Ian Marchant Leading Questions

Now, it is time for Leading Tried shedding light on the future

of energy and you get a lot of heat. It's a rapid rise in the Bills, 47%

increase over five years and combined bills has risen to more

than �1,400 every year, another reason to replace ageing power

stations, but what we eat? Wind, Tobias, gas? Either controversial

70 years ago, hydropower was the new power changing the mat up the

Highlands forever with a huge achievement bringing power to the

remote places for the first time. The Government agency that Bill

this is privatised and has expanded massively be on this but in

Scotland, it's still known as Scottish Hydro. These new projects

planned along with wind declines and tidal energy. This is sudden a

Electric. Along with Scottish Hydro it fans SSE. They dominate the

British energy supply. It's about the 30th biggest in Britain with

over 9 million accounts. It made a profit of �1.3 billion last year.

SSE faces strong criticism over prices and the treatment of

customers. His company has received a record fine for mis-selling, for

ever rising bills and threats facing future energy supplies. I

met Ian Marchant at the company headquarters to talk about the hard

choices the country faces. After that bruising fine, we asked about

whether he is popular or loved by the customers. I do feel loved and

supported by the staff, in a sense, the more immediate reaction you get

but obviously, over the last few weeks has not been good. Some

customers clearly don't like us at all. They have either been let down

all feel they've been let down and for that, I'm very sorry. The

larger reaction from the customers has been, it's undermined

confidence, you need to rebuild. What were you do about that?

has gone wrong with the relationship between the parent

companies and the customers? You are now more unpopular than the

banks as an industry, not you personally. I'm not sure that's

quite true. In a sense, there mis- selling that we are accused of,

that getting the price in slightly wrong. We did provide the energy.

Every day, 24 hours each day to all of the customers, and we still do

that. Some of the banks that they did, what were they providing? Was

there any value to the customer? Insurance that was not paid out.

Actually, we may be in the eye of the storm. I actually think they

are deep-rooted causes are less in our industry. We did get things

wrong. I am clear, the industry got things wrong. SSE got things wrong.

Believe you me, I spent a long time agonising over that, some of the

detail and some of the philosophical things. Why did this

happen and why didn't we deal with this earlier? From the chief

executive point of view, that's a more interesting debate about the

terms and conditions to somebody. Why did we create that culture?

Let's deal with that, specifically, SSE was fighting a �10 million fine

for mis-selling to try to get the customers to switch over. They

pinned the blame on senior management. It was a woeful failure

ISS the management.-SSE management. Until recently, not just yesterday,

why was it allowed to happen? have been thinking a lot about this,

the distillation of thought. We had a fragile business model. We were

selling on the basis of price. There was a very complex tariff

arrangement. We needed to compare 60 tariffs tour over 300 in the

marketplace. Think of the possible permutations. It was difficult. It

was fragile because, the customer did not know what the past

consumption was. At the price and the volume was unknown. Energy

patterns change. If the past may not be right, the future was

different. The prices are going up. While we may say you will save

money, what we actually meant was you will pay less than you would

have otherwise done. It's a fragile discussion. The other thing is,

it's seven or 800 people out there selling at any one point in time.

They are effectively, largely unsupervised. You have the

supervises visiting periodically to check. You have created a fragile

environment where the selling is happening. It's not like in a store

or online way you can put rigorous controls and detailed supervision.

That's my first point, a fragile business model. We underestimated

the scale of the changes of the environment. It was clear, clear

with hindsight, in 2009, a much higher standard was expected of us.

We recognise the higher standard, a lot of work went on to readers on

the processes but we pitched it wrong, we got it wrong. At the same

time there was a lot more scrutiny of the business, driven by the

banks but applied to the energy companies, the standard and

scrutiny we were exposed towards greater than we had assumed. The

third thing, we had an inadequate compliance ratio. Too much trust

and not enough for a vacation. We have learnt that lesson part-way.

Trusts in your own employees? everything OK? Yes. Are you

following the rules? Yes, that was happening. What was not happening

was that other thing about verifying and checking about what

we think was happening, three levels down in the organisation.

that why the managers were centralised to get the results at?

Effectively, there was not enough their vacation from senior

management, not involved in a direct process. There was a

weakness there. We were trusting, and you're absolutely right, within

the business unit, the compliance team was too close to the people

making the sales. We were not or did not have the attention clear

enough. Too much trust and not enough attention. We learnt that

bitter lesson a hard way. That applies to many business failures.

Before thing, there were some warning signs. Not at 2004-2006. We

had warning signs. Why didn't we pay attention to that? He took

about a fragile thing between the staff and customers. The customers

were being lied to about the prices from rivals and about the bills

coming down. How do you feel personally, after being so

committed to the company, to have this happen? I think, the examples

of lying there were few and far between. I think a more common

thing that was happening was misunderstanding either

deliberately or accidental. However, I feel deeply ashamed. Become meat

I was involved with and proud to be the leader, it was involved in

things that it should not have been. Absolutely, it's something I will

regret for the rest of my career. The at's talk about profits.

Another area of the reputation will damage. It's for the industry as a

whole. It clearly pleases the shareholders to get bigger prices.

Reinvesting a lot of investment. �1.3 billion was very tough. It

looks obscenely large. I understand why it looks have seen. We are big

company, the second largest generator of power and the third

largest network. The second largest supplier of energy, we are in gas

production. It's a big company. From the profits, roughly 45% comes

from the network business. The prices are regulated. Absolutely

explicit. The reason the profits was to remunerate the investors.

That happens within the UK. We employed people within the UK to do

that. It's about 45% of the products. Then there's another 35%

to run those generators. Then we have about 20% of the profits from

selling energy and energy related services. Only about 20%. The

profit margin, the difference between that cost and burnings was

about 3.5%. Not at any retailer. They have about 5% or 7%. You have

capital, a risk, I think our profits stand up as a reasonable

degree of scrutiny. To look at it in another way last week you put up

the prices by 9%. The half-year profit was up. They are going great

but personally, with your salary and bonuses, how do you think that

looks to the customer? The property increase over half he was an

unfortunate comparison. When you put the prices up, that sheet money

between the first half of the year and the second. The expectation

that over the Ford ute is about 5% increase, that's a better measure

for the half yearly increase. In terms of renumeration, what's

happened in corporate society is that renumeration levels have

become higher. This philosophical and historical reasons why this is

the case. In a sense, I am a beneficiary of that. I am actually,

you may not believe me, but for the size of my company, I am, quote,

underpaid, if you believe that. going rate for cheap executives is

too high? Is that what you're saying? Yes, and we are moderate

compared to our Piers. That's a philosophical thing and that leads

to a theme that is driven too much by the Americans. Consultants bute

comparisons. Our policy is to pay less than average. I am not aware

of any other company with that policy and by definition, 50 per

said the company should be. It's a real challenge how up

simultaneously, with one view, I am underpaid and Another View says I

am overpaid. That's a personal struggle that I go through. But in

up the industry generally, not just SSE, they look at the market's

concluding that competition is being stifled by poor worse

behaviour, tariffs, lack of transparency, many thought it was a

lot of progress but not fast enough progress. How does the industry win

back the trust? We need to rebuild confidence. Any organisation going

through turmoil, a bank, energy, media, they know that it's not a

quick task. The key point is that you need to get the reality right

first before you get their PR right. I won't come and say we will do

this or that because that's PR. We need to tell the customers about

what's happening and then tell them, by the way, let's tell people about

it. We have started to do things and we need to carry that through

and it will take a couple of years, I think, to get back to where we

way the markets operate, one of the things the regulator found was that

prices soar. They is simply not true. Are you saying that never

happened? I can give you an example. We put prices up as you mentioned

earlier at last year. To cover future winter gas prices. They

turned out even higher than we had assumed. The gas prices for the

winter we have come out of were the highest ever. We have not put

prices up. We have borne that. There are lots and lots of examples

of price spikes. We saw very high prices in the wholesale market it

the end of March, because it was pretty cold. Most of the guests in

Europe had been used and we saw very high prices. There are

examples where it is not true. I can prove the opposite. What some

of the superficial analysis ignores is the norm energy cost. Half of

your electricity or gas and energy, half of none energy, is the network

charges. They are going up, the debate is at what rate. And all the

non- energy costs, imposed by politics full regulation, support

for renewable energy or energy efficiency. They are all good but

those costs only go one way. That 50% is just increasing every year.

If you take that into account, that is the principal reason why prices

have gone up. You have been very forthright about one part of that,

one reason for the rising bills, the Social tariffs to subsidise

poorer customers and green energy targets. A lot of stop getting

loaded on you by government. This is an industry which is used as

target practice by politicians and the regulator. Has the eat industry

been a patsy in allowing this to happen? Some of these costs are OK.

And the electors say we should be at a cost of renewable energy. It

should be some of the cost of energy efficiency. There are some

which I think are more social issues, the tax benefits system

should help. On fuel poverty and some of the energy efficiency.

The other philosophical point is that there is an accepted political,

large political consensus across parties that we need to de

carbonised the economy. I agree with that. What it means in the

first 15 years of that path, the electricity bill is a

disproportionate cost. That is the cheapest place for society to pay

it. You are happier, that I green up ultras tea then drive your car

less. There has not been the honesty to say the cost of society

decolonisation is low but it comes here initially. There are two

reasons I think philosophically why it is a problem. Your point about

the industry is being a patsy, because our house was not in order,

we have struggled to resist. Looked ING at the energy market more

widely, you see there is a risk of the lights going out. The

government is underestimating the scale of the crunch facing the

country? What is the problem. are at an interesting point in the

cycle of the electricity generation market. We have too much, too much

generation on the system. Until recently. There were a number of

reasons for that. The bigger surprise was the economic recession.

Electricity vote has gone down four years in a row. This has never done

that since records began. Normally it goes up by 0.1 2.5% a year. We

have more generation then we need. The generation we have is not

making any money. You have got that and then you have some

environmentally regulations coming from Brussels that go back to

probably the late 90s, was its formulation which takes a lot of

generation of the system, not based on economics or need but the basis

of environmentally Kermit chewed. It has started to happen. We have

seen power stations are all shut in a few weeks. We have plants

shutting because it is not making money because it has to, we have

too much generation. And you have the third of factor, building new

is not easy because financial markets are tight. There's not much

liquidity. Government have said they will introduce new policy. But

it has not actually introduced new policy. To quote Donald runs felt,

they have created a Nalin unknown. They have said they will intervene

but you have to wait. So you wait. Who would build a gas plant today

on the basis that the market will recover in the government will give

its policy right? A board has to say let's wait until one of those

has happened. Today, none of these has happened. Although we said

government are underestimating the scale of the problem, we also mean

the government tardiness is making that problem worse. The government

has said we do not need new capacity for 2018. My answer is, I

hope you are right. SSE has invested heavily in renewables. Can

renewables take enough of a load off what is required for the

future? I have always believed renewables could do more than one

end of the spectrum. It is not the only answer. If you take

electricity, renewables for market the size of the UK, the 80 to 40%

from renewables is achievable with the technology of today. We will

need other solutions. One of those is nuclear. Can I come on to

nuclear because there is one technology we ignore which is

demand management. Renewables are variable and intermittent. Demand

is variable and intermittent if you get demands like management demands

like flexibility you can get more renewables on the system. However,

you will need a combination of clean and cleaner fossil fuels we

carbon storage comes in and nuclear. My objections to nuclear at the

moment are it is the wrong technology at the wrong price for

the wrong company. But we should wait. We can afford is a country to

wait. There's a lot of interesting technology development in nuclear

going on, especially in Asia and in the US with they are looking at

generation for technology, small reactors. Easier and quicker to

build. I think the UK we will wait. We should invest in gas, renewables,

demand site management and that gets us to 2025. 2025, you are not

far into your 50s, bags of energy, what his next? I need some time to

decompress and recover. It has been a great 20s. Really enjoyed the 11

years. I need some time to myself in time for the family. Later this

year, will question comes into play. I do not want to do another big

executive job. If I did, why do I not do the best one there is, the

one I have. 01 to-do a variety of different things. I am on the board

of the oil services company. That will carry on. I'm on the board of

the Maggie's cancer centres which is a great success story starting

in Scotland with 50 centres in the UK. I'm interested in small-company

development. A nice face more I mean single figure employees. I am

also interested in academia. When I was at university, I wanted to

teach. I had a teacher training places set-up. I thought I would

give accountancy a try. 30 years on, I've had enough of that. I am