Drax: criminal charges a possibility

Not before time, the FCA is investigating Drax: 

... covering the period January 2022 to March 2024 relating to certain historical statements regarding Drax's biomass sourcing and the compliance of Drax's 2021, 2022 and 2023 Annual Reports with the Listing Rules and Disclosure Guidance and Transparency Rules.

Needless to say, this hasn't done anything for its share price.

During the period under investigation, Drax was found guilty of misreporting by the pusillanimous Ofgem which let it off with a £25m fine.  In the context of literally billions Drax has received in subsidies, that's a bad joke.  And Ofgem's entire approach was pathetic, they had more than enough to throw the book at it.  But it means the FCA has a fairly robust platform from which to commence its own work, 

What's it all about?  Au fond, the issue is that Drax gets subsidised thus because it says it is saving the planet by burning trees for electricity - and it isn't.  The entire business model is built on a lie.  Living a lie is never good for integrity, personal or corporate.   In lay terms the FCA will be looking at something rather different to Ofgem which was, notwithstanding the proven misreporting, limited to whether Drax technically qualified for its subsidies.  In essence, their finding was, "even though they don't provide accurate info, we can't be sure Drax is in breach - so we'll carry on paying".  Pretty lame. 

The FCA will be looking at whether Drax has misled investors / shareholders / the market.  Here, as in the States, this can be a criminal offence.  When I was an FCA-authorised player (well, FSA in those days) it was "up to 2 years, and/or an unlimited fine" for executives involved.  In the USA, they actually do bang people up for this - see this earlier blog story.  

Who knows where the FCA will come down?  My own two-penn'orth is that (a) Drax's dissembling about its supposed CO2-reducing impact, & exactly what trees they burn, is probably of only peripheral concern to the FCA; (b) the Risk Disclosures in successive Drax annual reports look distinctly questionable.  They know how perilously they are placed via-a-vis regulatory risk, but it's not clear to me that comes across in the ARs (see for yourselves).  They've also spoken with forked tongue over whether they would be a going concern without subsidies at all.   And being already proven as prone to, err, *mis-speaking* - some entertaining stuff came out at an Employment Tribunal earlier this year - won't help Drax's cause.

My guess is that the CEO's future could be under scrutiny when the Board gets round to thinking about how they've got where they are.  But Miliband still depends on Drax to keep the lights on in 2030 - friends in high places.  That's just about their only plea in mitigation.  And it wouldn't stop a handful of execs being made an example of.  We shall see.

Popcorn, please ...

ND