Gas and Electricity Suppliers, Electricity Distribution Network Operators, Gas Transporters Email: [email protected] and all other interested parties Date: 29 January 2021 Dear colleagues, Decision on Last Resort Supply Payment claim from ScottishPower Energy Retail Limited On 7 December 2020, we1 published our minded-to position2 on a claim by ScottishPower Energy Retail Limited (“ScottishPower”) for a Last Resort Supply Payment (“LRSP”). ScottishPower is seeking to claim for costs incurred in acting as a Supplier of Last Resort (“SoLR”) to former customers of Extra Energy Supply Limited (“Extra Energy”). We received two confidential responses to our consultation. This letter confirms our decision to consent to ScottishPower claiming a LRSP of up to £10.6m.3 Our decision will allow ScottishPower to recover the costs of protecting the credit balances owed to former customers of Extra Energy, and certain other costs incurred in complying with the terms of the Last Resort Supply Direction (“LRSD”).4 In taking this decision, we have had due regard to Ofgem’s principal objective of protecting the interests of current and future energy consumers, the relevant provisions of ScottishPower’s gas and electricity supply licences, Ofgem’s “Guidance on supplier of last resort and energy supply company administration orders” (our “Guidance”),5 the terms of the LRSD and the particular circumstances of compliance with the LRSD. 1 References to the “Authority”, “Ofgem”, “we” and “our” are used interchangeably in this document. The Authority refers to GEMA, the Gas and Electricity Markets Authority. The Office of Gas and Electricity Markets (Ofgem) supports GEMA in its day-to-day work 2 Consultation on a Last Resort Supply Payment Claim from Scottish Power Energy Retail Limited 3 £10.573m 4 Direction to appoint ScottishPower Energy Retail Limited as Gas Supplier of Last Resort and Direction to appoint ScottishPower Energy Retail Limited as Electricity Supplier of Last Resort. 5 Supplier of Last Resort: Revised Guidance 2016. The Office of Gas and Electricity Markets Commonwealth House, 32 Albion Street, Glasgow, G1 1LH Tel 020 7901 7000 www.ofgem.gov.uk As per Supply Licence Condition 9 (Claims for Last Resort Supply Payment), a SoLR may make a claim for a LRSP from relevant distribution networks where we have given our consent to the amount claimed.6 ScottishPower’s claim is for £13.6m.7 This letter sets out the reasons for our decision to consent to a claim from ScottishPower for a LRSP of up to £10.6m.8 Background The SoLR process Electricity and gas supply is a competitive activity in Great Britain. Competition has the potential to bring many benefits to consumers but in a competitive market, companies that are not operating efficiently may fail. This applies as much in relation to the gas and electricity supply markets as it does to other markets. It is Ofgem’s statutory duty to protect customers’ interests in light of supplier failure. When a supplier fails, our focus is to ensure continuity of supply for its customers and to minimise wider negative impacts on the market. These wider effects stem from the fact that if an energy supplier fails, its customers will continue to be physically supplied with gas and/or electricity, but the supplier will not be able to meet the costs of providing this energy. In these circumstances, the costs of procuring the necessary electricity will be smeared across all suppliers and the costs of procuring gas will fall to the relevant shipper. There is also a real risk that if a supplier fails without urgent intervention, consumer trust and confidence in the energy market could be materially damaged. Ofgem can ensure continuity of supply to the failed supplier’s customers and minimise these wider negative effects by appointing a SoLR to supply the failed supplier’s customers at very short notice.9 6 In accordance with Standard Condition 9 of the electricity and gas supply licences 7 £13.635m. 8 £10.573m 9 The obligation for a supplier to comply with a LRSD derives from standard licence condition 8 of each supplier’s gas and electricity supply licences and is intended to ensure a universal service for Great British energy consumers (for further information on this universal service, see Article 27 of the Directive (EU) 2019/944, as retained in domestic law). The duties of a SoLR are further described in our Guidance and the LRSD contains specific details of ScottishPower’s obligations to supply Extra Energy’s former customers. The Office of Gas and Electricity Markets Commonwealth House, 32 Albion Street, Glasgow, G1 1LH Tel 020 7901 7000 www.ofgem.gov.uk Claim for a Last Resort Supply Payment As set out in the gas and electricity supply standard licence conditions, a supplier may make a claim for any additional costs it incurs in complying with a LRSD.10 As part of their competitive bid to become a SoLR, a supplier will include whether they expect to make a claim for a LRSP, or whether it will waive this right, in whole or in part. As stated in our Guidance, our preference is for the SoLR not to make any claim, and we expect efficient SoLRs to be able to minimise their exposure to otherwise unrecoverable costs to reduce the costs smeared across the rest of the market through a LRSP. In our Guidance, we explain that we will decide on a case-by-case basis whether it might be appropriate for a SoLR to make a claim under these arrangements. We also explain that we would consider whether the amount of any claim or the reasons for any claim were reasonable. In that Guidance, we note that, in certain circumstances, we may consider it appropriate to approve a claim where it relates to costs associated with the protection of customers who held a credit balance with the failed supplier. ScottishPower indicated at the time of our SoLR appointment process that it would not waive its right to make a claim. ScottishPower committed to funding £10m of open and closed credit balances and said that it would claim for any balances above this £10m level and associated costs, for example to cover working capital requirements. Our decision On balance, taking into consideration all information available to us and the specific circumstances of this case, we are minded to consent to ScottishPower claiming a LRSP of up to £10.6m.11 We have taken this decision in light of the broader market considerations and our wider statutory duties to protect both existing and future consumers. Our decision will enable ScottishPower to recover up to this amount from relevant gas and electricity distribution network licensees. This is subject to any costs recovered by ScottishPower from its claim from the Extra Energy liquidation process. For the avoidance 10 Standard condition 9 of the electricity and gas supply licences. 11 £10.573m The Office of Gas and Electricity Markets Commonwealth House, 32 Albion Street, Glasgow, G1 1LH Tel 020 7901 7000 www.ofgem.gov.uk of any doubt, we consider on a case-by-case basis whether it may be appropriate for any SoLR to make a claim for a LRSP. We have set out below our reasons for our decision. This 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. Our reasons for our decision Our decision will allow ScottishPower to recover the cost of refunding credit balances owed to former customers of Extra Energy and for the cost incurred in relation to service/operational work, data quality and interest on the cost of working capital. We do not consent to the recovery of the cost of item 4, consumer debt. Table 1: ScottishPower LRSP claim – decision Item Cost Category associated with Cost claimed Decision SoLR (£k) (£k) 1 Recovery of customer credit 6,526 6,526 balances 2 Service/Operational 2,547 2,547 3 Data quality 313 313 4 Consumer debt 3,062 0 5 Working capital 1,187 1,187 Total 13,635 10,573 Credit balances ScottishPower is claiming £6.5m12 for the costs of credit balances refunded to former domestic customers of Extra Energy for open and closed customer credit balances. Our Guidance states that we may in certain circumstances approve a claim associated with costs incurred in repaying credit balances to customers who had a positive credit balance with a failed supplier. 12 £6.526m The Office of Gas and Electricity Markets Commonwealth House, 32 Albion Street, Glasgow, G1 1LH Tel 020 7901 7000 www.ofgem.gov.uk We are satisfied in this case (subject to the points discussed below) 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. We have considered whether the costs ScottishPower is seeking to claim for credit balances are otherwise unrecoverable; we consider that it should be possible for ScottishPower to recover some of this claimed amount through the ongoing administration process for Extra Energy. We expect a SoLR making a claim for a LRSP to have taken all reasonable steps to make and pursue a claim from the administration/liquidation of the failed supplier for the cost of outstanding credit balances. The current licence provisions related to LRSPs do not require us to make our decision on ScottishPower’s claim ahead of the conclusion of the liquidation process. However, in our view, delaying a decision until the conclusion of the liquidation process would introduce a disproportionate degree of uncertainty around the timing of any approved LRSP claim, and ultimately increase the future costs liable to by paid by energy suppliers and consumers.