Energy price cap to be recalculated following flawed consultation

In R (on the application of British Gas Trading Ltd) v Gas & Electricity Markets Authority and others [2019] EWHC 3048 (Admin), British Gas (the "Claimant") successfully challenged the level of the price cap set by Ofgem (the "Defendant") on certain tariffs for the retail supply of domestic energy, on the basis that the Defendant had based its calculations on an incorrect assumption, which had led to an unfair consultation and amounted to a mistake of fact.

Key points

• Failing to provide consultees with sufficient information in a consultation process will amount to a breach of the requirement of fairness as it will not allow the participants to fully address the issue in question prior to the decision being made.
• The public law principle of mistake of fact operates where there is an uncontentious and objectively verifiable mistake for which the objecting party is not responsible, which plays a material (but not necessarily decisive) part in the decision maker’s reasoning. The principle is also engaged if the decision maker forms a mistaken impression which plays a material part in its reasoning, or acts upon a wrong assumption, or if the decision is taken on facts unsupported by evidence.

Background

In July 2018 the Domestic Gas and Electricity Tariff Cap Act 2018 (the "Act") introduced an obligation on the Defendant to set and implement a price cap on certain tariffs for the retail supply of domestic energy, with a view to protecting domestic customers on default tariffs. In setting the cap, the Defendant was required by the Act to have regard to four "needs", namely:

1.  the need to create incentives for holders of supply licences to improve their efficiency;
2. the need to set the cap at a level that enables holders of supply licences to compete effectively for domestic supply contracts;
3. the need to maintain incentives for the domestic consumers to switch to different domestic supply contracts; and
4. the need to ensure that holders of supply licences who operate efficiently are able to finance activities authorised by the licence,

(ss.1(6)(a) - (d) of the Act).

Prior to the implementation of the legislation, the Defendant consulted stakeholders on the design of the cap through the publication of working papers in March 2018 followed by a non-statutory policy consultation in May 2018. A statutory consultation was then carried out in September 2018 (the "September consultation"), as required under the Act. On 6 November 2018, the Defendant set the price cap (the "Decision"). The maximum prices under the cap are a function of allowances made in respect of various supplier costs, including wholesale energy costs which constitute around 40% of total costs.

The Claimant challenged the assessment of the sufficiency of the wholesale energy cost allowance which was used to calculate the price cap, arguing that the Defendant relied on an incorrect assumption about the behaviour of a "typical" supplier in respect of the supplier's hedging strategy in relation to purchasing wholesale energy, which the suppliers did not have an opportunity to comment upon (the "Assumption").

The Defendant submitted that it had not made the Assumption, or if it had, it was immaterial to its Decision. Alternatively, the Defendant argued that if there was such an assumption it had been communicated adequately to the suppliers and they had an adequate opportunity to provide information to challenge it.

The Claimant sought declaratory relief.

Judgment

In her judgment, Mrs Justice Andrews recognised that the Defendant had been mindful of its statutory obligations in carrying out a complex task. Nonetheless, the court accepted the Claimant's criticism of the approach taken in setting the price cap and found the Claimant was entitled to the declaratory relief sought, requiring the Defendant to reconsider the allowance for the relevant period and make appropriate adjustments.

In reaching its decision, the court rejected out of hand the Defendant's submission that it had not made the Assumption, in light of "overwhelming evidence" to the contrary. The court found that the Assumption was fundamental to the outcome of the calculations undertaken by the Defendant and was undoubtedly material to the Defendant's assessment of sufficiency which underpinned the setting of the allowance, which in turn determined the level of the price cap.

The court went on to conclude that the Assumption was not communicated to the consultees – it was not obvious on the face of the consultation papers and the suppliers' evidence was that they had no knowledge of it.

Consultation requirements

Mrs Justice Andrews proceeded to apply the well-established standards governing consultations to the present case. The process must be fair to allow the consultees to address the issue in question before a final decision is made. Particularly relevant here was the requirement to provide consultees with sufficient information to enable them to put forward an intelligent response (R (Help Refugees Ltd) v SSHD [2018] EWCA Civ 2098 cited).

In failing to communicate the Assumption during the September consultation or at any stage before making the Decision, the Defendant's consultation had, the court found, fallen short of the requirement of fairness. Relevant to this consideration was the fact that the Assumption was a "critical factor in" and "underpinned" the Defendant's assessment. In light of the failure of the Defendant to inform the suppliers that it was relying on this particular material assumption, the suppliers had no opportunity, whether in the consultation or in subsequent meetings, to address this "key aspect" of the Defendant's reasoning.

As a consequence of the above, the Court found that the Defendant's reasoning in reaching the Decision had been insufficiently transparent, the aspect of the consultation process that related to the Assumption was unfair and the Claimant was entitled to relief on that basis.

Duty of enquiry

Notwithstanding Mrs Justice Andrews' conclusion on the consultation ground of challenge, she went on to consider whether there was also a breach of the duty of enquiry, which requires the decision-maker to take reasonable steps to acquaint itself with the relevant information to take a properly informed decision.

On the facts, she considered that it was not necessary for the Defendant to have put a specific question to the suppliers to elicit information which would have, in the circumstances, demonstrated that the Assumption was wrong. Rather, it would have been sufficient if the Defendant had made the suppliers aware of the Assumption so that they could present information to explain that it was wrong.

She concluded that whilst she could see how this case could be characterised as a case of making an assumption without any or any sufficient evidence to support it, that state of affairs was more attributable to a lack of transparency in the consultation process than to a culpable failure to seek further evidence.

Mistake of fact

Finally, although it was not necessary for the granting of relief, the Court found that the requirements for a finding that the Defendant had made a mistake of fact, as set out in E v Secretary of State for the Home Department [2004] EWCA Civ 49, were made out. It was accepted by both parties that this principle was engaged if the decision maker formed a "mistaken impression which played a material part in its reasoning, or acted upon a wrong assumption" and, on the facts, this was found to have been the case.

Comment

This decision, though highly fact specific, serves as a reminder to those required to consult that it is essential to communicate all relevant material information to those participating in the consultation, in order for the consultation to be fair and the decision to be lawful.

In relation to assumptions being relied on by decision-makers, those participating in consultations must be aware that in some circumstances it is not necessarily a requirement for the party running the consultation to expressly request evidence from the participants that supports that assumption. Care must be therefore be taken by participants to proactively provide a response to or seek further information on assumptions that are evident from the consultation paper, if they consider them to be incorrect.