Copilot errors out when it is unable to access the web even with local model

I am using copilot chat in a corporate network. We dont have access to the github model endpoints. But i'm using a custom model, hosted locally. I am able to use this model as a chat agent without any issues. I recently created an MCP server with 10-12 tools. As soon as I activate that MCP and try to chat, I get an error saying `Unexpected token '<', ")
at n.json (c:\Program Files\Microsoft VS Code\a5b5009513\resources\app\extensions\copilot\dist\extension.js:1404:5620)
at process.processTicksAndRejections (node:internal/process/task_queues:104:5)
at async GE._fetchModels (c:\Program Files\Microsoft VS Code\a5b5009513\resources\app\extensions\copilot\dist\extension.js:6734:5553): Failed to fetch models (1a867ca5-f354-46b7-90ee-b7d3d2bf8836)
2026-09-11 09:39:27.589 [error] [InlineChatProgressMessages] Error fetching messages for generate: SyntaxError: Unexpected token '<', ")
at n.json (c:\Program Files\Microsoft VS Code\a5b5009513\resources\app\extensions\copilot\dist\extension.js:1404:5620)
at process.processTicksAndRejections (node:internal/process/task_queues:104:5)
at async GE._fetchModels (c:\Program Files\Microsoft VS Code\a5b5009513\resources\app\extensions\copilot\dist\extension.js:6734:5553)
2026-09-11 09:39:27.683 [info] Fetched model metadata in 95ms 5472fe7a-15f9-4272-b6f8-408a54e86f99
2026-09-11 09:39:27.684 [error] SyntaxError: Unexpected token '<', ")
at n.json (c:\Program Files\Microsoft VS Code\a5b5009513\resources\app\extensions\copilot\dist\extension.js:1404:5620)
at process.processTicksAndRejections (node:internal/process/task_queues:104:5)
at async GE._fetchModels (c:\Program Files\Microsoft VS Code\a5b5009513\resources\app\extensions\copilot\dist\extension.js:6734:5553)
at async GE.getCopilotUtilityModel (c:\Program Files\Microsoft VS Code\a5b5009513\resources\app\extensions\copilot\dist\extension.js:6734:3212)
at async L3e.resolve (c:\Program Files\Microsoft VS Code\a5b5009513\resources\app\extensions\copilot\dist\extension.js:1574:58351)
at async Hte._refreshUtilityOverrides (c:\Program Files\Microsoft VS Code\a5b5009513\resources\app\extensions\copilot\dist\extension.js:1603:8093): Failed to fetch models (5472fe7a-15f9-4272-b6f8-408a54e86f99)

Steps to Reproduce:

1. Block vscode in an isolated network
2. Configure custom model provider
3. Activate 80+ mcp tools
4. Chat with copilot!