Public Accounts Committee 

Oral evidence: Bulb Energy, HC 1232

Thursday 25 May 2023

Ordered by the House of Commons to be published on 25 May 2023.

Watch the meeting 

Members present: Dame Meg Hillier (Chair); Olivia Blake; Ashley Dalton; Peter Grant; Sarah Olney; Nick Smith.

Gareth Davies, Comptroller & Auditor General, National Audit Office, Matthew Rees, Director, National Audit Office, Adrian Jenner, Director of Parliamentary Relations, and Marius Gallaher, Alternate Treasury Officer of Accounts, were in attendance.

Questions 1 - 122

Witnesses

I: Jonathan Brearley, Chief Executive, Ofgem; Stuart Jackson, Chief Financial Officer and Co-Founder, Octopus Energy; Matt Cowlishaw, Special Administrator, Teneo.

II: Jeremy Pocklington CB, Permanent Secretary, Department for Energy Security and Net Zero; Dan Osgood, Director, Energy Markets, Department for Energy Security and Net Zero; James Bowler CB, Permanent Secretary, HM Treasury; Phil Duffy, Director-General, Growth and Productivity, HM Treasury.

Report by the Comptroller and Auditor General

Investigation into Bulb Energy (HC 1202)

Examination of Witnesses

Witnesses: Jonathan Brearley, Stuart Jackson and Matt Cowlishaw.

Chair: Welcome to the Public Accounts Committee on Thursday 25 May 2023. Today, we are looking at the collapse of Bulb Energy. It collapsed in the summer of 2021 at a time when there was a real crisis in the energy market. The Government placed it in a special administration regime—the first time that that vehicle had been used. It is very interesting for us to look at how well that worked.

In June 2022, the National Audit Office reported that £0.9 billion had been spent by Government on running Bulb through the special administration regime in 2021-2022. In October 2022, a delayed sale followed—it was originally hoped to have been earlier in the summer—and Octopus Energy was identified as the acquirer of Bulb’s customers, business assets and liabilities, including customer credit balances.

Today, the Committee is going to question two panels of witnesses on the special administration sale process and transaction agreement, and on the amount of taxpayer money supporting the special administration regime and how the sale was handled. Where Government and taxpayers’ money hits a private company is an interesting area for us, and so we are very interested in teasing out what worked, what did not, and what lessons there are for the future.

I would like to welcome our first panel of witnesses. We have Stuart Jackson, co-founder and chief financial officer at Octopus Energy. Welcome to you. You took over Bulb. We have Jonathan Brearley, the chief executive of Ofgem. Jonathan was appointed as chief executive of Ofgem in February 2020, so he has been there throughout this process. Matt Cowlishaw is the senior managing director of Teneo, which is the special administrator appointed by the High Court to run this. One of the other things that we are interested in is the fees and how that was handled, and the issue of being a special administrator in this quite unique set of circumstances.

Before we go into the main session, though, I am going to ask Sarah Olney MP to ask some questions of Mr Brearley about the latest news.

Q1                Sarah Olney: We heard you talking on the radio this morning about the new energy price cap, which we understand to be £2,074 for an average annual bill.

Jonathan Brearley: That is right.

Q2                Sarah Olney: Can you first tell us a little bit more about that? Also, what are your longer-term expectations for the direction of travel for the energy price cap?

Jonathan Brearley: If you do not mind, I will just try to explain some of the numbers that sit behind it. Right now, the cost to an average household for their energy use is about £3,300. The price guarantee is paying part of our bills, so our bills are fixed at £2,500. What we have seen is a big drop in the cost of wholesale gas and electricity, which has resulted in prices now going down to £2,074, which is a drop of roughly £1,200 per year. That is enormous.

To give you a benchmark, that was the price of our bills two years ago, and that is being fed through both in terms of no longer meeting the threshold for Government support, but also seeing a direct reduction in our bills of around £420. That is a big change for customers. As I said this morning, I do need to emphasise that bills are still at £2,000 a year, which is substantially higher than we saw in 2021.

Q3                Sarah Olney: Can you just put a quick number on that for me? How much higher, either proportionately or actually?

Jonathan Brearley: Bills were roughly between £1,100 and £1,200 previously, so it is still £800 higher than that. It has not doubled but it is a significant amount above where they were. Many households will struggle to pay that, and so we are working across the sector—and, indeed, with Government—to consider what might need to be done in response to that.

In terms of the future, I know this is disappointing, but it is very hard to predict. Every projection that I have seen of how the gas market might evolve has turned out to be substantially wrong. If I were to look out across the market and we were to project today, we would expect prices to stay stable, but I really would not put much weight on that projection.

The good news is that the price has been coming down for some time. I would hope that that will continue, but it would take only one significant supply event or, indeed, a big change in international demand, like demand from China, to see that situation reverse.

Q4                Sarah Olney: Although this is welcome-ish news—it is still very high for households, but much lower than it was—we do not have much confidence at this stage that we are now in a stable situation or that prices might be on a downward trajectory that we can confidently predict.

Jonathan Brearley: It feels like we are in a different phase of the gas crisis. Last autumn, prices were 15 times what they used to be, and we and the sector were managing all sorts of impacts as a result. Things do seem better and more stable than that, but, as I say, predicting what may happen in the next six months is tough. As a best guess, it stays stable, but that is literally a guess.

Q5                Nick Smith: Mr Brearley, you said that average bills are still going to go up from £1,200 to £2,000 this year, and you were going to look at what might be done. What do you mean by “what might be done”? Could you give us some idea about what could be possible?

Jonathan Brearley: Just to clarify, bills are £2,500 right now, so they are going down to about £2,000. They were £1,200 two years ago, before the gas crisis. There is a range of options that we are looking at within the sector, such as companies providing more access to support for vulnerable customers, and making sure that, when customers struggle, they are treated fairly and put on things like affordable repayment plans. There is a decision for Ministers—and you have my colleagues coming soon—about what else might be done. What we will do is provide the technical support and advice for that.

Chair: That is not the end of that discussion, but, for today, we are going to move on now to our main discussion about the collapse of Bulb.

Q6                Sarah Olney: Back when we first started seeing some of this real disruption in the energy market, Ofgem talked about needing to change its approach to how it was regulating energy suppliers, moving away from a reactive model and towards assessing and testing companies in the market. You made an application to the Treasury to expand your resources. Can you give us an update on, first, how that work is progressing, as well as what the risks are and what your concerns are about how that is unfolding?

Jonathan Brearley: The approach that we have moved to in financial regulation is also now the approach that we are moving to in terms of service standards. That really is an organisation that was more focused on the edge cases and where things were going wrong, rather than looking systemically across the sector at what has happened.

Right now, we have very regular stress tests of every retail company in the market, so we know their financial situation. We have enhanced both the regulations and the guidance that sits beneath them around what companies should do, so I am much more confident about the risk management within the sector as a whole. In addition, we have a set of capital advocacy controls that I would describe as similar to what has happened in the banking sector—they are more light-touch than the banking sector—which are still being developed and implemented.

Overall, when I look at the sector today, it is in a much more resilient position than it was in mid-2021. We have a team who regularly monitor that, and we have responded already where we see companies going off track.

Q7                Sarah Olney: Presumably, that means that you have staff taking a quite different approach to regulating. Have you transitioned or retrained staff, or are you using different skills? How has that occurred within the organisation?

Jonathan Brearley: We have changed the skills within the team, which has meant bringing in new people. My Treasury colleagues are here, so I am very grateful for the funding that we got for that. You always end up in grumpy acceptance rather than delight with what Treasury gives you.

We have also changed the leadership. We brought in a director from the Bank of England who has done this with the banks and is leading that transition of financial resilience. He brings not only the technical ability to think about the technical side, but also how you create and implement this framework in a way that moves the sector from where it was to where it should be.

To be honest, it is not perfect, so there are companies that still need to improve their financial resilience. We want companies in general to hold more capital—not all of them, but on average—and that is a process that will take time to implement.

The sector is much more resilient than it was. Just to give you an idea, prices went up to between 180p and 200p per therm, per gas unit, at the end of 2021, from an original figure of between 20p and 40p, so it was a big rise. That led to many collapses. The price in the gas market for the same unit last August was £6, and we did not see the sorts of failures that we saw previously. Clearly, the sector is in a better position, although not a perfect position, so progress has been made.

Q8                Sarah Olney: You mentioned stress tests. Can you just expand on that a little? What sorts of stresses are you testing?

Jonathan Brearley: You lay out scenarios for companies in the sector, as my colleague here gets from us, and you ask for a financial assessment of how that company would manage under different pricing scenarios.

If I take you back to July of last year, we had seen the war in Ukraine. If you think through the range of different pricing scenarios that we might face, we ask the companies, just like the banks, “Are you resilient to these scenarios? If you are not, what needs to be done to change that?” We then process and look at that across the sector.

I would describe three categories. One category is where we enforce, and we have done that against one company. There are categories where you are working in partnership to change the situation, and companies that, right now, we are not worried about. In a sense, that is the framework that we apply on a regular basis. As we bring the new rules in, it will become more specific and clearer as to what we are asking of companies.

Q9                Sarah Olney: To what extent are your processes and your testing done from the point of view of the consumer and what the consumer experience will be if we come into another scenario like we did before with very high wholesale gas prices? To what extent are you viewing the supplier through the customer’s eyes?

Jonathan Brearley: In terms of the financial assessment, that is quite a technical matter. What customers will see, we hope, is fewer failures and, therefore, less disruption and the cost that was involved. We are beginning to apply the same approach to service standards, where we are looking across the sector at how we can more directly intervene to improve service standards across companies.

If I take you back to 2015, Ofgem’s thesis was, “Competition is going to drive all this stuff up. You are going to have people moving if they get bad service. You are going to have people moving if they get bad prices”. What we now accept, which is different, is that there is a role for the regulator not just in challenging very bad behaviour, but also in looking at standards across the board.

We came out with a new framework earlier this year that begins to do that, and I would describe those things as two halves of the same piece. We hope that that will drive improvement for customers. As an example, we had really poor responses on the phones in some areas, where people could not get through to their supplier. I said at what was a BEIS Select Committee at the time that, if you are a vulnerable customer and you cannot even get through to your supplier, you are not going to get the support that you need. Having run the compliance review and responded, we are seeing those sorts of things improve.

Q10            Sarah Olney: Are customer credit balances being ringfenced in all of the companies regulated by Ofgem?

Jonathan Brearley: They are not. We took a different approach. The renewables levies are being ringfenced, and the argument there is very simple. That is not money that a company should be making. They are really just collecting and passing that money back to Government as part of the scheme.

Sarah Olney: Like VAT or something.

Jonathan Brearley: Yes, exactly. We have said that companies should not be overly reliant on customer credit balances. We are setting a threshold and, if they go above it, ringfencing is one of the options that we have. The reason why we did not do that was that, when we looked at the overall cost of that measure, it was not offset by the resilience benefits that were incurred. We started out with a very firm position and have gone to a broader position to make sure that we allow the diversity that we need in the market.

This comes back to a particular trade-off that we are facing in the regulatory system as a whole. We absolutely want to make sure that we do not go back to 2021. Equally, we want to make sure that we have a diverse and competitive market. Once we come out of the gas crisis, we have a massive transition for the sector to make. Whereas the first part in my mind has been all behind the wires and about wind turbines etc, this part is going to be about all of us changing our behaviour in terms of the way in which we use the energy system. That is going to require new and innovative companies coming forward with different tariffs that are going to make that possible. You risk that if you have a very small, concentrated group because you have overregulated financially.

Q11            Sarah Olney: You talked about vulnerable customers. When we looked at the energy market a few months ago, we were quite concerned to hear about the lack of take-up of Government support that was available by those on prepayment meters. From memory, £400 should have just been available, but they had to go and ask for it. We were seeing significant numbers of these most vulnerable customers not getting the support that they were due. Clearly, these are the customers who needed it most. Do you have an update on that take-up and how vulnerable customers have been supported?

Jonathan Brearley: Just over 80% are now taking up those vouchers. We see this in other schemes. The group that we are worried about are customers on a prepayment meter that is still run traditionally. We at Ofgem say all the time that the best thing for a customer on a prepayment meter is to move to a smart meter, because these things are done automatically by the company. Indeed, the monitoring of smart meters and the ability to support someone who is disconnecting because they cannot afford to pay their bills is just much higher.

Those people on traditional meters are sent a voucher through the post. There are just a group of people who do not trust energy companies or a lot of institutions like ourselves, I am afraid, and, therefore, they do not open the mail, they do not find the voucher and they do not cash it in. With the Department and with the industry, we are doing as much as we possibly can to publicise the fact that these vouchers are available. There is something that is called “Help with your energy bills” on the Government website, where you can go to if you have lost that voucher and need to find another one. There is a lot that we are doing to make sure that take-up increases.

Q12            Chair: If you have lost a voucher because you did not open the post, you are not the sort of person who is going to hop on the Government website to find it.

Jonathan Brearley: I totally accept that. It is a real challenge, and it is not just in this scheme; it is in others that we run as well. We are doing everything that we can, but it is hard to get greater take-up.

Q13            Sarah Olney: Can I just press you on that? When you say “everything that we can”, what are you doing specifically?

Jonathan Brearley: We are working very closely with the companies. We have regulated the entire scheme, so we make sure that they are complying with the regulations. The companies are proactively contacting those customers to make sure that they take it up, and Government are running a publicity campaign. We are working very closely with consumer groups that, frankly, have much better access and a much better relationship with the kinds of customers who struggle with this.

Q14            Sarah Olney: Do you have any sense of the regions of the country in which the take-up has been lower? I heard in a previous session with the Minister that it was London, but I do not know if you have a sense of that.

Jonathan Brearley: That is not information that I have here, but I am happy to come back to the Committee.

Q15            Sarah Olney: That is fine. Around Christmas-time, we were seeing some quite distressing footage of forcible entry to homes of vulnerable customers in order to have prepayment meters fitted. Can you give us an update on that practice? Is that still happening? Is that something that you are proactively managing?

Jonathan Brearley: That practice has been suspended by the industry at Ofgem’s request. Equally, the courts have also said that they will not process warrants until we all feel that this practice is in a different place. We have also developed and implemented a voluntary code of practice across the industry, which lays out precisely what the companies need to do in different circumstances.

The way that I would articulate that is that they need to be very proactive to understand the vulnerabilities of customers. They need to be able to respond to that. For anybody who has any kind of real risk, they need to make sure that that customer has continuity of supply. That is a voluntary code of practice right now, but, by winter, that will be in regulations and guidance, so it will be something that we will be monitoring and enforcing against.

The last thing that I would say is that, until we are confident that companies are able to restart under the code of practice and to make the changes that they need to make, this practice will not restart.

Q16            Sarah Olney: That is really good to hear. I just want to go back quickly to something that you said earlier, when we were talking about ringfencing credit balances and why you thought that that was more regulation than required, partly because you do not want to deter new entrants to the market. Are you seeing new entrants to the market? Are you expecting there to be new entrants?

Jonathan Brearley: We are absolutely expecting there to be new entrants. It is worth describing the situation in which we find ourselves now. The other feature of the market that is part of the price cap announcement today is that, in a sense, we do believe that it is possible, although not certain, that, in the second half of this year, we begin to see new fixed tariffs or different kinds of deals re-enter the market. To be honest, most customers who can be are on the price cap tariff today, but, in the second half of the year, we may well see companies competing once more.

If you have companies that are able to offer fixed tariffs, that provides an opportunity for a new entrant to come in, and we are seeing licence applications come into Ofgem. Subject to the financial part of that, of course, in order to make sure that they are robust enough to manage, we would welcome that.

Q17            Sarah Olney: Essentially, what you are saying is that, when you have this time of uncertainty and turbulence, this is not a time for new entrants, but, when stability and perhaps a bit of certainty has returned, you would expect them.

Jonathan Brearley: I think so. It all depends on an investor’s view on the risks that they want to take. Right now, given the last few months and the turbulence, we have not seen new entrants coming into the market.

Q18            Sarah Olney: Moving on to the arrangements that you put in place when companies started to fail as a result of the increased wholesale price, have you completed a review of the impact of both the supplier of last resort and the special administration regime arrangements? What conclusions have you reached?

Jonathan Brearley: We keep the supplier of last resort in particular under regular review. I would highlight two lessons for us. The first is really making sure that the process of transfer is better controlled right from the start. One of the issues that we saw was customers having a delay moving between one company and another. The resolution of any billing or financial issues, and the resolution of any service concerns, just become more difficult when you are in that transition, so we are going to be establishing clearer milestones up front with the companies to make sure that that happens more smoothly.

We are also working with the insolvency agency to make sure that the residual companies—the administrated company that is left behind, which has to play a role in this—is better set up and better prepared to support that transition.

The third issue that I would raise is that we remain concerned that the residual company assets do not offset the liabilities that have been created through the SoLR process, and we would like to find some way in which we can say to a company, “If you have gone bust but you have, for example, residual hedges that have value, those should be transferred or paid to offset the cost to customers of that failure”. If the cost is zero, that is fine, but, if it is not, that should offset that. That is something that is beyond our power to do, but we have been engaging with Government on that issue.

Q19            Chair: With Government?

Jonathan Brearley: Yes.

Q20            Chair: Would that require legislation?

Jonathan Brearley: We think that it will require legislation. We are looking at regulatory alternatives, just to emphasise, but it looks hard from our perspective.

Q21            Sarah Olney: Can you talk a bit more about Ofgem’s role during the setting up of the special administration regime? Has your review thrown up any questions about whether the level of Ofgem’s intervention in that process was appropriate, too much or too little? Could it have been done differently?

Jonathan Brearley: In terms of how I would describe it, there are two parts to this. The first part is, when you identify a company that is struggling in the way that Bulb was, assessing and making the case for a special administration regime to be used. There are always trade-offs here and judgments that need to be made. There were two judgments that made us come to Government and make the recommendation.

The first was, in a sense, the value-for-money question. All of those residual hedges remained in the company. If you put it into special administration, those are preserved. Probably most importantly, transferring that number of customers through the SoLR process had a great deal of risk. We are talking about November and, for example, issues around customers on prepayment meters losing power did not feel like a risk that was fair to take.

I feel comfortable about the way we made the case. After the special administration happens, we step back and become a regulator. I am not going to pretend that it is not more complex than regulating other companies, because you are regulating a company funded by Government, but I would describe our role there as advisory and regulatory.

The biggest learning for me from the special administration regime, which we are working on now in advance, is on the structure of the company. One of the complexities with Bulb was the fact that you had a holdco with some of the operations in it, and you had a separate ringfenced regulatory company. That created a lot of complexities around the special administration regime, and we are working across the industry to say to retailers, “You need to either own or control all of your assets”. That is for other reasons as well as this, but, in this case, it would make the special administration much simpler.

Q22            Sarah Olney: Of the recommendations that you made to Government about moving forward with the special administration regime, did they adopt all of them or was it only in part? Did things progress as you had advised?

Jonathan Brearley: It is a fairly binary decision. Once you put a special administration in place, you go to court and you get permission, and that really moves on to a role that is taken up by Teneo. Then you have the transaction, which is really under Government’s control. It was a position that was agreed to by Ministers.

Q23            Sarah Olney: I am going to move on to Mr Cowlishaw now; you have had a lot of my time, Mr Brearley. You are here from Teneo. You were appointed as the joint energy administrators for Bulb. Can I quickly ask you first of all about the amount that was spent on professional advisers—yourself and others—during the sale process? Do you think that the Government could or should have done more, or do you think that that was appropriate?

Matt Cowlishaw: As special administrators, we have two very clear objectives that are set out in the legislation. One is continuity of supply at the least reasonably practicable cost for customers, and the second is to exit from the special administration through a rescue or a sale. It is set out in legislation that we should run an M&A process, effectively, and try to achieve that second objective.

Clearly, the role of the special administrator—effectively, catching a very large business that has entered into insolvency—comes with significant challenges through employees keeping the suppliers together, communicating with customers and getting the wholesale arrangements in place. That requires a specialist team to go in and do that.

In relation to the M&A sale, we also appointed Lazard to support the sale process. The sale process was very deliberately designed to go out as wide as possible and to provide flexibility, which, ultimately, ended in the transaction with Octopus.

To address your specific question in terms of the total costs, the costs at the time of the NAO Report for the special administrators, for the special administrators’ legal advisers and for Lazard totalled £49.9 million at the end of January. In terms of thinking about what needs to be completed before the final exit of the special administration, we expect those costs to increase to around £60 million, which is the number that is built into our overall estimated outcome statement, which is addressed in the National Audit Office Report.

Q24            Chair: I just wanted to come to Octopus for a moment. Apologies, but one of our colleagues is in the Chamber and is joining us in a moment, so we will come back to some of the other issues.

Nobody was easily able to take this over, hence it went into special administration, and yet Octopus then did. Mr Jackson, do you want to talk through what the thinking was within Octopus before taking this on? There is a chart in the NAO Report, which I will find in a moment, explaining why many companies did not want to enter it, so I would be interested to know why you did.

Stuart Jackson: The first thing to say is that we were engaged in the transaction for about year. It was a difficult transaction to do, because the book was unhedged, as we know. When it became clear that the process was open and that the administrators were open to suggestions about ways in which we could construct a transaction that enabled us to take the business out of administration and put an end to the uncapped exposure that the Government had to the wholesale market, we worked extremely hard and very quickly to construct a deal that worked and delivered the outcomes that were needed.

As a consequence of that, we have, in the space of less than six months, been able to execute a very smooth acquisition and migration of customers. Bulb is now 97% migrated onto Octopus platforms. 94% of staff who worked for Bulb have come across into Octopus. Customer experience measures have improved slightly, although Bulb was already in a good place. We view it as a very successful transaction.

Q25            Chair: Do you mean improved from when Bulb was in a good place or from when it was in administration and worried about the future?

Stuart Jackson: Even in administration, the customer experience was good.

Q26            Chair: Teneo did a good job there then. It is a big challenge to take on, and that is why it went into special administration. Were you leant on to take it on?

Stuart Jackson: No, certainly not. We worked very hard to create a deal that could work. It is well documented that, as a result of the judicial review process, the judges in the High Court hearing commented on how an unusual amount of information about the transaction had come into the court. Through that, we learned that Octopus was faster and more creative in pulling together a deal, but the judges were very clear that there was no special deal for Octopus.

The deal was open to everybody. We were non-exclusive until the end and we executed the transaction. Everybody had equal opportunity to come in. The nature of the deal was well foreshadowed in the press, as it turned out, and still nobody came back in. It was a very fair contest, and that has been corroborated by the High Court.

Q27            Chair: Figure 9 on page 37 of the report highlights understandable reasons why other organisations chose not to go into it—volatile prices, poor liquidity, regulatory uncertainty, and strategically not the right time. Some of those must have applied to Octopus’s thinking when you put together your bid. What were the biggest barriers to you that made you pause for thought before you did finally put the bid in?

Stuart Jackson: Unequivocally, those risks applied to us as well. That is why we constructed a deal that limited our exposure to the unhedged position that the business was in. Although we started hedging immediately post completion, it takes time to put a business of that scale into good order. We achieved that by 1 April, by the time the new price cap period started, and, in the interim, we were still going to market on a day-ahead basis to acquire the energy for Bulb’s customers.

The way that we constructed the deal limited our exposure to the market to the cost of energy baked into the price cap. That is what we paid. That meant that we limited our risk but gave the Government any upside, were prices to fall below the price cap wholesale cost. It also meant, crucially, that there was no disadvantage to other suppliers in the market from us getting cheaper energy, because we were just paying the same as everybody, if you were hedging following the price cap methodology. We considered it to be a very fair and very effective deal and, as a result, that meant that we could get Bulb out of special administration quickly.

Q28            Chair: I know that Mr Grant is going to talk a bit about backwardation and hedging, so we may follow up with you, Mr Brearley, when he has done that. Having gone through what you have gone through, Mr Jackson, what would be your message to Government about how it went? Is there anything that the Government should do differently to make it easier for a company to take over and, indeed, better for the taxpayer? Would you like to comment on that?

Stuart Jackson: The overriding sense is that special administration was important. In the thick of the crisis, when Bulb went bust, it would have been inconceivable for any commercial organisation to pick it up through the normal supplier of last resort process. Our view is that it has been a success. Bulb exited the process, which is critical. The Government’s exposure was limited and they have come through this with a profit of roughly £1.2 billion. Customers had continuity of supply. The staff in Bulb have been retained, and the operations were continuous throughout. In our view, it has been a very successful process and should continue.

Chair: It is helpful to get that on the record. Welcome to Mr Peter Grant MP, who has come hotfoot from the House of Commons Chamber.

Q29            Peter Grant: Can I apologise to witnesses for missing the start of the session? As the Chair explained, I had to be in the Chamber for questions earlier.

Mr Jackson, my understanding of the arrangement that you had was that you had to purchase energy on the day-ahead market. What was the rest of the industry doing at that time? Were they purchasing their energy on the same basis?

Stuart Jackson: I cannot speak for what other suppliers were doing, but a prudently managed business would be building up an unacceptable exposure, in our view, if they did not follow the price cap hedging methodology for customers on the standard variable tariff, which, at that time, most were and, at Bulb, all customers were, but that takes time.

The price cap, as you probably know, has an observation window three or four months before the start of the price cap period, during which an average cost of energy is built up, based on observations every day. We completed the transaction on 20 December, which was slightly after the start of that observation window, so we had a couple of weeks to catch up. After that, we then went to market to build up a hedge for the price cap period beginning on 1 April as normal.

That meant that, because there had been no hedging to cover the price cap period starting in January through to the end of March, we really had no option but to go to market day ahead. To try to fill a hedge in one go would have been a very big trade into the market, probably would not have been possible and would have been very expensive. That is why we went day ahead until 1 April.

Q30            Peter Grant: Were there other ways that you could have traded that would have either reduced the price to customers or reduced the potential exposure to market volatility? Did the arrangements that you had achieve the best balance between taking advantage of lower prices, if and when they happened, without being exposed to higher prices, if they happened?

Stuart Jackson: We worked very hard to come up with a structure that delivered fair outcomes. As it turned out, if we had been just buying fuel day-ahead and reflecting that in prices for customers, the Government would not have made the £1.2 billion profit that they have on this deal. We would probably also have been a destabilising force in the market, had we done that. We feel that it was an extremely fair and very well-considered process, which meant that value was delivered back to the Government and the taxpayer.

Q31            Peter Grant: Mr Cowlishaw, if the hedging policy had been different, is it likely that other firms would have been interested in going for that bid, or would you still have had only one firm that was seriously interested?

Matt Cowlishaw: The population of interested parties all knew about the unhedged position of Bulb and the fact that that could be resolved as part of the transaction. In fact, as Mr Jackson has alluded to, as part of the recent judicial review that was undertaken, the judgment of which was published at the end of March, the fact pattern of the sales process was gone through in great detail. If the Committee does not have a copy, we can certainly make sure that it gets that. We are confident that we got the best outcome in the circumstances.

Q32            Peter Grant: Coming back to one of the comments that you made, Mr Jackson, about the Government having made a profit, how much of that profit depends on you being able to pay back the money that you owe them when it becomes due?

Stuart Jackson: I think of them as different things. The Government have made a profit and will then get the cash for that as we pay back the advance, which we fully expect to do.

Q33            Chair: What are the risks? What could stop you paying back that advance?

Stuart Jackson: The deal was structured in a way that means that Bulb is insolvency-remote from the rest of the Octopus group. Any profit or cash that is generated in Bulb will sit inside Bulb. We designed the deal in a way that means that it is funded and stress tested hard through a high range of volatile outcomes. We expect the business to be solvent and, therefore, are not anticipating any issues in returning cash to Government.

Q34            Chair: So you stress tested some catastrophic situation in Ukraine or Russia, for example.

Stuart Jackson: Even prior to this, we have always run stretching stress tests for the business. We executed even tougher stress tests for Bulb to ensure that it had sufficient liquidity.

Q35            Peter Grant: The last year for which you have published accounts was the financial year before all of this happened. What was the company’s financial performance in that year? Did you make a profit or a loss?

Stuart Jackson: Overall, the business made a loss, but £150 million of that was, effectively, as a result of investments that we made to protect our customers from rising energy prices. When you adjust for that, there would have been a modest underlying profit.

Octopus Energy Group is very well funded. We have taken £1.1 billion worth of investment over the last three years. To put that into context, that is 20 times more than Bulb took. We are well funded. Our shareholders are very large organisations and pension funds. Some of the largest investors in the world are there. We have, among our shareholders, large energy companies with a tremendous amount of expertise in the global energy market. We are a well-backed, prudently managed, well-hedged business.

Q36            Peter Grant: You previously said that any profits within the Bulb purchase are ringfenced. Are there any losses to do with that ringfenced as well?

Stuart Jackson: If there are losses and Bulb needs funding, it is for Octopus Energy Group to fund it. The profit that accrues into Bulb stays in the business until the advance from the Government is repaid, and is subject to profit share back to the Government.

Q37            Peter Grant: The profit on the Bulb acquisition part of your business is ringfenced, and I appreciate that, certainly in your last published accounts, you took advantage of the permitted exemption that you did not publish details of transactions with other firms within the group, which you are perfectly entitled to do. Did the Department or Ofgem ask for confidential disclosure of any of those dealings as part of the deal?

Stuart Jackson: We now always supply a very considerable amount of information as part of Ofgem’s stress testing. It is a very detailed and granular level of information as part of the stress testing process that Mr Brearley outlined. They put in a considerable amount of effort into understanding Octopus Energy and its suitability to take over Bulb as part of the process, and that was part of the recommendation.

Q38            Peter Grant: In last year’s published accounts, the bottom line in the balance sheet was net liabilities of just short of £250 million. I know that your most recent accounts have not been published and you cannot divulge too much about them, but is there anything about the balance sheet’s bottom line in the current financial year accounts that we should be concerned about?

Stuart Jackson: No, not at all. It is not uncommon for a fast-growth business to invest heavily, naturally, as part of funding that growth. That is what we have done. We have raised £1.1 billion into group. During the last year, Octopus Energy Group has provided in excess of £500 million of liquidity to Octopus Energy Limited, and we held considerable dry powder in reserve. I do not see that as any issue at all.

Q39            Peter Grant: I have a similar question for you, Mr Brearley. Are you satisfied that all of the information that you needed to get from Octopus was made available to you on an open-book basis before the deal was confirmed?

Jonathan Brearley: Yes, absolutely. We looked at the financial resilience implications. Stuart Jackson has laid out the arrangements of being insolvency-remote. That was important to us to make sure that we had confidence in what was happening. In terms of consumer impact, we looked at whether the company can cope operationally with the change. We had some questions about that. That is something that we are monitoring and continue to monitor, but we are satisfied with that. We then looked at the sorts of things that you would expect us to look at, such as the fit and proper person test and how the combined entity will manage industry obligations like smart meter rollout etc.

To be frank, yes, there were some risks there, but our perspective was that there would be risks with almost any transaction within the market. What we do not do, and did not do, in our assessment is to ask whether this was the best possible deal. That is a matter for the Government and for the tendering process itself.

Q40            Peter Grant: I appreciate that you cannot divulge anything that has been given to you in confidence, but can you assure the Committee that, from your ongoing monitoring of the firm’s financial performance, you are satisfied that they will be in a position to repay all the debts that are due to the Government on time?

Jonathan Brearley: Like many companies, Octopus is on a journey, and we are on that journey together to a more financially resilient position. I do not think that I can offer any full guarantee of what might happen there, but we are satisfied with what we are seeing.

Q41            Peter Grant: If you cannot give a 100% guarantee, what percentage guarantee could you give? Is it 50/50?

Jonathan Brearley: We are more than 50/50. You have to understand that we have been in a market that has been through a remarkable change in the last two years. In those conditions, many companies in the sector would still be in a position where we would be closely monitoring them, but what we are saying is that we have confidence in this.

Q42            Peter Grant: Forgive me if you have already been asked this question, but does the whole Bulb collapse give strength to the argument that the entire way in which the energy market is operating in the United Kingdom has failed? We may have managed to prevent the worst of the damage, but the market, as it has been operating, was not working, was it?

Jonathan Brearley: You have to understand the enormous stress that the market has been under. Last August, as I mentioned before, energy and gas prices last August were 15 times what they are normally, and so, in a sense, every market in Europe has been under stress. We have seen nationalisations of EDF in France. We have seen interventions by Germany both in nationalised companies and to pay for gas to make sure that the security of supply was there. Every market has been under stress.

What I would say, and what we said clearly to this Committee in the previous report, is that what should have been there but was not there was financial regulation of the companies. What I am really pleased to say today is that we have a system, although still developing, that assures us that the retail sector is in a much stronger place.

Q43            Chair: Before I pass over to Ms Blake, I just wanted to touch on the issue of managing public money. Mr Brearley, you gave clear advice to the then Department for Business and Teneo that they should adopt at least a partial hedging position to manage risk, both on price and volume. Because of managing public money constraints, which we will talk to our Treasury witnesses about, they approached it using the day-ahead purchase model. Do you want to just unpack that a bit for us in terms of why you made that recommendation? Do you think that Managing Public Money is fit for purpose in these very particular types of circumstances?

Jonathan Brearley: I ought to explain how we look at this. Mr Grant asked a question about what we would expect a normal, prudently run company in the market to do. More than advising, we now require companies to manage their risk, which, in a sense, means hedging against the price cap to a limited degree. We would expect anybody in the market to do that.

Chair: I am aware that people who are not experts in this might be following this. We keep talking about hedging, and you might be one of the best people to explain, in a sentence, what that means.

Jonathan Brearley: Very simply, the way that we calculate the price cap is that we look at the market for power. You can buy power ahead, so in three months’ time. Let us say that you are buying power for August right now. There is a price there. That price funds the formula for the price cap, which is ultimately, for example, why changes take some time to come through.

What we say to the companies is that, given that that is the formula, they should be hedging, within a margin of judgment, against that evolving price. The risk and the problem was that many companies were buying quite differently to that. Some of them were just buying in the very short term. That is fine when prices are flat or go down, but, when they go up, that is when you face the financial problems that we saw at the end of 2021.

From an energy market perspective, we would encourage every company to hedge. What we cannot do, though, is make the financial trade-off that the Treasury will make around public money itself. If this was a one bet in the energy system, I would say absolutely clearly that you should hedge. When you are pooling risks from defence and other areas, and other billion-pound contracts, that is a judgment that Treasury needs to make and not one that I can make.

Chair: So you were really giving your advice looking purely at the commercial side.

Jonathan Brearley: As a regulator.

Chair: Properly, as you should do, as a regulator and official.

Stuart Jackson: There is a really important point here. The vast majority of the cost of the failures that has been socialised into the industry and paid for by customers is as a result of firms not hedging. The cost has been the cost of getting back into the market to put a business into good order. It is a really important point.

Q44            Olivia Blake: Thank you to the witnesses for appearing today. I have a question for Mr Cowlishaw around the latest estimate of the overall gross costs to the taxpayer for the process surrounding Bulb, whether all the funding will be fully recovered and, if so, by when.

Matt Cowlishaw: Our estimate, as set out by the National Audit Office, was an overall shortfall to Government of £246 million. That is something that is driven by what we, as insolvency practitioners, called an estimated outcome statement, which takes everything that has happened to date. We also then put estimates on what we think is going to happen right to the end of the job to get to the overall net outcome. As we sit here today, that estimate is broadly in line with, or possibly a little bit lower than, the outcome to the Government.

The critical thing is the repayment, which is circa £2.8 billion, from the ringfenced entity that sits in Octopus. The repayment, as we look at the markets to date, should be made by September 2024. In the documentation, there are deferral triggers based on the position of the wholesale markets at a later point in time. However, if you look at the markets today, it would be September 2024.

Q45            Olivia Blake: That is very helpful. If Octopus pays back in full the amount owed, how much will be left for billpayers to absorb?

Matt Cowlishaw: The shortfall under all the funding agreements that the Bulb tsar has with Government would be that £246 million. It is probably then a question for Government in terms of how they deal with that £246 million and whether it sits with taxpayers or with billpayers.

Q46            Olivia Blake: Mr Jackson, how and when do you expect Octopus to repay the amounts owed to the taxpayer? Will you meet that timeline?

Stuart Jackson: We are expecting to repay it by September 2024, or by September 2025 if the markets are higher and beyond the trigger that Mr Cowlishaw mentioned.

It is probably also worth noting that the £240 million expected total cost of the failure amounts to 75p per billpayer per month, which compares against the circa £100 per month per household that has resulted from the cost of the crisis. It is a comparatively small amount and compares really well with the cost per customer of all the other failures that have gone through the supplier of last resort process. It is a fraction of that cost.

Q47            Olivia Blake: For how many months would that 75p be there?

Stuart Jackson: It is calculated over 12 months. It is just £240 million divided by the number of households over a year.

Q48            Chair: It is the first time that this approach has been used. It would be very helpful to hear from you about what worked. We have covered it, but is there anything that you wanted to add about what went well with it and what could be tweaked or radically changed? This is something that we hope Government do not need to use again, but it needs to be there as a last resort. Mr Cowlishaw, you deal with a lot of companies going into trouble. How did this compare and what lessons could Government learn from this?

Matt Cowlishaw: There are probably two main lessons. The first is the planning. That is the planning even before you get to the appointment in terms of how you can effectively take control and stabilise what, inevitably, could be a very large business that has failed.

Q49            Chair: Is it planning by the business or by the regulator?

Matt Cowlishaw: Planning by all those who would be involved with the special administration. From my perspective, it would be doing some very granular operational planning, understanding the risks and having a view on how to mitigate those risks on day one of the appointment. That would involve engaging with the regulator and Government Departments as well as the business itself.

Q50            Chair: As an administrator, you get quick access to that data.

Matt Cowlishaw: Yes, we can do.

Q51            Chair: You did in this case as well.

Matt Cowlishaw: Yes. There is always an element of management understanding that that is the direction of travel, but, in this case, there was adequate time to plan with management as well.

The second point is the collaboration piece and having all the relevant Government Departments, as well as the regulator, up to date with all the implementation of the strategy of the case, such that decisions can be made and views taken quickly.

Q52            Chair: From your point of view, on a scale of 1 to 10, if 1 was a disaster and 10 was totally successful, what would you say it was?

Matt Cowlishaw: We are up at 9.

Jonathan Brearley: I need to say first that I am a civil servant, so I never get to 9 on anything.

Chair: It is very good that you say that to the Public Accounts Committee.

Jonathan Brearley: I just want to emphasise the first point about planning and collaboration, which goes back quite a long time. When the Covid crisis started, we war-gamed the special administration regime. We war-gamed against a company of comparable size. I would argue that that gave us the pre-preparation, such as having your cool-off contracts in place with administrators, but it also allowed us to think in more open time around how you think about this issue.

We had a notional limit of around a million customers, for example, where you move from a regime that the industry can sort out to one where you need a special administrator. The collaboration on all sides, which is inevitably a bumpy process, is something that worked really well.

The big lesson for me is this point that I have made already about corporate structures. It is about making sure that the special administrator has access to everything that they need to be able to make sure that the company can be run and financially managed properly, and that is something that we are putting in through regulations.

Q53            Chair: In terms of legal changes, is there anything that you need from Government and Parliament in terms of changing the law or doing anything better?

Jonathan Brearley: On the special administration regime, no. The point that I have made about residual assets within the SoLR regime is something that we think is important.

Stuart Jackson: There are two things that are worth noting. The comment from Mr Brearley around residual assets is a complex one and can interrupt normal creditor relationships if they are not able to access assets under a normal administration process. That can have a material consequence on the well-functioning of the supply market.

The second thing is with respect to Bulb specifically, which is that the delay to completion caused by the legal action from some of our competitors resulted in a larger requirement for liquidity injection into the Bulb business, and that inevitably increases cost. It was very clear from the court hearing that those applications were described as disingenuous.

Q54            Chair: Court proceedings are still live on this, but the point is that there is a whole legal system and a competitive market; people are at liberty to use that. We will park that there for now, because that will come out in court in due course. Mr Brearley, I wondered whether you wanted to add anything about the issue.

Jonathan Brearley: I might just chip in to explain the situation that we do not think is acceptable from a customer’s perspective. It is really around the SoLR regime, not the SAR. There are companies that went bust, but, when the administrators came in afterwards, they discovered that they had bought energy in the market forward. They bought it at £1 and it is now worth £4. That is quite a significant asset. If you are costing customers hundreds of millions of pounds, that asset should offset that cost. I accept that there are complexities to work through in the relationship with creditors, but it is important that we do.

Q55            Chair: If you are a business, you have one set of metrics, an approach and a modus operandi that you have to work on, but Mr Brearley’s job is to be the bridge between the business interests and, of course, the consumer and taxpayer who end up suffering if something goes wrong. This is the challenge, Mr Jackson, of having a regulator. You may disagree, but we think that it is very important to have a regulator. We may sometimes disagree with a regulator, but it is important we have that regime.

Stuart Jackson: That is understood, but, equally, suppliers need to be able to ensure that they have funding options ready.

Chair: We are in danger of getting into the territory of our sister Committee here. We are not a policy Committee. We are here just to challenge and check whether Government are doing their job as they should be. It has been very helpful to hear from you directly about how this went. It was an extraordinary situation. In the end, it has got to a relatively good position, but we will be challenging the Treasury and others on this in a moment.

We are now going to come to the end of our first panel. We will adjourn briefly. You are very welcome to stay and listen; just take a seat at the back. The transcript of this session will be published on our website, uncorrected, in the next couple of days, or maybe as late as Tuesday, because of the bank holiday. I am not sure, but our colleagues at Hansard are very helpful in that respect. If you have any corrections, you need to pass those through. We will be publishing a report on this before the summer recess.

Examination of Witnesses

Witnesses: Jeremy Pocklington, Dan Osgood, James Bowler and Phil Duffy.

Q56            Chair: Welcome back to the Public Accounts Committee on Thursday 25 May. We are considering what happened with the Bulb Energy collapse and the special administration regime. As part of our second panel, we want to discuss how the Government handled it from their end.

We have, from the Department for Energy Security and Net Zero, Jeremy Pocklington, the Permanent Secretary, and Dan Osgood, who is the director of energy markets, so very involved in this issue. From HM Treasury, we have James Bowler, the Permanent Secretary, and we welcome back Phil Duffy, the director-general for growth and productivity.

Just to be clear, Mr Pocklington was in the predecessor Department as a director-general at some of the early stages of preparation for this regime, but not for the actual issue of Bulb. Mr Osgood was there during the whole time. Mr Bowler was not at the Treasury during all of this time for the Bulb situation, but Mr Duffy was. I hope that is clear to people.

Before we go into the main session, I just wanted to turn to Sarah Olney MP to ask some questions about the energy price cap.

Q57            Sarah Olney: Mr Pocklington, we had a very good update from Mr Brearley in the previous session about the energy price cap and the new level. One of the things he highlighted is that it is still a significant increase for households compared to where we were about two years ago. It is as much as £800 extra a year on an average bill.

The current policy has been that, when the energy price cap goes above £2,500, that is when help for households kicks in, but we know that, since the new price cap is going to be £2,074, that policy will not apply. What else might your Department be able to do for those households for whom this new energy price cap is still going to represent a significant outlay?

Jeremy Pocklington: I thought Mr Brearley summarised the issue well. It is to an extent welcome news that the price cap has come down, now below the level of the price guarantee, saving households well over £400 on an annualised basis.

The Government have of course provided very large amounts of support. We have been providing support roughly equivalent to half of people’s household bills over the course of the winter. Looking forward, the energy price guarantee remains as a backstop if prices spike upwards again, until the end of March 2024, but we hope that will not actually apply. That is at the higher level of the £3,000, which you will recall was originally intended when the £2,500 cap was brought in.

Q58            Sarah Olney: Jut to confirm, if the price cap goes above £3,000, that is when the guarantee will kick in.

Jeremy Pocklington: Yes, exactly. That remains in place until the end of March 2024. I would highlight the wider support that has been offered to vulnerable people to deal with the additional pressures from the cost of living. The £900 payment for those on means-tested benefits will remain, as will the additional payments for those in pensioner households on eligible disability benefits. It is important to look at that in the round.

Q59            Sarah Olney: How long will that additional support remain in place?

James Bowler: It is worth saying that, if anything, the fall in prices was ahead of forecast when this was announced in the Autumn Statement. They are paid in three instalments over the coming financial year 2023-24, so the first payment goes out around now. There are two other instalments, £900 for everyone on means-tested benefits, £150 for those on disability benefits and £300 for pensioners.

Jeremy Pocklington: Those payments remain. The other issue that Mr Brearley alluded to is the Department will be consulting on the issue of price protection for vulnerable consumers in the summer. That is looking at the energy system itself. We will be consulting on what arrangements to put in place after March 2024, when the energy price guarantee, or that backstop, no longer applies.

Q60            Sarah Olney: Mr Brearley was able to update us that 80% of those on pre-payment meters have claimed their voucher, which is obviously welcome news, but that still leaves a significant number of people who have not claimed that really essential additional support. What more can the Government do to reach those people who, through your best efforts, I am sure, you have so far been unable to reach?

Jeremy Pocklington: It is a really important issue. The latest figure I have is, as of the end of April, 83% of vouchers have been reclaimed. We want to see as many of those vouchers reclaimed as possible between now and the end of June.

We are already doing a lot of communications around this, working with Ofgem. For example, suppliers are required to contact companies at least three times, and at least by two different formats, to encourage them to reclaim the vouchers. We have also been doing a lot of communications. We will be ramping that up in the weeks to come in order to give a big push to encourage people to reclaim vouchers.

We publish data regularly. The Committee has asked me, and we do publish constituency data as well. I know it is a question you have asked me before.

Chair: We will publicise that to colleagues around the House. Thank you.

Q61            Ashley Dalton: Ms Olney has asked about support to households. I wanted to ask a question around support to businesses, which has changed quite recently. Has there been any assessment of that support, or the change, and what impact has that had?

Jeremy Pocklington: It is a good question. I am sorry; there are lots of acronyms here.

Ashley Dalton: Yes, and they are all quite similar to each other.

Jeremy Pocklington: The energy bills discount scheme is now in place this year. That does provide a base level of support for all business, with a more targeted and higher level of support for businesses that are energy and trade intensive. I recognise that means that there is less support available for other businesses. Those that are most challenged, which you may come on to, are those fixed-term contracts, but for many others, they will be moving on to lower tariffs as their contracts come up for renewal.

The Government have incredibly challenging decisions to make on how to manage limited resources, but additional support is being provided for businesses. That continues through this financial year.

Q62            Ashley Dalton: In terms of the energy and trade intensive businesses that you mentioned, I know there have actually been some discussions around this, but is there an intention to review the criteria in terms of which businesses are eligible? There are some very large businesses, such as the steel industry, which tends to be included, but there are very energy intensive businesses, such as laundries or the hospitality sector, which have not been included in that, as far as I am aware.

Jeremy Pocklington: I completely understand the question, and I think we have covered this at a previous hearing. It is an incredibly challenging policy objective to actually define what are trade and energy intensive businesses that we are going to provide support to. We have set out the definition very clearly, using ONS classifications. Ms Dalton, it is very clear that everyone who has already received support with their energy bills because of their energy intensive businesses will automatically qualify. Other businesses qualify as well.

We are now in the phase of operating that scheme. There is an appeal process, but that is only if companies think they have been misallocated the wrong industry code rather than to bring in new sectors. There has been further targeted support, which I think we have touched on before, for leisure centres and charities, but I understand that there are hard‑edged cases here that are not straightforward to deal with.

My Minister has written to energy suppliers to ask suppliers to do everything they can to support these businesses, particularly those on fixed-term contracts. The EBDS scheme does not stop suppliers offering what is termed blend and extend, which is the idea that those on fixed‑term contracts could be offered commercially a lower price than they are paying now but over a longer period. This is something that some suppliers and businesses are interested in. There is nothing in our EBDS scheme that stops that. Indeed, it actually potentially helps the margin. I do not want to overstate that. The detailed work helps at the margin. That is a commercial matter for suppliers and businesses involved.

Q63            Chair: Let us move on to the issues of Bulb. We have obviously had a good canter through with our previous witnesses. Thanks again to the National Audit Office, Matthew Rees and his team and the C&AG for delivering this really useful report.

One of the challenges here is this was the first time the special administration regime was used, and in some ways it worked well. Mr Pocklington, did you think you had the skills and experience necessary in the Department, or in the previous Department, to deliver this? Is there anything there that was missing?

Jeremy Pocklington: It was the first of a kind. Although it went well—that is our view in the Department—we always need to think about how we can operate any intervention like this better. The Department did have a lot of the skills required. It had done a lot of thinking, war-gaming and exercising around how a special administration regime would work. It essentially stems from the 2011 Energy Act. We had developed and signed a memorandum of understanding with Ofgem and the Treasury in 2016 to identify our separate roles and responsibilities, and had further tested that as the energy crisis appeared on the horizon so that we were ready to deal with a situation like this.

Q64            Chair: What skills did you need, and did you recruit skills when you produced that memorandum of understanding about how you deal with it, in 2016? Were your predecessor Department and the Treasury thinking about the skills you needed in-house?

Jeremy Pocklington: We have continued to develop our skills. It is very complicated areas, like insolvency law, and it is restructuring as well.

Q65            Chair: Indeed, that is the point. Things are often quite well worn in the private sector but not very regularly used in Whitehall.

Jeremy Pocklington: For example, we have had additional advice from UK Government Investments, which has restructuring expertise as well. The Department was bringing a lot of knowledge of energy markets and a lot of thought about how these things could run, and then we are bringing in specialist advice on insolvency restructuring. At the time, BEIS had overall responsibility for insolvency law as well.

Q66            Chair: Is that a problem?

Jeremy Pocklington: I do not think it is. We work very closely with our colleagues in the Department for Business. It is commonly accepted that the scale of what my Department is doing now requires the additional focus of being a single Department.

We have brought in a secondee from the insolvency service, who is in my department as well. We are continuing to build the expertise, but this was not one of those cases where the Department had not thought about the problem. It is quite the reverse.

Q67            Chair: I will come back to UKGI because I am quite interested in, and a fan of, UKGI and what it can contribute to Government. Mr Bowler, the Treasury obviously deals with money a lot, and you have other areas where you interact with the private sector on things, but are there any skillsets that were missing or that you had foreseen you would need that you recruited especially to deal with this sort of situation?

James Bowler: I will give a similar answer to Mr Pocklington. We have just been through an extreme test, with both Covid and energy, of these kinds of areas, and we did it well. I would point out, in this area, particularly compared to some others, the legislation was there as to how to do it. The MoU was signed, and the war-games had happened.

Q68            Chair: Treasury was involved in the war-gaming.

James Bowler: Yes. Mr Duffy can take you through the exact bit.

Q69            Chair: Mr Duffy and Mr Osgood would have been involved in those directly. We might need to hear from you then.

James Bowler: I am glad we have alighted on UKGI, and you might want to come back to it. Every Department needs the corporate finance, insolvency expertise and that link between public and private sectors. UKGI is a highly impressive and specialised set of talent that provides advice to that. It allows you to be an intelligent customer of these kinds of areas.

This was very much the case here, where Treasury, BEIS, as was, and UKGI sat on the operating board of Bulb. UKGI advised ourselves and BEIS throughout this time. That is a really good example of their expertise being used.

Q70            Chair: Did UKGI have the right people already or did they have to recruit?

James Bowler: They did. For me, it is a reminder of the importance of it all. My skills focus is the importance of keeping that going forward.

Phil Duffy: Within UKGI, we have a specialist insolvency practice that is helping us on really difficult things we found here, like intercreditor disputes and how you structure a deal to protect taxpayers’ money. These are difficult things which we need help with. For general capability, we are working to have more interchange between the Treasury and UK Government Investments so we can cross-fertilise that and train civil servants in corporate finance, and offer them qualifications so that they are better able to deal with that.

I would observe that the level of corporate finance work the Treasury has been undertaking in the last two years is much higher than has historically been the case. We have gone through several of those with this Committee. That has been quite an important part of building capability.

Q71            Chair: That is interesting. Mr Bowler, you have a high turnover of civil servants who come in. I completely get that you are training them on corporate finance, and it is vital for you to have those interactions. Are you seeing a loss of people to the corporate sector?

James Bowler: We do at times have a high turnover. People mainly go to the rest of the public sector, which you could argue is of benefit to the wider public sector.

Chair: I am sure the Treasury would think its tentacles—

James Bowler: I do not spend too much time worrying about that. That is why, when you asked about skills, it is about maintaining rather than building. It is worth saying that we did augment Mr Duffy’s area quite significantly through the pandemic and thereafter.

Q72            Chair: Mr Osgood and Mr Duffy, you were both involved in the war-gaming of how to deal with this. You did that, and then it happened. What were the lessons from that experience, and would you do that differently now you know what you know?

Dan Osgood: A number of exercises took place in the years running up to Bulb’s failure. The most recent exercise happened in the summer of 2021, just a few months before Bulb failed.

Q73            Chair: Was that because you could see it coming?

Dan Osgood: We had seen gas prices start to tick up from August 2021, but this was part of a regular exercise that we did within the Department. For instance, we had a standing business case for a template special administration regime, which, on an annual basis, went through the departmental approvals process so people could review our plans. We would get scrutiny on things like this question, around resourcing and preparedness.

In the summer of 2021, with Treasury colleagues, other colleagues from elsewhere in Government and the regulator, we stepped through this whole process of a potentially failing supplier, the decisions around what to do with it, and all the approvals and funding arrangements that would need to be put in place to enable a SAR to actually be initiated successfully. As you heard from earlier witnesses, a lot of preparation had gone on, both within the Department, Ofgem and other bodies as well.

Phil Duffy: I would say two things. The first one is we all knew each other. We had worked a lot together between the Treasury and Ofgem, and the then Department for Business. That helped to understand the language and the terminology of what was going to go on. We had pre-prepared template text on all the legal documents. That was really positive.

As ever, though, a plan never matches with the reality. There were a few things here that were different. As Mr Osgood has said, during that summer we were seeing a lot of small failures, and the capacity of the market to absorb further SoLRs was reducing because of the cost of taking on all those small companies. That was a new feature.

As Mr Brearley was saying in the earlier session, there was a particular set of problems around hedges and what happened to the residual assets that I do not think we had foreseen. There were a few things that were different in the summer running up to this that we had had to learn from, but we were in a relatively good place because we knew the basic processes of a SAR. We were not completely starting from scratch. When Bulb happened, there was really no prospect of a SoLR because of the SoLRs we had already had. That was a new thing.

Q74            Chair: You could say it was too big to fail. It went into administration for the reasons that we know. Briefly going back to UKGI, Mr Bowler, we are quite a fan of the expertise that it brings. Do you think that there is anything that it did not have? It recruits these great non-executives who can provide really useful advice. Having gone through this process, is there anything that you think is missing, which it could be stepping up on in terms of recruiting different skills?

James Bowler: No. I am not aware of it. It is worth saying that there are limitations, particularly around pay, when you are appointing people with these kinds of levels of skills and expertise. There are flexibilities there. It is worth pointing that out. Charles Donald and team have done an excellent job across a whole range of issues, not least in the last few years.

The key thing for us and all the Departments out there is to realise that that expertise exists and to get it on board and engaged because it really does help. They briefed you, so you will know they manage Government shareholdings effectively and do so much more. As you have said, we have been really tested on our interventions recently.

Q75            Chair: One of the challenges here is something we see with some of the elements of the private companies running public sector services. Here, you have a group of people, mainly from the private sector, coming in to work and add experience and useful talents to Government business. You have other areas of Government where all of you will have restrictions, if you were to leave your job, about where you could go next. Equally, Ministers would have those sorts of restrictions, and yet you have people coming in from the private sector, giving support to the public sector, and then they may exit again.

In one way, we need to see those skills coming into Government. We do not have a problem with that, particularly, on this Committee. How do you guard that? You need to get the talent and expertise you need to deal with these difficult situations, which you would not have the up-to-date skillset for within most Government Departments on a reasonable level. How do you make sure that you are managing that interface?

James Bowler: First, I am a huge advocate of wanting to get those expertise and skills right across Government, particularly commercial procurement and advice. You will know that their functional agenda has done quite a lot to try to push that forward.

One of the issues that you alight on when you do that is, as part of a career, people might want to come into the public sector and then go out again. That should be absolutely fine. There is a process called ACOBA, which sits to make sure that happens. It is important that people understand that. It is important that that process is slick.

Q76            Chair: Does that apply, though, to UKGI?

James Bowler: Yes. It applies to all senior staff. There will be sets of options around lobbying bans on Government.

Q77            Chair: That would apply. It is just because they are in a slightly different position. They are not direct employees in the same way.

James Bowler: There is a balance here. You do not want to have the restrictions so high as to put people off in entirety from coming in in the first place. It is balance, and one that we should get the right balance on. It needs to be a smooth and quick process.

Q78            Chair: I just wanted to touch on fees and advice. We obviously covered this earlier with Teneo. We understood that you are inevitably going to have fees because of the nature of the vehicle. Now you look back, is there anything there that you think you could have saved money on for the taxpayer, where you overpaid or there was just a bad negotiation over the deal? We are looking for honesty here. Lots of this went well, but we do need to know. This is eyewatering. The total fees, including the expenses for your predecessor Department, which presumably fall under you, as accounting officer, Mr Pocklington, is nearly £53 million.

Jeremy Pocklington: Yes, £53 million is the number set out in the NAO Report. I completely understand the interest in fees. This was a highly novel, complex, first-of-a-kind process that we went through, which, despite all the exercises and war-gaming, meant that there was going to need to be considerable expert advice and help in ensuring that that happened.

The largest bulk of that is Teneo’s fees and the legal support for the administrator. We scrutinised their fees carefully. We did that ourselves. We had Ernst & Young helping us to do that. Teneo is formally an officer of the court; I think that is the formal position. It has an obligation to the court to ensure that its fees are fair and reasonable. The court has also put in place a process to scrutinise those. I do not think we think that the fees here are somehow untoward.

Q79            Chair: Do you benchmark them? Is it possible to benchmark them?

Jeremy Pocklington: For example, we know that the legal fees are significantly below commercial rates. Government can sometimes do this. Because it is the Government, it can persuade companies to bid below their commercial rates. We know we were getting a reasonable approach. There is not a simple reference class here.

Chair: It does not mean you should not try.

Jeremy Pocklington: That is what we will get in future. There has been a lot of process. Mr Osgood’s team, with Ernst & Young, are getting weekly and more detailed monthly reports, scrutinising the fees closely. We have been protecting the taxpayer and the consumers in this process.

Q80            Chair: Up until January, that was £440,000 that EY was being paid to do that.

Jeremy Pocklington: That is correct.

Q81            Chair: You are getting value for that.

Dan Osgood: Yes, we are. Going back to the point around preparedness, one of the things that the Department had done ahead of Bulb’s failure had been to run a tendering exercise to have a panel of potential financial advisers in the event of a SAR. EY were the successful candidate in that, but we also had other stand-by firms that were pre-qualified in case there had been a conflict of interest that EY had with either the failed company or the administrators appointed by the court. There had been a competitive exercise to get EY on board as well.

Q82            Chair: Mr Bowler, benchmarking this sort of thing is probably in your territory. It is easy to say, “It is a one-off; we think it went well”. I am rudely paraphrasing you, Mr Pocklington. These are actually pretty hefty fees. Is there anything you are looking at to see if you can benchmark this against other Treasury-funded activities?

James Bowler: It is a good point about benchmarking, and we will take that away. This is a very large merger and acquisition which attracts the need for an enormous set of issues. As Mr Pocklington said, Teneo was appointed by the courts to administer this. It has a legal obligation to minimise the costs that it has, and I am assured that BEIS did a thorough job in scrutinising those on a weekly basis. We will take away the benchmarking.

I do not think this is unusual for a very large merger and acquisition, but the situations are all different.

Q83            Chair: The danger is that people might use this as a benchmark. It is about making sure that this is pinned down in case someone in the future says, “It was only a bit more or a bit less than the special administration regime”. The danger is, once you have a figure out there, people think that is a normal figure. It is just making sure that it is rigorously tested.

Mr Duffy, I just want to come to you about the quantum of funding. The Treasury was backing this. When you talk about the Treasury providing budgetary cover for rises in energy prices, how did you calculate what the risk was going to be, and what made you make that statement?

Phil Duffy: There was not a great mystery about it. The largest part of these costs when we were offering the financing facility was about providing Teneo, and then subsequently Bulb in administration, with cover to purchase the gas it needed for its customers. The key determinant of the financing envelope was what we thought the price was going to be at that time.

We set the initial number based on that forecast. If you recall, during this period the gas prices were very volatile. In order to get Teneo and the court to accept the financing agreement, we had to provide adequate cover for the months ahead, and we had to keep revisiting that.

In general, it went down because the price went down, but we had to provide an adequate level of cover to ensure that we could meet the gas requirements of the customers. That was the main driver of the sum.

Q84            Chair: It was a fairly straightforward decision for you to make.

Phil Duffy: Yes. We had these weekly and monthly reports from Teneo, as did our colleagues in the energy Department, so we knew what the money was going on. We could challenge them on things like the cost of IT provision, the cost of moving customers over and management costs. We had some sense of some of the costs there, not just the actual purchasing of the gas. That was actually monitored throughout the period. We could then make adjustments to the funding envelope throughout the process.

As you all know, we had to subsequently put more credit facilities in to ensure the sale later on in the cycle.

Q85            Chair: What controls did you have in place? You were obviously making these decisions. What was the system inside the Treasury?

Phil Duffy: The Chief Secretary had to sign off the funding envelopes, and subsequently any amendments to those. We were creating contingent liabilities, which we had to notify Parliament of.

Q86            Chair: Yes, absolutely. I just wanted to go into the whole history of managing public money. Mr Bowler, the NAO Report lays out very clearly and comprehensively why you had to make this decision on the day-ahead purchase approach rather than the hedging. We heard the view of Mr Brearley on what advice he gave you. You are obviously sure. You would not have done it if you did not think it met managing public money requirements, but is it fit for purpose for a situation like this? If it were to emerge again, would you be looking for any changes in that?

James Bowler: There are probably a fair few points to make here. I do think it is fit for purpose. The first point to make is that it was not the case, both in terms of managing public money and what happened in reality, that there should be zero hedging. There was hedging where operational and market conditions required it. I think the NAO Report talks about weekly purchasing ahead of electricity of up to 50% and 70% for gas at times. It was not a total ban or a zero thing. It was pragmatic, and that was sensible.

Why would we take a different approach to taxpayers’ money than managing an energy company? There are a couple of points. The most important from the point of view of managing public money is that hedging is not a free good. It is a commercial insurance that you enter into, and this time with highly volatile things. It is an expensive product. The people doing it will make a profit, in their view, on that. Their financing costs will be more expensive than the Government’s financing costs. Therefore, it is poor value for money to enter into one of those arrangements.

The final thing to say is let us look at Government intervention during this thing. We had a total protection of customers with an energy price guarantee. We had a big intervention with the suppliers with this intervention on Bulb, in terms of the special administration regime. The Government have intervened in a number of areas. Our judgment here was that we did not need to go the whole hog on hedging as well. In this Committee we often talk about whether we would, with hindsight. With hindsight, we should do exactly the same. I think the NAO Report says that the decision to not go for a full hedging saved £240 million.

Q87            Chair: That was luck, was it not?

James Bowler: No, because hedging is not a free good. There is an expense to it.

Chair: So that money was saved.

James Bowler: No. In fairness, the £240 million is mostly the change in price. It is worth saying there is no free hedging to be had. Secondly, as our colleague from Octopus Energy was talking about, the gain share that we put in place between December 2022 and April 2023 was not luck. That was a deliberate policy decision that both allowed the sale to proceed but also put in place a protection for the taxpayer. It yielded a profit, if you would like to put it that way, to the taxpayer of £1.2 billion. That was not luck; that was sensible policy.

Q88            Chair: You say you would not change Managing Public Money. If you were advising your successor as Permanent Secretary about any other unusual or first-time use of a product, what would you say?

James Bowler: That is a really good point. My first point is Managing Public Money is fit for purpose here. My advice to my successor, which I hope is not very soon, is that that would be the case. The second point would be about having a level of pragmatism. The assertion was not, “Do not do any hedging”. It was, “Please do minimal hedging only when operations and markets allow”. That is what actually happened. That received the right balance.

Q89            Chair: That is very helpful. Mr Duffy, I will just come back to you about the administration and funding agreement. It had been hoped that the original sale would be achieved much earlier. Can you just talk through the cost of extending and the risks that you were trying to manage there?

Phil Duffy: I would say two things. The first is, between Bulb entering administration and the time we initially thought we might sell it, things got worse. It is worth recalling for the Committee that the dual fuel price went above £4,000 at that point. The market conditions were extremely challenging during that period.

In terms of value for money, it would remain the case whatever had happened that we would have had to provide financing to purchase the gas and electricity for those customers. That was an accepted cost. We already planned to recoup it, via the price cap, but there was going to be a cost there. The situation became very difficult. As the gentleman from Octopus was saying in the first session, it is a very hard company to sell completely unhedged with prices swinging above £4,000.

We had to put additional financing in, which is detailed in figure 12 of the NAO’s Report, to cover the additional oil, gas and electricity that was being consumed by customers. In fact, the final sale took place roughly six months later than had originally been envisaged.

Q90            Chair: My final question is about the role of Teneo. Figure 4 is quite interesting in this respect. BEIS, or now Mr Pocklington’s new Department, effectively, has been the decision-maker in most cases, but, in terms of other Government Departments, apart from the funding, the Treasury was an adviser. Because Teneo was appointed under the regime, it was really in the decision-making seat for a lot of this. That is the Government giving away responsibility. On one level, that is partly what you war-gamed.

Mr Pocklington, you seem to agree that this worked and went well. Do you think the balance was right there, given the legal constraints around it? The court was also pretty significant.

Jeremy Pocklington: I understand the question. It is complicated. The first thing to say is that, yes, Teneo is formally an officer of the court and that is where it owes its primary obligations. That is ultimately bounded by legislation that was approved by Parliament. That is the Energy Act, which has set the objectives for the insolvency and administration processes.

Teneo also had obligations to Government through the contractual agreement, which is the funding agreement to which you referred. That agreement governed the funding that Government provided but also put in place the obligations in return, in terms of reporting and oversight, that you would expect. Our interests were aligned in a way that meant that that system would work. Mr Osgood may have something to say about how that worked in practice.

Dan Osgood: Teneo was the court-appointed administrator responsible for the operational running of the company. The Government were ultimately providing the financial backing to enable that special administration to continue. There were certain key documents that were agreed around the parameters of that funding at the beginning of the special administration.

Picking up on your question about the duration of the SAR, the other part of Teneo’s statutory duties was to exit the SAR as quickly as possible. The timetable was very much driven by that commercial exercise in seeking to obtain best value for the company and enable the SAR to be concluded.

Q91            Chair: In terms of getting out of it as quickly as possible, I referred to figure 9 in the earlier session. It was good, useful work done to find out why the other six potentially interested parties decided not to take over. I will not go through the read‑out of the graph. Earlier, Mr Bowler, you were defending the use of Managing Public Money and the approach to hedging, but that was clearly having an impact on the desire of other companies to come in. That could equally have had an impact on the value for money of the final deal. Are you still confident in your previous answer?

James Bowler: At the heart of this, which you also heard in your previous evidence session, was that the sale was set up to ensure that bidders set out what support they think they needed. I shall be slightly careful because, as you said in your previous session, there are ongoing appeals in court. The idea of that from a value-for-money point of view was that we did not want to lead the market and say, “Here is the support that Government would offer”, and find that people would snap that up. The process was set that the bidder would say what support they needed.

From figure 9, the one that jumps out at me is “strategically not the right time”, given the backdrop that was happening in the industry, as Mr Duffy described. At the time, it was a far from stable time for people. I would also refer to the gentleman from Octopus Energy, who set out his views of the process.

Chair: I could go round this quite a lot, but I will pass over.

Q92            Peter Grant: Mr Duffy, in answer to one of the Chair’s earlier questions, when you were talking about the initial potential cost to public purse, reported at £6.5 billion, you said that it is now likely to be significantly less than that. Is that because the Government were taken by surprise at how soon the energy price fell, or was it simply a case of being prudent and reporting the reasonable worst-case scenario when the purchase was announced?

Phil Duffy: As Mr Brearley was saying this morning, forecasting energy prices is very difficult. Long-term gas forecasts are very rarely predictive of what actually happens in the market. There is genuinely difficulty there, particularly when you are dealing with a global crisis, with the war in Ukraine and what was happening with the refilling rates in European gas. It is very difficult to forecast those. I would not claim we had any crystal ball about what was happening with gas prices. For the reasons Mr Bowler set out, notwithstanding that, in terms of whether or not we should hedge, we thought we should not hedge because it is expensive and it would not necessarily represent value for money.

There was a bit of prudence in the way that the deal was structured, because we did put in this arrangement that said we would have a reviewed and agreed forecast of gas and electricity prices, going forward, with Octopus. If they were higher, the taxpayer would have to pay more; if they were lower, we would receive a gain share. That was the arrangement we reached. It has worked very well for us. It could have gone the other way, of course, but it was not necessarily an imprudent way of managing that risk. We are pretty confident that was a sensible way of structuring the final sale.

James Bowler: There have been very large figures at various points for the cost of this. There are two aspects to that. First, most of that is the cost to Government of purchasing the amount of gas needed to deliver for customers. There was always a large up-front cost in this. Secondly, it then depends on when those estimates were made. The £6.5 billion was the OBR’s estimate in November last year. It was its estimate of the cost of buying the gas needed to deliver for these customers, which, as you say, changes as you go forward. That is at figure 15 of the NAO report.

Q93            Peter Grant: Given the view the Committee has taken previously when cost estimates have turned out to be wildly optimistic, we should recognise the fact that this might have been a time when prudence was appropriate.

You gave some more information about the Treasury approach to hedging in your answers to the Chair. I understand that Managing Public Money has just been updated within the last few weeks. Are there any changes in that with regards to hedging compared to what was in place at the time?

James Bowler: The only nuance in Managing Public Money in recent times has been around foreign currency. It is the case that we think it is poor value for money to undertake a commercial hedge. You can look at policy reasons for why you might want to do so rather than just financing reasons. I do not think that was a change in Managing Public Money, as published a couple of weeks ago, but there has been some discussion there. The overall situation remains the same. We think that, given the Government can finance things more cheaply than the private sector and has the balance sheet to do so, going into a commercial insurance arrangement does not represent value for money.

Q94            Peter Grant: Taking into account the experience of Bulb and Octopus, we have heard slightly differing views as to whether a different set of rules would have been a good thing. Is it still your view that the rules in Managing Public Money that applied at the time were the most appropriate ones and still are the most appropriate ones?

James Bowler: The answer is yes. I would say two things for full disclosure. First, there was some hedging, which is detailed at paragraph 2.19, page 32 of the NAO Report. There was some week-ahead hedging. There was a pragmatism there.

Secondly, the Government were intervening on the customer side and supplier side. There was a lot of Government intervention going on here, as well as intervening on the financing side. That would have been a lot of intervention, and it would all come at an additional cost.

Q95            Chair: When we were talking about hedging, we were talking about much further ahead.

Jeremy Pocklington: May I just help with that? This is important. As Mr Bowler said, it was absolutely a pragmatic approach. I think what happened in practice was it was a combination of energy purchases day-ahead and week-ahead. Even purchasing energy day-ahead is technically hedging, as is week-ahead.

The distinction I would draw between day-ahead and week-ahead is that it is essentially about operational smoothing for market purposes versus buying energy three months ahead, or even longer periods, which is what many other companies in the market would have been doing in order to essentially hedge against the price cap. That is what happening here. It is a pragmatic approach for smoothing stability for operational reasons, but not following what other companies were doing in the market.

Chair: That is where you draw the line at how you define pragmatism.

James Bowler: It is also worth saying, as colleagues said in the earlier briefing, that it was Bulb’s failure to hedge well in advance that was its main driver for going into administration. That is because its creditors said, “Enough is enough”. The Government have a different set of creditors, if you like.

Q96            Peter Grant: In other public bodies, Managing Public Money might be seen as financial regulations or financial standing orders. How do you build pragmatism into such a key document, which is supposed to be rules and guidance? How do accounting officers all over the Government know where the limit to that pragmatism lies?

James Bowler: The system allows for that. It is important that Managing Public Money is a living document. You mentioned it is being updated. It is important that it does set a set of principles. I have been quite clear on the hedging one. As accounting officers, as Mr Pocklington and I are, you will look at that when a particular issue comes along.

If you were to stray from that, that is not something that cannot be done, but it is the type of thing you would look at in your accounting officer assessment. You would look with your Minister. If you were to do that, it would be a very deliberate decision and could even go to a direction, if you thought that was the right thing to do. Directions are often the right thing to do. That is the process.

Q97            Peter Grant: Mr Osgood, I want to look at the financial position of Octopus at the time that the sale of Bulb was agreed. The financial accounts for 2021-22 show that, in the previous year, the customer base had already increased by 50%. The net liabilities were just short of £250,000, partly because of the costs of taking on those other customers.

Taking on the Bulb customers as well meant that they had seen well over a doubling of the customer base in the space of two years. Looking at the accounts, they were probably quite badly undercapitalised at the time. Does all of that suggest that this was actually quite a high-risk company to choose to take on the responsibilities you were asking them to do?

Dan Osgood: I would not take that view. As we heard from Mr Brearley in the earlier session, as part of the sales process, Ofgem carried out an in‑depth examination of Octopus’s position. It looked at both the financial and operational side of things. As Mr Brearley set out, its view was clearly that no transaction in this sector, particularly given the context at the time, was ever going to be risk-free, but it felt confident that Octopus could manage those operational risks. As part of the structure of the deal, a number of financial arrangements were put in place to safeguard the taxpayer money that is going into this new HiveCo subsidiary. It will protect that taxpayers’ money, should there be any financial difficulties.

At the time the deal was announced, various consumer groups—Citizens Advice, Which? and organisations like that—were quite welcoming of the deal in terms of what it would potentially mean for the customer experience for Bulb’s 1.5 million customers who were being transferred. This was extensively considered at the time. There were steps taken, as part of the sale arrangement, to protect the taxpayer money against the risks that were identified. As we heard from the earlier witnesses, the customer experience so far has been very smooth.

Phil Duffy: May I build on that? We say it was sold to Octopus; of course, it was moved into a ringfenced entity, HiveCo. To protect public money, we put in place a whole series of provisions, as Mr Osgood said. They cannot pay Octopus management fees. They cannot do inter-entity loans inside the company. They cannot pay dividends until they have paid back the Exchequer funding. That is quite a lot of protection from the wider company. That is detailed at 3.12 of the NAO’s Report.

Q98            Peter Grant: When I asked similar questions to Mr Jackson from Octopus earlier on, he was quite keen to point out that it is part of a much bigger group of companies that has substantial assets available if necessary. Is there any requirement built into the deal for the parent company or associated companies to bail them out if things start to go wrong?

Dan Osgood: Under the terms of the sale, and with the ringfence agreement and funding arrangements that are in place as part of the sale, this new HiveCo entity that has been set up is effectively going to be as though it was fully hedged from day one. The risk of a fully hedged supplier failing in the energy retail market is pretty low. I do not have any concerns on that front.

Q99            Peter Grant: You seem to be saying that the fact that the HiveCo is part of a much bigger family of companies is not particularly relevant. What is relevant is the other protections that have been built in as to what they can and cannot do with the assets of that company.

Dan Osgood: The ringfence that is in place is effectively a two-way protection. It ringfences HiveCo from the rest of Octopus until the point that the taxpayer funding has been repaid. That is there to protect the Government and the taxpayer, but it is also there so that, if there any difficulties for either HiveCo or the Octopus parent companies, that HiveCo entity and the customers within it are insulated against that.

Phil Duffy: Not to labour our discussion on hedging, but as HiveCo became a private-sector body, we actually encouraged them to build a hedge, because that is the way you protect them. That has substantially reduced the risk of a corporate failure in HiveCo because they are now fully hedged, in line with the Ofgem modernised regulation. That means we are pretty confident about our access to the money we are owed. It is an important part of our protections.

Q100       Peter Grant: Mr Pocklington, is it not the case that, whatever protections are put in place and whatever hedges are set up, the fundamental fact is that, if a big energy company gets into trouble, one way or another the public will have to bail it out? This will either be through taxpayer support or by customers having to pay additional bills. Those are the two bottom lines, are they not?

Jeremy Pocklington: Mr Grant, that question is getting to the broader point that I think Mr Brearley alluded to earlier, which is we need a retail market of suppliers that is sufficiently resilient as to minimise the risk of a company failing. At a certain level, it will not be an acceptable outcome to see vulnerable consumers left without energy supplies. That is why Ofgem has already taken a number of steps; Mr Brearley referred to them earlier.

This is also a focus of the Department. We will be issuing a call for evidence about the future regulatory framework for suppliers and retailers later in the year to ensure that we have a market that is resilient, but also one that works for consumers and supports the energy transformation that we need to see.

Q101       Peter Grant: We have learned lessons from the past. We are changing the way the market has to operate to minimise the risk of large-scale failure. We can never completely remove that risk. If something goes wrong again, ultimately, one way or another, the public will have to pay for that.

Jeremy Pocklington: We will still need a special administration regime. That could result in costs to taxpayers and consumers. We will still need a SoLR—supplier of last resort—regime. That is an important part of an energy market. It is two processes that have been seen to work well. We need to create a market that reduces the risk that they are needed, because when they are needed, they can result in the costs that you have outlined.

Q102       Peter Grant: Mr Pocklington, you referred to the Government’s action having halved consumers’ bills. Is it not more correct to say that the Government action meant that consumer bills doubled or trebled rather than going up four, five or six times? My constituents did not see their bills halving. They saw their bills going up by between 100% and 200%.

Jeremy Pocklington: I think I said we provided support equivalent to half of the consumer’s bill. I do not think we have said that we have halved consumer bills, but I dare say we will have to check the transcript.

Chair: You have corrected yourself if you did say that.

Peter Grant: I apologise if I misheard your comment.

Q103       Sarah Olney: How formal was BEIS’s dependency on the advice in approving Octopus? Was it formal, official advice given that you followed, or was it just a contributory factor to the decision?

Dan Osgood: There was a formal letter to the Department from one of the directors at Ofgem, setting out Ofgem’s view. I am afraid I forget the exact legislative provision, but it set out Ofgem’s view of Octopus as a potential purchaser of Bulb. That formal letter was taken into account in the advice that we ultimately put to Ministers within the Department as to whether or not the sale of Bulb to Octopus should be approved. It was a formal and documented process.

Q104       Sarah Olney: I wanted to ask a bit about the interest. There is an administration funding agreement for Bulb. Interest is payable on loans made under that arrangement, but the interest rate is all being accrued and payable at the end when the special administration regime concludes. Mr Bowler, why has that particular arrangement been come to on the interest?

Chair: I should just point to figure 5 on page 25, which helps to illustrate this.

James Bowler: Others might have a better answer than me. The one thing I am alive to on interest is on the issue of whether market conditions will mean that the repayment would be deferred. An interest rate then applies, giving an incentive to Octopus, in this instance, to repay as quickly as possible. Others might know more about the accrual point, as I try to absorb figure 5.

Chair: Mr Osgood is volunteering.

James Bowler: Good man.

Chair: There is an expert in the room. Never fear, Mr Bowler.

Dan Osgood: I am not sure I would go quite that far. Stepping back to the objectives that the Department had at the time that the SAR was set up, a key priority was to protect Bulb’s customers and minimise the cost to the taxpayers. One of the other objectives that the Government were trying to achieve was to avoid having any negative impact on energy markets.

Bulb had failed and had gone into special administration. It was continuing to trade in the market, and the Government were effectively financing that through the special administration. We were advancing funding to Teneo to enable it to trade. In line with Managing Public Money and also being very mindful of subsidy control considerations, there was an interest rate applied to the funding that the Government were advancing to Teneo. Otherwise, the risk was effectively that we would have been providing some form of subsidy to Teneo.

Sarah Olney: It had to be a commercial loan.

Dan Osgood: Yes, exactly. It was to avoid having that negative impact on the market.

Q105       Sarah Olney: Why is the interest accrued until the special administration regime concludes rather than payable on an ongoing basis?

Dan Osgood: It is part of considering the overall cost of the SAR. The interest has been an element of that cost. The final bill for the SAR will be calculated at the end of the process, when Teneo have finished winding up the failed supplier business and when Octopus has finished with all the repayments that are due to us under the terms of the sale. That interest element will be one part of the overall bill for the SAR.

Phil Duffy: If we had charged interest monthly at the time we were doing it, we would have had to put more money in ourselves because it was a wholly owned state body. It would just increase the cost for us in the short term.

When we talk about these costs, these are costs under the SAR legislation. They are costs to billpayers. That is different to costs to taxpayers. There are political choices about what the taxpayer will do, but the NAO’s rather excellent account of this is about the cost to billpayers at the end of the SAR, which is the £246 million we have talked about.

James Bowler: If you look at figure 13 on page 49, the interest is the penultimate grey bar, of £400 million. On these figures, it adds to the cost of £240 million.

Q106       Sarah Olney: Does that £400 million vary with the rate rises that have been announced since?

James Bowler: It is an estimate of the charge.

Matthew Rees: These interest rates were set at the time that the administration funding was agreed. They will not change through the life of this intervention.

Q107       Sarah Olney: Coming on to that £246 million, Mr Pocklington, how are you managing the recovery of that taxpayer funding?

Jeremy Pocklington: As we have touched on before—indeed, I think it is one of the objectives that the Department set out—the approach we are working towards is that this money will ultimately be recovered from consumers under what is called a shortfall—

Q108       Sarah Olney: Sorry, I am confusing everybody. I mean the £3 billion owed by Octopus to the taxpayer. That was my fault. I am sorry; I used the wrong number.

Jeremy Pocklington: It is incredibly important in the post-completion phase that we are closely monitoring the cash balances to ensure that we recover the £2.8 billion—that was the number we used earlier—to the taxpayer and consumer. We are continuing the monitoring arrangements in place. The most important thing to remember is the ringfenced entity remains in the special administration regime until that money is recovered, at which point the ringfences will drop away.

We are continuing to monitor it with Teneo. That process—the regular meetings and dialogue—is perhaps not quite as intensive as it has always needed to be, but it is going to continue on a very regular basis until that money is recovered. We will also liaise closely with Ofgem and Octopus about the financial resilience of the ringfenced entity. Mr Duffy has already alluded to the fact that there are real protections in place as well.

Why is it needed there? Why does the money need to be there? When I arrived in the Department, I asked myself that question. There is an answer, which is that that is what resulted from the competitive process. Why is it needed there? Because it is in a bank account within the ringfenced entity, providing collateral for a letter of credit for Shell—this is set out in an incredibly complicated way—so that Shell, which is the wholesale provider to the ringfenced entity, know that the ringfenced entity is good for the energy supplies as it is hedged in the period ahead.

The ringfenced entity is now building up its own collateral so that we can take our collateral away, back where it is needed. That is probably slightly over‑simplified, but that is the best that I can explain it.

Chair: That is actually a very useful simplification.

Q109       Sarah Olney: Mr Osgood, are you confident in the terms under which that collateral has been provided—that they are robust enough and that taxpayers should receive that back in full?

Dan Osgood: Yes. The Permanent Secretary has set out where that money is currently sitting within the corporate structures, but I would also come back to the sales process. Our view, which was subsequently backed in the legal proceedings, is that this is the best outcome for the taxpayer.

Q110       Sarah Olney: Mr Pocklington, how will you determine, at the conclusion of the SAR, the extent to which there is a shortfall and how much of that is going to be passed to billpayers?

Jeremy Pocklington: We are continuing to monitor it closely. We have already set out to Parliament that our intention we are working towards is that we will recover the money from consumers. The figure in the NAO report is £246 million. I think some of the previous panel alluded to the fact it may have just come down just a little bit from there. We will recover the money.

It is not something we are planning to do imminently. We want the SAR to continue to run further to get a better handle on the figure and the plan for recovering the cash balances. These will ultimately be decisions that we will then need to confirm with Ministers at the time. Our objective is clear. I think Octopus referred to the £8 over a year, or £4 over two years. That gives you a sense of order of magnitude, compared to the £94—again, this is another public figure—from the other 28 failures that have gone through the SoLR regime. That is an order of magnitude for you.

Q111       Sarah Olney: Mr Bowler, you have made a distinction between taxpayers and billpayers. They are the same individuals and the same households, at the end of the day.

James Bowler: They are not quite

Q112       Sarah Olney: A single person will be paying their electricity bill and also paying their tax.

James Bowler: Yes, they will be.

Sarah Olney: In most cases they are the same people.

James Bowler: Yes.

Q113       Sarah Olney: This is almost a question about the means by which that same individual is potentially paying for the shortfall.

James Bowler: Mr Pocklington set out the next steps absolutely correctly, and that is how the Treasury sees it too. We are running through a system that was set up in legislation in the Energy Act 2011. That is the system, It is there to provide continuity of supply to customers, effectively, but the costs then do go back on to customers. That is the system. Depending on how the end figures end up, Ministers will have to confirm that that is what they want to do.

Chair: We are straying into the political policy decision around taxation.

James Bowler: They will take that decision. To your point, yes, you pay your bills and you pay your taxes. It is worth saying there is no free lunch here. That is a good Treasury point, is it not? There is not a sense where the taxpayer does not pay, and the billpayer does not pay.

Q114       Sarah Olney: We have been talking about the £246 million. What is your confidence at this stage that that is the ballpark figure? How likely is it to remain within that area?

James Bowler: I found figure 13 incredibly useful as I was preparing for this Committee. That is the sense. This was a January report, and I do not think we expect that the figures have moved on massively. The big variable factor is what we expect to happen to the energy markets. There are continued protections in place for consumers, but the trigger on deferral for Octopus payments is based on the mapping of the wholesale energy price. That is the big variable here.

As you have heard from a number of witnesses much closer to this than me, the expectation is that we are on a path to that level for September. I am sure there will be a set of end game issues around the SAR, I am sure. We should be totally transparent in what they are with the Committee.

Q115       Sarah Olney: Finally, do you think that the SAR process has led to a lower cost for consumers overall than the SoLR process? If so, does that mean we may need to look at SoLR again and consider whether that process needs to be improved?

Chair: That is at least £94 on every bill, pretty much.

James Bowler: That is a very good question. We should keep all of these aspects under review. Mr Pocklington talked about the ultimate review of the retail energy market. It may be something for that.

The point to make is there were 28 failures of companies under the SoLR and one SAR. The reason you are intervening is continuity of supply to the customer. It must remain the case that the easiest thing to do and the easiest way to deliver the objective of continuity of supply to the customer is via a SoLR rather than the extraordinary special administration regime.

Jeremy Pocklington: It is a very good question. Decisions ultimately need to be taken on the merits, as it were, at the time. SAR looks attractive, superficially, but that is ultimately as much to do with movements in wholesale energy markets. It actually leaves the state and the taxpayer really quite exposed through the administration process.

SoLR is a more efficient and quick process where, at its best, you can actually compete so that the loss to the consumer is minimised as much as it possibly can be, because there is value in customer books.

Q116       Chair: It is more directly on the billpayer, is it not? They can see it on their bill.

Jeremy Pocklington: This could have ended up with a much larger impact on the bill than it did. Ultimately, the bigger challenge is how you create a retail market that is more resilient and what is the right balance there.

Q117       Chair: Mr Pocklington, you are in the hot seat now. It was with a big six, and then it was 29 or whatever, and we are now where we are.

Jeremy Pocklington: There were up to 70, and there are now 20‑something suppliers in the market, but very dominated by the top nine or so.

Q118       Chair: We could open up a whole debate on that. We are about to finish. We have pretty much gone through what lessons can be learned. I will particularly look to Mr Osgood and Mr Duffy because they have been there through the whole process. Is there anything that you think should be tweaked or done differently? What is the takeaway you have from this? We are not after just positivity because you are in front of the Public Accounts Committee. We want to know if there is anything that should be different when this extraordinary measure has been used.

Dan Osgood: Our overall reflection, as you have heard from Mr Pocklington and others, is that the SAR has worked well on this occasion. We are constantly looking at these things. It has worked well on this occasion for this supplier in this set of circumstances, but what if it had been a different supplier with a different corporate structure, as you heard from Mr Brearley, with a different set of circumstances? We are making sure that our planning and preparations are resilient to a range of possible scenarios.

Q119       Chair: You are not resting on your laurels because this has delivered an outcome as planned, broadly speaking.

Phil Duffy: There are two big things. The first one is that this was a strategically important company, and it failed. What other companies are out there that we need to be prepared for? We were lucky that we had done the preparatory work in energy, but there may be other areas of the economy that need that. That is the first question the Treasury is gripping.

Chair: That could be a water company.

Phil Duffy: I will not comment on the sectors.

The second thing is, as Mr Brearley was saying, in SoLR we had some very difficult issues about customer hedges. Those hedges belong to consumers. They are part of their asset base. That is a policy issue that needs to be resolved because we cannot have consumer hedges snaffled off during an insolvency and sold on. That is a really important message for how we undertake the work that Mr Pocklington was talking about, about the future energy market.

Chair: That would be under the retail energy market.

Jeremy Pocklington: We are looking at that issue as part of this work.

Q120       Chair: Would it require that level of primary legislation, or is there another way of doing it?

Jeremy Pocklington: I do not know today that it requires primary legislation. We need to understand what the right policy solution is.

Chair: It is firmly on your radar.

Jeremy Pocklington: We are well aware of the issue.

Chair: If we keep asking you about it, at some point we will get an answer.

Jeremy Pocklington: Yes, indeed. It gets into quite complicated insolvency law.

Chair: It is not the place for this now, but we want to know it is on your radar and, if we keep asking, we will get an answer when you have finally reached some conclusion. It may not need primary legislation, but we do not know yet. On that, we will leave it.

Q121       Peter Grant: Mr Bowler, I have a quick question. I notice on figure 12 on page 47 there is Barnett consequentials of £150 million. Can you briefly explain what that relates to and how that figure is arrived at?

James Bowler: My immediate assumption is that we are acting for England, Scotland and Wales, but Northern Ireland is in a different place. I think it relates to Northern Ireland.

Q122       Peter Grant: Is that because the energy market in Northern Ireland is governed by the Northern Ireland Assembly?

James Bowler: That is correct.

Chair: Thank you very much. Can I thank our witnesses very much indeed? The transcript of this session will be available on the website in the next couple of days. Thank you, again, to our colleagues at Hansard for that. We will be producing a report on this, hopefully before the summer recess. Thank you very much.