Two weeks ago I summarised the hearings held in late February before the Administrative Court in the application for a judicial review of sale of Bulb Energy to Octopus Energy in a deal involving a subsidy worth up to £4.5 billion. I concluded that:

“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?”

Today the judgement was handed down, finding in favour of the Defendants and rejecting the application for a judicial review on the basis of delay but also would have rejected it on the merits:

  1. Delay: Judges Singh and Foxton determined that there was a delay in bringing the claims, and that these delays were beyond what was reasonable: “we have reached the conclusion that these applications for permission must be refused on grounds of delay alone under section 31(6)(a) of the Senior Courts Act 1981”;
  2. Public Law: despite refusing permission on the grounds of delay, the judges determined that the merits of the grounds on which judicial review was sought on Public Law grounds were not reasonably arguable;
  3. Subsidy Control: the judges would have granted permission on the Subsidy Control grounds under the TCA but would have rejected those grounds on their merits.

In my previous blog I expressed a view that the Claimants could have brought their claims more promptly and that the impact of a delay would be significant, so despite not being very happy with the concept that poor decision-making by government ministers is OK if no-one objects quickly enough – the amount of taxpayer money at stake being large – it is true that allowing the deal to proceed and then unwinding it would be very challenging. It would certainly be a sub-optimal way to proceed. While I am disappointed that the delay in bringing the claims means they cannot proceed, I appreciate that the courts need to set boundaries to avoid general chaos around legal proceedings. In this case though, the delay was around 2 weeks which doesn’t seem so bad as to make a review untenable.

The judges rejected the public law arguments. These were not very strongly presented in the pleadings – my understanding was that they were grounds that had become less important to the Claimants as time went on. Their rejection was likely anticipated by the Claimants as the process progressed.

On the subject of subsidy control, the judges agreed that this was an area amenable to judicial review but again found in favour of the Defendants in that the decision made by the Secretary of State was reasonable since he relied on expert advice from the JEAs and Lazard and had oversight of the process on the basis that:

  1. The M&A process was conducted with the involvement of expert advisers in the form of Lazard and the JEAs;
  2. Lazard advised the JEAs that “a competitive sales process has been run over the past four months”, summarised what that process had involved, compared the Octopus offer with other “precedent transactions” and recommended the Octopus transaction;
  3. The JEAs advised that, together with Lazard, they had run “a comprehensive M&A process and undertaken a “detailed analysis of the counterfactuals”; that the M&A process was “comprehensive”, and the JEAs expressed the expert assessment that the bid which emerged from that process was “the value that the market is placing on Bulb in the current sector environment”;
  4. BEIS had itself followed that process, receiving regular updates in the form of weekly and monthly report packs and periodic reports. Further, it had made it clear to the JEAs that the process needed to be fair and capable of withstanding scrutiny, making specific observations on aspects of the process as necessary. The Secretary of State “was in a position to, and did, form his own informed assessment of the extent to which he could rely upon the outcome of the exercise which had been conducted, and the expertise of those conducting it”;
  5. The JEAs’ recommendation did not rest solely on the outcome of the M&A process, but was supported by counterfactual analysis and benchmarking analysis which had been performed by Lazard;
  6. BEIS commissioned an independent high level analysis of the JEAs’ recommendations from E&Y, including as to “whether Teneo has followed an appropriate process”, on the Octopus offer, and on the counterfactual analysis performed by Teneo, which did not raise any issues of concern.

Therefore the judges were satisfied that the Secretary of State was “reasonably entitled to conclude that the M&A Process had been conducted as an “open, non-discriminatory and competitive” bidding process” and that he could treat the only bid which had emerged from the process as a fair reflection of the market value of Bulb’s business at the time.

I did find this part of the judgement disappointing. As I mentioned previously, and as the Claimants had argued in the hearing, the JEAs and Lazard were experts in M&A not in subsidy control, and there was no discussion suggesting that BEIS had been clear with the JEAs that its concerns around fairness related to subsidy control, something neither the JEAs nor Lazard were qualified to assess.

The judgement contains a much fuller account of the facts than was heard in court, which did present a different view of events. It appears that British Gas Trading (“BGT”) had failed to express interest in buying Bulb as a whole and repeatedly limited its interest to at most one third (500,000) of Bulb’s customers. However, it strikes me that BEIS had been so concerned with not “leading the market” by indicating the level of support it might offer, that it ended up with a sub-optimal deal. There was a point at which lack of transparency on the support available went from not leading the market to discouraging engagement.

The judges took at face value the JEA’s assertions that they wanted BGT in the deal, but if this were the case I still find it inexplicable that a more robust discussion was not had outlining the potential extent of government support available and seeking a revised bid. The judges considered that Lazard’s conclusion that BGT was not interested and therefore should not be offered the same re-engagement opportunities as Octopus was reasonable, but I’m not inclined to agree.

I certainly find it difficult to see how telling BGT there was an offer on the table for the purchase of the entire Bulb book that included government support, and that absent any other similar offers that deal would be done, would have been a bad thing. In other words making it clear that there was no reason to try to break up the business, so that option was now firmly off the table. This could have been done without putting the offer from Octopus at risk, although as I said previously, the fact the Octopus offer was considered to be at risk if the deal was “shopped around” implies a better deal could have been done.

I think it likely that BGT would have been in a position to make a better offer involving a lower subsidy had this been made clear, and that it would have done so, otherwise why bother objecting to the Octopus deal? I doubt that BGT engaged in this legal process in the hope that it could end up with just a third of the Bulb’s customers.  

Centrica and E.On have indicated they are considering their options, indicating they may appeal the decision. ScottishPower has apparently decided not to appeal the judgement. A spokesperson for British Gas owner Centrica said state bailouts for energy companies put a “burden” on UK taxpayers and are “avoidable”. Michael Lewis, the E.On CEO pointed to a need to scrutinise a decision that enabled a private company to grow its business using public money:

“A huge amount of public money has been used to subsidise this transaction and it’s absolutely correct that any use of public money to help a private company grow in this way should be thoroughly scrutinised. We will analyse the detail of today’s ruling and consider our next steps, including whether to appeal, but we remain concerned about the amount of taxpayers’ money that has been used to subsidise the deal. Only an open, fair and transparent process would have ensured this truly represented value for money for the public and we still cannot see how this was the case with only one bidder in the key stage of the negotiations,”
– Michael Lewis, Chief Executive of E.On UK

Should BGT and/or E.On decide to continue to dispute the transaction they could appeal today’s decision in the Court of Appeal. I would be surprised if E.On proceeded alone, I would imagine any appeal would involve BGT since it was the most likely party to submit a more attractive bid having already made a bid for Bulb earlier in the process. I don’t know how likely an appeal would be to succeed – while I disagree with the judgement as it relates to subsidy control the claim was primarily rejected on the grounds of delay, and it is difficult to argue that there wasn’t a delay. The question is whether the delay was such that the claim should fail, and here the delay was measured as around 2 weeks – is it a good outcome for taxpayers to allow a potentially poor decision to stand because of a 2-week delay in bringing a claim?

An argument could also be made in relation to fairness to Octopus, which is not responsible one way or another for the outcome of the situation. It has been working to integrate the Bulb customers, and would certainly suffer were the deal to be set aside. However, it would have known that the deal would be controversial from the outset and that legal challenges were a possibility.

It will be interesting to see what BGT and E.On decide to do next. I still believe the sale process was flawed and the optimal outcome for taxpayers was not achieved, however there clearly was a delay in bringing the claim, so while an appeal on the subsidy control arguments might have merit, it is unclear to what extent the ruling on delay is open to challenge. As a taxpayer I’m not happy that 2 weeks of delay is considered too much, but this is a matter of law and not the feelings of taxpayers, regardless of how many of them might agree with me. We will have to wait and see if this matter is now closed or if an appeal will be brought.

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