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How will suppliers fare under Ofgem’s new supplier licensing rules?

Emma  Bill Emma Bill Analyst
14th July 2020

Ofgem published its statutory consultation on the final phases of its Supplier Licensing Review (SLR) on 25 June, intending to take forward the majority of the policy proposals it has previously discussed. The main changes from its earlier position include new thresholds for carrying out Milestone Assessments on domestic suppliers as they grow, and Ofgem withdrawing prescriptive requirements for suppliers to protect 50% of customer’s credit balances and 50% of environmental scheme costs. The decision to do so followed “serious and credible reservations” about the impact of such proposals on future energy and competition. Still, Ofgem said that it may consult separately on similar proposals in the future.

Taken together, the package of proposals aims to raise standards across the energy sector by promoting better risk management, more responsible governance, increased accountability, increasing market oversight and strengthening exit arrangements. While some the new proposals essentially formalise what might be considered standard practice anyway – being financially responsible and having sufficient operating capacity to serve customers effectively and efficiently – they will ensure a consistent approach among suppliers. This should, ultimately, prevent a repeat of the recent trend of multiple supplier failures, and reduce the extent of the socialised costs being picked up by the wider industry when there is a failure.

New milestone and dynamic assessments, as well as, independent audits represent a significant change in how suppliers are monitored as they grow. A supplier should notify Ofgem of the date it expects to meet 50,000 and 200,000 domestic customer accounts per fuel, and then do so again when it meets or crosses the threshold. While the regulator will decide whether a milestone assessment is required, this will depend on the information it already holds about a supplier. Dynamic assessments, on the other hand, can be undertaken where the necessary information has not been forthcoming during former processes. Ofgem confirmed that suppliers would not have to pay for the assessments, but that they would be subject to any costs associated with compliance, including an independent audit if necessary. Both domestic and non-domestic suppliers may be subject to a dynamic assessment, specifically where Ofgem has concerns about a supplier’s financial sustainability or ability to serve their customers. For example, the regulator said that it may undertake such an assessment in response to financial warning signs such as missed payments, customer service indicators and pricing practices that place risks on consumers. 

A ‘fit and proper’ test, first introduced as part of the licence entry requirements last year, will extend to individuals who have significant managerial responsibility or influence in the business. It will be up to suppliers to decide who falls into this category, being mindful of who carries out the assessment to avoid potential conflicts of interests. Ofgem said that it expects an individual’s role in a past supplier failure to be considered, with the nature of the failure playing an important role. So, the extent of consumer harm, mutualisation costs and disorder brought about by a market exit.

Another new principle requires suppliers to be open and cooperative with the regulator, with Ofgem setting out factors it will consider to this end. Fulfilling this requirement means that suppliers submit information to the regulator that is timely, candid and accurate. Suppliers must also proactively discuss non-compliance, or potential non-compliance with Ofgem, especially where this is likely to be (or has been) detrimental to consumers.

In the spirit of being open and cooperative, Ofgem’s additional reporting requirement (formerly ‘change of control’) means that a supplier must notify the regulator if it plans to sell its customer book. Suppliers will also be required to inform Ofgem where there has been a change in any person with significant managerial responsibility or influence.

All suppliers will need to produce a customer supply continuity plan detailing, among other things, arrangements with third-party service providers to ensure continuity of services in the event of a Supplier of Last Resort. Ofgem also expects suppliers to set out the processes that would be followed to prepare a summary of customer debt information and customer account balances. The plan would not be publicly shared, however suppliers must submit their plan as part of the milestone and dynamic assessments.

Although Ofgem doesn’t have the powers to regulate administrators directly, it will require suppliers to reference debt recovery activities in contract terms and conditions. Meanwhile, it will continue to engage the relevant regulatory bodies for insolvency practitioners, and seek opportunities to collaborate.

While Ofgem does not expect the majority of changes to require a significant cost or turnaround in activities, the proposals are likely to impact some more than others. It would be wrong to assume that suppliers at the lower thresholds may be impacted more, and vice versa. Only time will tell, as Ofgem begins to conduct assessments and get a greater handle on supplier processes and plans. Arguably, those coming into the market now do so with hindsight and are able to learn from the mistakes of those who have failed, and should be able to avoid the same fate.

The consultation closes on 20 August, with the new rules to be in place this winter.

On 1 August our latest update to the Energy Supplier Compliance Portal is due to go live and will include changes to the compliance landscape seen during May, June and July this year. The update will set out the new requirements covered in this blog, as well as changes to protections for prepayment meter customers at risk of self-disconnection and the updated ability-to-pay principles.

As part of the August update we are running our biannual webinar on key compliance developments in the year to date. We also look ahead to planned changes during the next six months such as programme milestones on Faster Switching and Half-Hourly Settlement. The webinar will take place on Thursday 6 August, 3-4pm. For more information, or to request a free trial of the Energy Supplier Compliance Portal, please contact e.bill@cornwall-insight.