Policy Explainer Special Administration Regimes

In January, the Department for Environment, Food and Rural Affairs issued legislation to update the 35-year-old special administration regime (SAR) for water monopolies in England and Wales.

Troubled Water

The move came amid fears over the financial health of the privatised monopolies, including Thames Water, the country’s largest, which is struggling under the weight of its £18.3bn debts.

The legislation contains provisions that will allow a water monopoly to enter administration, restructure its borrowings and then exit as a “going concern”. It also makes it less likely that the government would be forced to renationalise utilities.

Under the current rules, water company assets have to be sold off, and the corporate entity liquidated, if they go into administration. The new rules would also allow existing shareholders to potentially retain a stake.

The water companies’ SAR was drawn up soon after the industry was privatised in 1989. It allows the regulator, Ofwat, or the secretary of state to appoint special administrators from private insolvency companies to manage the business in the case of a financial collapse so that essential services can be kept running. Ofwat is concerned about the financial stability of several water companies, which are facing higher energy, labour and financing costs.

Public Service 

A special administration is essentially an insolvency process for businesses that provide a statutory or critical public service or supply, or where there is a wider public interest in a tailor-made insolvency procedure with a different purpose than a standard Insolvency Act administration.

The objective of a particular SAR commonly involves ensuring the continuation of essential services or activities or preserving the entity’s business operations.

There has been a significant expansion of the sectors for which a special administration is available. Some examples of current SARs include:

• Investment Bank SAR (IBSAR): introduced following the global financial crisis and the insolvency of Lehman Brothers. It was designed to handle the failure of financial institutions.

• Energy Supply Companies SAR: designed to protect customers if a large energy supplier becomes insolvent.

• Postal Services SAR: introduced to ensure that a universal postal service is provided in accordance with the standards set out in the universal postal service order.

• Payment and Electronic Money SAR: introduced in 2021 to provide a regime similar in nature as the IBSAR but designed to protect customers of a payment services provider or an electronic money institution.

Bright Spark

In November 2021, Ofgem handed Bulb to the energy companies SAR after the collapse of the power firm, which supplied gas and electricity to 1.5m UK customers.

A November 2023 report from the Public Accounts Committee noted that ministers proclaimed the administration to have been a success.

It said: “The SAR process has reached a cost of £3.02bn to the taxpayer, and government must carefully manage the risks to recovering this money in the next year or two. Government intervention can be necessary to protect households and businesses when energy suppliers fail, and government expects to recover most of the money it has invested. However, if this funding is not fully recovered, energy consumers may ultimately be left to foot the bill.

“At the time of the NAO report, Teneo estimated that the Department would recover £2.96bn of the taxpayer funding for the SAR from Octopus Energy Group Limited, which acquired Bulb, leaving an estimated shortfall of £246m.”

Better directors for a better world

The IoD supports directors and business leaders across the UK and beyond to learn, network and build successful, responsible businesses.

Finding stability in a changing economy

Browse valuable UK economy resources from the IoD.
Internet Explorer
Your web browser is out of date and is not supported by the IoD website. It is important to update your browser for increased security and a better web experience.