Ofgem consultation on energy company insolvencies

21 August 2020

In June, the energy regulator Ofgem launched a consultation to look at its "approach to supplier licensing to ensure that appropriate protections are in place against poor customer service and financial instability", as part of its Supplier Licensing Review.

This consultation aims to "strengthen [Ofgem's] arrangements for dealing with supplier exit, to ensure that the failing supplier bears their share of the costs and minimise the implications for remaining suppliers and consumers" – worthy goals, and ones which R3 supports.

However, we are concerned that the proposals in this consultation which deal with what happens when an energy company enters an insolvency procedure lack consideration of insolvency practitioners' statutory duties when acting as office holders (that is, as liquidators or administrators), and do not recognise the practical difficulties that office holders often face in dealing with insolvent energy suppliers.

Having previously engaged with Ofgem on the issues raised, it is disappointing that our points have been noted but not fully addressed and allayed.

Practical issues

When appointed as office holder for an energy company, an insolvency practitioner faces unique and challenging circumstances. They may be appointed to a financially distressed company with little prior notice, and they may inherit systems and processes which are not fit for purpose, including patchy or incomplete customer and financial records, constrained staff levels, and a need to balance every outlay against creditors' needs.

Maintaining the infrastructure of the insolvent energy company, in order to support the process of closing off customer accounts (refunding customer balances and collecting outstanding monies, and agreeing on final bills before the customer is moved to a new supplier), involves a lot of practical difficulties for office holders.

These tricky conditions make Ofgem's requirement for final bills to be sent within six weeks of the end of a supply contract, for example, difficult or often impossible to honour, given the time needed to communicate with all customers and collect final meter readings - factors outside the office holder's control. Indeed, the office holder will want to get final bills issued as rapidly as possible, in order to speed up the process and minimise the costs for creditors.

Communication with customers is also difficult for the office holder, as they are likely to be operating with a reduced headcount in the customer services team, with less than perfect customer records, at a time when inbound calls will be potentially far higher than normal, as customers get in touch to enquire about their balances, or to say they are moving to a new supplier.

Key concerns

Several proposals in the June 2020 consultation have caused concern for R3, in particular:

• customer interactions with administrators (where Ofgem plans to introduce a requirement for energy suppliers to include references in their contract terms and conditions that activities relating to debt recovery will be executed as outlined in relevant licence conditions);
• customer book sales (with proposals for a new requirement for energy suppliers to notify Ofgem when they are planning to undertake a commercial transaction which would result in the transfer of customers, and a licence condition that prevents energy company licensees from engaging in commercial transactions that "subvert or distort, or are likely to subvert or distort", the Supplier of Last Resort (SoLR) process, and/or make it more likely, in Ofgem's opinion, that costs will be mutualised); and
• SoLR commitments (with a new requirement for energy suppliers to take all reasonable steps to honour the terms of the bid they provide as part of the SoLR selection process, and a requirement for energy suppliers to include a clause in deemed contracts committing them to honouring customer credit balances where that contract arises from a SoLR process and the supplier has committed to honouring credit balances).

R3's over-arching concerns arise as a result of the fact that, upon the insolvency of an energy supplier, it ceases to be a regulated utility provider, and other regulatory frameworks come into effect. An insolvency practitioner appointed as administrator or liquidator will operate under a different set of statutory and regulatory requirements to those of the energy supply sector.

The insolvency practitioner acting as office holder has a duty to maximise returns to the company's whole body of creditors. Criticising office holders for their approach to collecting debts, for example, ignores the statutory and regulatory framework in place that they must adhere to on pain of regulatory penalties, potentially including the loss of their licence to practice. A more productive approach would be to focus on improving the way different regulatory frameworks interact, rather than criticising office holders for trying to navigate between competing regulatory demands.

On the topic of debt collection, a necessary part of the office holder's role, office holders are also mindful of the need to treat customers in a fair and sensitive way. Indeed, office holders will usually have a policy (on a firm or practice basis) relating to the way that they will collect debt, outlining the steps they will take to understand why a customer may struggle to pay a debt, as well as how they will manage these situations.

Many insolvency practitioners' practices are regulated by the Financial Conduct Authority in respect of providing debt advice and debt collection, or will refer to FCA-regulated debt collectors when seeking to recover debts.

R3 members have noted that it would be helpful to explore and agree a framework with Ofgem in respect of debt collection in cases of energy supplier insolvencies. Such a framework could provide clarity where currently office holders have to navigate overlapping regulatory frameworks.

Conclusion

R3 is keen to maintain an open dialogue with Ofgem, given our role as the voice of the UK insolvency and restructuring profession. Improving engagement between the energy regulator and the profession should lead to everyone having greater confidence in the framework for dealing with insolvent energy suppliers - and ensure customers are switched over to new suppliers as quickly and efficiently as possible.

• To read R3's response to this consultation, click here.