Energy supplier insolvencies – specialist, but critical

15 December 2019

While a lot of press and political attention in recent months has been focused on big-name insolvencies like Thomas Cook, or the many struggling High Street firms and restaurants, there has been little focus on one particular part of the economy that has seen a steady stream of insolvencies, affecting hundreds of thousands of customers - that of energy suppliers.

Since 2015 there have been at least 29 energy supplier insolvencies each year, rising to 43 in 2018, with many firms citing higher wholesale prices and new regulations as key factors in their financial difficulties. The regulator for the sector, Ofgem, has had responsibility for moving all of these firms' customers over to new suppliers, while the insolvency practitioners appointed as office holders to deal with the insolvent firms have had responsibility for providing those customers with final bills and ultimately collecting the debts owed (or refunding credit where applicable).

In October, Ofgem published a review ('Supplier Licensing Review: Ongoing requirements and exit arrangements') which contained "a package of proposals for...'exit arrangements' to mitigate the negative effects of supplier exit", citing concerns around the approach some office holders have taken to finalising customer bills and collecting debt.

In our response to the consultation, we recognise the importance of ensuring that the customer experience in these situations is both fair and prompt, but note that the review lacks consideration of a number of important issues from the insolvency profession's perspective. This blog post looks at two of those issues: insolvency practitioners' statutory duties when acting as office holders, and the practical difficulties that office holders often face when dealing with this type of insolvency.

Different regulatory frameworks

One key point underlying concerns about customer experience relates to the different regulatory frameworks that apply to the collection of debts from customers pre- and post-insolvency: when an energy supplier becomes insolvent, it ceases to be a regulated utility provider and other regulatory frameworks come into play. When a supplier enters an insolvency procedure, an insolvency practitioner will be appointed as an office holder (either as an administrator or liquidator) and will operate under a different set of statutory and regulatory requirements to those of the energy supply sector.

It is important to emphasise just how important these duties are for office holders.

When appointed to act as an 'office holder' in an administration, liquidation or voluntary arrangement, insolvency practitioners have a duty to maximise returns to the company's whole body of creditors. Indeed, an insolvency practitioner's primary duty is to the creditors of the insolvent company as a whole, and every decision taken about an insolvent company is made with the ultimate benefit of creditors in mind. To criticise office holders for their approach to collecting debts is to ignore the statutory and regulatory framework in place that they must adhere to.

Failure to adhere to these duties would lead to regulatory penalties for an insolvency practitioner, potentially including the loss of their licence to practice. We believe it would be more appropriate to focus on improving the way different regulatory frameworks interact, and to acknowledge the difficulties office holders face when trying to navigate between competing regulatory demands.

That said, insolvency practitioners are aware of the stresses of the insolvency process and will seek to work with all stakeholders to manage the process sensitively and effectively.

Practical issues facing office holders

It is also important to recognise the unique practical challenges faced by an office holder in an energy supplier insolvency. It is the difficulty of resolving these challenges that can lead to some of the issues identified in Ofgem's consultation, including the "significant delays in final billing" flagged in some cases.

Ultimately, an office holder is picking up the pieces at a financially distressed company. They may be appointed with little prior notice, and they may inherit systems and processes which are not fit for purpose. The office holder did not put these systems in place; they are there to try and achieve the best outcome in the circumstances.

It is also worth noting that the interests of office holders and Ofgem are aligned: given their statutory and regulatory requirements, it is in office holders' interests to finalise customers' final bills as quickly as possible. Doing so allows the insolvency process to progress faster, keeping costs down and protecting creditor returns.

Specific challenges faced by office holders in energy supplier insolvencies include:

• The quality of data held by the insolvent energy supplier and across the wider sector can often be poor, leading office holders to take additional time to obtain accurate and reliable information regarding customer billing positions, at the same time as trying to ascertain the financial situation of the insolvent company over which they have been appointed.
• R3 members have commented that the time taken by a Supplier of Last Resort (appointed by Ofgem to ensure continuity of supply for customers of an insolvent supplier), as the new supplier, to provide meter readings to office holders can take well over six weeks. This must take place before office holders begin to create and issue final bills, which are in turn heavily reliant on the insolvent company's billing systems to produce. It is the weakness of these systems which is often one of the causes of financial distress for the company in the first place.
• The process of managing the release of such a high number of bills and managing customer queries and disputes with what is left of the company's staff can be difficult. Even if final bills could be readily prepared within six weeks of appointment, as suggested by Ofgem, the issuing of these requires careful phasing. In the event that these bills are issued too quickly, a heightened level of enquiries will result. If, as is likely, the retained infrastructure is insufficient to cope with the volume of calls that is generated, this will result in increased customer frustration and complaints.

Next steps

Now that the consultation is closed, we look forward to engaging with Ofgem to discuss these issues in more detail. We hope that by improving dialogue, understanding and engagement between Ofgem and the insolvency and restructuring profession, all stakeholders will be able to have greater confidence in the framework for dealing with insolvent energy suppliers.