[BBC News] Prices rise for Manx electricity

[manshimajin]

The ARR is a fund that the MEA builds up each year to enable it to pay for new plant to replace what has worn-out. This fund is now negative, which isn't clever, and the whole MEA operation is actually insolvent. I hope the directors of the MEA have obtained a guarantee from the government to cover its liabilities, because in normal circumstances it is illegal to operate an insovent company unless you know you can pay the debts.

 

And all this was in 2007, before the oil price rises. I dread to think what the situation is now. The recent 16% rise in the tariff is a drop in the ocean.

 

S

Thank Sebrof for your analysis. Would I be right in paraphrasing it thus?

MEA Direcors' are operating an insolvent company. This is primarily caused by its debt level but is also in part due to a shortfall in its recovery of the costs of producing the electricity it sells. The insolvent situation is deteriorating every year. The directors make no mention in the accounts of how they are going to repay debt and return to normal profitable trading. The accounts also do not indicate whether the MEA have a guarantee (involving taxpayer funds) from the Manx Government and whether, if it exists, such a guarantee is unlimited or to what extent it is limited.

 

If that is a reasonable summation it sounds pretty worrying. Would the company be best to file for bankruptcy?

 

I also read a little gem at Note 22

Expenditure totalling £17,446 relating to travel costs incurred by the wives of the former Chairman and Chief Executive was incurred during the year ended 31 March 2005. These costs have been written off in the prior year’s accounts. The Board is currently considering whether it is appropriate to take legal action to recover this expenditure.

The auditors, KPMG, refer to these as 'unlawful items'.

 

Stu Peters another one for your programme?????

[Chinahand]

Its been admitted for a while that the Government is hugely subsidizing the cost of electricity on the island: Manx Radio Link

 

Mr Lowey revealed each unit costs 16.41 pence, while the MEA charges just 12.73 pence.

 

It would be interesting to see how much of this loss is down to the MEA absorbing fuel price increases, verses increases in overheads, finance costs etc due to the new equipment.

[oldmanxfella]

The accounts make interesting reading.

 

How do you interpret Note 16? The accounts show that the net book value of pipeline systems for the Group and Authority includes £100,782,000 in respect of capitalised gas pipeline capacity payment commitments detailed in note 16. Is is fair to assume that this would seem to be the only real asset and right to future income it could offload if it needed to?

[Chinahand]

On note 16:

 

Its a bit complicated and shows I've been too simplistic in my earlier posts - the pipeline was four bits: the UK - Eire bit, the Pipeline to IOM coast bit, the Pressure reduction station, and the cross Island bit.

 

Please note: do not take these posts too seriously I am mainly working on long term memory for these posts and I will definitely be wrong on the exact details - I haven't been refreshing myself with this stuff and rather stupidly thought I'd seen the end of it when the PKF report was published something like 4 years ago - I can really recommend the PKF report - its very good!

 

In my recent posts I've only posted about the last two bits, which were built and paid for up front by the MEA. The other bits were built by BGE - they charge the MEA a fee to use the rest of it and have a long term contract with the MEA to do this - basically a lease.

 

Now for corporations leases can be a big deal depending how they are structured - financial leases verses operating leases. If you have an operating lease it is not reported as a debt on your balance sheet and the expenses can be written off against tax. This is a big deal and corporations really like it.

 

If you have a financial lease the value of the lease is put onto the balance sheet as debt and the payments to use it are written off a bit like a virtual mortgage each year. This puts debt onto the balance sheet and as the payments are now used to offset the debt they can't be offset against tax. Very annoying.

 

Lots of MBAs and accountants spend their entire lives trying to write operating leases for things like jet engines etc and as they mean the tax man doesn't get as much tax when something is defined as an operating lease the tax man spends a large proportion of his life defining an operating lease in ever more restrictive ways.

 

All of this is totally irrelevent for the MEA as it doesn't pay any tax.

 

The lease is simply a long term contract - just like the fact that the MEA has a requirement to pay its people wages for the next 30 years it also has a requirement to pay BGE.

 

As the MEA audits itself and publishes its accounts as though it were a tax paying corporation, purely for accounting reasons one of these requirements (the lease) is put down as a debt to be paid off and the other (wages, fuel bills etc) is kept off balance sheet.

 

IF the BGE lease had been written up as an operating lease all this debt would not be on the balance sheet. Whether it is or is not is totally irrelevent as the MEA doesn't pay tax.

 

As a certain member of the MEA used to say: its accountants playing with themselves.

 

Bottom line: Don't get worried by note 16!

[Joe Public]

A wet saturday...sat here googling.

 

from http://www.reh-plc.com/staff_board.asp

 

 

Mike Proffitt FCA - Chief Executive Officer

 

A qualified Chartered Accountant since 1975, Mike joined the Wyndham Hotel Company as CFO in 1982 where he guided the expansion of the group from five to 14 hotels. Moving out on his own, in 1987 he became part owner and President of The Savoy Hotel Company. Mike’s experience managing corporate growth saw him in 1997 invited onto the board of the Manx Electricity Authority and was appointed CEO in July 2000.

 

Streamlining its operations, Mike instigated a cut of nearly 30 percent in electricity prices and initiated major capital works such as the successful commissioning of the longest AC subsea interconnector cable in the World (from Isle of Man to Blackpool) and the commissioning of a new Combined Cycle Gas Turbine (CCGT) 'state of the art' power station together with a natural gas pipeline connecting to Scotland.

 

He is a Non Executive Director of BPC Limited and a former Chairman of Barclays Private Clients International Limited, a wholly owned subsidiary of the Barclays Group. With his management, energy and investment experience, Mike recognises the opportunities provided in the renewable energy sector and is well suited to exploit them.

 

Mike is responsible for the day-to-day operation and development of the Company.

 

Says nowt about the complete fuckin' mess it's left us in.......strange that.

[Sebrof]

The ARR is a fund that the MEA builds up each year to enable it to pay for new plant to replace what has worn-out. This fund is now negative, which isn't clever, and the whole MEA operation is actually insolvent. I hope the directors of the MEA have obtained a guarantee from the government to cover its liabilities, because in normal circumstances it is illegal to operate an insovent company unless you know you can pay the debts.

 

And all this was in 2007, before the oil price rises. I dread to think what the situation is now. The recent 16% rise in the tariff is a drop in the ocean.

 

S

Thank Sebrof for your analysis. Would I be right in paraphrasing it thus?

MEA Direcors' are operating an insolvent company. This is primarily caused by its debt level but is also in part due to a shortfall in its recovery of the costs of producing the electricity it sells. The insolvent situation is deteriorating every year. The directors make no mention in the accounts of how they are going to repay debt and return to normal profitable trading. The accounts also do not indicate whether the MEA have a guarantee (involving taxpayer funds) from the Manx Government and whether, if it exists, such a guarantee is unlimited or to what extent it is limited.

 

If that is a reasonable summation it sounds pretty worrying. Would the company be best to file for bankruptcy?

 

In fairness, these accounts did not include a Directors' Report. There may in fact be one, and it may address the points you mention.

 

If an undertaking owned and operated by the Manx government went bust, and did not pay its creditors, the Manx government would never be able to borrow money from anybody ever again.

 

So no, it shouldn't attempt to liquidate itself. The IOM is stuck with the present level of debt; what concerns me is that it is continuing to rise - probaby quite rapidly, given present circumstances.

 

In my view, the Manx government needs to recognise reality, and assume the whole debt, or a very large chunk of it. This would then stabilise the situation, and allow the MEA to go forward without raising tariffs unduly, and without racking up further losses.

 

The trend for oil prices is up. Nothing short of a massive natural or man-made catastrophe will change that. The government therefore urgently needs to come up with an alternative source or sources of energy for power generation.

 

In my view the most promising alternatives are a hydro scheme, as I suggested earlier, and a tidal system, probably at the Sound. They could be augmented by some wind power, but the variable nature of wind power means it can only ever be a small part of the solution.

 

You'd think the Chief Electrician would take an interest in this, but it seems not. It is by far the biggest problem facing the IOM today, IMHO. Thanks to the credit crunch we may have a respite for a couple of years, but then prices will rise again.

 

And of course, we have the added problem of using Sterling. Thanks to Gordon Brown, Sterling has already dropped about 20% in the last year, and has further to fall. This means that even if the oil price falls, we will have to pay more for it.

 

Anybody else for Skeddan's independence movement?

 

S

[Sebrof]

On note 16:

 

Its a bit complicated and shows I've been too simplistic in my earlier posts - the pipeline was four bits: the UK - Eire bit, the Pipeline to IOM coast bit, the Pressure reduction station, and the cross Island bit.

 

Please note: do not take these posts too seriously I am mainly working on long term memory for these posts and I will definitely be wrong on the exact details - I haven't been refreshing myself with this stuff and rather stupidly thought I'd seen the end of it when the PKF report was published something like 4 years ago - I can really recommend the PKF report - its very good!

 

In my recent posts I've only posted about the last two bits, which were built and paid for up front by the MEA. The other bits were built by BGE - they charge the MEA a fee to use the rest of it and have a long term contract with the MEA to do this - basically a lease.

 

Now for corporations leases can be a big deal depending how they are structured - financial leases verses operating leases. If you have an operating lease it is not reported as a debt on your balance sheet and the expenses can be written off against tax. This is a big deal and corporations really like it.

 

If you have a financial lease the value of the lease is put onto the balance sheet as debt and the payments to use it are written off a bit like a virtual mortgage each year. This puts debt onto the balance sheet and as the payments are now used to offset the debt they can't be offset against tax. Very annoying.

 

Lots of MBAs and accountants spend their entire lives trying to write operating leases for things like jet engines etc and as they mean the tax man doesn't get as much tax when something is defined as an operating lease the tax man spends a large proportion of his life defining an operating lease in ever more restrictive ways.

 

All of this is totally irrelevent for the MEA as it doesn't pay any tax.

 

The lease is simply a long term contract - just like the fact that the MEA has a requirement to pay its people wages for the next 30 years it also has a requirement to pay BGE.

 

As the MEA audits itself and publishes its accounts as though it were a tax paying corporation, purely for accounting reasons one of these requirements (the lease) is put down as a debt to be paid off and the other (wages, fuel bills etc) is kept off balance sheet.

 

IF the BGE lease had been written up as an operating lease all this debt would not be on the balance sheet. Whether it is or is not is totally irrelevent as the MEA doesn't pay tax.

 

As a certain member of the MEA used to say: its accountants playing with themselves.

 

Bottom line: Don't get worried by note 16!

 

In simple terms, the MEA paid for the on-island gas pipeline, and BGE paid for the undersea part. The MEA will pay £100,782,000 to BGE over a period of (approx) 20 years to compensate them.

 

As Chinahand says, it's all smoke and mirrors. The actual payments will amount to more than £100 million, but a payment in the future is worth less than a payment made today - this is what is meant by "the present value of future payments".

 

S

[manshimajin]

I think the layman's summary is 'it's a cock-up on a massive scale'! One way or another we pay for it either through higher electricity prices or through the Government subsidising the MEA from our taxes - instead of doing more useful things with them.

 

Whilst suggesions to find alternative sources of energy make a lot of sense would this lead to the MEA making bigger and bigger losses on its current capital investments as their utilisation would reduce?

 

The way the losses seem to be growing is not at all comforting. Of course as you say Sebrof the Government could assume responsibility for the debt but presumably this means the taxpayer will be responsible for paying the interest and capital repayments - or were the borrowing directly from the Treasury in which case the taxpayers would have to suffer the financial consequences of them being wiped off?

 

Given the enormity of this issue one would have think it should be never be off the public agenda until it is sorted.

 

I have to confess that I also do not like the sound of a management style that paid for partners' travel in a way that the external auditors think is improper (for an Audit Practice that Note is very strongly worded). I hope that the current Directors go out of their way to recover this money - if only to send a message that 'it's not on'.

[Sebrof]

I think the layman's summary is 'it's a cock-up on a massive scale'! One way or another we pay for it either through higher electricity prices or through the Government subsidising the MEA from our taxes - instead of doing more useful things with them.

 

Whilst suggesions to find alternative sources of energy make a lot of sense would this lead to the MEA making bigger and bigger losses on its current capital investments as their utilisation would reduce?

 

It's a good point, but the fact is that this is a sunk cost. The money has been spent, and the loans have to be repaid whether the plant is being used or not.

 

The question now is whether it will be cheaper in the medium to long run to keep using existing technology, or whether and when to invest in renewable energy. And there is no precise answer. Renewables will pay back more quickly the higher the oil price goes, but who can say how fast oil will go up, or where it will end?

 

The question that nobody has answered satisfactorily so far is this:

 

With the benefit of hindsight, was the MEA right to commission the gas link, lay the power cable, and to build Pulrose? If they had secured cheap supplies of gas for thirty years, then the answer might well be yes to the gas line and Pulrose. If they had anticipated massive wind power generation, and if it actually happens, then the power cable will be useful as it will enable us to flog the surplus power when the wind blows strongly.

 

But as they couldn't turn a profit on gas-fired electricity generation eighteen months ago (even before interest) then it seems to me that perhaps they didn't do too well with their gas purchasing.

 

The way the losses seem to be growing is not at all comforting. Of course as you say Sebrof the Government could assume responsibility for the debt but presumably this means the taxpayer will be responsible for paying the interest and capital repayments - or were the borrowing directly from the Treasury in which case the taxpayers would have to suffer the financial consequences of them being wiped off?

 

Treasury IS government. Tax-payers are lumbered whatever happens.

 

S

[manshimajin]

Treasury IS government. Tax-payers are lumbered whatever happens.

 

S

I was unclear in my wording.

 

If the loans are from 3rd parties then presumably the taxpayers are up for interest payments and capital repayments but this can be staggered over a longer time. The lenders will want their money back.

 

If the loans were made directly by the Manx Government (ie the Treasury) presumably these could be written off as a bad debt on a massive scale. This I assume would mean that all sorts of services would suffer for lack of funds or that taxes would need to be hiked and all the wealthy would jet off to the Channel Islands.

 

I agree we are stuffed either way just a matter of how quickly this happens. Incredible....meanwhile do I hear the sound of fiddling (musical instrument sort?) as Rome burns

[Sebrof]

Treasury IS government. Tax-payers are lumbered whatever happens.

 

S

I was unclear in my wording.

 

If the loans are from 3rd parties then presumably the taxpayers are up for interest payments and capital repayments but this can be staggered over a longer time. The lenders will want their money back.

 

If the loans were made directly by the Manx Government (ie the Treasury) presumably these could be written off as a bad debt on a massive scale. This I assume would mean that all sorts of services would suffer for lack of funds or that taxes would need to be hiked and all the wealthy would jet off to the Channel Islands.

 

I agree we are stuffed either way just a matter of how quickly this happens. Incredible....meanwhile do I hear the sound of fiddling (musical instrument sort?) as Rome burns

 

Well, the Barclays loans are not repayable immediately, and could no doubt be assumed by government without difficulty, and rolled over as long as necessary. In fact, since it appears that there is considerable doubt about the legaility of the loans, and since whatever he says, Profitt (there's a man with the wrong name) clearly had a conflict of interest, I should imagine there is scope for the government to do quite a hard deal with Barclays.

 

S

[Sebrof]

I wonder what it would have cost to have simply upgraded Peel and Pulrose power stations.

 

Year ago I worked for a company which was involved with Hawker Siddeley, which owned Mirrless Blackstone. The latter proudly told me that the generators at Peel, which they had supplied, had been running for longer than any others they had ever made. That was before the new Peel station, which isn't actually that old.

 

In the 1980s, Mirrlees supplied generators for three new power stations in Tanzania for £10 million, so even allowing for inflation, it might have been slightly cheaper to have simply replaced the generators on the island. Just slightly.

 

S

[manshimajin]

I wonder what it would have cost to have simply upgraded Peel and Pulrose power stations.

Sadly, and frustratingly, this is hypothetical!!!

 

As they say 'why spend a little when you can spend a lot!'

 

I wonder what the Goverment is saying about this behind closed doors?

 

P.S. I can guess: "How much!!! Bloody hell! Oh my god! let's leave it for the next lot! Agreed"

 

[Sebrof]

I wonder what it would have cost to have simply upgraded Peel and Pulrose power stations.

Sadly, and frustratingly, this is hypothetical!!!

 

As they say 'why spend a little when you can spend a lot!'

 

I wonder what the Goverment is saying about this behind closed doors?

 

P.S. I can guess: "How much!!! Bloody hell! Oh my god! let's leave it for the next lot! Agreed"

 

 

I suspect you are totally correct. Any attempt to do anything now will draw attention to how half-witted it was to embark on such a large-scale project anyway, when (it seems) it would have been possible to do what was needed (increase capacity/replace old plant) for a tenth of the cost of the ORIGINAL estimate, let alone the final actual cost.

 

And Profitt is a chartered accountant. Probably trained at the same firm as "Lord" Simpson, who destroyed GE/Marconi.

 

S

[P.K.]

In fact, since it appears that there is considerable doubt about the legaility of the loans, and since whatever he says, Profitt (there's a man with the wrong name) clearly had a conflict of interest, I should imagine there is scope for the government to do quite a hard deal with Barclays.

Or more likely the MEA will have to stick to the legally binding contract they already have with Barclays Bank.