Ofgem to get new powers to protect wholesale gas and electricity markets from abuse

The EU Regulation on wholesale electricity and gas market integrity and transparency (REMIT) will come into force in the UK from 29 June. Once in force, the regulation will give energy regulator Ofgem new powers to investigate and take enforcement action against companies it suspects of breaking the law.  Its powers including being able to require access to information from and to enter premises under warrant of the companies under investigation. It will also be able to impose unlimited fines for breaches of the regulatory regime.

Ofgem has published a draft penalties statement and procedural guidelines, setting out how it plans to use its new powers, for consultation. It is also asking for evidence about how price benchmarks, produced by price reporting agencies, are used and whether the current arrangements are fit for purpose.

"It is vital that we have all weapons at our disposal in the fight against unlawful activity in the energy market," said Energy Secretary Ed Davey.

"That's why I have given Ofgem new powers to deal with market manipulation and insider dealing in wholesale gas and electricity. These include unlimited fines and new access to information, including the power to enter premises," he said.

REMIT prohibits market abuse in wholesale energy markets, whether in form of insider trading or attempted or actual market manipulation. It also establishes a monitoring regime for wholesale energy trading, and requires EU member states to put in place an enforcement and penalty regime for regulatory breaches.

The regulation also sets a number of explicit obligations on energy companies themselves and those arranging energy trading. Companies are required to publicly disclose price sensitive 'inside information', such as details about unplanned outages, on their websites or on other platforms so that other market participants are quickly made aware of the situation.

REMIT was adopted by the EU in October 2011 and the key prohibitions on insider trading and market manipulation came into force in December 2011. The enforcement regime will be implemented in the UK through secondary legislation. As energy is a devolved matter, similar regulations will be made in Northern Ireland to give NIAUR, the energy regulator, powers mirroring Ofgem's. These will come into force when the Northern Ireland regulations are made, which the UK Government said would be "no later than August 2013".

Ofgem said in a statement that it had already begun more extensive monitoring of the energy markets ahead of formal implementation of the new rules, using information from "a wide range of sources". It said that it was continuing to review allegations of gas market manipulation, raised by rate-setting company ICIS Heren in November 2012, together with the Financial Conduct Authority.

Ofgem also issued a call for evidence on pricing benchmarks in gas and electricity markets. Ofgem is trying to assess whether there are any inherent problems in relation to the formation and use of benchmark prices in the gas and electricity markets which might result in raised costs to energy consumers. Ofgem will consider a range of issues around the role of reference prices and the key factors that determine the ability of price reporting agencies to make price assessments that represent a fair reflection of the market. It will seek views from stakeholders on how they use and contribute to price benchmarks, and whether they feel current arrangements are fit for purpose or whether further action is necessary.

Energy law expert Jeremy Chang of Pinsent Masons, the law firm behind Out-Law.com, said that Ofgem's consultation on its proposed REMIT penalties statement and procedural guidelines was an "important next step" in the implementation of the rules.

"The Electricity and Gas (Market Integrity and Transparency) (Enforcement etc) Regulations, which were laid before Parliament on the same day the guidance was consulted upon, are relatively unchanged from the draft consulted on in March this year," he said. "They are not entirely new concepts from a regulatory perspective and draw very much from the enforcement regime for financial services in the UK. There may be lessons which can be learned for both Ofgem and market participants as to how these powers can and should be exercised."

"However, there remains a question over whether applying these powers too faithfully to the energy sector has resulted in unnecessary 'gold-plating': for example, whereas the ability to commission expert reports during the investigation phase may have been appropriate in the financial sector given the wide variety of products being regulated, some in the industry have questioned whether this is strictly necessary given the relatively standard nature of products in the gas and power sector. Another possible cause for concern is the costs which may be incurred by the participants, especially by the smaller players, in complying with the obligation to record conversations and electronic communications for a period of six months from their creation," he said.

Given the criticism levelled at the regulator in relation to its handling of the probe raised in September last year, many suspect that Ofgem will likely be keen to make a "strong statement of intent" on this policy issue, Chang said.

"Market participants will, no doubt, wish to revisit their compliance procedures to ensure that they are robust enough to secure compliance with REMIT, especially given the prospect of increased risk of whistleblowers, enforcement action, investigations and dawn raids, fines and possible criminal sanctions under the new regime," he said.