics, who is fairly heavily involved in an alternative energy proposition, amongst many other things. We got talking about Green Deal and feed-in-tariffs and the challenges of comparing the official option for financing your personal alternative energy generating/saving with alternative means of financing. One idea is to enable you to generate an "Energy Credit Rating" to use as a base for comparing the overall benefit to an alternative energy option. It could combine your MPAN billing number, linked to some data from the Met Office about average sunlight/wind in your area, local energy prices for what you buy and what you generate, the Feed-in-Tariff scheme, and your own credit rating.

Linking some of this data may also help reduce the complexity/cost associated with making energy price changes.

Oh, and Bruce also told me Ovo credits your bill with the equivalent of 3% interest on any credit balance (see under "Earn from Energy").

Image from Energy Saving Trust.

Why The GIB Should Be P2P

In this month's Financial World, Michael Mainelli helpfully explains why the Green Investment Bank "supporters get a hard ride from City anlaysts." The problem, he says, is lack of independence from the government, especially since government policy on alternative energy is "capricious".

I like the "slightly subversive" suggestion for an index-linked carbon bond with the coupon set to the government's performance against its green energy targets. Although if the City won't gamble on government policy, we probably shouldn't let the government bet taxpayer money on its own performance either.

However, there is a way to encourage both broad-based retail investment and widespread household commitment to alternative energy without direct government support. Allow individuals to directly finance each other's alternative energy projects via a dedicated channel on any peer-to-peer finance platform - or, indeed, on dedicated peer-to-peer platforms. Credit risk would sit with individual lenders who are able to diversify across many projects and limit the amount allocated to each one, while earning a better return on their surplus cash than bank savings rates. The initial and ongoing capital requirements for each platform operator would be nominal, compared to the £3bn currently being contemplated for the GIB. And the transparency of online P2P platforms would enable easy measurement of the capital dedicated to alternative energy. In effect, the government would be leveraging its subsidies towards feed-in tariffs etc., not by borrowing on its own account through the bond markets, but by attracting surplus personal savings that currently lack a decent return.

As I've previously explained, this would also avoid the primary risks associated with the vertical credit model of existing bond structures, namely:

1. The separation of lender and borrower, and fragmentation of the original loan note makes it harder to adjust loans when borrowers get into trouble (as highlighted by the 'fraudclosure' and 'forced repurchase' problems in the US also explained in Confessions of a Subprime Lender).
2. The process of transforming 'maturity' (changing the date when loans or debt instruments are due to expire) creates balance sheet risk for the intermediary.
3. It is unclear whether ratings, accounting and audit functions really do remove information asymmetry between borrowers and lenders. Do we have "credible" ratings agencies, when only three dominate the market and they are paid by the issuers of the securities they grade? Similar problems exist in the accounting and audit markets - hence the calls for reforms in these areas.
4. There are huge challenges for subsequent bondholders to undertake adequate due diligence on large volumes of original loans long since disconnected from the bonds and often not even under the bond issuer's control.
5. Pressure to reduce the amount of capital required by each operator in the vertical chain of intermediaries results in a game of regulatory, tax, capital and ratings arbitrage that spans the globe and creates endlessly complex corporate structures.
6. Various factors lead to underestimation of the capital required for the private and implicit public sector guarantees required to support it. This is further complicated by the fact that "...the performance of highly-rated structured securities... in a major liquidity crisis... become highly correlated as all investors and funded institutions are forced to sell high quality assets in order to generate liquidity."
7. The knowledge that the market can ultimately 'put' problem securities on the taxpayer (whether this is explicit, implicit, direct or indirect) creates a moral hazard that seems to increase in line with the demand for the securities until the system irretrievably melts down.

Horizontal credit intermediation, is a feature of peer-to-peer finance platforms - like Zopa, Ratesetter and Funding Circle - where each borrower's loan amount is provided via many tiny one-to-one loans from many different lenders at inception.

The one-to-one legal relationship between borrower and lender/loan owner is maintained for the life of the loan via the same loan origination and servicing platform (with a back-up available), allowing for ready enforcement. The intermediary has no balance sheet risk, and therefore no temptation to engage in regulatory, tax or other arbitrage. Loan maturities do not need to be altered to achieve diversification across different loans, loan terms and borrowers. The basis of the original underwriting decision remains transparent and available as the basis for assessing the performance of the loan against its grade, as well as for pricing the loan on any resale or refinance, making due diligence by subsequent owners easy. To the extent that credit risk were to concentrate on certain borrowers or types of borrowers, those risks would remain visible throughout the life of the loan, rather than rendered opaque through fragmentation, re-packaging and re-grading. Similarly, the transparency of the initial underwriting and subsequent loan performance removes the scope for moral hazard.

Image from Carnation Canada.

Alternative Power For Geeks

It's fascinating how much data is publicly available. Here, for instance, is a summary of key data that describe the UK electricity market, including demand and generation by fuel type.

So what?

Well, apart from putting various fuel types into perspective, and maybe settling a few arguments, it's worth reflecting that the Hawthorne Effect was named after the electricity plant in which it was first documented. Henry Landsberger found that workers' productivity improved when he measured it to study the impact of light levels on their work, but declined again when his experiments ended. That suggests that when people know you're measuring their activity, it improves.

Alternative energy-generation measurement widget, anyone?