At the end of February I attended five of the six sessions of the application for a judicial review (“JR”) of the decision to sell Bulb to Octopus Energy which was heard in the Administrative Court. Since I missed the final session I had to wait a week to get hold of the transcript, hence the delay in publishing my analysis. As is often the case with these matters, there is a gulf between what a lay person might make of a given situation and the legal principles which will determine the outcome. As I am not a lawyer, I will do my best to set out what I see as the issues and what might happen next.
I have tried to set out the pleadings as I understood them, so if any readers have reason to disagree with my analysis, please add your comments below. Also, the section on the pleadings is long and is a summary of the arguments without comment – anything in this section that looks like a comment is commentary by the resepctive barristers, not by me. The subsequent section contains my analysis of what I understood of the positions of the various parties, and some conclusions about what they mean.
The collapse and subsequent sale of Bulb
In late 2021, Bulb collapsed into bankruptcy. Ofgem advised BEIS that a normal Supplier of Last Resort (“SOLR”) process would be challenging since the SOLR(s) would be entitled to immediate recovery of the associated costs, which were large, and this would impose a major burden on consumers struggling with rapidly rising energy costs. For that reason, Bulb was placed in Special Administration – bill-payers are ultimately still responsible for the costs incurred but there is significant discretion over recovery timescales, unlike in the SOLR scheme.
Ultimately Bulb was sold to Octopus Energy in a deal which had three main elements:
- It was to be implemented using the Energy Transfer Scheme (“ETS”), which would transfer the relevant assets of Bulb into a new entity. This entity would subsequently be sold to Octopus and will remain ringfenced from its core business for a defined period;
- The Government would provide financial support to the new entity for the procurement of energy for Bulb customers over the course of Winter 2022. This financial support would be repaid by the new entity in accordance with an agreed repayment schedule;
- A profit sharing agreement would be put in place for the ringfenced business until agreed funding was repaid by Octopus. Under this structure payments to shareholders or the wider Octopus group from the ringfenced entity would be restricted until the repayable funding to government was repaid.
The notice of the post transfer facility published in December last year estimated the value of the government support for the deal could be as much as £4.5 billion. The funding facility was made available to Bulb post-transfer, to discharge Bulb’s obligations in relation to:
- a cash injection of an amount to ensure the consideration paid by Octopus at completion is positive ;
- payments (if needed) to adjust the initial consideration to reflect the actual as opposed to the estimated value of certain assets after transfer to the new entity;
- the energy cost funding agreement between Bulb and the new entity put in place to meet the cost of purchasing wholesale energy for the transferring Bulb customers for a limited period until 31 March 2023
- certain energy purchase hedging costs related to the delayed date on which completion occurred;
- a payment (if needed) to adjust for actual as opposed to estimated energy consumption by the transferring Bulb customers; and
- should it be necessary, to indemnify the new entity for any regulatory liability that it might incur as a result of Bulb’s actions prior to the transfer.
What are the issues?
Following a failed sale in late 2021, a second round sales process took place in 2022 after which Octopus Energy (“OE”) emerged as the sole bidder and was granted government support worth £ billions as well as some degree of shielding from regulatory change which is not available to other suppliers.
Shortly after the sale was announced, British Gas Trading (“BGT”), ScottishPower (“SP”) and E.On challenged the decision to sell Bulb to OE alleging that the Secretary of State had failed to follow proper subsidy control procedures and that as a result OE and the new merged entity known as “HiveCo” were in receipt of an unlawful subsidy. It should be noted that the holder of position of “Secretary of State” changed several times during the course of these events, and that the claim relates to the office rather than the person.
The hearings in February were to determine whether a Judicial Review of this decision should be undertaken. If the Court decides that it should, then there would likely be further hearings, and ultimately the Court could overturn the entire sale if it deems that there has been an unlawful subsidy, although at the moment this prospect is remote.
On the one side we have the Claimants (BGT, SP and E.On) who argue that as the sale process was not, in their opinion “open, fair, transparent and non-discriminatory” the resulting decision was not consistent with proper subsidy control leading to an unlawful subsidy being granted. On the other side we have BEIS, Teneo (the Joint Energy Administrators or “JEAs” – in fact administrators are individuals, so these are three people who work for Teneo and were appointed as the administrators for Bulb) and OE. The JEAs were advised by the investment bank Lazard and OE was advised by KPMG.
The Defendants argue that the process was open, fair and transparent, and that any discrimination between the parties (which they concede did take place) was justified, and therefore the Secretary of State was entitled to determine that the proper subsidy control procedures had been followed and there was no unlawful subsidy. The Defendants further argue that delays in bringing the application should count against the Claimants.
The matters in dispute are very much procedural. The question is, “was the decision to award the subsidy lawful in the context of subsidy control?”
The situation is complicated by the fact that the UK subsidy control legislation was not enacted at the time of the decision, and so the relevant rules are the Trade and Co-operation Agreement (“TCA”) between the UK and the EU. Under the Subsidy Control Act 2022 and the TCA, there is an expectation that an independent body would exist to review the decisions of subsidy-awarding authorities. The new UK Act gives this role to the Competition & Markets Authority, but at the time, the CMA had no such powers. Under the TCA, the EU Commission has oversight but its powers go beyond those the CMA has under the UK Act, so there was some debate in Court as to the remit of the Court in deciding these matters.
Summary of the pleadings
I have not had sight of any of the written submissions other than the non-confidential skeleton argument submitted by OE, since they saw me in court and offered to send it to me. I believe that members of the press can get hold of these, and possibly I could as well, but I don’t really have the time to read through it all, so I am really relying on the oral pleadings to describe the situation, and I think this gives a reasonably good overview.
The pleadings kicked off with Counsel for BGT, SP and E.On making their pleadings. Mr Harris for BGT set out the Claimant’s view on the facts. This was interesting as it provided a chronology of the events from BGT’s perspective. Mr Beal for SP and Mr Perez for E.On spoke more about procedure and the legal positions.
The essence of BGT’s position seems to be that BGT was very interested in buying Bulb, but saw all the difficulties everyone else did with the un-hedged portfolio and customer credit balances. Mr Harris said that BGT had never been given a clear indication that government support was available, and that its offers to discuss various matters had been consistently rebuffed. Much was made of a letter sent by the Centrica CEO, Chris O’Shea to BEIS, Ofgem and the Treasury on 12 August 2022, which received no response from any of the recipients. (In fact during Mr Harris’ pleadings it appeared he was arguing that BGT did not know there may be subsidies available, however in his rebuttal he clarified this saying the issue was there had been no clear communication with BGT on this point, despite this information having been conveyed to other parties.)
“We weren’t told clearly about the availability of government support and that all we had to do was ask for it,”
– Mr Harris, Counsel for BGT
BGT submitted a non-binding offer letter for the purchase of Bulb on 7 April 2022, inviting the Government to enter discussions on structure, but despite these discussions not taking place, it remained formally part of the M&A process throughout. It does not appear, and no evidence of such was presented by the Defendants, that BGT at any time formally withdrew from the process. Throughout April and May of 2022, BGT was engaging with Lazard, for example asking for and receiving customer data and accessing documents in the data room. On 10 June there were further requests for information from Lazard to which there was no response.
On 8 April 2022, OE had written (presumably to the JEAs) to formally withdraw from the process. This left just two parties: BGT and an overseas supplier not active in the GB market known by the pseudonym “Tulip” (the flower theme crops up throughout!). On 12 April, there was an approach from the JEAs to OE to discuss an “alternative structure”, which was followed up by a meeting at OE’s offices and various calls with Lazard. The upshot of all this activity was that OE went from formally withdrawing in April to submitting a formal expression of interest on 10 May and a non-binding offer on 15 May.
In mid-June, Tulip formally withdrew, suggesting that a supplier active in the GB market would be better placed to buy Bulb. Tulip apparently cited four areas of concern: branding, staff, the IT platform and hedging/lack of government support in respect thereof. BGT testified that the only concern it had was around hedging – it shared none of Tulip’s other concerns. Evidence was submitted to show that within 37 minutes of receiving this email from Tulip, Lazard responded suggesting the possibility of some form of joint ownership to mitigate the collateral requirements, saying this was not the Government’s preferred approach but it was open to discussions. No such suggestion was ever made to BGT, which is not disputed by the Defendants.
Mr Beal for SP then turned to matters of procedure. He said that there was no dispute relating to the conduct of the JEAs and their M&A process, but rather the decision-making by the Secretary of State. He also spent a good deal of time on the issue of delay, that being one of the main challenges to the JR application made by the Defendants. The essence of his arguments was that the timing of the application was delayed of necessity since the Claimants could not issue the application before they had the relevant details such as the amount and nature of the subsidy, despite the fact that they first became aware of the existence of the subsidy as a result of press reports prior to the official announcement of the deal.
In his response submissions (after the Defendants pleadings) remarks, Mr Harris said that the funding decision was not taken until 7 November 2022 and the Claimants were not aware of it until 9 November, and that before the funding decision was actually made they could not bring the claim as they did not know what they would be claiming about. Also, the Claimants did not know the details of the subsidy until 23 November. He said the question is whether the 19 days it then took to file the claim was too long and justified denial of the JR application.
The official announcement of the deal came on 29 October 2022, when the high level terms of the deal were announced but without any financial detail. Subsequently on 21 December 2022, the official notice of the post transfer facility was published, providing further detail including an estimate of the size of the subsidy.
Mr Beal went on to describe how the deal really involved two processes: a sale process and a subsidy control process. In the first instance, the sale was carried out by the JEAs under the auspices of the Energy Act 2011 whereas BEIS was responsible for subsidy control. While to a certain extent BEIS had given instructions to the JEAs in relation to the sale process, agreeing scripts for example, and there was some evidence that BEIS officials were nervous about whether the process had been fair, the fact that the Secretary of State had declared the processes to be fair did not actually make them so.
When the JEAs advised BEIS that the deal with OE was the best deal available in the market at the time, this was not necessarily the case (and the Claimants provided evidence that they would have submitted bids that were more favourable to the taxpayer) because Lazard had been allowed to provide different information in relation to potential government support to different parties. While this might be reasonable in a regular M&A process, he said it was not reasonable in the context of subsidy control since it undermined the ability of the JEAs to know whether other parties might have come forward with a better deal had they been in possession of the same information. In effect, the deal with OE was a bilateral agreement and there was no effort to put any structure including government support to tender. He said that, like BGT, had SP understood the extent of the subsidy available it would have made a bid for the Bulb business.
One aspect of Mr Beal’s submission that was interesting was that during October and November 2022 the Claimants had made various requests of the Government with increasing levels of urgency, for transparency and information relating to the deal, but rather than responding in a timely fashion, these were treated as Freedom of Information requests with the associated 20 working day response time. One of the judges did ask why the Claimants did not file their application at this point, since they must have known by now they had been treated unfairly, but Mr Beal replied, that the Claimants were still unaware of the extent of the subsidies, and without knowing this, the decision to award the subsidy could not reasonably be challenged. In late November BGT followed quickly by SP sent pre-action protocol letters outlining their objections to what they believed (not yet having it confirmed) were £ billions of taxpayer subsidies involved in the deal.
Mr Peretz for E.On largely focused on subsidy control, outlining the subsidy control principles, interpretation of the various provisions, issues around fairness and non-discrimination, and the lack of a proper subsidy control process by the Government. In particular he highlighted that there are strict provisions in EU law around the granting of subsidies in the context of the rescue or re-structuring of a business, since this has the potential to cause significant market distortions. He went on to say that even if E.On had not been interested in making an offer for Bulb it was entitled to be concerned about a competitor receiving significantly more favourable treatment than itself and other market participants.
He added that the Government did not actually know how parties such as E.On would react had they known the extent of the subsidies available because the only parties to whom this information was given were OE which made a bid, and Tulip which did not. BEIS, he said, was essentially speculating about the likelihood or otherwise of additional bids, and whether those would be on more or less favourable terms, precisely because the process was not open, transparent and non-discriminatory.
He went on to present arguments as to the subsidy control process or lack thereof. The core of these was that at the outset, the Government hoped to sell Bulb without any subsidy being offered, and that when it became clear that support would be needed, there should have been a change in the process, with subsidy control being explicitly recognised. The Claimants argue that subsidy control was treated as an afterthought by BEIS and that attempts had been made retrospectively to make it appear as if proper controls had been in place throughout when they had not.
By mid-April 2022 it was clear that some form of government support would be needed. At this point there should have been an explicit recognition by the Government that a subsidy control process was also required – there is no evidence from BEIS that this was considered until the end when the Subsidy Control Assessment (“SCA”) had to be signed off. Mr Peretz also asserted that the SCA was flawed since it relied on the assumption that the sale process had been open, fair, transparent and non-discriminatory when it had not. Neither the JEAs nor Lazard had subsidy control principles in their Terms of Reference for the deal: the JEAs had a responsibility to secure a sale of Bulb as a going concern as soon as possible – subsidy control was not part of their job, it was the responsibility of the Secretary of State.
Mr Peretz said that under the TCA the Secretary of State must have an effective system in place that ensures compliance, particularly where there is only one bid under consideration. The Secretary of State stated that the process had been open, fair, transparent and non-discriminatory, and that having chosen to carry out the process on that basis, he had to follow through and make sure that it actually was open, fair, transparent and non-discriminatory. In his rebuttal, Mr Harris pointed out that having gone down that road, it was for the Government to demonstrate that this was the case, particularly as there had only been one bid, not for the Claimants to demonstrate otherwise, and he submitted that it had not.
Mr Peretz outlined other apparent errors within the SCA:
First of all, the SCA concluded there was no subsidy to OE (as opposed to HiveCo) because of “the competitive nature of the M&A process” which was incorrect due to the discrimination between the parties. Secondly any failure to apply any subsidy control principle is fatal – that other aspects might be acceptable is not relevant, it’s all or nothing. In this case the Government justified the subsidy to HiveCo in the first instance to avoid social hardship since a “hard-close insolvency” would potentially cause hardship for prepayment meter customers as their meter keys might stop working. However he rejected this as a justification for the subsidy since other options for exiting the Special Administration were considered, including a SOLR process, which would have avoided any hard close insolvency. The Government also justified the subsidy on the basis that there was a failure of the loan market since Bulb was unable to access bank finance, however, the Claimants consider that this was the opposite of a market failure – the banks were refusing to lend to a poorly run business and other suppliers were able to access funding during the period in question.
Thirdly the sensitivity analysis performed by the JEAs was flawed as it did not correctly address the alternatives to the sale, for example a SOLR process. At one point the JEAs had sought but not received information as to the costs of other SOLR processes. There were flaws in the quantification of the subsidy but these were not discussed in Court since they were in the skeleton arguments which I have not seen. There were errors in relying on Article 364 of the TCA which allows subsidies to be granted in the event of an economic emergency – Mr Peretz said that the subsidy offered in this case was not an appropriate response to the economic emergency (invasion of Ukraine) since the failure of Bulb was not related to this event while the invasion and subsequent market events might have made the sale of Bulb more difficult, the subsidy was not an appropriate response to this situation.
There were further errors in applying other rules, for example OE was in receipt of a subsidy since it was able to buy Bulb with a much lower contribution than in other comparable cases. The existence of the profit sharing mechanism relied on by the Government is not relevant to this. Finally, the SCA is supposed to address the steps taken to ensure that any subsidy does not distort competition for example, deals often include strict undertakings for the recipient of the subsidy designed at preventing this. There is no reference to this in the SCA at all and while BEIS has subsequently pointed to the ring-fencing rules and restrictions placed on OE around extracting money from HiveCo for a certain period, these do not go far enough since OE could for example raise capital more easily following the deal than before.
Because of these problems, the view of the Claimants is that SCA cannot stand, and without the SCA neither the funding decision not the ETS can stand and therefore they should be set aside.
Mr Coppel for the Government said that the challenge brought by the Claimants was effectively a challenge to the rationality of the decision made by the Secretary of State to approve the funding inherent in the deal and that the Secretary of State should have wide discretion in making such decisions, and that any review should be “light touch and with low intensity”. In the first instance, such decisions are made on the basis of expert advice, in this case that of the JEAs, themselves advised by Lazard, which made extensive recommendations that were reviewed by the consulting firm EY. He questioned whether any of the evidence submitted by BGT did in fact indicate that the OE deal was not the best deal that could have been done. Secondly, he said that in the context of commercial decisions, public bodies have extensive discretion in decision-making which is only amenable to judicial review in the case of bad faith or fraud, neither of which was present here. He did however concede that this situation was not entirely analogous to a commercial process.
He said a key feature of the design of the sale process was that it would not be an open tender setting out the levels of government support because (i) it was not known at the outset that support would be required, (ii) many different types of support could have been considered, and (iii) they wanted bidders to outline the support they would need rather than the Government to set out what it would be willing to offer. In other words it was a market-led approach, and while the intention was for it to be fair, the Government wanted to avoid leading the market. In this sense it needed to achieve a balance between not putting off bidders by suggesting there would be no support available and not giving away too much support.
Mr Coppel disagreed with Mr Peretz, saying that asking bidders to outline their required level of subsidy rather than offering government support up front was a rational approach to take. He also disputed whether the Government did indeed have a duty of fairness, since it could hamper public bodies in negotiating deals if they always had to treat parties identically, effectively giving everyone a right to match. He said if there was no common law duty of fairness then the Secretary of State was unable to create one.
However, he also said that all the Claimants were aware that government subsidies would be available as part of the deal, pointing to an email from BGT to Lazard offering to discuss the possibility of government support. He also referred to what he described as a “well sourced” article in the Financial Times on 10 June 2022 which said: “To offload the energy provider this summer, the government is expected to offer bidders a clean balance sheet with no debt as well as a generous financial dowry to secure a deal, say two people close to the negotiations.” (Although the next sentence of the article says: “However, the government has not set out how much money it would be prepared to inject in the deal and is instead waiting to see what the three bidders offer, according to officials.”) The article mentions that Centrica among others declined to comment, ie that Centrica was aware of the contents of the article and the references to government support.
Later the same day, there were text messages between Chris O’Shea and Lazard in which he said Centrica was “specifically informed that negotiations were going on about Government support”. (In his response submissions Mr Harris denied that the text messages said any such thing.) Mr Coppel went on to say that the evidence from Centrica was that the references to government support in these texts were not taken seriously by Centrica as it was only mentioned once and there had been no reference to subsidies when Chris O’Shea had met with Kwasi Kwarteng (then Secretary of State) the previous day (apparently it was not mentioned because BEIS understood from Lazard that Centrica was not interested in buying Bulb so there was no reason to mention it).
In his submissions, Mr Harris had said that in response to these messages, Chris O’Shea had asked Lazard to contact Centrica’s head of M&A to discuss these issues further but this did not happen. Mr Coppel said that Centrica’s head of M&A was told to make a proposal, but that he had characterised this as a “brush-off”.
Ultimately, the Government’s position was that Lazard had advised the JEAs that BGT was not interested in buying Bulb, and as Tulip had withdrawn, the JEAs then advised BEIS that the OE deal was the only deal available in the market, therefore the Secretary of State approved that deal. Mr Coppel said there was no legal obligation for the process to be fair, only that it could be relied upon to deliver the best available deal.
He then went on to address E.On’s complaints of unequal treatment, but said it was left to the discretion of Teneo and Lazard as to who should be contacted for re-engagement after withdrawing (which E.On had done early in the process) and that their conduct was “unimpeachable” as they focused on the bidders with whom they felt there was the greatest chance of success and this did not include E.On. He also said it was open to E.On to re-engage at any time.
In terms of what was communicated to OE during the re-engagement exercise, Mr Coppel stated that OE was told there might be government support available, but was not told the nature of thus support, the level, or that it was guaranteed. In this respect, OE was told the same as everyone else. He went on to say that the level of these communications were a degree of detail that was simply not brought to the attention of the Secretary of State, and that it would be “difficult to see how something that happened this early in the process with this level of vagueness and lack of particularity could have rendered the ultimate decision unlawful”.
He went on to describe the discussions with Tulip on 28 June where certain aspects of the OE deal were outlined to see if they would be enough to attract a second bid. He said that the main thrust of the exchange related to hedging support, terming this as “a little more flesh on the bones” of what BGT had been told on 10 June. He said the reason this was not tested with multiple market participants was a fear that the offer from OE would be lost, and also that sharing this information more widely would not have changed the minds of any of the other parties. This was apparently conveyed to the Secretary of State at the time.
Mr Coppel then turned to the issue of fairness in the context of subsidy control, and in particular pointed to various occasions where BEIS officials had asked whether the process was “fair”. He said there was a single process throughout which BEIS officials had given input, being aware of what the JEAs were doing, but at the same time leaving them to get on with it while “providing regular input and considering subsidy control issues in the background”.
On the question of justification for the subsidy, Mr Coppel said his clients relied both on the need to prevent social hardship (to prepayment meter customers) and on the need to prevent a severe market failure due to issues within the bank market. In preventing social hardship, decision-makers have wide discretion. He also said the SOLR option wasn’t a viable exit from the Energy Administration as Ofgem which would be responsible for implementing it, was strongly opposed. Ultimately the argument here was that the Secretary of State has wide discretion in granting subsidies that prevent social hardship or market failures, and that the subsidy was a proportionate and effective response to the problems it was designed to address.
In his response submissions, Mr Harris says that some of Mr Coppel’s statements regarding what Lazard had said to BGT were simply incorrect – that the emails and texts in question did not say what Mr Coppel claimed they said. He also pointed out that various people at BEIS had given evidence of what they “understood” Lazard had said to BGT, but there was no direct evidence of these things actually having been communicated.
Mr Harris also points out that key personnel at Lazard, and KPMG, OE’s advisors, failed to provide evidence to the Court, and that had they given evidence he would have applied to cross examine them. The Lazard banker could very easily have cleared up what was said to whom, when and why, which is at the heart of the Claimant’s case, while the KPMG advisor could have given evidence as to what exactly was said to him by Lazard which was characterised in a description of a discussion between them as a “great conversation” – the Claimants believe this conversation was key to bringing OE back into the process ultimately leading to the deal which involved a potential £4.5 billion subsidy (that the expected value of this subsidy has since declined due to favourable market conditions is irrelevant to the proceedings which relate to what was known by the Secretary of State at the time he approved the transaction).
We then came to Mr Hickman for the JEAs. He began with some submissions about the duties of the JEAs under the Energy Act 2011 and the Insolvency Act but I didn’t think they were particularly relevant since no-one was questioning the conduct of the JEAs in those regards. He went on to say there were three issues before the Secretary of State in making the subsidy decision: whether there was a subsidy at all, (and here this refers to the question about whether there was a subsidy or not to OE); whether the subsidy provided was proportionate and not more distortive than necessary under the TCA; and, whether the subsidy was proportionate in response to a global economic emergency.
He said the M&A process was relevant to, but not determinative of, these questions because the TCA does not require any process to be engaged in before a subsidy is granted, let alone a process of any particular type. There is also no requirement even in guidance that a subsidy cannot be proportionate unless there’s been a process meeting certain conditions of openness, transparency and non-discrimination. He said it was irrelevant whether there had been a subsidy control process, it only mattered whether at the point of his decision, the Secretary of State was satisfied that any subsidy met the requirements of the TCA.
He went on to challenge the submissions from Mr Harris saying BGT’s position had changed over time and that it was contradictory in that on the one hand BGT did not say it didn’t know about subsidies but on the other hand is claims it was not told that subsidies were available and all they had to do was ask. In response he made three points: firstly, none of the participants were proactively informed in phase 1 of the sale process that government support was available. That was deliberate because at outset, it wasn’t clear there would be any need for support at all; secondly, BGT was aware throughout that government support would have to be provided and that they could ask for it; and, thirdly, that in phase 2, statements were made to BGT which expressly referred to and confirmed the existence of government support. These he said held no interest to BGT because it was not interested in purchasing the Bulb business.
He also referred to the text exchanges on 10 June as evidence BGT was aware significant funding was available was being negotiated with OE and pointed to various communications from BGT mentioning the possibility of negotiations in relation to government support. He said that the case was not about a lack of engagement from the JEAs to BGT but that BGT did not know about a “narrowly defined piece of information”. He claimed that the JEAs had been very keen to engage with Centrica but that Centrica wasn’t interested, and that the idea that Centrica might buy the whole of Bulb and not just take on part of the customer book was only something that arose very late in the day. He also claimed OE was not told anything proactively that was not also told to BGT or the other Claimants, and that whatever was said to Tulip, was irrelevant because Tulip didn’t make any bid at all.
He went on to address the issues of delay, saying that since the deal was announced on 29 October 2022, this was arguably the date from which the clock should run when considering the delay in bringing the JR application, or at least the 7 November. He then cited various authorities to illustrate his point that the claim should have been made within a small number of days of that date (maybe five) and that since this was not the case, the Courts could, under the Senior Courts Act, either refuse permission for the JR or refuse to grant relief (and if there was no possibility of relief there would be no point in having a JR). He also said that the fact the Claimants had neither sought an expedited process nor interim relief should count against them (the Claimants later disputed that they had not requested expedition). The JEAs had themselves requested an expedited hearing but had been denied in early December by Mr Justice Swift.
“But the point is that [the Claimants] were aware of the unfairness well before the decision was taken, so when the decision is taken, it’s not a standing start case. They should be in a position to go,”
– Mr Hickman, Counsel for the JEAs
The JEAs believe that any application for a judicial review should have been made by 9 November 2022, but pre-action protocol letters were not sent until 21 November with the claim being issued the day before the second hearing before Mr Justice Zacaroli on 29 November to determine the effective date of the ETS (which he set as 20 December 2022).
Lord Pannick for OE adopted the arguments made by Mr Coppel and Mr Hickman and added that in relation to substantive issues and procedural fairness, both in relation to domestic law and the TCA, the Court should “accord a broad margin of discretion to the Secretary of State and to the administrators”. He made arguments about expertise in decision-making, saying that Parliament had in mind for experts appointed by the decision-makers to inform decisions, and that these should not later be second-guessed by the courts, and that the decision-makers have significant discretion in relying on that expertise. He added that Parliament intended that the courts should only intervene in relation to the procedure adopted by the energy administrators at most only in very extreme circumstances, such as corruption or bad faith. He went on to cite various authorities supporting his views on the discretion of decision-making bodies.
His submission was that the JEAs had a responsibility to act with speed since market volatility was a threat to the outcome. He also argued that a judicial review of the decision would have the potential to cause chaos, and uncertainty for the 1.5 million customers of Bulb, and that this should have led to much more prompt action by the Claimants in bringing their application.
He summarised his position saying:
“My clients were more nimble and they saw an opportunity missed by the bigger, more established operator in very adverse market conditions. In my submission, there’s no substance to this claim. We invite the courts to dismiss it on its merits and on the grounds of delay,”
– Lord Pannick, Counsel for Octopus Energy
In his response submissions, Mr Harris said that the Government’s argument is that the discrimination against BGT was reasonable because Lazard knew BGT was not interested in buying Bulb. He added that whether or not this was the case, it did not explain why Lazard made explicit efforts to re-engage OE and Tulip following their unequivocal withdrawal from the process, yet failed to do the same for BGT. Mr Hickman for the JEAs stated that his clients had been extremely keen to have BGT in the mix, which is not consistent with the failure to make the same efforts to re-engage it as it did with OE and Tulip. He claimed that neither the Government not the JEAs had any coherent argument on this point, and there was simply no reasonable justification for the failure to make the same disclosures to BGT. The Defendants claimed that all parties were aware that Government support would be necessary and therefore there was no need to separately inform BGT, but on that basis, they similarly would not need to inform OE or Tulip either. Indeed, he said, if “everyone” knew about the existence of government support all along then why did OE withdraw in the first place?
“The position as regards Octopus is even more indefensible. If they already knew about the available of government support, then why did they withdraw from the process in the first place, bearing in mind that the way it was put yesterday by Mr Coppel was, “We already knew right at the outset”. Well, why did they withdraw? It is said that all that they were told in April and May, when they were recontacted, was just in very general terms, “There is government support available just generally”, and no more, and that they’re all very entrepreneurial and they came up with their own structure straightaway because they’re all very clever or, as Lord Pannick put it, “very nimble”,”
– Mr Harris, Counsel for BGT
Mr Harris went on to say that the Government’s evidence was that it had not decided in April and May that a subsidy would be necessary, so it was not reasonable to believe “everyone” knew there would be a subsidy. He went on to criticise the JEAs for their conduct of the M&A process in that it did not result in the best outcome for the taxpayer since a deal could have been done with BGT for a lower subsidy cost.
In his submissions in reply, Mr Beal addressed the Government’s assertion that the subsidy was required due to a market emergency.
“Bulb did not become insolvent because of any emergency. It became insolvent, as I indicated in opening, because it made a commercially bad decision not to hedge and to simply rely on the goodwill of the day-ahead market. There was no causal link, therefore, between any emergency and Bulb going into administration. What has happened is that, as a result of the intervening event of an emergency, the cost of getting Bulb out of administration has gone up, but the underlying objective of removing Bulb from an insolvency position under the ETS took place long before the Russian invasion of Ukraine and therefore has no causal connection to it. There was a decision taken essentially to enable a supplier, an energy supplier, not to go under and the cost of that happening has increased. But it’s therefore, with respect, wrong to say that the subsidy that is now required to proceed to the conclusion of that process is therefore a response to the emergency,”
– Mr Beal, Counsel for ScottishPower
He also said that there is no evidence that the sale process was conducted with fairness in mind, and that if the JEAs had been instructed to conduct a fair process then they failed to do so. He also cited authorities where it had been held that self-direction itself gives rise to a reviewable decision, in other words that even if there had been no legal duty to conduct the process fairly, the fact that the Secretary of State decided it should be and claimed that it was makes it amenable to a judicial review.
In his reply submission, Mr Peretz, addressed further the absence of a subsidy control process, noting that there was evidence that the Government had recognised that this would be necessary, but there was no evidence of it having actually been done
“Mr Coppel hinted that legal advice, which regrettably he couldn’t disclose, might have been considering the subsidy control issues, but quite apart from the question of whether Mr Coppel is permitted selectively to waive legal professional privilege in that way, it doesn’t help him because the issue isn’t whether lawyers thought about or gave advice as to what should be done under the TCA, an issue that might be covered by privilege, but whether BEIS officials actually did or even started doing any work. And that’s a factual matter that it would not have been privileged, would have been disclosable under the duty of candour, and no doubt, if it had happened, would have been disclosed and not only disclosed but disclosed enthusiastically. Indeed we wouldn’t have heard the last of it if there had been thorough consideration of the SCA principles throughout the process. Instead what we have is silence and that silence speaks volumes,”
– Mr Peretz, Counsel for E.On
Disappointing lack of candour from just about everyone involved
I’m not persuaded that the Claimants had “no idea” about the possibility of subsidies but do believe they were shocked by the extent of the eventual government support. Nor am I persuaded that OE went from withdrawing to making a bid on the basis on no material new information. The Government’s position that it wasn’t worth exploring the possibility of subsidies with BGT which hadn’t formally withdrawn but was worth discussing them with OE which had was bizarre. According to the Mr Coppel, Lazard only thought BGT wasn’t interested in buying Bulb, but had been officially told that OE wasn’t since it had formally withdrawn, so that is hardly a sound basis for treating OE more favourably than BGT regardless of whether their assumptions were correct.
The Government’s position is not logical. The topic of subsidies was discussed (as opposed to mentioned) with exactly two parties: one of whom went on to bid for Bulb and the other which didn’t. I don’t see how any conclusions could be drawn from this in terms of how market participants would react to being told about the prospects for government support, and therefore whether the OE deal was in fact the best deal available in the market at the time. And the claim that “everyone knew” some form of support would be needed is very different from knowing that the Government was willing to provide support or that the level of that support could amount to £4.5 billion. Would a rational commercial operator have anticipated this degree of government support in May 2022 without a strong steer to that effect? I think not.
So, my sense is that the essence of the claim that had the Claimants known the degree of government support that was on offer they would also have made bids on probably more favourable terms for the taxpayer since all have better balance sheets than OE is likely correct.
However, that isn’t the basis for the JR application, and I can’t answer the question as to whether the Government failed to properly follow the subsidy control rules. One reading of the evidence could be that Lazard said to OE something along the lines of “tell us what it would take to get a deal done” (there is a strong suggest of this in OE’s skeleton adrgument) and that led to the OE bid. There were then efforts to engage Tulip on a similar basis, but I see that as something of a red herring as far as subsidy control is concerned: as a non GB market participant Tulip was unlikely to make the best bid anyway – surely that would most likely have come from BGT, so why on earth would the structure not be tested with BGT to get a meaningful benchmark for the deal? I cannot see what anyone except perhaps OE would have lost by simply asking that question of BGT and leaving it up to it whether to make a bid or not.
I can however imagine that Lazard understood, rightly or wrongly, that there was a preference for anyone except BGT to end up as the buyer. The Government made much of BGT’s preference for a break-up of the Bulb customer book. I can see two possible reasons for this – on the one hand, as the market leader, Centrica might have judged that the Government would not welcome a transaction that would increase BGT’s market dominance, and such a view would be consistent with the way BGT was treated in the process. On the other hand, you could argue that the Bulb customer book is not very high quality – the people who signed up with Bulb were price conscious active switchers who might very well switch away from BGT at the first opportunity. This could explain BGT’s reticence surrounding the purchase, however it does not explain the failure of Lazard to test the OE structure or something similar with BGT since, as noted above, there was much less certainty about BGT’s lack of interest than OE’s at the time the subsidies were first mooted.
I am not at all impressed that Lazard failed to give evidence since they could easily clear up the question of who said what to whom and when. While I understand that the court probably can’t draw conclusions from the absence of evidence from anyone at Lazard, I as a taxpayer certainly can! I wonder if they could be compelled to give evidence if a JR is ordered. The Court can certainly compel cross-examination but it’s unclear to me whether it can compel written evidence, but while it would certainly be interesting and useful for understanding the facts to hear what they have to say, it may not be actually relevant. The question is whether the Secretary of State took the required steps to ensure proper subsidy control, and what matters there is not so much what Lazard actually did but whether BEIS had in place the necessary procedures, and the absence of any reference to subsidy control in either Teneo’s or Lazard’s terms of reference for the sale process would suggest not.
Was there an unlawful subsidy, and might there be a judicial review of the Bulb sale?
At one point, Lord Justice Singh summed up the question pretty clearly:
“…there are possibly two different issues that the court will need to consider. One is a factual issue which may turn on the evidence, about timing, when various people did what or didn’t do something, but I think at the moment the question really is at a conceptual level: are the two [M&A and subsidy control] processes different? Are they legally different? Therefore, if you’re going through one process, you may well perfectly validly say, “We have run an open, non-discriminatory, competitive sales process”, and that’s good enough for performing the functions of the JEA, but [Mr Peretz] says, I think, that it’s not good enough for the Secretary of State’s role in making sure that there isn’t an unlawful subsidy at the end of the day.”
The Government’s case is that the Secretary of State relied on the expert advice of Teneo and by extension Lazard, but they are experts in insolvency and M&A, they are not experts in subsidy control. I do not think this was adequately addressed by Counsel, and the pleaded case that the OE deal was at risk if information was shared more widely does not in itself demonstrate that this was the best deal available at the time. It potentially suggests the opposite – if Lazard was under the impression OE would pull out if the structure was tested with other parties this implies a fear on the part of OE that other parties could make a more attractive offer, and the threat of losing the OE deal was a way for OE to maintain its position (I am not suggesting that OE actually made such a threat, but that this was Lazard’s interpretation of the situation, and that had Lazard continued the train of thought it might have concluded that this suggested a better offer was actually more likely than not).
The Government also said there was no evidence the Secretary of State failed to keep in mind subsidy control from the outset, and that because the sale process was “open, fair and transparent” he could rely on the conclusion that the OE deal represented the best deal available at the time. Of course, a lot depends on what “fair” means in legal terms, and while I as a lay person think the process did not appear to be fair, various authorities were cited by the Government to support its position that the process was sufficiently fair to be relied upon. I can’t comment on that – my sense is that it wasn’t the best deal that was available at the time and that the process wasn’t actually fair – it certainly wasn’t non-discriminatory, but from a legal perspective, how unfair does it need to be before it becomes an actual problem?
I was not persuaded that subsidy control actually was properly considered from the outset, but that could have been recovered later on. However, the claim that BEIS was “providing regular input and considering subsidy control issues in the background” does not ring true because there did not seem any evidence that this was explicit. It does not appear that at any time BEIS officials told the JEAs that the process needed to be fair, open, transparent and non-discriminatory because there might be a subsidy at the end of the day it was necessary to demonstrate that it was lawful. Nor does there appear to have been any guidance given to the JEAs as to what a lawful subsidy would look like so they could ensure their process was compliant, since this is an area outside the expertise of the JEAs and Lazard. Nor do the JEAs appear to have taken any advice about subsidy control. The Government’s case is that this “regular input” was sufficient, but the evidence of that input was just occasional questions about fairness, without any context. The JEAs might very well have thought the process was fair enough for an M&A transaction but would have no idea if it met the standards required for subsidy control.
I reject the argument of a failure in the banking market – banks wouldn’t lend to Bulb because it was a poor credit not because of a market failure. I think the market emergency argument is also pushing things, – the war in Ukraine might have made the sale of Bulb more difficult, but I tend to agree with the Claimants that the huge subsidy to OE wasn’t necessarily the correct solution to that difficulty (a smaller subsidy to another party would have the same effect).
I was similarly not persuaded by the delay arguments but this is an area where there can be a big gap between normal intuition and a proper legal interpretation. As a taxpayer, I’m not very pleased with the idea that poor decision making is OK as long as no-one objects fast enough. I do however agree that the claims could have been brought more promptly in the circumstances, and that the consequences of delay could be significant, so it may be that the Court gives weight to these factors.
In the end I think this will come down to discretion (unless the delay arguments win). Does the Secretary of State have broad discretion when it comes to decisions relating to subsidies and was his decision to award the subsidy rational based on the process that took place? On that point I have nothing to add because I have absolutely no idea how the Court will evaluate this.
I would like to see a judicial review of the decision since I do not believe the deal was the best one that could have been achieved and that the process was flawed. I think the JEAs did effectively pick the winner possibly due to overt or perceived bias against BGT from BEIS – biases within BEIS around the energy supply sector are very strong, so it rings true to me that BEIS was simply against BGT buying Bulb and wanted to avoid that outcome. In some ways I feel sorry for Octopus which I think behaved opportunistically but why should it not? If a JR is granted there is a risk that the transaction could be unwound, in which case I believe Octopus should be compensated – not for the opportunity cost of the lost deal, but for the actual costs incurred in trying to onboard and then offload the Bulb customers.
As for those Bulb customers themselves, they appear to have no agency here, but as all consumers are currently benefitting from subsidised tariffs, there is no reason for them to worry unless the situation is not resolved by July when it is expected that the market will begin to function as a market again. Hopefully the Court will reach its decision promptly.
Thank you for taking the time and trouble to provide such an excellent synopsis, concerning a genuinely important political and commercial issue.
Thanks, it was a bit of work, but I think the issues raised are interesting, and the implications if a JR were to be granted, significant.
Since the government/Ofgem are effectively in control of our entire energy market from energy production to retail pricing and given that Bulb’s customers were given no say why couldn’t the government/Ofgem simply have divided up Bulb’s customers between those companies who were prepared to take them?
“Bulb did not become insolvent because of any emergency. It became insolvent, as I indicated in opening, because it made a commercially bad decision not to hedge and to simply rely on the goodwill of the day-ahead market.”
I am dismayed that Ofgem appear to have allowed retail energy companies to either just gamble or worse, run their companies on the Savundra principle, but then Ofgem’s remit is now the delivery of Net Zero and not protecting the consumer.
Ofgem did a terrible job of ensuring the retail market was secure because it and the Government only valued swithing as the measure of an effective market. They ignored the lessons of 2008 just because that was in finance and not energy. This was an inexcusable regulatory failure.
The simplest solution would have been to appoint multiple SOLRs but they would have been entitled to recovery of the costs immediately. The next easiest option would have been to farm the customers out from the SAR with the customers being given to the new suppliers without debt, and then cost reovery dealt with separately. They could have done it in Spring 2022 for lower cost because the challenging unhedged Win21 would have passed. They might still have needed some form of support for Win22 hedging but if they had been clever they would have linked it to the Government’s upstream long gas position to net off the costs. They could also have passed legislation to pass the costs to taxpayers rather than bill payers.