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Restructuring Within The Energy Sector: What Can Be Learnt From The Bulb Energy Special Administration? – Oil, Gas & Electricity



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Why is this case interesting?

For the first time, the high court1 has exercised its
discretion to make an order under the Energy Act 2004 and Energy
Act 2011 appointing special administrators in respect of an energy
supply company rather than using the more familiar process of
appointing an alternative supplier.

The court also concluded, and provided a formal direction, that
the special administrators had the power, and it was proper for
them, to enter into a £1.69 billion funding agreement that
provided for repayments outside the usual statutory order of
priorities and allowed certain unsecured creditors to be paid in
full.

The legal and regulatory framework

Ofgem has two tools to deal with failing energy suppliers
– the Supplier of Last Resort regime (SoLR)
and an Energy Supply Company Special Administration
(Special Administration).

The SoLR regime allows Ofgem to direct another energy supply
company to be appointed as supplier of last resort to the customers
of a failing supplier, which the SoLR is obliged to comply with
under its licence terms. Ofgem must be satisfied that the SoLR can
supply the additional customers without significantly prejudicing
its ability to continue supplying its existing customers (which is
becoming increasingly difficult given the vast number of recent
failures). The failing supplier’s licence is revoked and the
SoLR must supply to the failed supplier’s customers on a deemed
contract rate. Continuity of supply to customers is therefore
guaranteed.

The Special Administration regime on the other hand was
introduced as a different option where a transfer to a SoLR would
not be practicable. A failing supplier can be placed into Special
Administration only through an application to court by either the
Secretary of State or Ofgem (with the Secretary of State’s
consent). Once appointed, the Special Administrator’s objective
is to continue to contract to supply gas and electricity to
customers at the lowest practicable cost until the company is
rescued or its business transferred.

So why were special administrators appointed for Bulb
Energy?

Three reasons were cited by Ofgem for using the special
administration regime rather than a SoLR transfer:

  1. There were competition concerns around transferring Bulb
    Energy’s 1.7million customers to another large energy supplier
    via the SoLR regime.

  2. Concern that existing suppliers were already under significant
    strain, having already absorbed 2.7 million customers from the
    numerous energy suppliers that had failed prior to Bulb
    Energy.

  3. The likely additional levy claim from a SoLR which would add
    further financial stress to the sector and consumers in the short
    term (the SoLR regime allows for the suppliers acting as SoLRs to
    make a claim for any reasonable costs they incur as a result of the
    transfer).

How we can help

Recent supplier failures have provided an unprecedented insight
into how the SoLR regime operates and enabled a closer examination
of the consequences from an insolvency perspective. Ofgem have
stated that they will be implementing reforms to help deal with the
energy crisis, with improvement in financial resilience being one
of the main drivers for change. At Walker Morris we have an Infrastructure and Energy team who work
closely with our restructuring lawyers, resulting in a team of
experts who can help you navigate the tricky times ahead.

Footnote

1. In the matter of Bulb Energy Limited [2021] EWHC 3757
(Ch)

Originally published 20th June, 2022

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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