Insolvency (Moratorium) (Special Administration for Energy Licensees) Regulations 2020
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Lord Callanan
That the Regulations laid before the House on 4 September be approved.
Relevant document: 26th Report from the Secondary Legislation Scrutiny Committee
The Parliamentary Under-Secretary of State, Department for Business, Energy and Industrial Strategy (Lord Callanan) (Con)
I hope that these regulations will be slightly less controversial than the previous ones. The noble Lord, Lord Paddick, looks sceptical.
In the summer, the Government moved quickly to introduce the Corporate Insolvency and Governance Act 2020—many Members here took part in those debates—which inserted new Part A1 into the Insolvency Act 1986, introducing a moratorium regime for companies in financial distress. The moratorium gives those financially distressed companies breathing space from their creditors to pursue a rescue or restructure. The company’s existing management remains in control during the moratorium period but a monitor is appointed to oversee the moratorium.
There was wide support in your Lordships’ House for the new moratorium provisions and the other measures in the Act to help financially distressed businesses, particularly at this time, and I thank noble Lords for that. The Government will be publishing statistics on the use of the new procedures of company moratoriums and restructuring plans later this month. The Corporate Insolvency and Governance Act also inserted Section A50 into the Insolvency Act 1986, which enables regulations to be made to modify the application of Part A1, the moratorium provisions, in relation to a company for which there is a special administration regime.
Similar to other sectors, there are special administration regimes in the energy sector. These cover companies that hold an electricity distribution or transmission licence or a gas transporter licence, a smart meter communication licensee and energy supply companies. The energy special administration powers exist to ensure that essential services, such as electricity and gas supply or the maintenance of distribution networks, continue and that customers continue to be served at the lowest reasonable cost. These powers can also be used to mitigate the risk of financial contagion and to maintain market stability and consumer confidence. This instrument will modify the application of Part A1, the moratorium provisions, in relation to these energy companies.
Therefore, if a relevant energy company enters or has applied to enter a moratorium, the Secretary of State and Ofgem will want to promptly consider whether there is any need to apply for a special administration order. Special administration has never been used in the energy sector and the Government’s assessment is that it remains unlikely, but as a prudent Government we must ensure that we have the powers and processes in place to act swiftly to protect consumers and other market participants should that become necessary.
This instrument will ensure that the Secretary of State and Ofgem will be promptly notified of any moratorium or proposed moratorium for a relevant energy company so that an application for a special administration order can be considered. This will avoid any delay in making that decision and therefore reduce uncertainty for consumers and market participants.
This instrument does one other thing. A relevant energy company in a moratorium will continue to trade and operate as an entity licensed and regulated by Ofgem. Therefore this instrument will ensure that during the moratorium Ofgem can continue to engage in legal processes in relation to relevant energy companies, including to enforce licence obligations and revoke licences without first having to seek the court’s permission, as it would have to where a company was not in a moratorium. This will avoid any delay in Ofgem acting to protect the interests of consumers.
These regulations build on the moratorium provisions in the 2020 Act to ensure that those provisions work effectively alongside the special administration powers for energy supply, energy networks and smart metering, and that the Government and the regulator, Ofgem, are able to take all necessary action to protect the interests of consumers. The regulations, unlike the previous ones, are a short, simple and proportionate step to align the moratorium provision with the need to protect the interests of energy consumers and other market participants. I beg to move.
Lord Callanan (Con)
I thank both noble Lords for their contributions to this debate. The moratorium provisions in the Corporate Insolvency and Governance Act will help businesses in financial distress, giving them the appropriate breathing space from their creditors to pursue a rescue or restructure. This SI builds on that, ensuring that the Government and Ofgem can act swiftly in response to events. It will ensure that consumers will be protected if and when an energy company enters a moratorium.
However, the energy sector is fundamentally robust, even in the face of events such as Covid-19. For instance, in the supply market, there are around 57 energy suppliers that serve households, which is up from 12 in 2010. In the business energy market, there are around 80 licensed electricity and gas suppliers. New-entrant suppliers now serve more than 40% of the household gas and electricity markets, which is up from around 1% in 2010. The Government welcome this increasingly competitive and innovative market, and we continue to promote competition as the best driver of value and service for customers.
However, as in any competitive market, it is normal for energy suppliers to fail from time to time. Ofgem and the Government are focused on ensuring that exits are orderly and that, during the process, customers are protected. When an energy supplier fails, the supplier of last resort process is triggered. Ofgem revokes the supplier’s licence and appoints another supplier to take over its customers. The process allows for a quick transfer of customers. In the first instance, Ofgem invites suppliers to bid to take on the customers and chooses the supplier that will offer the best value for consumers. Ofgem has successfully used this process for multiple supplier insolvencies and is confident that the process remains robust.
In the event that the use of the supplier of last resort would not be practicable, there is a special administration regime. This has never been used in the energy sector, and the Government’s assessment is that it remains unlikely. However, of course, as a prudent Government, we have to ensure that we have the powers and processes in place to act swiftly to protect consumers and other market participants should it become necessary.
I will now deal with a number of the questions that were asked by both noble Lords. The noble Lord, Lord Paddick, asked why the changes were not included on the face of the Corporate Insolvency and Governance Act. It was important to move quickly to bring forward this Act in order to help businesses in financial distress at the time. This meant that we had to prioritise the content of the Bill and deliver some provisions, such as this one, in following secondary legislation.
The noble Lords, Lord Paddick and Lord Stevenson, asked about the moratorium and whether it would increase costs for energy consumers. The answer is no. The purpose of the moratorium is to provide the time and space to pursue a rescue or restructuring of the company, which would avoid the company failing. It is normally in the interests of creditors, including customers, to avoid the failure of an energy company. However, if one does fail, domestic customers have the credit balances on their accounts protected.
The noble Lord, Lord Paddick, also asked about the number of energy companies that we expect to access a moratorium. As I said, the sector is fundamentally robust, but it is normal in a competitive market for some businesses to fail. However, the market is strong, with around 60 suppliers. Ultimately, of course, a decision to enter a moratorium is one for the company’s directors, working alongside the monitor, so he will understand that I cannot speculate on numbers.
The noble Lords, Lord Paddick and Lord Stevenson, asked about the payment of levies. We are working with Ofgem on potential reforms to reduce the likelihood that suppliers fail to meet their payment obligations and to mitigate the impact in the event of non-payment. Ofgem has already made licence modifications aimed at increasing the robustness of suppliers’ financial practices and is consulting on further changes.
Again, the noble Lords, Lord Paddick and Lord Stevenson, asked me about the number of energy companies that we anticipate may become insolvent. Again, I am sure that both noble Lords will understand that I cannot speculate on numbers, but we think that the market is fundamentally robust. The noble Lord, Lord Stevenson, asked how likely it was that a company would go insolvent. I say again that the market is robust, and, occasionally, companies will fail, but we do not expect very many to do so. I think that deals with all the questions from both noble Lords.
These regulations align the operation of the corporate moratorium regime that we introduced in the summer with the existing powers to protect the interests of energy consumers and other market participants when energy companies are in financial distress. I commend these regulations to the House.