The Guide to Energy Market Manipulation

Energy Market Manipulation in the EU: Practice and Procedure

22 February 2018

OFGEM

As explained in chapter 5, REMIT[2] provides for a harmonised set of rules prohibiting, among other things, market manipulation in wholesale energy markets. To ensure the effectiveness of those rules, REMIT requires each Member State to grant investigatory and enforcement powers to its national regulatory authority for energy (NRA).[3] Member States retain some flexibility on to how to do this.

This chapter outlines those investigatory and enforcement powers, drawing on the example of the approach adopted in Great Britain by the government and Ofgem.[4] It addresses the following areas that are important to understanding the overall approach: powers and conduct of investigations, due process and rights of defence, sanctions (administrative and criminal), cooperation among regulators and private enforcement.

The chapter also takes a comparative approach, highlighting relevant similarities and differences between the REMIT processes and those for enforcing competition law. This is appropriate given, in the author’s experience, it will often be the in-house or external competition or antitrust lawyer who is the first port of call for market participants seeking advice on compliance.

Background

REMIT requires that Member States give NRAs specific powers to ensure the effective enforcement of the prohibition on market manipulation and the other substantive provisions of REMIT. All enforcement is undertaken at a national level. The Agency for the Cooperation of Energy Regulators (ACER) performs an important role in coordinating pan-European enforcement and monitoring within this framework.[5] It does not, however, have its own investigatory powers. This is in contrast to the position of the European Commission in relation to investigations into market manipulation under Article 102 of the Treaty on the Functioning of the European Union (TFEU).

NRAs must be given at least the following investigatory powers:[6]

a to have access to any relevant document in any form, and to receive a copy of it;

b to demand information from any relevant person and, if necessary, the right to summon and hear any such person;

c to carry out on-site inspections;

d to require existing telephone and existing data traffic records;

e to require the cessation of any practice that is contrary to REMIT;

f to request a court to freeze or sequester assets; and

g to request a court or any competent authority to impose a temporary prohibition of professional activity.

These powers may be exercised either by the NRAs alone, in conjunction with other authorities or on application to judicial authorities.[7]

REMIT envisages that the penalties for its breach are consistent with those adopted for breaches of the market abuse regime,[8] which applies in relation to trading in financial instruments.[9] This reflects the close interactions between products that are subject to that regime (such as derivatives) and those are subject to REMIT, such as products for physical delivery.[10] Indeed the scope of REMIT’s enforcement powers is defined by reference to financial markets: the prohibition on market manipulation in REMIT does not apply to those wholesale energy products that are subject to the market abuse legislation for financial markets.[11] In Great Britain the government has also used the financial market abuse model as the basis for the investigatory and enforcement powers of Ofgem. The last comprehensive study on the implementation of REMIT noted that at least some Member States, of which the United Kingdom is now one, had created criminal sanctions for certain breaches.[12]

Ofgem’s powers, as set out in the Electricity and Gas (Market Integrity and Transparency)(Enforcement, etc) Regulations 2013 (the GB Regulations) are modelled on those of its fellow regulator, the Financial Conduct Authority’s (FCA), for investigating market abuse in financial markets. These powers are similar to those given to national competition authorities, again including Ofgem insofar as the matters relate to the energy sector in Great Britain, for investigating breaches of competition law.[13]

Powers and conduct of investigations

Ofgem has published extensive procedural guidance setting out its approach to investigating and enforcing REMIT under the GB Regulations.[14] Before turning to look at the powers of investigation and how Ofgem makes decisions on whether there has been a breach, a number of initial observations arising out of the guidance should be made. These relate to the different ways in which Ofgem may become aware of potential REMIT breaches and how it prioritises cases to decide which to open.

Ofgem has wide discretion about which cases it investigates and how it investigates them. For example, in relation to suspected market manipulation, it is open for Ofgem to decide to investigate and take action against an individual trader, the corporate entity on whose behalf the trader is authorised or both. This is different from competition law, where the possibility of action against the individual is relatively limited.[15] The real prospect of individual liability arguably provides a greater level of deterrence against wrongdoing than competition law.

As mentioned, the guidance also covers the sources of investigations. Market monitoring of transactions and other relevant market data is likely to be the most important source of information for investigations.[16] This is facilitated by the system of registration of market participants with a relevant NRA, imposed by REMIT.[17] Another important source of information for investigations is the requirement on persons professionally arranging transactions (PPATs),[18] such as energy market brokers, to notify Ofgem of suspicious transactions.[19] Suspicious transactions include those which the PPAT suspects might breach the prohibition against market manipulation. The guidance explains how such a notification can be made to Ofgem. A failure to comply with this requirement may itself be subject to investigation and enforcement.

This is another way in which NRAs will become aware of potential infringements. It performs a similar function to the leniency framework for competition law to achieve this objective. It uses the ‘stick’ of enforcement to encourage reporting by a third party rather than a ‘carrot’ of significant discounts to penalties for wrongdoers who bring their conduct to the regulators’ attention.[20]

Powers of investigation under GB Regulations

This section focuses on three of Ofgem’s main powers of investigation under the GB Regulations. These may be exercised where there are circumstances suggesting a person may have engaged in market manipulation.[21] This section then goes on to explain the consequences for non-compliance with any of the investigatory measures, in addition to limitations on the powers of investigation.

The first of these is the power to require information and documents.[22] This may be exercised by notice in writing and can be used by Ofgem to gather information from any person, not just those suspected of having engaged in market manipulation. In practice this power is likely, in market manipulation investigations, to require the provision of information contained in electronic communications and telephone calls relating to the market participants entry into energy market transactions. Market participants are required to create and maintain such records for at least six months under the GB Regulations.[23] This, in effect, requires the use of recorded lines by energy market traders.

The second is the power to summon and hear.[24] This is effectively a power to compel any person to attend an interview and answer questions.[25] There is no right to silence and a failure to attend or answer can be subject to enforcement.[26] In some circumstances, Ofgem may invite individuals to attend interviews without recourse to this power.[27] Whether or not carried out under compulsion, interviews will normally be recorded in order to ensure that there is an accurate record of the answers given.

Finally, Ofgem also has the power to enter premises under a warrant.[28] Once on premises Ofgem has powers to, among other things, search for relevant documents and take possession of them. The power can be exercised where a failure to comply with a written notice under Regulation 11 is suspected to have occurred or is anticipated. It is subject to oversight by the courts as it is necessary for Ofgem to make an application to a justice of the peace for a warrant.

There are further measures set out in the GB Regulations to support effective investigations by Ofgem. These include the power for Ofgem to seek the assistance of the court in enforcing compliance with the power to require information.[29] There are also offences associated with the destruction or concealment of documents during investigations, the provision or false or misleading information or the obstruction of a warrant.[30]

Limitations of investigatory powers

Ofgem’s investigatory powers are subject to two key limitations, relating to legal professional privilege and the privilege against self-incrimination. Each is explained in turn below.

The GB Regulations impose a general limitation on Ofgem’s investigatory powers in relation to ‘protected items’.[31] These items include communications between a professional legal adviser and his or her client (or a representative of the client) made in connection with the giving of legal advice. They also include communications between a professional legal adviser, his or her client or any person representing the client and any other person where that communication is made in connection with, or in contemplation of, legal proceedings and for the purposes of those proceedings.

An extensive examination of the legal issues relating privilege and regulatory investigations is beyond the scope of this chapter. Two brief observations can, however, be made.

First, there appears to be no distinction between the protection afforded to an external lawyer’s advice and that of a similarly qualified in-house counsel. This differs from the position in relation to competition law investigations undertaken by the European Commission under Article 102 of the TFEU, where advice provided by in-house legal advisers does not benefit from legal professional privilege.[32] This divergence exists because while REMIT, like Article 102 of the TFEU, is an instrument of EU law, powers of investigation are matters left to national law entirely.

Second, it is unclear when proceedings will be sufficiently adversarial for litigation privilege to apply: while proceedings in the Tribunal (discussed further below) will be legal proceedings for the purposes of protection, it should not be presumed that this applies from the outset of Ofgem’s investigation under Regulation 10 of the GB Regulations.[33] English law has also applied the concept of ‘client’ in relation to corporate entities restrictively, limiting it to those authorised to give instructions or receive advice.[34] This means that there is a risk that discussions between lawyers and third parties (i.e., those not authorised to give advice) may not be protected at the early stage of an investigation.

Rather than being an absolute bar to Ofgem requiring the provision of material like the protection for legal privilege, the protection for the privilege against self-incrimination operates differently. Instead, the restriction is on Ofgem, in certain proceedings, including those relating to the imposition of a penalty for market manipulation against a person, adducing a statement it required that person to provide under its investigatory powers.[35] This is an exception to the general rule that all statements made to the Authority are admissible in evidence in any proceedings[36] and is itself subject to exceptions. It does not prevent the Authority from relying on a statement made by one person against another person.

The approach adopted by the GB Regulations is the same as the one used in many other UK statutes following the judgment of the European Court of Human Rights in Saunders v. UK.[37] This is to be contrasted with the approach adopted in European competition law investigations where the ability to compel the provision of potentially incriminating answers is limited. In that context, and in order not to undermine the subject undertaking’s rights of defence, the European Commission cannot ‘compel an undertaking to provide it with answers which might involve an admission on the undertaking’s part of the existence of an infringement’.[38]

Due process and rights of defence

The provisions of REMIT dealing explicitly with due process and rights of defence are limited to a requirement that Member States provide for, essentially, a route of appeal that is compliant with Article 6 of the European Convention on Human Rights.[39] Subject to this, it is open to Member States to provide for a range of decision-making models, including administrative decision-making or a prosecutorial model before a court or specialist tribunal.

In GB an enhanced administrative model has been adopted. This is based on the FCA’s decision-making for market abuse cases in financial markets but has some similarities with the approach adopted for competition cases. A number of key steps may occur in an investigation and further information may be found in Ofgem’s guidance. A brief explanation is provided below.

Following the conclusion of the investigation stage of the process, Ofgem will prepare an issues letter that sets out, among other things, the relevant facts and initial findings on the alleged infringement. This document is prepared by the case team who have undertaken the investigation to date. The next formal step involves referral of the case to independent decision-makers (who have not been involved in prior steps of the investigation) within Ofgem.[40] These, collectively, are known as the Enforcement Decision Panel (EDP) and three individuals will normally be selected for each case.

The EDP will decide whether to issue a warning notice, which warns the individual of the action which is proposed to be taken against them on finding of an infringement. The options are explained further in the section on sanctions below. The individual has, at this stage, rights to make representations (both written and oral) to the EDP as well as a right to access documents on Ofgem’s file.[41] Subject to the EDP being satisfied that an infringement has occurred, a decision notice will be issued. This starts the time period for referring the matter to a specialist tribunal, the Upper Tribunal (Tax and Chancery Division). Where no reference is made in the relevant period, a final notice will be made by Ofgem, confirming the findings.

A detailed examination of Tribunal practice and procedure is beyond the scope of this chapter. It should be noted that the Tribunal’s powers are broad and do not, strictly speaking, amount to an appellate jurisdiction.[42] The Tribunal is to consider[43] the appropriate course of action based on the evidence presented to it and will remit the matter to Ofgem and direct it to take that action. As a consequence, the burden of proof will be on Ofgem to make out its case.[44]

Sanctions

This section focuses on sanctioning powers available for breaches of REMIT. Ofgem’s guidance and penalties statement[45] contains a fuller description, including of its powers to order restitution,[46] seek injunctions[47] and the issue of a statement of non-compliance.[48] Sanctions under criminal law for certain acts of market manipulation are discussed below.

Administrative financial penalties

Ofgem has a power to impose financial penalties for breaches of REMIT. This is not subject to an explicit cap in contrast to competition law, where a cap of 10 per cent of turnover exists. The power may also be exercised against individuals and corporate entities. Ofgem’s penalties statement sets out the different approaches to the setting of penalties in relation to each.

Ofgem’s penalties statement also sets out the availability of discounts to financial penalties for those who admit infringements of REMIT. The size of discount reflects the stage of the investigation, with the largest discount available to those who settle early in the investigatory process. This reflects, among other things, the saving of Ofgem’s resources associated with settled cases. As noted above, there is no direct equivalent to leniency in the REMIT context and therefore complete immunity from financial penalties is not available like it is in the competition law context.

Criminal sanctions

In addition to the extensive administrative sanctions discussed above, certain acts of market manipulation in Great Britain amount to an offence. The government created these offences in 2015 to provide parity with the financial services regime.[49]

At a high level, a person will commit an offence where the acts of market manipulation referred to in chapter 5 are committed with either a particular intent (e.g., to give false or misleading signals as to the price of a wholesale energy product) or is reckless. It is open to a person charged with an offence to raise specific defences set out in the regulations.

The offences may be prosecuted by Ofgem, in accordance with its published guidance as well as other authorities.[50] A person found guilty of an offence faces imprisonment of up to two years or an unlimited fine.

Cooperation

It will come as no surprise that, as an EU-wide instrument, REMIT envisages extensive cooperation between ACER, the NRAs and authorities with closely related responsibilities such as financial markets regulators and competition authorities. In addition to general obligations of cooperation there are specific obligations to inform other regulators of suspected breaches in that other area of responsibility. For example, NRAs are required to inform competition authorities and the European Commission where acts suspected of breaching competition law are identified by them.[51]

ACER plays a central role in many of the cooperative measures, including through its ability to require NRAs to provide information and to require the establishment of cross-border investigatory groups. ACER also has a critical role in collecting transaction data from market participants and ensuring its onward transmission to relevant national regulatory authorities. The provision of comprehensive and systematic data like that envisaged by the system is likely to be particularly important for the detection of market manipulation.

Cooperation on such issues, including on access to data, is likely to be important for the effective investigation and enforcement of REMIT in the United Kingdom following Brexit.

Private enforcement

There have been significant recent developments in enforcement of competition law by persons other than the relevant public authorities entrusted with enforcement. Such proceedings are either undertaken on a follow-on basis (where damages actions rely on a prior decision of a regulator to establish breach and therefore focus on causation and quantum) or a stand-alone basis. In addition to relying on tortious liability, specific provision has been made for such actions in national legal frameworks even prior to requirements imposed by the European Union.

In contrast, no specific provision is made under REMIT itself nor the GB Regulations for private enforcement, either on a standalone or follow-on basis, of the REMIT prohibitions. Given both the developments in the competition law context and the potential sums that may be lost by market participants owing to market manipulation by another company on a wholesale energy market, this could be a space to watch closely in the next few years.

Conclusion

REMIT and its national implementing legislation provides a robust framework for investigation and enforcement of market manipulation, including by providing for a strong deterrent effect on individual traders. As the above has demonstrated there are sufficient similarities to make it familiar to the competition law practitioner who is first called upon to give advice but also sufficient differences to require him or her to look closely before doing so.

Notes

 

[1]  Mark J Mills is a principal legal adviser and solicitor at Ofgem. This work is personal and represents the author’s own views. It does not necessarily reflect the position of Ofgem.

[2]  Regulation (EU) No. 1227/2011 of the European Parliament and of the Council of 25 October 2011 on wholesale energy market integrity and transparency. References in this chapter to an Article or Recital are to the relevant Article or Recital of REMIT unless otherwise stated.

[3]  The authority designated for the purposes of each of the EU’s Third Energy Package – see: https://ec.europa.eu/energy/en/topics/markets-and-consumers/market-legislation.

[4]  Readers should note that equivalent powers have also been given to the Northern Ireland Authority for Utility Regulation, which is the NRA for Northern Ireland.

[5]  Recitals 17 and 27.

[6]  Article 13(2).

[7]  Article 13(1).

[8]  The Market Abuse Directive (Directive 2003/6/EC of the European Parliament and of the Council of 28 January 2003 on insider dealing and market manipulation), which is referred to in the text of REMIT, has been superseded since REMIT was enacted. It has been replaced by Regulation (EU) No. 596/2014 of the European Parliament and of the Council of 16 April 2014 on market abuse.

[9]  Recital 31.

[10] Recital 31.

[11] Article 1(2).

[12] See the Council for European Energy Regulator’s report: https://www.ceer.eu/documents/104400/-/-/82435ef8-a07a-e005-781a-c022abc800b5.

[13] See Council Regulation (EC) No. 1/2003 of 16 December 2002 on the implementation of the rules on competition laid down in Articles 81 and 82 of the Treaty.

[14] See https://www.ofgem.gov.uk/system/files/docs/2016/09/remit_procedural_guidelines.pdf (Guidelines).

[15] In UK competition law it is only possible to take action where there is collusion that engages the criminal cartel offence under the Enterprise Act 2002 or in relation to company directors who are subject to disqualification proceedings. The use of these powers has been limited in the UK with few convictions and disqualifications.

[16] See Article 8. Ofgem also has the power to require information to be provided for monitoring purposes – see Regulation 9 of the GB Regulations.

[17] Article 9.

[18] See the ACER Guidance on the Application of REMIT (4th Edition) at Section 9.2, available at:
http://www.acer.europa.eu/official_documents/other%20documents/4th%20edition%20acer%20guidance%20remit.pdf.

[19] Article 15.

[20] This arguably reflects the fact that the competition law framework trades off the penalties foregone in relation to the leniency applicant against those gained (if one presumes the cartel would not have been detected absent the leniency applicant) against the other cartelists. By comparison, market manipulation in the REMIT context can generally be committed by just one participant and therefore the incentives for the regulator are different.

[21] Regulations 10(1)(a) and 10(2) of the GB Regulations.

[22] Regulation 11 of the GB Regulations.

[23] Regulation 8 of the GB Regulations. This is not specifically required by REMIT but mirrors the approach first imposed in 2008 by the FCA’s predecessor, the Financial Services Authority, in financial markets. Information about the rationale for that initial decision may be found here: http://www.fsa.gov.uk/pubs/policy/ps08_01.pdf.

[24] Regulation 12 of the GB Regulations.

[25] Competition law practitioners will note the similarities with the power under s26A of the Competition Act 1998. Unlike that power, however, there is no requirement under Regulation 12 for the person to have a formal connection with the business under investigation.

[26] Under Regulation 20(1)-(4) of the GB Regulations, although see further below – limitations of investigatory powers.

[27] For example, such an approach may be used for interviews of suspects where Ofgem is considering prosecuting the criminal market abuse offence. In such circumstances, Ofgem will comply with the wider legal framework for criminal investigations, including the Police and Criminal Evidence Act 1984. Other regulators also undertake a range of different types of interview. See, for example, the description of the FCA’s approach at: https://www.handbook.fca.org.uk/handbook/EG/4/11.pdf.

[28] Regulation 16.

[29] See Regulation 20(1)-(4).

[30] See Regulation 20(5)-(8).

[31] Regulation 52.

[32] Case C-550/07 P Akzo Nobel v. Commission.

[33] See the discussion at Property Alliance Group Ltd v. Royal Bank of Scotland plc [2015] EWHC 1557 (Ch) beginning at Paragraph 43, which cites Tesco Stores v. Office of Fair Trading [2012] CAT 6 relating to competition law investigations. While the Tribunal’s observations in that case were made obiter, the issue of a statement of objections (SO) was identified as a relevant matter – see [44] – to determining whether the proceedings were sufficiently adversarial for privilege to arise. The SO process has some similarities with the warning notice procedure under the GB Regulations.

[34] See Three Rivers District Council v. the Bank of England (No. 5) [2003] EWCA Civ 474.

[35] Regulation 15(2) of the GB Regulations.

[36] Regulation 15(1) of the GB Regulations.

[37] Saunders v. United Kingdom [1997] 23 EHRR 313.

[38] Case 374/87 Orkem v. Commission for the European Communities at Paragraph 35.

[39] See Article 14.

[40] Regulation 42(2) of the GB Regulations sets out the requirement to have such decision-makers.

[41] Regulation 41 of the GB Regulations.

[42] This should be compared to competition law cases where Ofgem’s decisions are subject to appeal.

[43] In relation to decisions to impose a penalty under Regulation 31.

[44] This is different from the position of decisions taken under the Competition Act 1998 by Ofgem where the Competition Appeal Tribunal’s hears the matter as an appeal, with the burden on the appellate to show that Ofgem’s decision should be overturned.

[45] See https://www.ofgem.gov.uk/sites/default/files/docs/2015/06/remit_penalties_statement_23_june_2015_1.pdf (Statement).

[46] See Section 3 of the Statement and Section 8 of the Guidelines.

[47] See Section 6 of the Guidelines.

[48] See Section 4 of the Statement and Section 8 of the Guidelines.

[49] Criminal Justice Act 1993, s 52 (insider dealing) and Financial Services Act 2012, ss89-91. Also see the government’s consultation at: https://www.gov.uk/government/consultations/strengthening-the-regulation-
of-wholesale-energy-markets-through-new-criminal-offences.

[50] https://www.ofgem.gov.uk/system/files/docs/2016/02/criminal_prosecution_policy_statement_29_february_2016_0.pdf.

[51] See, for example, the opening of an investigation by the Italian Competition Authority following a referral by the energy regulator, which was itself undertaking an investigation into market manipulation: http://www.agcm.it/stampa/comunicati/8411-a498a-a498b-aumento-costi-in-bolletta,-istruttoria-antitrust-su-enel-e-sorgenia.html.

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