A high standard is applied before Court will hold public bodies to assurances

The post below was first published on our Public Law notes blog:

In R (E.ON Next Energy Ltd) v Gas and Electricity Markets Authority [2023] EWHC 2891 (Admin) the High Court interpreted alleged assurances that passed between the Claimant, a retail supplier of energy and gas, and the Defendant, the independent regulator of the gas and energy market, during an energy supply crisis in 2021 and 2022. The court found against the Claimant on its main arguments regarding a letter of comfort it had received from the Defendant, but in favour of the Claimant regarding qualifications to a commitment it had made to the Defendant.

Key Points

• A “clear and unambiguous” statement, devoid of relevant qualification, is required before a court will find a legitimate expectation capable of binding a public authority.
• Courts will interpret assurances made by public bodies in the wider context, including other communications between the parties.
• The court will assess whether there is a legitimate expectation objectively and is not concerned with the subjective understanding of the party seeking to rely on the alleged legitimate expectation.

Background

2021 was a volatile time in the energy market. Several retail suppliers went out of business. In such circumstances, the Office of Gas and Electricity Markets (Ofgem) (through whom the Defendant operates) may direct other retail suppliers to step in by appointing them as a Supplier of Last Resort (SoLR).

SoLRs cannot necessarily recoup the costs of this role by ordinary means because the market is subject to price caps. However, they can claim a Last Resort Supply Payment (LRSP), which is levied on all other suppliers. Because this payment will be passed through to consumers indirectly, SoLRs can only make a claim with Ofgem’s consent and Ofgem will only provide that consent if it considers the claim appropriate. In previous years, Ofgem routinely communicated to suppliers the criteria which it takes into account (the Ofgem criteria), including that the costs sought by an SoLR ought to be additional to the costs of serving its pre-existing customers and ‘incurred as a result of taking on customers in an emergency situation as opposed to normal customer acquisition routes’.

In theory, so-called “shaping/imbalance costs” (which result from actual supply and demand differing from forecasted supply and demand) could be recouped via a LRSP, subject to the abovementioned criteria, but this had never been tested prior to this case.

In this case, the Claimant bid to be a SoLR at least partly because it thought that if it did not make a bid on its own terms then it would be directed to take up the role on unfavourable terms. The Claimant made clear that: it would need to ‘recover’ its costs through a LRSP (although Ofgem insisted that this be corrected to ‘claim’ its costs); its request should be dealt with in a timely fashion; and its request might include shaping/imbalance costs. The Claimant also assured Ofgem that it would absorb £15m in costs of the SoLR role if, in the Claimant’s opinion, Ofgem treated its request fairly. On 1 October 2022, Ofgem appointed the Claimant as a SoLR and provided it with a ‘comfort letter’ (as the Claimant characterised it), pertaining to the timeline by which Ofgem would consider the Claimant’s request. Yet, in subsequent industry consultations, decisions, and a deed executed by the parties on 1 March 2022, Ofgem referred to and reiterated the Ofgem criteria by which it would consider requests to claim an LRSP. On one occasion, it clarified that an SoLR must demonstrate that any shaping/imbalance costs claimed in respect of their emergency customers must be greater than the shaping/imbalance costs faced by existing customers. The Claimant did not challenge those statements at the time.

Eventually, the Claimant made a request to claim its shaping/imbalance costs but Ofgem denied this on the basis of the Ofgem criteria. In response, the Claimant stated that it had been treated unfairly and would be exercising its discretion not to absorb any of the £15m it said it might in its bid. Ofgem took issue with this, believing its criteria had always been clear and the Claimant was failing to meet its commitment. Consequently, Ofgem further reduced the amount the Claimant could claim by £15m. The Claimant challenged these decisions in the High Court.

Judgment

Ground 1

The Claimant’s primary argument was that the comfort letter gave rise to a legitimate expectation that Ofgem would consent to a claim for shaping/imbalance costs. Bright J considered that the comfort letter was more about timing than substance, and in any event, must be read in the context of the Ofgem criteria which were communicated to suppliers on many prior occasions. The court also noted that the Ofgem criteria had been referenced on multiple occasions subsequent to the Claimant’s appointment and the Claimant had made no objections on those occasions. Moreover, if there had been a legitimate expectation that shaping/imbalance costs would necessarily be recoverable, this would have been eliminated by the execution of the deed on 1 March 2022 because it referenced these same criteria again and made clear that the costs were not necessarily recoverable.

Ground 2

The Claimant also argued that Ofgem’s decisions were unreasonable and irrational because they were made by reference to new criterion concocted after the Claimant’s appointment as SoLR which was impossible to meet (i.e., because shaping/imbalance costs for the emergency customers would necessarily be the same as for existing customers, not higher). The court considered that this was not a new criterion but the application of an existing criterion in a new context. Additionally, it was applied in a manner which had been clarified earlier and the Claimant did not object to that clarification when it was made. Further, the Claimant provided no evidence that, within the retail electricity and gas industry, it is impossible for shaping/imbalance costs to be higher for emergency customers than pre-existing customers. The court reiterated again that it must apply a wide margin of discretion given Ofgem’s expert role, and the fact that whether or not to allow costs of this kind involves complex regulatory choices about the allocation of risks and costs carried out by Ofgem as regulator, having regard to its principal objective to protect consumers.

Ground 3

However, the court held that the Claimant made no firm commitment to absorb £15m of the costs of its SoLR role; or rather, all it committed to do was absorb the costs if Ofgem treated it fairly in its opinion. The court rejected Ofgem’s view that the fairness of its conduct must be assessed by reference to the performance of its statutory duties in accordance with public law standards; the Claimant’s opinion meant the Claimant’s opinion. Ofgem was found to have understood the significance of this, acknowledging that in certain circumstances EON may not absorb any of the relevant costs. Accordingly, Ofgem’s decision to discount the claim by £15m was wrong in law and/or the deduction was legally irrational.

Comment

When commercial organisations are dealing with a public body both parties should be alert to any qualifications, conditions or clarifications placed on each other’s assurances. They should consider immediately challenging each other on any qualifications, conditions, or clarifications they find unsuitable. It is notable that in this case the court held the public authority to the terms it had accepted in respect of EON’s discretion as to absorbing costs, rather than applying public law principles. However a high threshold will be applied before a court will even find an enforceable legitimate expectation against a public body, let alone hold an expert regulatory body to it in the context of complex regulatory choices.