SCOTTISHPOWER ENERGY RETAIL LIMITED (R on the application of) v THE GAS AND ELECTRICITY MARKETS AUTHORITY

In November 2018, the energy supplier, Extra Energy Supply Limited (“Extra Energy”), ceased trading. When it failed, the company was supplying electricity to approximately 129,000 electricity customers and gas to approximately 95,000 gas customers. In order to ensure continuity of supply, the industry regulator, Ofgem, appointed ScottishPower Energy Retail Limited (“ScottishPower”) to continue supplying customers of Extra Energy, in a role known as ‘Supplier of Last Resort’ (‘SoLR’). The appointment followed a commercial bidding process involving eight companies.

This claim arises out of a dispute between Ofgem and ScottishPower as to whether ScottishPower can claim the costs of performing aspects of the role from an industry levy, paid for ultimately by consumers. The payment is known as a Last Resort Supply Payment (LRSP). Whilst Ofgem permitted the majority of the costs sought by ScottishPower (£10.6 million), it did not permit the company to claim the cost of debts of £3.1 million accrued by former Extra Energy customers in respect of energy supplied to them by ScottishPower after its appointment as Supplier of Last Resort.

ScottishPower claims that Ofgem’s decision to refuse its claim for customer debt is unlawful on three grounds:

Ofgem fettered its broad discretion by taking an “in-principle” decision that debt costs were not within the scope of a LRSP. It therefore “closed its mind” to allowing this aspect of the claim. Alternatively, Ofgem did not explain to ScottishPower that it had a specific policy in respect of debt costs, which was not referred to in its published criteria for assessment of LRSP claims, which rendered the decision procedurally unfair.

The decision was irrational. Ofgem failed to follow its published criteria for assessing claims. In addition, Ofgem rejected the claim on nonsensical grounds, namely that debt costs fell outside the basis on which ScottishPower was appointed as SoLR; they were a category of costs which a SoLR should not be able to recover; and it was necessary to rule out the recovery of debt costs, as a matter of principle, in order to protect the interests of consumers.

Ofgem failed to give adequate reasons for its decision.

In response, Ofgem contends that it has a broad discretion whether to allow a claim for an LRSP to be made against the industry levy. It exercises its discretion on a case by case basis. It uses published criteria as part of a wider overall analysis of the merits of any application, but the criteria are not an empirical, complete or exclusive tool. Ofgem did not have a policy regarding the recovery of customer debt because the claim was novel. It had regulatory policy reasons for refusing to protect ScottishPower from debt accrued after the transfer of customers, which included the wider implications for the future of the market, as well as reasons specific to ScottishPower, including ScottishPower’s failure to indicate it proposed to make any such claim when it bid for appointment as SoLR. ScottishPower’s claim amounts, in effect, to an impermissible attempt to re-argue the merits of a decision it disagrees with.

The Defendant, the Gas and Electricity Markets Authority (GEMA) is the independent regulator of gas and electricity markets in Great Britain, established by the Utilities Act 2000. It is a non-ministerial government department. Its functions, so far as relevant to this claim, are provided for in the Gas Act 1986 and the Electricity Act 1989. It is funded largely by the network companies, which are licensed by it to participate in the gas and electricity markets. The Defendant’s day to day functions are carried out by the Office of the Gas and Electricity Markets Authority (Ofgem), also a non-ministerial government department and an independent national regulatory authority. GEMA provides strategic and policy direction for Ofgem. Ofgem engaged in all relevant correspondence and decision making in this case and is therefore referred to throughout this judgment, in lieu of GEMA.

Pursuant to s. 4AA of the Gas Act 1986 and s. 3A of the Electricity Act 1989, the principal objective of Ofgem is to protect the interests of existing and future consumers, in relation to the supply of gas and electricity, wherever appropriate by promoting effective competition between persons engaged in, or in commercial activities connected with, the provision of gas and electricity. In particular, section 3A(1) of the Electricity Act (as amended and repeated in all material respects in the Gas Act) provides:

Subject to limited exemptions, suppliers of gas and electricity to any premises are required to hold a licence permitting the supply (ss 5 and 7A Gas Act 1986 and ss.4 and 6 Electricity Act 1989). Accordingly, ScottishPower supplies energy to approximately 5 million householders and businesses in Great Britain, pursuant to its licence. A licence to supply gas or electricity is subject to Standard Licence Conditions (s. 8 Gas Act 1986 and s. 8A Electricity Act 1989). The Standard Licence Conditions are determined and published by the Secretary of State.

From time to time, companies in competitive markets fail. This applies as much in relation to the gas and electricity supply markets as it does to other markets. Unlike other areas of the market, gas and electricity are services that are generally regarded as essential.

The failure of a supplier may impact on a range of groups including its consumers, the wider market and other consumers. Accordingly, Ofgem has discretionary powers that enable it to address these consequences. In particular, Ofgem can direct any gas or electricity supply licensee to take over responsibility for a failed supplier’s customers. The role is known as ‘Supplier of Last Resort’. Generally speaking, energy suppliers are open to taking on the role of SoLR because they acquire a large number of new customers, a significant percentage of whom may remain with them over the longer-term. The effect is that the process of appointing a SoLR tends to be a competitive one, albeit that it takes place over a very short period of time.

Standard Licence Condition 8 of the Gas and Electricity Supply licences provides for Ofgem to issue a Last Resort Supply Direction to a licensee to take on the role of SoLR. In considering which supplier to appoint as SoLR, Ofgem must be satisfied that the SoLR can supply additional customers without significantly prejudicing its ability to continue to supply its existing customers and to fulfil its contractual obligations for the supply of gas or electricity (Condition 8(1)(b)). The obligations on a SoLR include an obligation to inform customers of the failed supplier that the failed supplier has ceased supplying the customer, and the customer is now supplied by the SoLR (Condition 8.6).

Ofgem’s criteria for the selection of a SoLR are set out in guidance titled “Guidance on supplier of last resort and energy supply company administration orders”. Ofgem’s stated policy preference is to appoint a SoLR who has volunteered for the role. A SoLR should have robust arrangements in place that will enable it to supply the failed supplier’s customers economically and efficiently. A SoLR must be able to operate the relevant change of supplier process and bring the customers onto the SoLR’s own systems promptly, in order to minimise disruption to customers and other industry participants.

The process for appointing a SoLR starts with Ofgem gathering information to decide on an appropriate course of action. It collects information about the failing supplier’s portfolio, including a copy of the standard contract entered into by the supplier with customers, a description of the financial position of the company and customer details.

Ofgem then provides high-level, aggregated portfolio information about the failing supplier to potential SoLRs to enable them to assess their ability to supply the additional customers. To understand the terms on which suppliers are willing to act as SoLR, Ofgem requires potential SoLRs to provide information about a number of issues, including customer service. This is done via a Request for Information (RFI). Questions asked of potential SoLRs include:

How the supplier would meet the obligations and whether it would make any LRSP claim and if so, for what categories of need and with what upper limit.

Details of the arrangements the supplier will make to manage the change of supplier process and the length of time it is likely to take to transfer all the customers of the failed supplier.

The arrangements to be made with the customers of the failed supplier, including how customers will be informed about what has happened and how customer enquiries will be dealt with.

The selection of a SoLR necessarily takes place quickly. For that reason, Ofgem asks suppliers to update it on a regular basis as to their willingness to be considered as a potential SoLR.

Once a SoLR is appointed, it is for the SoLR to decide the best way to transfer customers to its portfolio. Prior to transfer, however, the SoLR has a deemed contract with each of the failed supplier’s customers (pursuant to paragraph 3 of Schedule 6 to the Electricity Act 1989, and paragraph 8 of Schedule 2B to the Gas Act 1986). The SoLR is therefore able to charge them for the gas or electricity they use from the date of the SoLR’s appointment, at the value proposed by it in its bid. The deemed contract rate applies until transferred customers have agreed a replacement contract with the SoLR or another supplier. The ‘deemed contract rate’ cannot exceed the costs of supply and a reasonable profit.

Condition 9 of the Standard Licence Conditions permits a SoLR to make a claim for the otherwise unrecoverable costs that they have incurred in being a SoLR. The permitted costs are referred to as a ‘Last Resort Supply Payment’. Condition 9 provides that:

Where Ofgem agrees that an LRSP claim can be made it is funded initially by the network operators, and subsequently socialised by a change to the network operators’ general charges for use of their networks, which is ultimately passed on by network users to end customers.

Ofgem’s guidance recognises that the role of SoLR represents a significant logistical challenge to a supplier. The supplier is likely to incur increased administrative costs and will have to implement additional energy purchasing arrangements. These will have to be activated and managed within a very short period of time. However, the guidance also recognises that there are potentially valuable commercial benefits to a SoLR. It has the opportunity to convert the customers it has acquired as a SoLR to normal contracts and will not have the usual costs of acquiring new customers, such as paying commission to price comparison websites.

The guidance goes on to explain Ofgem’s position on LRSPs as follows:

The reference to credit balances in the penultimate line of the extract above is a reference to the problems arising from the common position whereby some customers pay monies to their supplier in advance towards their future energy supply. Most often this arises where customers pay by direct debit and the amounts paid monthly exceed the energy which they have so far used at any given point in time. If a customer's supplier then becomes insolvent, the customer will usually only have an unsecured claim against the supplier, which in practice will likely mean that they lose their credit balance. To protect customers from this and to maintain consumer confidence in the energy market, Ofgem will wherever possible seek to appoint a new supplier who, as SoLR, agrees to pay the customers an amount equal to the credit balances which they held with their previous supplier.

Ofgem has published criteria for the assessment of LRSP claims, as follows:

In November 2018, the energy company, Extra Energy Supply Limited, informed Ofgem that it was in severe financial difficulties and would cease trading shortly. Extra Energy provided information to Ofgem that it was supplying electricity to 128,841 households and businesses and gas to 94,804 households and businesses.

Accordingly, on 21 November 2018, Ofgem approached ScottishPower and other energy companies requiring them to provide information to enable it to appoint a supplier to continue the supply of gas and electricity to the customers of Extra Energy (a request for information (RFI)).

Responses were required by 22 November 2018. Ofgem listed a series of questions to which it required answers. These included questions about the arrangements for migrating customers of Extra Energy onto the potential SoLR’s relationship management and billing systems; ensuring adequate arrangements were in place to deal with queries without a deterioration in all customers’ experiences; and how the potential SoLR would ensure that customers received a timely and accurate bill. The request provided summary information about Extra Energy’s customers and included an Annex on “Frequently Asked Questions”. The RFI said that it would give preference to appointing suppliers who agreed to honour credit balances. On Last Resort Supply Payments, Ofgem said:

Questions 23 and 24 posed the following questions:

More detail was provided in an Annex of FAQs.

The FAQs also addressed the question of transferring the direct debits of customers of Extra Energy to the potential SoLR:

Eight energy companies, including ScottishPower, indicated a willingness to take on the SoLR role.

In making its bid, ScottishPower noted the potential difficulties with the transfer of customers. It acknowledged the uncertainty as to the quality of the relevant customer data and that “some challenge may emerge through this process” but considered that it had “excellent relationships with all relevant industry parties” and as such “will work closely with those parties to mitigate risks and manage this process to ensure the best customer experience for Extra Energy customers”. It expected the process to be “relatively quick”:

ScottishPower also set out its intended deemed contract prices which were lower than its standard variable tariff. It made clear in relation to the Last Resort Supply Payment (LRSP) that it would make a claim in respect of credit balances above £10m “to cover balances and associated costs, for example working capital requirements.” In response to Ofgem’s request that an upper limit for any potential LRSP claim be set out, ScottishPower stated that it could not provide an upper limit on any LRSP it might make because “we cannot at this point set out any additional areas where we can foresee us making a claim at this point. However, if ScottishPower is appointed and we are then exposed to additional costs which are unforeseeable and unexpected at this point based on the information we have been provided, we may make a further claim for a [LRSP]”

On 24 November 2018, Ofgem announced its decision to appoint ScottishPower as the SoLR. Ofgem’s letter announcing the appointment stated that ScottishPower’s “offer…represented the best deal overall for both customers of Extra Energy and all energy consumers.”

The letter went on to state that:

Ofgem noted specifically that:

As regards tariffs, Ofgem noted that “Scottish Power offered to move Extra Energy’s domestic customers onto a tariff that was comparable to other bids received and cheaper than their standard variable tariff. Scottish Power’s non-domestic tariff was cheaper than the majority of bids.”

As regards on-boarding customers, a term used to describe the process of transferring customers from one supplier to another: “[b]idders put forward a range of solutions to “onboard” Extra Energy’s customers, and [Ofgem] closely assessed each of these. Scottish Power provided a strong bid that included assurances on getting in touch with customers in a timely way.”

Following its appointment as SoLR, ScottishPower began taking steps to set up new customer accounts and apply credits to those accounts. There were however significant difficulties in doing so. ScottishPower explained the difficulties in evidence to the Court from its Operations Director. There were substantial problems in setting up direct debits for customers. Amongst other difficulties, PricewaterhouseCoopers, the administrators of Extra Energy, refused to allow the existing direct debits of its customers to be utilised by ScottishPower to collect payments from customers. ScottishPower had to contact customers to put fresh direct debit arrangements in place. It was however difficult to make contact as there were significant gaps in the email and telephone records provided by Extra Energy. By September 2019, ScottishPower had only been able to commence collecting direct debit payments from 56 per cent of the Extra Energy customer base, despite the fact that immediately prior to being appointed SoLR, 92 per cent of customers had been paying by direct debit.

ScottishPower also faced considerable difficulties in returning credit balances to customers. The necessary information about Extra Energy’s customers was incomplete and not in a standardised format, forcing ScottishPower to seek information from other sources and to employ staff and third-party contractors to review the data and create accounts manually. Even once accounts had been opened, ScottishPower could not begin to bill customers until it knew the opening meter readings. Ordinarily the opening meter reading used by a new supplier would be received via a data "flow" from the previous supplier, as part of the industry process for change of suppliers. However, Extra Energy had lost the ability to initiate these types of data flows. ScottishPower had to work with PricewaterhouseCoopers and Extra Energy to set up a manual process of exchanging spreadsheets and agreeing the readings to be used for opening new accounts and closing the accounts with Extra Energy. A number of difficulties were experienced with this process. Consequently, ScottishPower did not start applying credits to the accounts of domestic customers until June 2019, twenty-nine weeks after its appointment as SoLR. This was far longer than the four-to-six weeks timescale it had anticipated. For non-domestic customers, ScottishPower was not able to start applying credits to their accounts until January 2020. The delays in returning credit balances not only caused an increase in customer queries and complaints, but also resulted in increased levels of customer debt. Affected customers were reluctant to pay ScottishPower monies for their new supplies, in circumstances where they believed they were still owed monies by Extra Energy in respect of their previous account balances.

ScottishPower’s Operations Director explained in evidence that a prospective SoLR is heavily reliant on the information given by Ofgem as to the quality of the failing supplier’s data because of the short time period in which a prospective SoLR is required to make a bid. ScottishPower only had two days to make its assessment. In contrast, Ofgem had greater contact with the failing supplier and, thus, greater insight into the quality of the data. Yet, Ofgem gave ScottishPower no reason to believe that it would encounter such a high level of missing or incomplete customer records.

Ofgem’s position on the difficulties was explained in evidence from its Deputy Director of the Retail Directorate, with responsibility for issues relating to the energy retail market and suppliers. By May 2019, Ofgem was sufficiently concerned by ScottishPower’s SoLR performance to decide to raise the matter at a meeting between Ofgem’s Executive Director for Consumer and Markets and the Global Retail Director of Iberdrola, the parent company of Scottish Power. An internal briefing states:

The memo went on to state that:

On 29 October 2019, ScottishPower submitted a provisional LRSP claim for £18,938,589. It claimed for various heads of costs including:

credit balances (for domestic and non-domestic customers) over and above the £10,000,000 it committed to in its SoLR bid (£8,656,024), associated customer service costs (£1,647,478) and billing costs (£753,984);

additional costs incurred as a result of “poor-quality data that impacts on ScottishPower’s ability to register Extra Energy customers in a timely manner and to return credit balances as quickly as ScottishPower wished to do so” (£313,156);

additional costs in relation to difficulties with registering customers in ScottishPower’s systems and for fixed gas transportation charges incurred during the period between transfer to ScottishPower as SoLR and registration of the customer account (£2,086,418) (ScottishPower subsequently withdrew this aspect of the claim);

working Capital costs (£1,964,051);

debt costs for the cost of money owed to ScottishPower in respect of energy supplied to former Extra Energy customers by ScottishPower after its appointment as SoLR (£3,517,478). It is this head of cost which forms the focus of the present claim.

The debt costs of £3,517,478 comprised £131,000 for debt follow up work, £536,000 for the cost of working capital associated with this debt, with the largest component for customer debt provision (£2,850,000). ScottishPower structured its claim by reference to Ofgem’s published criteria for the assessment of LRSP claims (i.e. whether the costs were additional; directly incurred; otherwise unrecoverable; unavoidable and efficient). In particular, ScottishPower explained it had not been able to recover the debt and considered it would not now do so. It compared the debt costs of new customers gained in November 2018 (a ‘business as usual’ scenario) with debt costs attributable to former Extra Energy customers, identifying the difference between the two as attributable to the SoLR process. The key causes of the debt were said to be the issues and delays experienced in returning customer credit balances occasioned by poor quality customer data from Extra Energy and the difficulties in setting up direct debits. Information provided by Ofgem had indicated that 92% of Extra Energy customers were on direct debits whereas ScottishPower had only managed to get 56% of customers onto direct debit by September 2019.

In light of the nature of the claim advanced by ScottishPower, it is necessary to set out Ofgem’s decision making process in some detail, by reference, in part, to internal documents disclosed in these proceedings.

An internal Ofgem memo, dated 25 November 2019, shows its initial considerations of debt costs:

On 18 December 2019, Ofgem wrote to ScottishPower to say that it had carried out an initial analysis of the LRSP claim and “would find it really helpful to have a meeting in the New Year to discuss in more detail as there are several areas where we currently have questions or concerns”. That meeting took place on 16 January 2020 and constituted a “high level review” of the claim. Prior to the meeting, Ofgem prepared an internal memo highlighting the novel nature of elements of the claim:

The memo set out a list of questions to ask ScottishPower at the meeting, including:

“In your view what level of debt is a consequence of failure in the information provided as part of the SoLR process, or of the timescale and process for returning customer credits and/or collecting debt?

What percentage of customers were paying by direct debit? (the 92% direct debit figure does not seem to have been quoted in the initial submission we sent)

How much of the ‘debt’ accrued after the transfer of customers to ScottishPower?”

The minutes of the meeting on 16 January 2020 record discussion around the specifics of the customer transfer process. These included ScottishPower not getting bank details for each of Extra Energy’s former customers automatically; assumptions by ScottishPower prior to its appointment as SoLR; and the difficulties faced by ScottishPower after its appointment in relation to transferring customers over to it.

After the meeting, there was an exchange of additional questions from Ofgem followed by a further meeting on 20 February 2020. The minutes of this meeting, prepared by Ofgem note the following:

During May and June 2020, Ofgem engaged in further internal analysis of ScottishPower’s claim. An internal memo produced in May 2020 indicates Ofgem’s position on debt costs at this juncture:

Also, in May, Ofgem analysed the debt costs against its published criteria and concluded that the debt costs did not satisfy the criteria. In summary, its reasoning was as follows in this respect:

Debt provision: The costs were not additional on the basis it should have been reasonably foreseeable that the levy would not cover the debt costs after transfer. They were not directly incurred as part of the SoLR role. A significant proportion of the costs related to SME. They were otherwise recoverable. They were not unavoidable on the basis that ScottishPower could have done more to manage customers, as for example with more active contacting; earlier set up of payment plan; earlier gesture of goodwill or pay estimated credit balance. It was also reasonably foreseeable that debt may rise if payment terms were not set up/moved to quarterly billing. Finally, the costs incurred were not efficient on the basis they are considered disproportionate to costs to avoid in first place. (e.g. more active contact/set up to avoid build-up of debt/agree estimate credit balance).

Debt follow up: the costs were not additional, not unavoidable and not efficiently incurred, but were directly incurred as part of the SoLR role. They were otherwise recoverable.

Debt Working Capital: the costs were directly incurred as part of the SoLR role, but they were not additional, unavoidable and not efficiently incurred. They were otherwise recoverable.

Another internal document setting out Ofgem’s overview of the wider claim underwent various drafts during May 2020. Ofgem’s view at this stage on the various heads of claim was that the claim for credit balances, data quality costs and working capital were “mostly uncontroversial”. It considered it may be able to consent to the category of customer service/operational costs and billing costs, "even if we cannot consent to the full cost claimed (due to our view on where responsibility for the cost lies)”. However, debt costs (as well as the costs of energy and transportation costs for customers who switched before ScottishPower could register them) “aremore challenging”. For these costs, ScottishPower has either failed to “explicitly provide for them in the [Request for Information] or is claiming for costs that no SoLR has claimed to date (consumer debt) or that we have previously rejected (cost of energy and transportation).” The view expressed on customer debt was as follows:

A further internal memo dated June 2020 records that:

The debt is an additional cost faced by ScottishPower that arose only in relation to customers taken on by ScottishPower acting in its role as a SoLR supplier.

ScottishPower say that they anticipated that debt would arise, as normal, and made a provision of £1.2m for debt, but the debt is £4m (hence the £2.8m claim for debt provision). Factors raised by ScottishPower include its expectation, based on information provided by us following its appointment, that 92% of customers were on DD payment method (the outturn position is 56% on DD). ScottishPower was unable to use customers prior DD mandates and this (ie they needed fresh consent), and this [sic], and issues with customer data and customer reluctance to pay bill[s] while credit balances were not confirmed, led to levels of debt [that] was substantially higher than anticipated/expected compared to the same number of customers acquired by normal acquisition routes.

While debt is in principle recoverable, there is a point in the debt recovery cycle where it is commercial practice to cease recovery efforts and either write the debt off / sell the debt book/ pass it to an agency for collection.

In submissions, ScottishPower pointed to the (underlined) text in §1.31 to submit that its claim satisfied Ofgem’s methodological criteria. In response, Ofgem pointed to the (underlined) text in §1.32 and said its position was that the claim did not meet all the criteria.

An internal memo dated 6 July 2020 records Ofgem’s analysis of ScottishPower’s final claim, which had been submitted on 3 July 2020. Relevant extracts are as follows:

Ofgem had an internal meeting to discuss matters on 13 July 2020. Following the meeting an internal memo was produced setting out recommendations. The document sets the context (§1.2); explains that debt is a commercial risk for a supplier (§3.3); and that its decision is case specific (§3.4):

Work started on the preparation of a draft letter setting out Ofgem’s ‘minded to’ position and a further document containing a high-level summary of Ofgem’s position on the costs it was not minded to consent to, including debt costs. Drafts disclosed in these proceedings show an internal comment on a version of the summary document which reads as follows, “…trying to look for ways to be firm on this point while tying to the specific case to not preclude a SoLR from explicitly saying “I’m going to claim for bad debt for these customers in future.”

The final version of the summary document states as follows:

In respect of the consumer debt element of the claim, Ofgem gave its ‘high level’ reasoning as follows:

The summary document was sent to ScottishPower on 11 August 2020, with the offer of a follow up conversation to discuss further. The offer was accepted by ScottishPower on the basis that a meeting would enable it to “go through each area in detail and understand more fully Ofgem’s position” as well as to “share any further thoughts that we have on those areas Ofgem is minded not to accept at this point’. Following a telephone call on 14 October 2020, a meeting took place on 9 November 2020. An internal Ofgem email sent the day before the telephone call indicates Ofgem proposed to tell ScottishPower it would “...reflect on any evidence and let them [ScottishPower] know if we [Ofgem] have any further questions (or it changes our minds) but this is the current position of decision makers.”

ScottishPower presented slides at the 9 November meeting which addressed each of Ofgem’s reasons for proposing to reject the claim for debt-costs. ScottishPower recorded its view of the 9 November meeting in an internal e-mail, stating that Ofgem:

On 19 November 2020, Ofgem provided its response to the additional information from ScottishPower by email as follows:

ScottishPower responded to Ofgem’s email, withdrawing its claim for transportation and registration costs and domestic ombudsman costs, but continuing to maintain the debt claim, albeit reducing it by £453,000, to £3,062,000.

Ofgem consulted industry on its ‘minded to’ position on ScottishPower’s claim. The consultation was addressed to “Gas and Electricity Suppliers, Electricity Distribution Network Operators, Gas Transporters and all other interested parties” on the basis these parties were directly affected by a claim on the industry levy.

On 3 December 2020, Ofgem emailed ScottishPower a pre-publication copy of the consultation. ScottishPower responded on the same day with comments.

On 7 December 2020, Ofgem issued the consultation. The consultation document explained Ofgem’s general approach to LRSP claims and attached its methodology criteria as Annex I to the document explaining their status as follows:

The letter went on to explain that Ofgem proposed to grant ScottishPower £10.6m of its £13.6m claim “in light of the broader market considerations and our wider statutory duties to protect both existing and future consumers.” Each head of claim was set out together with Ofgem’s position. On debt costs, Ofgem explained that:

ScottishPower responded to the consultation on 13 January 2021 explaining its opposition. There was one other consultation response, agreeing with Ofgem that ScottishPower should not recover debt costs. Ofgem put the response to ScottishPower for its views and ScottishPower responded on 20 January 2021. A copy of the pre-publication draft of Ofgem’s final decision was shared with ScottishPower on 27 January 2021.

The final decision letter, dated 29 January 2021, starts by confirming that Ofgem consents to ScottishPower claiming a LRSP of up to £10.6m, to recover the costs of protecting the credit balances owed to former customers of Extra Energy, and certain other costs. Ofgem explains that in taking its decision, it had had due regard to its

The letter set out the general background to the claim, of which salient parts read as follows:

The letter then turns to Ofgem’s reasons for its decision. Relevant extracts are as follows:

On credit balances (£6,526,000) the letter stated that Ofgem was satisfied “that the claimed amount is consistent with the relevant criteria and, in particular, is consistent with the commitments made by ScottishPower in its SoLR bid.”. On the claim for customer service/billing costs in respect of the on-boarding of former customers of Extra Energy, the letter noted the view expressed in the industry consultation that the amount claimed for billing was excessive, before explaining its reasons for allowing this aspect of the claim:

Ofgem also allowed the claim for £313,000 for costs incurred in relation to data quality (i.e. IT work, managing and resolving issues relating to incorrect meter reads, account set-up issues, erroneous transfer issues, billing, meter reading, and complaints). It did so on the basis that:

It did not, however, allow the claim for £3.1m to cover the debt cost explaining:

ScottishPower submits that Ofgem has a broad discretion when considering whether to allow an LRSP. Ofgem has published criteria which constitute Ofgem’s policy governing how it will exercise its discretion on a case-by-case basis. If the criteria are met then the LRSP claim will be allowed. Ofgem’s decision in this case was unlawful because it took an in-principle decision that debt costs could not form part of an LRSP. It thereby fettered its broad discretion, disabling itself from giving proper consideration to its exercise. This is apparent both from the content of the decision itself, in particular the reference to “consumer debt is outside…the reasonable scope of any LRSP claim” and from Ofgem’s internal consideration of the claim. Ofgem never reached a firm final conclusion on whether the claim met its own criteria. There is no indication that the detail underlying ScottishPower’s claim was considered and/or scrutinised by Ofgem. The clear picture which emerges is that Ofgem decided not to apply its criteria and instead took a decision that debt costs could not form part of a LRSP. In doing so, it “shut its ears” to the claim and disabled itself from giving it proper consideration. Further or alternatively, Ofgem did not disclose a specific, unpublished, additional policy in respect of debt costs, namely that debt costs would ordinarily not be allowed unless identified as a possible component of a claim when a SoLR was seeking to be appointed. This alternative policy could not have been apparent to ScottishPower. Had Scottish Power been aware of it, it could have addressed it.

It was common ground that a public authority vested with a discretionary power must not operate it in an overly-rigid manner, so as automatically to determine the outcome of its exercise. In British Oxygen Co Ltd v Minister of Technology[1971] AC 610, Lord Reid explained the general rule that a decision-maker must not “shut his ears to an application.” However, there is nothing objectionable about a public authority establishing a principle, policy or rule for the exercise of a discretionary power. Policies are a necessary part of administrative functions. They are necessary both for the administrator, so as to ensure consistency and prevent arbitrariness, and for an individual affected by the decision making, so as to ensure legal certainty and predictability. Applied to the present context it means that an energy supplier bidding to become a SoLR knows from Ofgem’s guidance that the regulator’s general preference is for a SoLR not to make a LRSP claim and that suppliers will be expected to honour credit balances. This knowledge assists a supplier in assessing cost risks and benefits when bidding to become a SoLR. Accordingly, the existence of a rule, policy or principle governing the exercise of the discretion is not, of itself, a fetter on a discretion. A fetter arises only when the decision maker does not allow for the possibility of any exception to that rule, policy or principle. Thus, the decision maker must “always be willing to listen to anyone with something new to say” (British Oxygen at 625A-F). In order to succeed on this ground, it is therefore necessary for Scottish Power to show that Ofgem “shut its ears” to considering ScottishPower’s claim for debt costs.

It was also common ground that a person must know what the relevant policy of a public authority entails and must be able to make submissions about its application to their individual case (Lumba v Secretary of State for the Home Department[2012] 1 AC 245 per Lord Dyson at [34]-[38]).

It was common ground by the hearing, if not before, that ScottishPower’s claim for debt costs was novel. No other SoLR had made such a claim. For this simple reason, Ofgem had no policy or principle on these types of claims at the point at which ScottishPower made its application.

On receipt of ScottishPower’s claim, Ofgem began a process of consideration and analysis. It posed a series of questions seeking to understand why the debt levels of former Extra Energy customers were so high. It recognised it needed to look in more detail at the information it had supplied to ScottishPower (internal memo, dated 25 May 2019 at §44 above). Ofgem sought a meeting with ScottishPower in January 2020, to gather information about the claim. The minutes of that meeting record discussion of the circumstances which led to the accrual of debt by Extra Energy customers. A further meeting took place the following month. In between these meetings, Ofgem raised further questions of ScottishPower in writing (§45-48 above).

Between May – July 2020, Ofgem engaged in a process of internal deliberation. It analysed the claim against its published criteria. Its internal analysis comprised an intermingled assessment of the specifics of ScottishPower’s claim with broader policy considerations (memo of June 2020 at §52 above). By July 2020, Ofgem had come to the view that it was uncomfortable with the claim. This was both for reasons specific to ScottishPower, because there had been no indication that it would seek to claim for debt in its bid, alongside broader policy concerns, that debt should be a commercial risk for a supplier. Nonetheless, Ofgem was concerned not to create an inflexible rule. An internal memo of 6 July 2020 records a comment that “a decision to rule out the recovery of debt may reduce the flexibility we have for future SoLR’s” and the note went so far as to consider the circumstances in which Ofgem might want to allow recovery for debt in the future (§54 above). The memo canvasses a number of options to resolve ScottishPower’s claim, in part by reference to the specifics of ScottishPower’s situation (“while ScottishPower made no explicit provision for the recovery of debt….we are broadly sympathetic to the situation it found itself in”); and partly by reference to policy considerations. Ofgem considered further discussion was necessary given the significance of the issue to both ScottishPower’s claim and the fact it would represent “an important evolution in our approach to assessing LRSP claims” (§54 above).

Further evidence that Ofgem did not want to create an inflexible rule is apparent from an internal draft of the summary document explaining its decision not to consent to the claim. It includes a comment which refers to the author “trying to look for ways to be firm on this point while tying to the specific case to not preclude a SoLR from explicitly saying “I’m going to claim for bad debt for customers in future”” (§56 above).

Ofgem continued to reflect on its emerging policy position and the specifics of ScottishPower’s situation. It met again with ScottishPower in October and November 2020 and was willing to receive any further evidence from the company (internal Ofgem emails sent before the October meeting indicate Ofgem proposed to reflect on any further evidence from ScottishPower “and let them [ScottishPower] know if we [Ofgem] have any further questions (or it changes our minds)” §59 above). ScottishPower acknowledged Ofgem’s willingness in this respect (internal ScottishPower email refers to Ofgem “noted they would review the detail within the slides, noting that it was a helpful meeting and the points we shared were useful. She [i.e. me] noted that Ofgem had already considered our claim in a lot of detail, but they would consider the additional detail we provide and come back to us.” § 60 above).

In addition, Ofgem consulted on ScottishPower’s claim and its proposed response. In evidence to the Court, Ofgem’s Deputy Director explained the purpose of consultation as being to “improve...the quality of our decisions, facilitates industry planning and prioritisation, builds understanding of our work and enables progression towards consensual solutions that protect the interests of existing and future consumers”.

Ofgem’s final decision was to refuse the debt claim. It did so for a mix of regulatory policy reasons on debt claims and reasons specific to ScottishPower. It is apparent from Ofgem’s decision to allow ScottishPower to claim for costs arising from poor data quality and customer service/billing costs that Ofgem accepted ScottishPower’s case that it faced significant difficulties in its role as SoLR (§71 & §72 above). Nonetheless, Ofgem took the view that debt costs were less directly related to the costs of onboarding customers. It had regulatory policy reasons for doing so, taking the view that a decision to refuse the debt claim represented ‘the most appropriatebalance between the ability of a SoLR to recover legitimate and efficient costs and protecting the interests of consumers’ (§73 above). Crucially, whilst expressing a policy position that debt claims were outside the scope of an LRSP claim, the decision letter did not preclude future consideration of debt claims by other suppliers:

Accordingly, drawing the analysis together, a review of Ofgem’s decision making process demonstrates the following:

Ofgem had not seen an LRSP claim for customer debt before. ScottishPower’s claim was novel in this respect. For this simple reason, there was no policy in place in relation to debt when ScottishPower made its claim in this regard.

Ofgem gave detailed consideration to the specifics of ScottishPower’s claim, asking questions and gathering information about the difficulties faced by the company in ‘on boarding’ former Extra Energy customers. It liaised extensively with ScottishPower. In the words of Lord Reid in British Oxygen, Ofgem was more than willing to listen to ScottishPower.

Ofgem applied its published criteria for assessing LRSP claims to ScottishPower’s claim and decided that the debt claim met some but not all the criteria.

Ofgem moved through an analysis of the facts of the claim and consideration of its statutory duties, towards reaching a regulatory policy view that debt incurred by customers after the SoLR starts supplying them was different to other SoLR costs and should ordinarily be a commercial matter for a SoLR, not a cost to be borne by the industry levy. Ofgem was, however, explicit that its policy view in this regard did not preclude a case by case assessment of claims and its decision on ScottishPower’s claim should not be taken as setting a precedent.

In so far as ScottishPower’s application for debt costs led Ofgem to formulate an approach to such claims, ScottishPower played a formative role in Ofgem reaching that view, in which it was consulted both individually prior to the ‘minded to’ decision and as part of the consultation process that Ofgem carried out in relation to that ‘minded to’ decision.

ScottishPower’s submission that an LRSP claim should be allowed if it meets Ofgem’s published criteria for assessing LRSP claims ascribes too great a status to the criteria in the decision-making process and is, moreover, inconsistent with the regulatory scheme. The criteria were not referred to in Ofgem’s Guidance on supplier of last resort. Similarly, they were not referred to in the November 2018 Request For Information from potential SoLRs or the accompanying FAQs, although ScottishPower explained in evidence to the Court that it was told orally by Ofgem to base its LRSP claim on the criteria and duly did so. Ofgem annexed them to its consultation and explained their role in its decision making (§65 above). As is apparent from the consultation document letter and the wording of the criteria themselves, they were used by Ofgem as part of its assessment process but not as an empirical, complete or exclusive tool in its assessment. They provided essentially subjective heads of assessment that Ofgem considered as part of a wider overall analysis of the merits of the claim. Used in this way, as Ofgem did, they are consistent with the regulatory framework which permits Ofgem a broad discretion in deciding on an LRSP claim, to be exercised on a case by case basis in accordance with Ofgem’s principle objective to protect the interests of existing and future consumers (Condition 9.5 of the SLCs and s. 4AA Gas Act 1986 and s. 3A Electricity Act 1989). ScottishPower’s submissions amount, in effect, to a claim that a SoLR has a right or entitlement to an LRSP if it can establish that those heads of assessment are somehow met. Yet this amounts to a legitimate expectation claim which ScottishPower has rightly not advanced.

ScottishPower’s criticism that Ofgem never reached a ‘firm final conclusion’ on whether the debt claim satisfied its criteria is rejected by Ofgem who explained in its evidence to the Court that it came to the view that the claim did not meet all the criteria. ScottishPower did not apply to cross examine Ofgem’s witness in this regard and no allegation of bad faith has been raised. I accept Ofgem’s position. I do not see how the timing of Ofgem’s application of the criteria (May/June 2020) assists ScottishPower’s case. The decision making spanned a period of 15 months. Ofgem considered the criteria in May/June 2020 and arrived at a provisional view in July 2020 that it was uncomfortable with the claim.

The submission that Ofgem did not grapple with the detailed evidence put forward by ScottishPower ignores the realities of the decision-making process, in particular the significant engagement and bilateral exchanges between Ofgem and ScottishPower during the course of the decision making. The statement relied on by ScottishPower in the final decision letter that “aclaim for consumer debt…is outside the reasonable scope of any LRSP claim” must be read in context. Other parts of the letter explain that Ofgem’s decision was taken on the basis of “taking into consideration all information available to us and the specific circumstances of this case,” and should not “be taken as setting a precedent for any future claims, which would also be considered on their merits and on a case-by-case basis, taking into account all relevant circumstances of the particular case.”

ScottishPower’s alternative submission, that Ofgem did not reveal or explain its specific policy that debt costs would not ordinarily be allowed unless identified as a possible component of a claim when a SoLR was seeking to be appointed, fails for the same reasons. There was no policy to this effect. In its assessment of the specifics of ScottishPower’s claim, Ofgem was influenced by the fact that ScottishPower had not indicated its intention to make such a claim in its bid (“…we continue to consider that the claim for consumer debt is outside the reasonable scope of the basis on which ScottishPower was appointed as the SoLR” §73 above) but its position in this regard was case-specific (“Each levy decision is taken on a case-by-case basis, and we are confident that we could reject this element of the claim while retaining the flexibility to allow customer debt costs to be recovered in future. For example, we may be more receptive to a case where a SoLR has expressly provided for them in the RFI….” §55 above).The case of R (Lumba) v Secretary of State for the Home Department[2012] 1 AC 245, upon which the Claimant relies, is authority for the proposition that any guidance which sets out how decision-makers should exercise their discretionary powers must be published and that individuals subject to the policy have the right to know what a policy is so that they can make representations in relation to it. The facts of this claim are far removed from that proposition and the facts of that case.

Ground 1 fails.

ScottishPower submits that Ofgem’s decision is outside the range of reasonable decisions open to it and there are demonstrable flaws in its reasoning. In particular;

Ofgem failed to follow its published criteria in taking the decision. Its final position on the criteria appears to have been that its debt claim probably satisfied them (the June 2020 internal memo).

In so far as Ofgem found that its criteria were not satisfied then its view in this regard was irrational.

There was no valid basis for Ofgem’s reasoning that debt costs fell outside the scope of ScottishPower’s appointment, given a key purpose of an LRSP is to allow recovery for unforeseen costs and the company had indicated it would claim for unexpected costs.

Ofgem’s view that it was unreasonable for industry to fund the ‘commercial risks’ associated with the cost of debt applies equally to the costs associated with returning customer credits, data quality issues and customer service problems, which Ofgem was prepared to allow.

Ofgem took into account an irrelevant consideration, namely that it was necessary to rule out debt costs, as a matter of principle to protect the interests of consumers. The criterion that costs must be incurred ‘efficiently’ already provides appropriate protection in this regard.

The legal basis for a challenge on the basis of irrationality, or as it is more accurately described, ‘unreasonableness’, has two aspects. The first is concerned with whether the decision under review is capable of being justified, or whether, put simply, it is outside the range of reasonable decisions open to the decision maker. The second aspect is concerned with the process by which the decision was reached. A decision may be challenged on the basis that there is a demonstrable flaw in the reasoning which led to it; for example that significant reliance was placed on an irrelevant consideration or that there was no evidence to support an important step in the reasoning or that the reasoning involved a serious logical or methodological error (Secretary of State for Work and Pensions v Johnson[2020] EWCA Civ 778.). ScottishPower relies on both aspects to advance its challenge under this ground.

Ofgem submitted that the Court should apply a wide margin of appreciation to its decision making given its role as a specialist regulator concerned with the operation of a market with predictions as to the future. It relied on the decision in R v Director General of Telecommunications ex p Cellcom [1999] ECC 314 at §26. ScottishPower submitted that the appropriate standard of review is the conventional Wednesbury standard. The evidence before the Court does not show that Ofgem engaged in complex, technical considerations.

I accept Ofgem’s submissions as to the standard of review. There are parallels between the regulation of telecommunications by the Director of Telecommunications in ex parte Cellcom and the regulation of the gas/electricity markets by Ofgem in this case. In both cases, the decision making under challenge takes place in the context of the operation of a competitive market; the award of licences to operators and the power of the regulator to modify licence conditions. The key passage in Cellcom which Ofgem relies on is §26:

Ofgem also pointed to the analysis in another case involving Ofgem; Npower Direct Ltd and other companies v Gas and Electricity Markets Authority (Competition and Markets Authority intervening)[2018] EWHC 3576 (Admin)) §§131-132 where the Court noted, albeit in the context of a proportionality challenge, that in assessing the adequacy of a regulator’s analysis, a court should read that analysis generously and not every perceived deficiency in that analysis requires or permits that the measure be quashed: there is a question of materiality.

In this case, Ofgem has a statutory duty to protect the interests of consumers in the context of the failure of a supplier in a competitive market for services generally regarded as essential, by ensuring continuity of supply to customers of the failed company and to minimise wider negative impacts on the market. In witness evidence, the Deputy Director of the Retail Directorate of Ofgem explained the nature of the decision making in this case.

This reasoning formed the basis for Ofgem’s final decision (“While we are open to a range of costs forming part of a claim for a LRSP, we consider that a decision not to consent to the recovery of consumer debt sets the most appropriate balance between the ability of a SoLR to recover legitimate and efficient costs and protecting the interests of consumers” §73 above).

In my judgment Ofgem’s decision making falls squarely within the scope of decision making at play in ex parte Cellcom and ought to be granted a margin of appreciation by the Court. There are parallels between the witness evidence of Ofgem’s deputy director set out above, with the Court’s observation in Cellcom that “the Director (assisted by his expert staff) made his decisions… after a prolonged consultation period in the light of “his experience of monitoring and regulating the mobile telephony market over a long period.” (§26). Ofgem must make complex regulatory choices about the allocation of risks and costs in the event that a supplier has failed and must do so having regard to the future operation of the market, including the future role of a Supplier of Last Resort within the market and the potentially distorting effects of allowing a supplier to claim for customer debt accrued after customers have transferred to the SoLR. It is a decision that affects the entire industry and the operation of the market in the future. In particular, Ofgem must balance the need to ensure that its approach to claims for a LRSP ensures that suppliers are not disincentivised from bidding to become SoLRs, whilst not creating a moral hazard, namely, circumstances where suppliers under-bid or take excessive risks bidding, knowing that any losses subsequently incurred could be recovered by way of a LRSP. This is a complex balancing assessment carried out by Ofgem as regulator, having regard to its principal objective to protect consumers.

Viewed in this context, ScottishPower submissions on this ground amount, in my judgment, to an impermissible attempt to re-argue the merits of the decision. In simple terms, Ofgem reached a judgment distinguishing between debt costs which are to be viewed as a matter of commercial risk for suppliers and other costs more directly associated with onboarding customers. It did so on the basis that this represents the most appropriate balance between the ability of a SoLR to recover legitimate and efficient costs and the need to protect the interests of consumers. Contrary to ScottishPower’s submissions, Ofgem did apply its published criteria to the claim and reached the view that not all the criteria were satisfied. ScottishPower’s challenge to Ofgem’s view that the criteria were not satisfied amounts to a disagreement with particular findings by Ofgem or its reasoning. ScottishPower may disagree with this distinction, but there is no fundamental flaw in Ofgem’s reasoning in this regard. Amongst other factors, Ofgem was influenced by the fact that ScottishPower had not indicated its intention to make a debt claim in its bid but this was a legitimate exercise of its case by case decision making. Ofgem was entitled to move through an analysis of the facts of the claim and consideration of its statutory duties, towards a regulatory policy view on the specifics of customer debt costs. Accordingly, I am not persuaded that Ofgem’s views are outside the range of reasonable views open to it or that there is any fundamental flaw in the reasoning process that would vitiate its view in this regard.

Ground 2 fails.

ScottishPower submitted that the reasons in the decision letter is manifestly inadequate. There is no explanation why Ofgem considered consumer debt to be different to other costs which ScottishPower claimed. The statement that consumer debt is outside the “reasonable scope” of the basis on which ScottishPower was appointed as SoLR is unexplained. No attempt is made to explain what the “scope” of an LRSP payment is, and why. Insofar as the claimed scope is that a claim should “principally” be for the costs of credit balances and those associated with migrating customers, no reasoning is provided for that statement, nor why this is Ofgem’s “expectation”. No explanation was provided for why it was said to be unreasonable for the wider industry to "fund" the commercial risks associated with the cost of debt yet not the commercial risks associated with other heads of its claim. No explanation is given for the “balance” referred to by Ofgem, as between the recovery of consumer debt, the ability of the SoLR to recover legitimate and efficient costs and protecting the interests of consumers. If the claim was rejected due to an alternative policy, that a claim will not ordinarily be allowed unless identified in a SoLR’s bid this was not explained in the decision. ScottishPower has been substantially prejudiced by Ofgem’s failure to provide an adequately reasoned decision in that it is unable to understand the basis of the decision.

It was common ground that Ofgem has a statutory duty to give reason (s. 49A of the Electricity Act 1989 and s. 38A of the Gas Act 1986). The standard of reasoning was also common ground:

Ofgem’s reasons for refusing the debt claim, set out in its final decision letter, explain that it regarded customer debt as different to the other costs claimed which are ‘directly related’ to refunding credit balances and ‘on boarding’ customers. Its decision in this regard was not inconsistent with its decision to allow recovery of service/operation and data quality costs which were finely balanced. Nor was it bound to consent to debt costs, by virtue of having consented to these other costs.The debt claim is outside the reasonable scope of the basis on which ScottishPower was appointed and any LRSP claim. Ofgem’s expectation is that a claim will be principally for the cost of credit balances and costs associated with migrating customers from the failed supplier. Taking account of all the circumstances of the case and having regard to its duty to protect consumers, the claim was not a reasonable cost to be recovered via the industry levy. Whilst Ofgem was open to a range of costs forming part of a claim for a LRSP, it considered that a decision not to consent to the recovery of consumer debt sets the most appropriate balance between the ability of a SoLR to recover legitimate and efficient costs and protecting the interests of consumers.

In my judgment, these reasons are adequate and intelligible. They explain the main bases for its decision and respond to key submissions advanced by ScottishPower in making its claim (consumer debt is no different from other heads of claim and Ofgem’s decision is inconsistent with its decision on other heads of claim). Reasons may be briefly stated and Ofgem is not writing an examination paper (South Bucks at §26 citing South Somerset District Council v Secretary of State [1993] 1 PLR 80, 83)). The reasons do not reveal any error in law or anything ‘substantially wrong’ or ‘inadequate’ (South Bucks at §25 citing the Westminster case[1985] AC 661, 673). They show Ofgem exercising its discretion on a case by case basis in light of its principal statutory objective to protect the interests of consumers. ScottishPower’s submissions on this ground amount to a request for further explanation of Ofgem’s reasons.

In any event, a reasons challenge will only succeed if the party aggrieved can satisfy the court that it has genuinely been substantially prejudiced by the failure to provide an adequately reasoned decision (South Bucks §36 per Lord Brown). I am not so satisfied. It is simply not credible, in the circumstances of this particular decision making, for ScottishPower to suggest, as it does, that it has suffered prejudice because it has been “unable to understand the basis of the Decision”. On receiving the claim, Ofgem held two meetings with the company to gather information and understand its position. In between the meetings it sent additional questions on the claim. Having come to an internal view on the claim Ofgem shared a summary of its view with ScottishPower. It offered to meet with ScottishPower to discuss its position, an offer accepted by ScottishPower on the basis that a meeting would enable it to “go through each area in detail and understand more fully Ofgem’s position” as well as to “share any further thoughts that we have on those areas Ofgem is minded not to accept at this point’. There followed a telephone call and a meeting at which ScottishPower presented slides addressing each of Ofgem’s reasons for rejecting the claim for debt-costs. Ofgem followed up the meeting with a written response by email in the same month. ScottishPower recorded its view of the meeting in an internal e-mail, stating that Ofgem: “noted they would review the detail within the slides, noting that it was a helpful meeting and the points we shared were useful. [The Ofgem representative] noted that Ofgem had already considered our claim in a lot of detail, but they would consider the additional detail we provide and come back to us.” ScottishPower had the opportunity to respond to the industry consultation, in which Ofgem explained its decision-making process and methodology, setting out its reasoning on the wider claim, including the debt claim. It is apparent from the chronology of decision making that Ofgem was in repeated contact with ScottishPower over an extended period. Ofgem repeatedly explained its thinking and ScottishPower had every opportunity to understand the basis of its decision.

Ground 3 fails.

For the reasons set out above, the claim fails.