'Naive' Met Office took £4.5m hit

Weather derivatives allow firms to profit from bad weather

The Met Office has lost £4.5m in a "naive and amateurish" attempt to sell weather forecasts to the international money markets, it has emerged.

Chief executive Mark Hutchinson told MPs civil servants at the agency lacked "hard private sector experience".

And they had been unable to properly assess the risks of WeatherXchange, which collapsed earlier this year.

But he insisted lessons had been learned from the experience and it had not made the Met Office "risk averse".

WeatherXchange was set up in 2001 with commercial partners including Australian mining giant BHP Billiton.

The idea was to create an online market in Europe for weather derivatives - complicated financial instruments which allow companies to insure against - and profit from - bad weather.

'Snakes'

But a wave of negative publicity following the collapse of US energy giant Enron, which was also in the weather derivatives business, hit confidence in the market.

Mr Hutchinson told the Commons defence select committee WeatherXchange had never made money and in order to stay afloat had wanted to start selling data previously provided free of charge by the Met Office.

But he said the Met Office, which is part of the Ministry of Defence (MoD), could not do this because it had to provide "generic" weather forecasts to "a wide range of users" by law.

He denied there had been a deliberate Met Office "conspiracy" to "drive WeatherXchange out of business".

Labour committee member Dai Havard asked why more questions were not asked about the Met Office getting involved with derivative traders, which he described as "two legged snakes".

Mr Hutchinson insisted it had been seen as a viable business with good growth potential but said there should have been "more rigour" in the way it was managed.

'Risk averse'

He said the Met Office now had non-executive directors on its board to help it "manage future commercial risks".

It had also appointed a marketing director with a "commercial private sector background" and was looking for a new chairman with commercial experience.

The Met Office lost £1.5m in direct investment in weatherXchange and a further £3m for services provided and legal costs associated with the project since 2001.

But Mr Hutchinson stressed the experience had not made the organisation "risk averse", adding it wanted to seek out more commercial partnerships to help boost its annual profits from £20m a year to £29m by 2010.

In Tuesday's session, Labour member Kevan Jones described the Met Office's conduct as "naive and amateurish".

He told Peter Ewins, Met Office chief executive at the time weatherXchange was set up: "If you had done this in local government, quite frankly, you would have been shot."

Privatization

Mr Ewins, who was also chairman of weatherXchange, put the company's collapse down to a "loss of confidence between the various partners".

He also stressed he had only received expenses for his role in the private company.

But, giving evidence in Wednesday's session, new defence minister Tom Watson confirmed some civil servants had been receiving salaries from both organisations.

The committee pledged to investigate the issue further in private session.

The status of government agencies which operate commercially, such as the Met Office, is currently under review - including the prospect of privatisation.

But Mr Watson said the Met Office was a "positive and successful operation" and he did not think there was a case for "moving away" from MoD ownership.

A document released by the MoD on Tuesday said there "had been no substantial impact on the Met Office's reputation as a consequence of the administration of weatherXchange".

But it added: "The Met Office remains conscious of risks in the future and continues to work actively to mitigate these risks."