There’s a little bit of rogue in you all
February 12th 2008

So £3.7bn – that’s a lot of money. Allegedly a trader at Societie General was able to speculate with the banks money placing large positions at risk on behalf of the bank with bets that the equity markets would move in the opposite direction to the way the market was actually moving at the time.

If the current information is to be believed, the perpetrator of this alleged fraud did not make any personal financial gain. The only crime would appear to be to try to make a commercial return for his employer and potentially manipulating some control systems when the positions did not go in his favour.

Many of you may be asking yourselves what this has to do with energy procurement and more importantly why it’s relevant to you and your organisations. Well the primary difference is one of intent. In the case of Soc-Gen it would appear there was intention to deceive which is obviously not the case in energy procurement, but placing this major difference aside there are a number of alarming parallels that should make everyone who deals with energy procurement stop and question the current status quo. We can summarise these parallels as follows:

• In the case of the Soc-Gen trader, it is alleged that a significant bet was placed that equity markets that were falling at the time would start to rise some time in the future. In the case of energy, prices have risen for 2008, 2009 and 2010 by over 50%. Any company that has not been managing its risk and taking some cover for these delivery periods has effectively been speculating that prices will fall even though the markets have been continually rising for the last 11 months; not dissimilar behavior to that which got the Soc-Gen trader into trouble.
• In the case of Soc-Gen, senior management claim to have been unaware of the behavior of the trader and the risk that was being taken. In the case of energy consumption most company directors when asked about the impact of the recent energy price rises on their business would understand the impact on their current budget year, but many would claim to be unaware of the impact of energy prices on their business over the longer term; indeed, many orgnaisations have strategic plans with energy price assumptions that have no bearing on the reality of the current market conditions.
• In the case of Soc-Gen, senior management claim that their detailed controls and procedures were circumvented by the malicious actions and activities of a lone rogue individual. With regard to energy purchasing, the reality is that the control procedures are perhaps not as robust as they could be. If you don’t know the changing cost of your energy spend for the next 3 years and how it continues to change each day, or how the risk of that energy spend is varying, then you don’t have a detailed control process in the first place.

The world of energy procurement is not as sophisticated as the world of financial trading within investment banks, but the stakes are high and energy commodities have, over the last 4 years been more volatile than most of the markets traded by the investment banks.

If you want to remove the little rogue that’s potentially hiding in your organization then we suggest you do the following things:

It's not that anyone deliberately sets out to be a rogue or that any organization sets out to create an environment where a rogue can exist. I tend to think circumstances conspire over time and these things escalate out of control. However we all have a responsibility to make sure energy procurement remains professional, transparent and effective.

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