Keep the home fires burning: exploring Britain’s new world energy quandaries
Great Britain’s Energy Supply Administration Regime, A Real Alternative to the Appointment of a Supplier of Last Resort?
This paper shall deal with the law of Great Britain’s (GB) legislation, as Northern Ireland’s legislative regime, following Brexit[1], in the energy sector, pursuant to the Withdrawal Agreement’s and the Protocol on Ireland/Northern Ireland’s terms[2], as well as ancillary agreements, remains that of the European Community[3]. A further distinction must be made in relation to Scotland, which whilst forming part of GB and thus falling under the remit of Ofgem[4] – a non-ministerial government department, which acts on behalf of the Gas and Electricity Markets Authority[5], from a legislative perspective, particular Scottish insolvency laws apply[6].
It is not the intention of this paper to discuss the reasons why GB energy suppliers fail, but to expound upon the effect of supplier failure vis à vis the most appropriate route to resolution of such failure under the current GB legislative regime.
In respect of energy suppliers, insolvencies of energy suppliers falls within the remit of a special administration regime – the Energy Supply Company Administration[7] (ESCA); since energy suppliers are deemed to be of a public nature and/or the nature of the service, of a wider public interest.
Insolvency Act 1986 (IA 1986) [8]
Whilst it is possible that suppliers may be dealt with under ordinary IA 1986 corporate insolvency procedures (or a scheme of arrangement or Part 26A restructuring plan[9]), in practice the ESCA regime, modifies and restricts the terms upon which, in relation to gas and electricity suppliers operating by virtue of Ofgem granted suppliers’ licenses[10], maybe placed into the ordinary insolvency process pursuant to the IA 1986.
Such restrictions as to the ordinary insolvency procedures afforded by the IA 1986 apply to: (i) winding up orders; (ii) voluntary winding up; (iii) ordinary administration orders; (iv) administrator appointments by creditors; and (v) enforcement of security.
To commence the insolvency process, the supplier or creditor must first serve a minimum of 14 days’ notice on both the Secretary of State and Ofgem. During this notice period, Ofgem will evaluate whether to seek the consent of the Secretary of State[11] in order make an application to the court for an energy supply company administration order. The Secretary of State also has the power to make such an application his or herself[12]. This 14 days’ notice is in addition to Ofgem’s power to revoke a supplier’s license upon 24 hours’ notice pursuant to the terms of [standard] terms of a supplier’s license[13]. The feasibility of saving a supplier from insolvency within such a relatively short period of time is debatable[14].
In the decision as to whether to make such an application to court, Ofgem will consider whether the supplier is: (i) is unable to pay its debts, or any voluntary arrangement is proposed in relation to it[15], or (ii) it enters into any composition or scheme of arrangement[16], or (iii) has a receiver appointed over the whole or any material part of its assets or undertaking; (iv) has an administration order made in relation to it; or (iv) passes any resolution for winding-up other than a resolution previously approved in writing by the Authority; and/ or (v) becomes subject to an order by the High Court for winding-up[17].
Energy Supply Company Administration (ESCA)[18]
According to Ofgem’s published guidance, their preference for a failing supply company will be for a private trade sale of that supply company. However, in circumstances where a trade sale is not achievable, Ofgem has the power to revoke the company’s supply licence upon 24 hours’ notice and exercise its powers to: (i) appoint a ‘Supplier of Last Resort’, or, if this is not feasible; (ii) to seek the Secretary of State’s consent to apply to court for an Energy Supply Company Administration order[19].
The court may only make an energy administration order (EAO) where it is satisfied that either (i) the energy supply company is unable to its debts when due, or (ii) the Secretary of State could apply to wind up the company on public interest grounds.
The overall objective of an EAO is primarily to continue the company as a going concern, or alternatively, to break up the company to one or more other suppliers. In any event, the energy administrator must continue to supply the customer of the failed supplier with an uninterrupted supply of energy.
Indeed, even where the supplier’s directors have obtained a Part A1 moratorium[20] from the court – allowing distressed companies temporary relief from creditor action, the Secretary of State can still apply for an EAO[21].
The modified insolvency process of the ESCA, as compared with the ordinary insolvency process under IA 1986, includes the ability of the Secretary of State, with the consent of HM Treasury Dept. to (i) make grants, or (ii) loans to the company, (iii) agree to indemnities, or (iv) to provide guarantees.[22] These remedies are indeed special to the EASC, as the same are not available to other types of companies under the IA 1986.
Indeed, the peculiarity of this process can be seen by Ofgem’s now dated, pre-Brexit, acknowledgement in the Memorandum of Understanding[23], that such action may fall foul of the European Commission’s State Aid laws[24] – now of course no longer relevant following GB’s departure from the European Union.
Despite the process and the provisions in the law to allow for an EASC, Ofgem’s own guidance makes it clear that the process is reserved only in cases where ‘large’ electricity suppliers fail: ‘‘Energy Supply Company Administration is a special administration regime for large energy supply companies. It ensures uninterrupted and safe operation of essential services in the event of a large energy supply company becoming insolvent.’[25]
What constitutes a ‘large’ supplier cannot be found either in the law or in Ofgem’s guidance. Further, Ofgem’s published Memorandum of Understanding[26], states ‘In the event of deterioration in the financial health of an energy supply company, particularly a large energy supply company’[27]. This general statement of ‘an energy supply company’ is then qualified by the second limb of that sentence: ‘particularly a large energy supply company’ thus confirming that the EASC process is open to all failing supply companies – whatever the size.
Supplier of Last Resort (SoLR)
When a supplier fails, Ofgem has a SoLR process in place, whereby a replacement supplier is sought to take over the supply to the failed suppliers customers; albeit not the contracts themselves that such customers had with the failed supplier.
Ofgem will not seek to appoint an “Energy Administrator” under the ESCA regime where it considers the SoLR process would be achievable.
To be clear, the SoLR is not an insolvency process, its objectives is to achieve the continuity of supply for customers. Upon the appointment of an SoLR, the failing supply company will, no doubt and predictably, still be required to go through the ordinary insolvency procedure – the failed supply company having had its supply license revoked and is thus treated like any other type of company from an insolvency perspective; this is subject to such supply company not having any other type of license i.e. shipper issued by Ofgem.
Following the collection of aggregate information as to the operations and customers of the failed supplier, Ofgem puts out a call to existing SoLR s, requesting that those SoLRs, which would be willing, on a voluntary basis, to take over the customers of the failed supplier to indicate their interest in taking over such customers. This should be a competitive process, however, considering the disruption to SoLRs by being involved in this process, as well as the credit risk posed by assuming the failed suppliers customers’ accounts, voluntary SoLRs may not be forthcoming.
Such ‘trade sale[28]’ being to another supplier on the basis that ‘we consider that trade sales are generally more desirable than regulatory intervention’[29]. A trade sale in this context may involve (i) the SoLR purchasing the debt book of the failed supplier, or (ii) the SoLR acting as a collections agent on behalf of the insolvency practitioner, or (ii) the insolvency practitioner arriving at a final billing position in respect of customers [of the failed supplier] with a view to debt collection[30].
As suppliers – as part of their supplier license conditions[31] – agree to act as SoLRs and thereby agree to take over responsibility for a failed supplier’s customers if asked to do so by Ofgem, Ofgem is not above using its power therein to direct SoLRs to act as such in any particular case[32]. However, preference will be given to SOLRs willing to carry over the credit balances of the customers of the failed supplier.
Ofgem’s objective is clear when selecting a SOLR: “In considering which supplier to direct, we must be satisfied that the SoLR could supply the additional customers without significantly prejudicing its ability to continue to supply its existing customers and to fulfil its contractual obligations for the supply of gas or electricity.” [33]
Policy Considerations
Throughout Ofgem’s guidance for suppliers – whether failed or as SoLRs – and insolvency practitioners, Ofgem is explicit as to its intentions and to its reasoning: ‘[for] customers…to continue to be supplied as cost effective as possible; impact on the industry systems, particularly in relation to balancing and settlement arising from large unpredictable transfers of costs from a failed supplier… are minimised; and [to ensure that] market stability and customer confidence is maintained’[34].
Bearing in mind the overriding policy objective that energy suppliers are deemed to be of a public nature and/or the nature of the service concerns that of a wider public interest, it is Ofgem’s imperative aim to ensure the continuity of service to customers of supply.
To achieve this policy objective a hierarchical resolution method has been adopted by Ofgem. Ofgem’s published guidance is clear that ‘a trade sale of a failing supplier remains our preferred means of ensuring continuity of supply’[35].
Ofgem further elucidates that failing a trade sale, the appointment of a SoLR is the next alternative, or ‘if this [appointment of an SoLR] is not feasible to seek the Secretary of State’s consent to apply to the court for an energy supply company administration order’.[36]
It is only when the appointment of an SoLR is not feasible would the ESCA be invoked and then only if the failed supplier was ‘large’ in size – presumably large being in reference to the number of customers it serviced as opposed to when a smaller energy supplier becomes insolvent.’[37]
It is therefore notable that the ‘Provisions for this administration scheme for energy suppliers were included in the 2011 Energy Act. It has never been used before because a large energy supplier has never been insolvent.’[38] – one should in the current energy climate add the proviso ‘to date’.
It must be concluded therefore, that the EASC is no alternative to the SoLR, the former being reserved for undefined ‘large’ suppliers. The irony being that as more and more suppliers fail in today’s economic climate, more and more pressure is being forced upon the industries larger suppliers to act as SoLR and one wonders whether with this added pressure to take over failed suppliers’ customers, whether such ‘large’ suppliers can continue to withstand such additional risk in the face of their own possible failure, or whether what is occurring is a de facto reversal of the energy supply industry’s liberalisation?
Bibliography
[1] United Kingdom’s departure from the European Union, https://www.gov.uk/brexit
[1] https://ec.europa.eu/info/strategy/relations-non-eu-countries/relations-united-kingdom/eu-uk-withdrawal-agreement_en
[1] Northern Ireland’s electricity sector is deemed an “all island” system, highly integrated with that of the Republic of Ireland via the I-SEM (Integrated Single Electricity Market)
[1] Office of Gas and Electricity Markets – Great Britain’s sole National Regulatory Authority: https://www.ofgem.gov.uk/
[1] Established by virtue of section 1(1) of the Utilities Act 2000
[1] Scotland’s insolvency regime is set out in the Insolvency (Scotland) (Company Voluntary Arrangements and Administration) Rules 2018 and the Insolvency (Scotland) (Receivership and Winding up) Rules 2018
[1] The Energy Act 2004 (as it applies by virtue of the Energy Act 2011) and further supplemented by Energy Administration Rules 2005 (SI 2005/2483), introduced the “Energy Supply Company Administration” regime
[1] Notwithstanding the Insolvency Regulations 2006, the provisions of IR 1986 will continue to apply pursuant to Energy Act 2004, Energy Administration Rules 2005 (SI 2005/2483), Energy Act 2011, Energy Supply Company Administration Rules 2013 (SI 2013/1046) and Corporate Insolvency and Governance Act 2020
[1] Companies Act 2006
[1] Supplier licenses are granted pursuant to s7A (1)(a) or (b) Gas Act 1986 or under s6(1)(d) Electricity Act 1989
[1] The Secretary of State for Business, Energy and Industrial Strategy has overall accountability for the security and resilience of energy supplies
[1] S. 156(1) Energy Act 2004 as amended by s96 Energy Act 2011
[1]https://www.ofgem.gov.uk/sites/default/files/docs/2012/01/electricity_supply_licence_revocation_conditions_0.pdf and https://www.ofgem.gov.uk/sites/default/files/docs/2012/01/gas_supplier_licence_revocation_conditions_0.pdf
[1] S.1 Insolvency Act 1986
[1] Other than for the purpose of reconstruction or amalgamation upon terms and within such period as may previously have been approved in writing by Ofgem
[1] ss123(1) or (2) of the Insolvency Act 1986
[1] Energy Act 2004 (as it applies by virtue of the Energy Act 2011) in addition to the Energy Supply Company Administration Rules 2013 or the Energy Supply Company Administration (Scotland) Rules 2013
[1] S.96 Energy Act 2011 96 Energy Act 2011, as amended by s.156-167 Energy Act 2004
[1] Part A1 Moratorium, an insolvency process introduced by the Corporate Insolvency Governance Act 2020
[1] S.A20(2A), IA 1986, as amended by reg.8, the Insolvency (Moratorium) (Special Administration for Energy Licensees) Regulations 2020 (SI 2020/943))
[1] S.165 to 167 Energy Act 2004 as amended by s.96 Energy Act 2011
[1] Memorandum of Understanding Between the Gas and Electricity Markets Authority and The Department for Business, Energy and Industrial Strategy and Her Majesty’s Treasury, paragraph 15 of 05/12/2016
[1] Ibid
[1] https://www.ofgem.gov.uk/publications/memorandum-understanding-energy-supply-company-administration
[1] Memorandum of Understanding Between the Gas and Electricity Markets Authority and The Department for Business, Energy and Industrial Strategy and Her Majesty’s Treasury 09/02/2017
[1] Ibid, paragraph 2
[1] See Ofgem’s Open letter to insolvency practitioners appointed to failed Energy Supply companies, 05/11/2019
[1] Ibid page 4
[1] Ibid page 2
[1] Ofgem Guidance on supplier of last resort and energy supply company administration orders dated 21/10/2016, page 9
[1] Energy supply company administration rules, IA No. DECC0084 of 14/01/2013
[1] Ofgem Guidance on supplier of last resort and energy supply company administration orders dated 21/10/2016
[1] Ibid
[1] Ibid
[1] https://www.ofgem.gov.uk/publications/memorandum-understanding-energy-supply-company-administration
[1] United Kingdom’s departure from the European Union, https://www.gov.uk/brexit
[2] https://ec.europa.eu/info/strategy/relations-non-eu-countries/relations-united-kingdom/eu-uk-withdrawal-agreement_en
[3] Northern Ireland’s electricity sector is deemed an “all island” system, highly integrated with that of the Republic of Ireland via the I-SEM (Integrated Single Electricity Market)
[4] Office of Gas and Electricity Markets – Great Britain’s sole National Regulatory Authority: https://www.ofgem.gov.uk/
[5] Established by virtue of section 1(1) of the Utilities Act 2000
[6] Scotland’s insolvency regime is set out in the Insolvency (Scotland) (Company Voluntary Arrangements and Administration) Rules 2018 and the Insolvency (Scotland) (Receivership and Winding up) Rules 2018
[7] The Energy Act 2004 (as it applies by virtue of the Energy Act 2011) and further supplemented by Energy Administration Rules 2005 (SI 2005/2483), introduced the “Energy Supply Company Administration” regime
[8] Notwithstanding the Insolvency Regulations 2006, the provisions of IR 1986 will continue to apply pursuant to Energy Act 2004, Energy Administration Rules 2005 (SI 2005/2483), Energy Act 2011, Energy Supply Company Administration Rules 2013 (SI 2013/1046) and Corporate Insolvency and Governance Act 2020
[9] Companies Act 2006
[10] Supplier licenses are granted pursuant to s7A (1)(a) or (b) Gas Act 1986 or under s6(1)(d) Electricity Act 1989
[11] The Secretary of State for Business, Energy and Industrial Strategy has overall accountability for the security and resilience of energy supplies
[12] S. 156(1) Energy Act 2004 as amended by s96 Energy Act 2011
[13]https://www.ofgem.gov.uk/sites/default/files/docs/2012/01/electricity_supply_licence_revocation_conditions_0.pdf and https://www.ofgem.gov.uk/sites/default/files/docs/2012/01/gas_supplier_licence_revocation_conditions_0.pdf
[14] Roggenkamp, M., & Banet, C. (Eds.). (2017). European Energy Law Report XI. Intersentia. doi:10.1017/9781780686257; Chapter 16: A Comparative Overview. pp 317-345. By René van’t Hoft
[15] S.1 Insolvency Act 1986
[16] Other than for the purpose of reconstruction or amalgamation upon terms and within such period as may previously have been approved in writing by Ofgem
[17] ss123(1) or (2) of the Insolvency Act 1986
[18] Energy Act 2004 (as it applies by virtue of the Energy Act 2011) in addition to the Energy Supply Company Administration Rules 2013 or the Energy Supply Company Administration (Scotland) Rules 2013
[19] S.96 Energy Act 2011 96 Energy Act 2011, as amended by s.156-167 Energy Act 2004
[20] Part A1 Moratorium, an insolvency process introduced by the Corporate Insolvency Governance Act 2020
[21] S.A20(2A), IA 1986, as amended by reg.8, the Insolvency (Moratorium) (Special Administration for Energy Licensees) Regulations 2020 (SI 2020/943))
[22] S.165 to 167 Energy Act 2004 as amended by s.96 Energy Act 2011
[23] Memorandum of Understanding Between the Gas and Electricity Markets Authority and The Department for Business, Energy and Industrial Strategy and Her Majesty’s Treasury, paragraph 15 of 05/12/2016
[24] Ibid
[25] https://www.ofgem.gov.uk/publications/memorandum-understanding-energy-supply-company-administration
[26] Memorandum of Understanding Between the Gas and Electricity Markets Authority and The Department for Business, Energy and Industrial Strategy and Her Majesty’s Treasury 09/02/2017
[27] Ibid, paragraph 2
[28] See Ofgem’s Open letter to insolvency practitioners appointed to failed Energy Supply companies, 05/11/2019
[29] Ibid page 4
[30] Ibid page 2
[31]https://epr.ofgem.gov.uk//Content/Documents/Gas%20supply%20standard%20licence%20conditions%20consolidated%20-%20Current%20Version.pdf
[32] Roggenkamp, M., & Banet, C. (Eds.). (2017). European Energy Law Report XI. Intersentia. doi:10.1017/9781780686257; at Chapter 16: A Comparative Overview. pp 317-345. By René van’t Hoft
[33] Ofgem Guidance on supplier of last resort and energy supply company administration orders dated 21/10/2016, page 9
[34] Energy supply company administration rules, IA No. DECC0084 of 14/01/2013
[35] Ofgem Guidance on supplier of last resort and energy supply company administration orders dated 21/10/2016
[36] Ibid
[37] Ibid
[38] https://www.ofgem.gov.uk/publications/memorandum-understanding-energy-supply-company-administration