A public interest report by Grant Thornton has found that Nottingham City Council made a number of failings in the creation and management of its energy company including inadequate governance arrangements and a failure to understand the risks associated with entering the energy business.
The report, published this week, outlines a number of recommendations including a risk assessment to urgently determine the future of “Robin Hood Energy” (RHE), a review of the use of councillors on the boards of its subsidiary companies and reform of the council's governance structure.
The council set up RHE in 2015 as a wholly-owned not-for-profit subsidiary, to tackle fuel poverty in the City of Nottingham and provide a realistic alternative to the 'big 6' energy suppliers.
Since 2015, the company has reported losses each year with its worst year seeing a loss of over £23m. As of 31 March 2019, RHE has made cumulative losses of £34.4m.
The report found that the losses were caused by a number of factors including volatility in wholesale energy markets, price caps changes by Ofgem and the need to increase the provision for doubtful debts by £2.6m (more than trebling it) following an increase in debtors among other factors.
The council eventually had to make significant additional loans to RHE to keep the energy company from failing.
According to the report, the company’s weak financial position stemmed from a range of factors:
• The setting up and operation of an energy company is "hugely ambitious, given the highly complex, highly competitive and highly regulated markets in which energy companies operate, and the impact which external global factors can have on pricing". Some aspects of RHE – particularly its focus on low tariffs and poorer customers – further increased these risks.
• The governance arrangements which the council has had in place were not strong enough, particularly given the nature of the company and its markets:
• There was an insufficient appreciation within the council (as a corporate body) of the huge risks involved in ownership of, and investment in, RHE
• There was insufficient understanding within the Council of RHE's financial position, partly due to delays in the provision of information by RHE and the quality and accuracy of that information
• There was insufficient sector (or general commercial) expertise at non-executive Board level
• There was a lack of clarity in relation to roles within the governance structure
• The arrangements did not establish an appropriate and consistent balance between holding to account and allowing the Company freedom to manage, and this worsened as levels of trust decreased and the financial position deteriorated.
• Overall, the governance arrangements were overshadowed by the council's determination that the company should be a success, and this led to “institutional blindness” within the council as whole to the escalating risks involved, which were ultimately very significant risks to public money. Where concerns were raised by some individuals, these concerns were downplayed and the resulting actions insufficient."
Nottingham City Council “should ensure that all elements of its governance structure, including the shareholder role, are properly defined and that those definitions are effectively communicated to the necessary individuals", the report added.
According to the report, lessons from RHE should also be applied to the council's wider governance structure, particularly in relation to the 'checks and balances' which need to be in place, including the need for a stronger monitoring and scrutiny function and moving to a culture in which challenge of political priorities and how they are being implemented is seen as a positive."
In the wake of the report, Nottingham City Council said that it accepted the findings and had implemented a number of changes, including:
• Establishment of a fortnightly 'Robin Hood Energy Steering Group'.
• The replacement of the Council's Shareholder Representative.
• Alongside the new Chair of the Robin Hood Energy Board, the strengthening of the Board with a councillor who is a qualified accountant and more legal and administrative support and expertise.
• The suspension of senior staff at Robin Hood Energy.
• The appointment of industry experts and a new management team to lead the company.
• To bring a fresh approach to governance.
• The establishment of a Companies Governance Executive Sub-Committee to strengthen the council's approach to governance across the authority
• The commencement of a wide-ranging Strategic Review to consider all options for the future of the company.
Councillor David Mellen, the Leader of Nottingham City Council, said: "We accept the findings of this report which, despite our best intentions, reveal failures in the council's governance of Robin Hood Energy over the several years following the formation of the company.
"The report makes a number of recommendations to review our current practice of company governance which we are fully committed to carrying out. Some of the recommendations have already started to be put into place while a review of future options for RHE will be completed shortly.
"There is much more to do however and the council is working hard to try to protect as much of its investment in the company as possible.
"We very much regret the past failings in the council's governance of Robin Hood Energy. The change in leadership at both Nottingham City Council and Robin Hood Energy over the last year has seen changes in governance procedures and financial rigour. We now need to look forward and continue to make the necessary improvements including those recommended by the external auditor. We will continue to build on the work done so far but we fully accept there is much more to do over the coming months to address the findings of this report."