Energy supply companies: special administration in focus

Speed Read

• The surge in the price of natural gas has placed unprecedented pressure on UK retail gas suppliers with Ofgem appointing a Supplier of Last Resort (SoLR) to over 20 suppliers in 2021 so far.
• As an alternative to SoLR, Ofgem may turn to the special administration regime as a resolution mechanism for distressed energy supply companies. The special administration regime is intended to ensure continuity of supply in the event of a failure of a larger supplier where the SoLR regime would not be appropriate.
• Bulb, an energy supply company with 1.7 million customers, has just become the first energy supply company to have special administrators appointed to it under that special regime.
• Given the number of customers that other large energy suppliers have had to take on as SoLR and the constraints of the energy price cap in the UK, is it only a matter of time before we see other energy supply companies falling into the previously unused special administration regime?
• A&O has experience of acting for administrators in a comparable special administration regime, used to implement a multi-billion sterling restructuring. Continuity of supply of essential services is key and the administrators have to balance that obligation against their duties to act in the interests of creditors.

Pressures on the energy industry and the toolkit for distressed suppliers

Gas suppliers in the UK and Europe are paying five times more for the natural gas required to heat our homes than they did a year ago. This price surge has led to a so-called energy crisis. In the UK, Ofgem (the energy regulator) has had to use its SoLR powers to transfer customers out of over 20 failed suppliers to larger suppliers in 2021 alone.

The SoLR regime has provided continuity of supply for the customers of those failed suppliers. However, a consequence of this action is that the UK’s largest energy suppliers have taken on more and more customers. Meanwhile, those surviving suppliers remain subject to a price cap under which they currently supply customers at a loss to wholesale prices.

Ofgem and the Secretary of State have another tool to deal with distressed suppliers - the energy supply company special administration regime. This special regime is intended to deal with situations where the SoLR regime would not be practicable. At the time the Government introduced the special administration regime, it remarked that it was intended as a “contingency” to the SoLR process to “deal with a low probability but high impact event”.^[1] Indeed, Ofgem’s guidance on circumstances where it might use the special administration regime refers to issues such as the size and nature of the failing supplier’s portfolio of customers, significant prejudice to the SoLR’s ability to continue to service its existing customers, practical problems with the appointment of a SoLR at short notice, and the extent to which funding is likely to be necessary.^[2] 

Bulb, an energy supply company with 1.7 million customers, has just become the first energy supply company to have special administrators appointed to it under the special regime. With the UK’s largest suppliers taking on more and more customers under the pressure of current market conditions, is it only a matter of time before other large suppliers, too big to be saved by the SoLR regime, fall into distress?

This alert summarises the previously unused energy supply company special administration regime and how it differs from a “normal” administration under the Insolvency Act 1986 (the IA), Schedule B1 (Schedule B1). It also reflects on the importance of appointing an experienced insolvency practitioner in the event of a special administration of an energy supply company, and Allen & Overy’s experience of having worked on a large-scale special administration under a similar regime.

What is an energy supply company special administration?

Special administration regimes alter the “normal” administration process for insolvent companies. These regimes are primarily designed to ensure continuity of service or operation. They usually apply where the business carries out a statutory function of a public nature (e.g. water, energy or railways) or where there is a wider public interest in a bespoke procedure (e.g. investment banks, other financial institutions or social housing).

The special administration regime for energy supply companies was introduced by The Energy Act 2011 (the 2011 Act), which modified an existing regime for licensed gas and electricity transmission and distribution companies under the Energy Act 2004.^[3]  Some of the key similarities and differences between an energy supply company special administration and a Schedule B1 administration are as follows:

Schedule B1 Administration

• Appointment: 
  Appointment out of court by qualifying floating charge holder, company or director. Or, an in court appointment.
• Conditions for the court to grant an order:
  The court must be satisfied that (a) the company is or is likely to become unable to pay its debts; and (b) the administration order is reasonably likely to achieve the purpose of administration.
• Objectives: 
  The primary objective is to rescue the company (as opposed to the business that the company carries on) so that it can continue trading as a going concern. If the rescue of the company is not reasonably practicable, the administrator must aim to achieve a better result for the company’s creditors as a whole than would be likely if the company were put into liquidation. If the administrator considers that is not reasonably practicable, then the purpose of the administration is to realise the company’s property to make a distribution to the company’s secured or preferential creditors.
• Duties: 
  The administrator must carry out his or her functions in the interests of creditors as a whole.
• Funding: 
  No statutory provision for funding, often provided by secured creditors.

Energy Supply Company Administration

• Appointment: 
  The Secretary of State (or Ofgem with the consent of the Secretary of State) may apply to the court for the special administration order. No out of court appointment.
• Conditions for the court to grant an order:
  The court must be satisfied that (a) the company is or is likely to be unable to pay its debts; or (b) grounds exist that would entitle the Secretary of State to apply to wind up the company in the public interest.
• Objectives: 
  To secure that energy supplies are continued at the lowest cost which it is reasonably practicable to incur until the company is either rescued as a going concern or, if that is not possible, transferred to another company as a going concern or, if that is not possible, transferred to two or more different companies.
• Duties: 
  In light of the objectives of an energy supply company administration, a special administrator has an obligation to consider consumers’ interests as well as creditors.
• Funding: 
  Unlike in a Schedule B1 administration, the Secretary of State may provide grants, loans, indemnities or guarantees to enable an energy administrator to finance the supply company’s activities. Approval from Her Majesty’s Treasury is needed for such financial support. Provision is made to recover any government funding from the company or, if it is not able to repay, through a cost recovery mechanism with the cost being borne by the industry.

How might this special regime work in practice, and our experience from a comparable special regime

The special regime is previously untested, and Ofgem’s guidance indicates the importance of choosing an experienced insolvency practitioner for the role of special administrator. The guidance refers to factors such as the knowledge and experience of the proposed administrators in relation to the energy sector and the company specifically, the expertise and level of resource available within the administrators’ firm, and the existence of any actual or perceived conflicts of interest relation to the proposed administrators or their firm.

We anticipate that a special administration in this sector will present its own unique challenges. In November 2019 and again in May 2020, Ofgem published open letters to (among others) insolvency practitioners appointed to failed energy supply companies.^[4] The letters remind insolvency practitioners of Ofgem’s expectations with regards to their dealings with customers. The letters specifically refer to the “mixed level of service and regard to consumers, including the vulnerable” and “extremely disappointing” practices, some of which “have led to avoidable consumer harm”.

In our experience, insolvency practitioners are diligent and take their professional obligations and statutory duties seriously. They take proper legal advice in the discharge of their duties. However, the objectives of the special administration regime may result in difficult tensions for the administrators to navigate - between the continuation of services and the protection of consumers, against the administrators’ duty to act in the best interests of the wider creditor group.

In light of Ofgem’s comments and the difficulties that may arise from balancing competing interests in a special administration, it is critical that the proposed administrator(s) has the benefit of robust and experienced legal advice. In this regard, Allen & Overy has strong experience of a similar special administration regime from advising the special administrators in the multi-billion sterling restructuring of Metronet. That restructuring was the first Public-Private Partnership special administration under the Greater London Authority Act 1999 (the GLAA), which shares a number of similarities with the energy supply company special administration regime. Like an energy supply company administration, the purpose of a PPP administration is primarily to ensure the continuation of supply under the PPP agreement (in the Metronet case, the provision of critical infrastructure services to the London Underground), which has to be balanced against the administrators’ duties to protect the interests of creditors and members of the companies in administration. The outcome of the Metronet administration was the successful transfer of the companies’ assets and liabilities to TfL through the statutory transfer scheme provided for under the GLAA, with the continuation of supply of services throughout.

_{[1] See the Department of Energy & Climate Change “Consultation on energy supply company administration rules” June 2012: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/183983/consultation-energy-supply-company-admin.pdf}

_{[2] Ofgem guidance on supplier of last resort and energy supply company administration orders 21 October 2016: https://www.ofgem.gov.uk/sites/default/files/docs/2017/09/solr_revised_guidance_final_21-10-2016.pdf}

_{[3] The Energy Supply Company Administration Rules 2013 are also relevant to the energy supply company special administration regime.}

_{[4] https://www.ofgem.gov.uk/publications/open-letter-insolvency-practitioners-appointed-failed-energy-supply-companies and https://www.ofgem.gov.uk/publications/open-letter-energy-suppliers-and-insolvency-practitioners-who-undertake-charge-recovery-action}