For a number of years prior to the adoption of specific rules on energy market manipulation, regulators around the European Union had been concerned about market abuse in wholesale energy markets. Particular examples that had raised concerns included withholding generation plant, with the intention of causing prices to increase, and cross-market manipulation – taking action in a physical market in order to secure a favourable price for a position in a derivative market.
A number of regulators had tried to use competition law – specifically the prohibition of abuses of market dominance in Article 102 TFEU and its national counterparts – to tackle this conduct. The practice of capacity withholding first came to mainstream attention through the European Commission’s investigation into E.ON. It suspected E.ON of withholding plant that would have been economic to run, in order to drive up prices. To close its investigation, it accepted commitments from E.ON to divest a significant proportion of its generation fleet. However, the Commission’s concern about its ability to establish dominance in that case was one of the factors that led to the development of a tailor-made abuse regime.
At about the same time, the GB energy regulator, Ofgem, investigated two of the six major integrated energy companies, SSE and Scottish Power, over suspicions that they had withheld plant from the forward wholesale market but then used the same plant to supply balancing power to National Grid at excessive prices. While concerned about the generators’ conduct, Ofgem closed the investigation because of its uncertainty about its ability to establish the dominance of the generators for competition law purposes. This investigation led to the adoption of a ‘Transmission Constraint Licence Condition’ in generators’ licences, which prohibits the exploitation of transmission constraints through excessive pricing.
Similarly the Spanish competition authorities imposed fines on a number of generators for abusing their dominance, similarly by withholding capacity in the day-ahead market and selling it at much higher prices in the ‘technical restrictions’ market. However, the decisions were overturned on appeal, on the basis that the Spanish authorities had not established that the generators knew for a certainty that their capacity would be required in the technical restrictions market, and that their conduct therefore amounted to taking a commercial risk rather than an abuse of dominance.
Against the background of these difficulties in establishing competition law infringements in the case of energy market manipulation, it is not surprising that the Commission was keen to introduce a dedicated set of rules on energy market manipulation. It therefore proposed, and the EU legislators adopted, REMIT, the Regulation on Wholesale Energy Market Integrity and Transparency, Regulation 1227/2011, which entered into force on 28 December 2011.
In addition to prohibiting insider trading and requiring the publication of inside information (which are not addressed here), REMIT introduced a dedicated prohibition of energy market manipulation. The substantive requirements are set out in REMIT itself. Member States were required to implement enforcement measures by 29 June 2013. These are addressed in the following chapter.
The prohibition of energy market manipulation
The substantive prohibitions in REMIT apply to wholesale energy products, namely:
a contracts for the supply of electricity or natural gas where delivery is in the European Union;
b derivatives relating to electricity or natural gas produced, traded or delivered in the European Union;
c contracts relating to the transportation of electricity or natural gas in the European Union;
d derivatives relating to the transportation of electricity or natural gas in the European Union.
However, the two key REMIT prohibitions on insider trading and market manipulation do not apply to energy derivatives traded on exchanges such as EEX. Instead, that conduct is covered by the very similar market manipulation and insider trading prohibitions in the Market Abuse Regulation (MAR).
As its name suggests, REMIT is intended to apply to transactions in relation to wholesale energy products. However, the European Parliament adopted an amendment to the Commission’s original proposal, extending REMIT to contracts for the supply and distribution of electricity or natural gas to final customers with a consumption capacity greater than 600GWh per year. In this case, consumption capacity means the capacity of all plants owned by the same economic entity (i.e., at a group level) on markets with interrelated wholesale prices.
The prohibition of market manipulation
REMIT prohibits market manipulation in relation to wholesale energy products.
Market manipulation means entering into any transaction or issuing any order to trade in wholesale products which:
a gives or is likely to give false or misleading signals as to the supply of, demand for or price of wholesale energy products;
b secures or attempts to secure, by a person, or persons acting in collaboration, the price of one or several wholesale energy products at an artificial level, unless the person who entered into the transaction or issued the order to trade establishes that his reasons for doing so are legitimate and that that transaction or order to trade conforms to accepted market practices on the wholesale energy market concerned;
c employs or attempts to employ a fictitious device or any other form of deception or contrivance which gives, or is likely to give, false or misleading signals regarding the supply of, demand for, or price of wholesale energy products.
It is also market manipulation to disseminate information through the media which gives, or is likely to give, false or misleading signals, where the disseminating person knew, or ought to have known, that the information was false or misleading. There is an exclusion for journalism and artistic expression.
Attempting to manipulate the market is also prohibited. This essentially involves entering into any transaction, issuing an order to trade or taking any other action with the intention of manipulating the market in any of the ways outlined above.
The prohibition of market manipulation in Article 5 of REMIT is set out in only very general terms. REMIT itself provides no explanation of what is meant, for example, by the concept of securing prices at an artificial level.
Some detail is set out in guidance produced by the Agency for the Cooperation of Energy Regulators, ACER, which has an important role in market monitoring and in ensuring consistent enforcement. ACER’s guidance is currently in its fourth edition, published in June 2016. In addition to defining terms such as ‘wholesale energy product’ and ‘market participant’, used throughout REMIT, the guidance provides examples of types of conduct that may constitute market manipulation. ACER has also issued more detailed guidance in relation to the concept of ‘wash trades’ – a specific category of manipulation, explained in more detail below. This appears to be intended as the first in a series of similar more detailed guidance notes on various specific types of market manipulation. It is important to note that the guidance only sets out examples of types of conduct that may infringe the widely drafted prohibition. The list is not exhaustive. It should also be noted that the same conduct may fall within more than one of the categories outlined below.
ACER’s guidance provides a number of examples of types of false and misleading transactions.
A wash trade is a transaction where there is no change in the beneficial ownership of the wholesale energy product, or the market risk, or any transfer is only between parties acting in concert or collusion. ACER issued more detailed guidance on the concept of wash trades in June 2017. It provides a number of illustrations of wash trades, and analyses them against the types of manipulation described in Article 5. It explains that in addition to sending false or misleading signals about market liquidity, prices and market fundamentals, wash trades may fall into the category of price positioning described below. It also provides indicators for identifying suspicious wash trades, together with best practice guidance for persons professionally arranging transactions (PPATs).
Improper matched orders
These are transactions where buy and sell orders are entered into at nearly the same time, by different but colluding parties. They constitute market manipulation unless entered into in accordance with the rules of the relevant trading platform.
Placing orders with no intention of executing them
Entering orders in order to give a misleading impression as to the supply of or demand for a wholesale energy product, influencing the price of the product, and then withdrawing them before they are executed, also constitutes market manipulation.
ACER also provides examples of price positioning – transactions that secure or seek to secure a price for wholesale energy products at an artificial level. They include the following.
Marking the close
Marking the close consists of buying or selling wholesale energy products at the close of the market in order to change the closing price, particularly on expiry dates for derivatives and reference dates for portfolio valuations and indices.
Where a market participant with a significant influence over the supply of, or demand for, or the delivery mechanisms for a wholesale energy product or the product underlying a derivative exploits a decisive position in order to distort the price, it engages in an abusive squeeze. However, it is important to note that while the interaction of supply and demand may lead to market tightness, this does not of itself constitute market manipulation. Nor does the mere fact of having a significant influence over the supply of, or demand for, a wholesale energy product, or over the delivery mechanisms, constitute market manipulation.
Trading in one market with a view to having an improper influence on the price in a related market is also a form of market manipulation. A particular example is trading in a physical market in order to move the price in a derivative market. Cross-market manipulation has been the subject of a number of the investigations by the US FERC under the US anti-manipulation rules.
Physical withholding consists of not offering the output of a plant, with no justification, in order to cause an increase in prices.
A third category of market manipulation consists of entering into transactions involving fictitious devices or deception. Examples include:
a The dissemination of false or misleading information (‘scalping’): with the intention of moving the price of a wholesale energy product.
b Pump and dump: taking a long position in a wholesale energy product and then making additional purchases, or spreading misleading positive information about the product, with a view to increasing its price, then selling out at the higher price.
c Circular trading: executing a sell order, in the knowledge that an offsetting buy order is being executed at the same time.
d Pre-arranged trading: where dealers trade with each other at prices agreed in advance. This may be intended to exclude other traders, or to obtain a tax advantage, or both. However, certain types of pre-arranged trades, conducted in accordance with the rules of specific markets, may not amount to market manipulation.
The final category of examples of market manipulation consists of spreading false or misleading information – disseminating false or misleading information, where the person disseminating it knows or ought to know that it is false or misleading – or engaging in other behaviour designed to spread false or misleading information (e.g., moving physical stocks in order to convey a misleading impression about supply or demand).
Legitimate reasons and accepted market practices
Securing prices at an artificial level amounts to market manipulation unless the market participant is able to establish that it entered into the transaction for legitimate reasons and in accordance with accepted market practices. This places the burden on the market participant to establish a defence. So in November 2013, Ofgem and the FCA dropped their investigation into suspected manipulation of gas markets in September 2012 when the market participants concerned were able to satisfy Ofgem and the FCA that they had legitimate reasons for entering into a series of transactions just before market close at anomalous low prices.
The concept of accepted market practices (AMPs) is derived from the Market Abuse Directive (now replaced by the Market Abuse Regulation) in relation to financial markets. Recital 27 of REMIT provides for ACER to cover the topic in its guidance. Under MAD/MAR, AMPs are practices that are reasonably expected in one or more markets, and are accepted by the relevant authority in accordance with a procedure set out in the Directive/Regulation. REMIT does not set out a specific procedure for approval of wholesale energy market AMPs, but ACER’s intention is clearly that a similar arrangement should apply. Its guidance sets out criteria that regulators should take into account in deciding whether to approve an AMP. They include the level of transparency of the market, the impact of the practice on market participants and the extent to which the practice allows other market participants to react properly and in a timely manner to the new market situation. ACER also refers to an obligation to coordinate and publish AMPs on its website, although REMIT imposes no such obligation. No AMPs have been published to date.
Enforcement to date
ACER publishes an annual REMIT report. It provides a useful insight into the state of REMIT enforcement. The 2016 report explained that ACER examined 33 new REMIT cases in 2015, of which 26 involved suspected infringements of Article 5. Most were notified by NRAs or PPATs, although some were reported by other market participants and whistle-blowers.
There have been relatively few public cases of energy market manipulation to date. The highest-profile case (and the only one in which a fine has been imposed) resulted from an investigation by the Spanish National Commission on Markets and Competition (CNMC) into withholding of capacity by Iberdrola, one of the largest Spanish energy undertakings. Over a three-week period, Iberdrola reduced the quantity of electricity from three of its hydroelectric plants dispatched in the day-ahead market, even though it had sufficient water reserves and prices were favourable. The CNMC concluded that Iberdrola’s strategy was intended to increase prices, creating an opportunity for in-merit entry by higher-priced CCGT plants, thereby securing a higher market price than that which would otherwise have arisen. This meant an increase in the market price of some €7/MWh. It noted that this type of conduct, which leads to artificial market prices that do not correspond to available production capacity or to fundamental market data, constitutes typical market manipulation prohibited by REMIT. The CNMC also quoted from ACER’s guidance, referring to the description of price positioning abuses in Section 6.4.2(d) of the guidance:
Actions undertaken by persons that artificially cause prices to be at a level not justified by market forces of supply and demand, including actual availability of production, storage or transportation capacity, and demand (‘physical withholding’): This is for example the practice where a market participant decides not to offer on the market all the available production, storage or transportation capacity, without justification and with the intention to shift the market price to higher levels, eg. not offering on the market, without justification, a power plant whose marginal cost is lower than the spot prices, misusing infrastructure, transmission capacities, etc., that would result in abnormal high prices.
The CNMC concluded that Iberdrola’s conduct constituted an infringement of Article 5 of REMIT, and imposed a fine of €25 million.
The case is interesting not only because it represents the first fine imposed for market manipulation, but also because it represents a type of conduct that the Spanish authorities had historically tried to tackle using competition law, ultimately unsuccessfully. REMIT allowed the CNMC to address the abuse without encountering the difficulties presented by competition law.
Enel and Sorgenia
In October 2016, the Italian competition authority announced that it had launched an investigation into suspected infringements of the competition rules by Enel and Sorgenia, in the form of withholding output from the day-ahead market. Interestingly the investigation had originated with the Italian energy regulator, which had opened an investigation under REMIT. It is not clear why the NRA transferred the case to the competition authority. The case was closed in May 2017 following commitments from Enel to cap the profitability of its Brindisi Sud power station.
A very different case can be seen in Ofgem’s investigation into National Grid, the electricity transmission system operator in Great Britain. National Grid published incorrect information about certain technical calculations, resulting in incorrect price information being given to the market. Ofgem took the view that this was an infringement of Article 5 of REMIT, even though it acknowledged that the breach was unintentional. This seems at odds both with the concept of ‘manipulation’ in Article 5 of REMIT, and with the examples given in ACER’s guidance, which emphasise the intent to create a false or misleading impression. Ofgem closed the investigation without a formal finding of infringement.
This investigation represents a somewhat troubling development in REMIT enforcement: it remains to be seen whether other authorities adopt a similarly broad approach, and also treat the unintentional publication of incorrect data as market manipulation.
Cases referred to in ACER’s annual reports
In addition to these higher-profile investigations, ACER’s guidance also gives examples of a number of cases of suspected market manipulation that have attracted less attention. They include the following.
• An investigation in 2014 into possible manipulation of the wholesale electricity market. Identical orders were introduced and withdrawn several times during the day. However, no cross-market effects could be established, and fundamental market information justified some of the withdrawn bids.
• An investigation, also in 2014, into potential manipulation in the wholesale gas market. In that case, a market participant placed an unusual number of orders for an illiquid month-ahead product. In some cases the market participant placed both buy and sell orders, and then withdrew them before they were executed. The conduct created the impression that the market participant was interested only in affecting the closing price of the product. The case closed with a warning to the market participant.
Basing an assessment of the current state of enforcement of Article 5 of REMIT purely on the decisions published to date is likely to understate the extent of the risk for energy market participants. The number of market manipulation cases investigated by ACER appears to be increasing, and national authorities are also becoming more familiar with the rules, and increasing their detection and enforcement capabilities. REMIT compliance is therefore likely to become a higher priority over the next few years.
 Peter Willis is a partner at Bird & Bird LLP.
 https://www.ofgem.gov.uk/system/files/docs/2017/05/2017_tclc_guidance.pdf. It is also worth noting that Ofgem attempted to impose a Market Abuse Licence Condition in 2000: the then Competition Commission rejected it. https://www.ofgem.gov.uk/sites/default/files/docs/2000/04/the-market-abuse-licence-condition-for-generators-a-decision-document-1404_0.pdf; http://webarchive.nationalarchives.gov.uk/+/http://www.competition-commission.org.uk//rep_pub/reports/2001/453elec.htm.
 Although see the investigation into Enel and Sorgenia by the Italian competition authority, mentioned below, as an example of an investigation going against this trend.
 Article 2(4), second paragraph and (5).
 Article 5.
 Article 2(2)(a).
 Article 2(2)(b).
 Article 5.
 Article 2(3)(a)