On 6 June, the Department of Energy and Climate Change (DECC) issued the draft Regulations to give the energy regulator Ofgem powers to investigate and penalize abuses of wholesale energy markets. The EU Regulation on Wholesale Energy Market Integrity and Transparency, REMIT, has been in force since December 2011, but Member States were not required to adopt enforcement powers until the end of this month. At the same time, Ofgem consulted on draft guidance outlining the way in which it intends to exercise its powers, and its policy on imposing financial penalties. The draft Regulations are surprisingly detailed, running to 31 pages, and the draft guidance runs to another 38 pages. The penalties policy statement is 8 pages long. The UK is one of the first Member States to adopt enforcement rules for REMIT, so the publication will be of interest around the EU.
The GB draft Regulations provide for the enforcement of some but not all of the requirements of REMIT. These are the prohibitions on insider trading and market manipulation the obligation to publish inside information and the obligations of those professionally arranging transactions in wholesale energy products to report suspicious transactions. The enforcement of other requirements, including the obligations on market participants to register and to provide information to assist wholesale market monitoring, will be the subject of further proposals in due course. The NI government will publish its own similar REMIT enforcement Regulations later.
The main features of the enforcement regime set out in the draft Regulations are as follows:
Retention of records – market participants, and those professionally arranging transactions in wholesale energy products (together described throughout the Regulations as "Regulated Persons" or "RPs"), must retain records of communications for at least 6 months, or longer if directed by Ofgem.
Market monitoring powers – Ofgem may require RPs and members of their groups to provide specified information or documents reasonably required in connection with monitoring wholesale energy markets.
Basis of investigation – Ofgem may conduct an investigation if it appears that a person may have failed to comply with a REMIT requirement, failed to retain records as required, or committed an offence relating to non-compliance with Ofgem's powers of investigation. Ofgem's draft guidance indicates that in deciding whether to exercise its powers of investigation, it will consider a number of factors, including the seriousness and impact of the suspected infringement, resources, deterrent effect of enforcement action and whether it is best placed to investigate.
Powers of investigation – Ofgem will have the usual powers of investigation, including the power to request information and documents, and the power (other than in the case of investigations into suspected failure to retain records) and subject to obtaining a warrant from a magistrate, to conduct an on-site investigation. A power that is not available in competition or energy regulatory investigations, but is a feature of investigations by the FCA under financial market abuse rules, and will be available in REMIT investigations, is the power to require a RP to prepare or to appoint a skilled person to prepare a report. Ofgem will also have the power to conduct both voluntary and compulsory interviews. There are restrictions on the use that may be made of information provided in compulsory interviews. Failure to comply with requirements imposed in the exercise of these powers of investigation can be penalized as a contempt of court. Destruction, concealment or falsification of documents is a criminal offence.
Statement of Case and representations – within 9 months of opening an investigation, Ofgem will give a Statement of Case to the person being investigated, close the investigation explaining why no breach of REMIT requirements has occurred or close the case for reasons of administrative priorities, or update the person being investigated of the expected timescale for one of these. A Statement of Case will explain Ofgem's initial findings. In response to a Statement of Case, the person under investigation may make written and/or oral representations. Following those representations, Ofgem may close the file, or if it finds that there has been or is likely to be a breach of a REMIT requirement, it has a range of sanctions available to it.
Injunctions – Ofgem may apply to the court for an injunction prohibiting or remedying failure to comply with a REMIT requirement, or prohibiting a person from disposing of assets.
Restitution - Ofgem also has the power to require restitution of profits resulting from a breach of a REMIT requirement, or compensation for losses suffered by any person as a result of a breach of a REMIT requirement. Payment is made via Ofgem. In this case, Ofgem must issue a warning notice and decision notice, in the same way as for the imposition of a financial penalty, outlined below. Ofgem may also apply to the court for an order for restitution. The restitution remedy does not affect the rights conferred on individuals and businesses directly by REMIT itself, who remain entitled to bring their own actions before the courts for compensation for any loss suffered. In practice, Ofgem explains that it will first consider using its own powers, but may apply to the court for a restitution order when it is also taking other court action, for example applying for an injunction or freezing order.
Penalties - Ofgem has the power to impose unlimited penalties for breach of a REMIT requirement, or breach of the requirement to retain records. It is required to issue a statement of its policy on penalties. Until Ofgem has consulted on and issued its policy statement, the transitional policy set out in schedule 2 of the regulations will apply. This provides for Ofgem to take account of the seriousness of the breach, the extent to which it was intentional or reckless, the extent to which the infringer reasonably believed that its conduct was not in breach, whether or not he or she took reasonable preacuations to prevent it and whether or not the person is an individual. Ofgem's draft policy statement outlines the criteria that Ofgem will consider when deciding whether to impose a penalty at all, including the impact on consumers and markets, whether the infringement was intentional, whether the infringer misled Ofgem, whether the person believed that its conduct did not amount to a breach of REMIT, the existence of a compliance programme etc. It also outlines the criteria that Ofgem will take into account in setting the level of a penalty, including the criteria outlined above, and also aggravating and mitigating factors such as the involvement of senior management and cooperation with the investigation. In setting the level of a penalty, Ofgem will also take into account the question of whether the infringer is an individual. Ofgem explains that it may give a discount for early settlement, and interestingly also where the infringer offers restitution for consumers. Alternatively, it may simply issue a statement of non-compliance.
Warning notice - before imposing a penalty, or ordering restitution, Ofgem must give a "warning notice" to the person concerned. A decision to issue a warning notice must be taken by an Enforcement Committee or Settlement committee of senior officials separate from the case team. A warning notice must state the amount of the proposed penalty or restitution amount concerned, and give reasons. The alleged infringer will then have a period of time in which to make representations. Ofgem will also give access to its file, including both material on which it relies and also potentially exculpatory material, subject to certain exceptions. After considering any representations received in response to a warning notice, Ofgem may issue a decision notice, or close the file. The warning notice is not generally a public document, although Ofgem may publish some information about it, subject to certain conditions.
Decision notice - a decision notice must state the action that Ofgem has decided to take, and its reasons, and must explain the right of access to the file and the right of appeal to the Tribunal. As in the case of a warning notice, a decision notice will be taken by an Enforcement Committee or Settlement Committee.
Appeal - following receipt of a decision notice in respect of a penalty, a restitution order or a statement of non-compliance, the infringer may appeal to the Upper Tribunal (Tax and Chancery Division). This is a judicial tribunal that also hears appeals against decisions of the Financial Conduct Authority under the market abuse rules in the financial services sector. The Tribunal may consider all evidence, whether or not it was available to Ofgem, and may either dismiss the appeal or remit the matter to Ofgem with directions as to the action that it should take.
Comment - the draft REMIT enforcement Regulations set out a complex mechanism, borrowing features from competition, energy regulatory and financial services enforcement. Ofgem will have a range of investigative and enforcement actions available to it. The procedure secures due process, with opportunities to make written and oral representations and to see relevant evidence, as well as an appeal to an independent tribunal. According to Ofgem's guidance, it will place a high premium on early settlement and restitution. This is consistent with Ofgem's approach in competition cases, and the approach of the FCA in financial services investigations, where early settlement may attract a discount of as much as 30%. A key strategy decision at the outset of any investigation will therefore be whether to defend against it vigorously or whether to seek an early settlement.