From costs to prices - a puzzling road in the energy industry

02/04/2015 FromcoststopricesapuzzlingroadintheenergyindustryManagementAccounting data:text/html;charset=utf8,%3Cdiv%20class%3D%22postinfo%22%20style%3D%22paddingbottom%3A%205px%3B%20fontsize%3A%2012px%3B%… 1/1 Fromcoststoprices–apuzzlingroadintheenergyindustry ByJoãoonApril13,2015at8:00am PostedIn:Ch14Pricing&CustomerProfitability,Ch19CostManagement,ValueCreationAndSustainable Development Buyourbookhere. Weallknowthatwhilecostsarerelevanttodetermineselling prices,theyareonlypartofthestory,andotherfactorsmaylead tounexpectedoutcomes–orperhapsnotreallysounexpected, onceweareawareofthewholepicture.Thecurrentplungeofoil pricesprovidesanotherexample. Crudeoilpriceiscurrentlyaround$50abarrel,thelowestsince 2009.Sincethecostofcrudeoilisamajorcomponentofthecost ofpetrol,petrolpriceshavealsobeendecreasing,asexpected. However,asNationalGeographicputsit“airfaresandsomehomeenergybillsstillseemhead scratchinglyhigh”.Why? Lookingateconomicreasons,someconsumersandcompanieshavesecuredtheirfuelpurchase pricesforseveralmonths,eitherbybuyinginadvanceorbyusinghedgingstrategies,sotheyare notabletotakeadvantageofthecurrentlowerprices.So,alageffectmayexist.[The“Management AccountinginPractice”example9.3“Actionforbeatingvariances”ofourbookconsidersfuelcosts hedgingstrategieswhendiscussinghowtoproactivelyavoidvariances;youmaywanttohavealook atit]. Othersarguethat“airlinesare“doinggoodthings”withtheextramoney,butthey’redoingthem“for everyoneexcepttheconsumer.”.Ajustificationbyanindustrygroupspokesmanthat“Untilwecan adequatelyreducedebt,returncashtoshareholders,renewourfleets,andshareprofitswith employees,thereisworklefttobedone”basicallymeansthatcompetitivepressuresarenotenough topassthefuelcostsavingsontoconsumers,enablingairlinesto,amongotherthings,improve theirbottomline. Ofcourse,regulatorsandpoliticsarealsopartofthestory.Theenergysectorisstronglyregulated. Interestingly,someregulatordrivenpoliciesmaypartlypromotethissituation,asNational Geographicreports:“inMassachusetts,lowenergypricesdon’tmatter,becauseregulationscompel utilitiestocontractforpowersixmonthsinadvance,accordingtoJakeNavarro,spokespersonfor NationalGrid”.However,thegeneralcurrentpictureisofregulators(e.g.,Ofgem,theOfficeofGas andElectricityMarkets,anonministerialgovernmentdepartmentandanindependentNational RegulatoryAuthority,intheUK)andparticularlypoliticianstopressforcostsavingstobepassedon toconsumers.WhenGeorgeOsborn,UKChancelloroftheExchequer,tweets“Oilpricewas$53pbl lastnight–lowestin5yrs.Vitalthisispassedontofamiliesatpetrolpumps,throughutilitybillsand airfares”andlaunchesaTreasuryinvestigationonthis,thepressureisclearlyon. So,whataretheexplanations?AsourfriendProf.HannoRobertssouniquelyputitinFB:“answers fluctuatebetweenlame,hypocritical,and“goaway!””.Intrigued?Checkthenextpostforafollowup onthiscomment.