On 10 October 2011, the Council of the European Union adopted a regulation on wholesale energy market integrity and transparency (the “Regulation”). The Regulation is expected to be published in the Official Journal towards the end of November 2011 and its provisions will come into force in each Member State 20 days after publication. The Regulation establishes rules prohibiting abusive practices affecting the wholesale energy markets in the European Union (the “EU”).

Background to the Regulation

The Committee of European Securities Regulators (“CESR”) and the European Regulators’ Group for Electricity and Gas (“ERGEG”) advised the European Commission that the scope of existing EU legislation was not effective in addressing market integrity issues in the electricity and gas markets. As a result, it was deemed necessary to provide an appropriate European legislative framework tailored to the energy sector, which would prevent market abuse and take into account sector-specific conditions not covered by other regulations and directives. As wholesale energy markets have become increasingly interlinked across the EU, with market abuse in one Member State affecting energy prices across national borders, the Regulation places great emphasis on implementing strong cross-border monitoring. For the first time, energy markets will be monitored at an EU-level through the Agency for the Cooperation of Energy Regulators (“ACER”).

The Regulation

The objective of the Regulation is to ensure that: (1) consumers and other market participants can have confidence in the integrity of electricity and gas markets; (2) prices set on wholesale energy markets reflect a fair and competitive interplay between supply and demand; and (3) no profits can be drawn from market abuse.

In particular:

  • The Regulation prohibits the use of inside information when selling or buying in wholesale energy markets. Exclusive and price-sensitive information must be disclosed before trades can take place.
  • Under the Regulation, manipulative transactions and the dissemination of incorrect information that gives false or misleading signals about the supply, demand or prices will be outlawed.
  • National regulatory authorities will be required to establish national registers of market participants. A European register of market participants, based on national registers, will also be established to enhance the overall transparency and integrity of wholesale energy markets.
  • Energy traders will be obligated to report their transactions to ACER, either directly or through a third party such as a broker or trade reporting system. Data to be reported will include price, volumes, the date and time of the transaction and the names of the seller, the buyer and the beneficiary. The specific details of these trade reporting obligations (i.e. format, timing, details, etc.) will be set out in a separate implementing regulation. 
  • ACER will be responsible for independent monitoring of all the trades and for verifying that rules are followed. On the basis of the data it receives, ACER will be able to conduct its own analysis of wholesale energy markets. Once its initial assessment confirms a suspicion of market abuse, it will request national regulators to investigate the case on the spot. In case of cross-border manipulations it will also coordinate the investigations. Once regulators establish a breach of rules they will apply appropriate penalties which have to reflect the damage caused to consumers. The Regulation encourages close cooperation and coordination between ACER and national authorities.

What’s next?

The rules on trade reporting are expected to be finalised within the next 18 months and should therefore enter into force by mid-2013. The registry of natural gas and electricity traders will need to be set up by each member state within three months of detailed reporting rules being adopted.

The Commission is also required to adopt further delegated acts adding specificity to key definitions under the Regulation, including definitions of “inside information”, “market manipulation”, and “attempt to manipulate the market”.

In addition, the Regulation requires all Member States to set the rules on the penalties for market abuse within 18 months of the Regulation coming into force.

Given the impact of these further definitions, market participants should consider providing input into each of these processes.