With the gradual opening of energy supply markets allowing new energy providers to challenge the established providers and bring increased competition to the market, the last two decades have seen an increase in smaller energy providers entering the market and sharing a growing customer base. But what happens to the customers when an energy provider becomes insolvent?
Squire Patton Boggs’ Birmingham Restructuring & Insolvency team recently assisted with the administration of the energy company, Economy Energy Trading Limited. Given the essential nature of the services provided to customers by energy companies, the pre-insolvency process is not as straightforward as would ordinarily be the case.
The role of Ofgem
Where an energy supplier is facing potential insolvency, there is a requirement for it to liaise with Ofgem – the government regulator for gas and electricity markets in Great Britain. Given Ofgem’s focus on the interests and needs of customers, each supplier of gas or electricity provides it under a supply licence granted by Ofgem. This licence sets out the required conduct of suppliers and, amongst other obligations, places a duty on the supplier to offer to supply energy to domestic customers. All energy suppliers are subject to these licences and they can only be revoked by Ofgem in certain circumstances (one of which is insolvency – see below).
In the event of potential insolvency, it is possible for Ofgem to seek the consent of the Secretary of State for BEIS to make an application under the Energy Acts 2004 and 2011 for the appointment of an Energy Supply Company Administrator. However, Ofgem’s published guidance indicates that it will only do so if it is not practicable to revoke the suppliers licence and to appoint a Supplier of Last Resort.
Appointing a Supplier of Last Resort (SoLR)
The SoLR process is Ofgem’s method of ensuring that the interests and supplies of customers are protected throughout the insolvency process. The SoLR will be another energy supply company which can either volunteer or be directed by Ofgem to step in and take on the customers of the insolvent energy company who will seamlessly transfer across to the new supplier.
In order for Ofgem to have sufficient time to determine its preferred approach to a supplier’s potential insolvency, the terms of the supplier’s licence provide that Ofgem is added to the list of parties entitled to receive notice of a proposed appointment of an administrator. The licence also provides that the appointment of an administrator cannot take effect until 14 days have elapsed after service of the final document required to complete the appointment of an administrator (namely, the administrators’ notice of appointment). In practice, the supplier will usually already have had some engagement with Ofgem prior to getting to the stage where appointment documents are being filed/served so that a preferred strategy is agreed with Ofgem in advance.
The 14 day notice period referred to above and the statutory time limits imposed on other insolvency processes are far from ideal against the backdrop of the worsening financial position of the supplier and more importantly, consumer unrest and uncertainty. Accordingly, the energy licence also provides that Ofgem has the power to revoke a supplier’s energy licence (to enable the SoLR process to commence immediately thereafter) if the supplier is unable to pay its debts within the meaning of section 123 (1) or (2) of the Insolvency Act 1986. This route does not have any statutory minimum days’ notice requirements but does require the court to be satisfied as to the supplier’s insolvency thereby necessitating court involvement. This is precisely the route that was followed in the Economy Energy case.
Almost immediately following the application to court and the resulting declaration of insolvency of Economy Energy, Ofgem was able to revoke the Economy Energy’s supply licences to allow Ovo Energy to become the SoLR and all customers at that time automatically transferred to Ovo with no interruption of supply.
Once customers transferred, the process to appoint administrators completed. Transitional services were agreed and concluded between the administrators and the SoLR and the administrators were able to begin their work in collecting any debts which remained with the company to ensure the best possible outcome for creditors of the company.
The SoLR process is unique to the administration of energy companies and, whilst still rare, energy company insolvencies have increased in frequency in the last few years.
With the growing socioeconomic uncertainty surrounding Brexit and the ongoing open market for small companies to challenge established providers, this pattern is unlikely to change in the near future.
Energy companies and insolvency practitioners need to be aware of the additional steps required, for example, engagement with Ofgem, prior to the appointment of administrators and to build these factors into their insolvency planning at the earliest possible stage.