Issue 36: Party Failure and Default
Current Status
Summary
As a result of the recent defaults under the BSC and the resultant debts that all Parties are being exposed to, the BSC Panel has asked that an Issues Group considers the processes and timings for dealing with defaulting and failing Parties. The Panel is keen to understand if the industry believes there are any improvements that could reduce the potential debt.
Questions that should be considered include:
- Does the Code allow the Panel default powers to be triggered sufficiently early?
- Are there any additional actions that should be undertaken relating specifically to the various mechanisms for a Party ‘exiting’ the arrangements (e.g. actions specific to entering into administration, trade sale, etc)?
- Is it appropriate to treat ECVNS and MVRNS differently? (Currently Trade sale and SoLR will automatically clear MVRNs and BOAs because they are BMU based, however the Panel is required to agree to clear ECVNs).
- Should we cash out volumes for failed Parties at a neutral price?
- Any further lessons to be learnt from recent failures?
Progression
The Issue 36 Group met on 15 December 2008. The Group considered the questions set by the Panel, and discussed the following suggestions for reducing the risk of uncapped industry exposure to bad debt:
- A ‘pre-Default’ process with earlier, more subjective triggers (which could include affiliates in financial difficulty) and a limited range of discretionary Panel powers to ensure the Party has sufficient Credit Cover to cover its indebtedness;
- Greater co-ordination between the Default triggers under different industry codes;
- Cashing out volumes for a failing Party at a ‘neutral’ price (e.g. Reverse Price);
- Underwriting the risk of bad debt in a different way (e.g. through a commercial insurance scheme, a mutualised bond, requiring all Parties to lodge extra credit, or making Elexon a preferential creditor).
Elexon has agreed to produce a worked example of whether a neutral cash-out price for a failing Party would reduce industry exposure. Depending on the results, the Group may hold a further meeting in late January. A verbal update will be given at the January 2009 Panel meeting, with the Group’s full report aimed at the February 2009 Panel.
The Group has discussed several suggestions for reducing the risk of uncapped industry exposure to a Defaulting Party’s bad debt. It has concluded that there may be merit in a ‘pre-Default’ process with earlier, more subjective triggers – but that there are no easy solutions. The Group recommends that Issue 36 can now be closed. Its full discussions and conclusions will be presented to the Panel on 12 February 2009 in paper 152/12.