Ofgem consults on proposed changes to REMIT Procedural Guidelines and REMIT Penalties Statement

On 17 August 2021, Ofgem published a consultation (the “Consultation”) proposing a series of changes to its REMIT Procedural Guidelines (the “REMIT Guidelines”) and REMIT Penalties Statement. The Consultation seeks to bring the REMIT Guidelines in line with Ofgem’s Enforcement Guidelines and Sectoral Penalty Statement, the proposed modifications of which were set out in a consultation published on 9 June 2021 (the “June Consultation”) (Law-Now accessible here).

The changes reflect developments in Ofgem’s wider approach to enforcement and revisions to make REMIT processes clearer and more efficient.

Background

REMIT is Regulation (EU) No 1227/2011 on wholesale energy market integrity and transparency (“REMIT”). It is a mechanism for reporting and preventing wholesale energy market abuse, in force since 28 December 2011. Under the Electricity and Gas (Market Integrity and Transparency) (Enforcement etc.) Regulations 2013 (the “Regulations”), the Gas and Electricity Markets Authority (“GEMA”) can investigate a suspected breach of REMIT and take enforcement action where it finds that a breach has occurred. Ofgem, acting under GEMA, holds enforcement powers allowing it to reprimand providers for breach of REMIT.

The REMIT Guidelines detail how Ofgem use their powers to enforce REMIT. The REMIT Penalties Statement explains its statement of policy on the imposition of REMIT penalties and how such penalties are quantified, as required under the Regulations.

The REMIT Guidelines and REMIT Penalties Statement were last updated in 2016 and 2015 respectively. Since such dates, the energy market has seen profound change and developments which have necessitated their revision.

Guidelines

Settlement Window

Under the Regulations, GEMA may pursue an investigation against a market participant if it suspects such participant has failed to adhere to their obligations under REMIT. If the investigation is deemed suitable for settlement, market participants currently have three windows in which they can settle the case: early (30% discount), middle (20% discount) and late (10% discount). During settlement, the participant must admit that the breach or breaches have occurred. They are expected to agree to GEMA’s finding and not to challenge any finding of breach.

Ofgem proffers that the purpose of the discount windows is to encourage settlement, save resources and time, and identify and penalise breaches of REMIT as early as possible. However, it has argued that the number of settlement windows currently available has negated these benefits, as participants spend significantly more time and resources attempting to reach settlement rather than continuing a case to contest.

The Consultation proposes to remove the middle and late payment windows, leaving a single discount window of 30%. Such single window will open when the settlement mandate and press notice are given to the person, and shall close on expiry of a reasonable period (which is usually 28 days).

Ofgem argues that the reduction to one window will incentivise participants to enter settlement more promptly and provides stronger deterrence to the market. It suggests that if someone is not willing to utilise the early window, their case will move to contest and be solved more quickly than if such case would have proceeded to a middle or late settlement window.

Decision Making in Settlement Cases

Settlement decisions are currently made by a Settlement Committee (“Committee”), comprising up to two Enforcement Decision Panel (“EDP”) members, and one Ofgem Director. The Committee is currently the only decision-making body for REMIT settlement cases.

As the energy sector has transformed in recent years, Ofgem has been required to take sectoral enforcement action across a broader range of businesses. Such action has more commonly been addressed through the use of Alternative Action, as a generally quicker means of redress. Whilst the use of Alternative Action for REMIT breaches has been successful in the past, Ofgem is concerned about the time taken for settlements to be reached, and whether Alternative Action is the right course for all types of REMIT cases.

To address this, the Consultation proposes a new means of conducting settlement cases whereby the Ofgem Director responsible for enforcement can be the sole decision maker, or delegate another Director to act on their behalf.

Ofgem proposes that a Director will be able to do the following for REMIT cases:

• issue a settlement mandate;
• approve and issue the settlement penalty notice; and
• approve final settlement decisions.

The Consultation proposes that a Committee will still be available where Ofgem considers the special expertise of the EDP may benefit the case.

Procedural Clarity

Ofgem acknowledges that the REMIT Guidelines, as currently drafted, could benefit from some clarity. Market participant feedback has highlighted that the explanation of different government procedures and how they interact with, for example, the Summary Statement of Issues Letter and Full Issues Letter could be improved.

The following proposals within the Consultation seek to achieve this clarity:

• Ofgem will include an explanation in Chapter One detailing each of the decision-making bodies within its structure, including the EDP and Committee.
• Chapter Four will be revised to clarify Ofgem’s criteria for opening an investigation. It will also elaborate on the Alternative Action process. Such criteria will be aligned with the Enforcement Guidelines criteria, explained in the June Consultation.
• There will be a more detailed explanation of when Ofgem would normally publish a Summary Statement of Issues Letter (“SSIL”), and what purpose this letter serves in Chapter Five. Such explanation will state that following the information gathering process a SSIL will be sent, providing Ofgem continues to consider that a breach of REMIT has occurred.
• Chapter Seven will include a revised explanation of how the settlement process works, including the proposed changes set out above regarding the reduced settlement window and change to decision making. The chapter will also elaborate on how Ofgem determines the suitability of a case for settlement, and propose the option to seek confirmation from a person under investigation that they would like to pursue settlement. Accordingly, this would replace Chapter Ten of the current REMIT Guidelines.
• Chapter Eight would be revised to include an explanation of when Ofgem would publish a Full Issues Letter, what purpose such letter serves, and how it ties in with the Contest procedure. The Contest procedure itself shall stay the same.

REMIT Penalties Statement

Ofgem’s proposals with regards to their REMIT Penalties Statement focus around improving its clarity and readability. The Penalties Statement explains Ofgem’s statement of policy on the imposition of REMIT penalties and how such penalties are quantified. The current Statement was published in 2015 and has yet to be updated.

In this Consultation, Ofgem proposes to align their REMIT Penalties Statement with the changes proposed to the Sectoral Penalties Statement in the June Consultation.

Seriousness of REMIT Breaches

The Consultation proposes to remove several of the factors GEMA consider when determining the seriousness of a breach. The factors will be consolidated, with those that currently overlap and those less relevant to REMIT cases being removed. This approach will apply to both sections under “Step Two” of proposed Chapters Five and Six.

The proposed consolidation aims to make the REMIT Penalties Statement more streamlined, and improve its readability. Ofgem does state, however, that the deleted factors should not be ignored as factors listed are deemed to be indicative, and not exhaustive of those which Ofgem will consider when determining a breach.

Calculation of Gain and Detriment

Ofgem is conscious to ensure there can still be a finding of breach even if a specific gain or detriment cannot be calculated. As such, it has proposed to calculate only detriment and gain where it is “proportionate, reasonable, and practicable to quantify it”. This would apply, for example, where a breach has been attempted but not completed, or where the ramifications of a breach are broader than the monetary gain or detriment.

Furthermore, Ofgem proposes to use “Step One” in Chapters Five and Six of the REMIT Penalties Statement only with respect to financial gain, as opposed to gain and detriment. If a market participant has suffered a detriment that has resulted in a person’s gain, such detriment will be compensated by a restitution order if proportionate, reasonable and practicable. Ofgem submits that “Step One” should deprive a person of all financial benefit gained from a breach and compensate affected parties, and any wider market detriment would then be taken into account in the assessment of seriousness. Such approach would give Ofgem flexibility to ensure any gain received by a person, as well as any compensation, is significantly greater than the detriment caused, as stated in Chapter Two of the REMIT Penalties Statement.

Other changes

Further changes to the REMIT Penalties Statement are being made, some of which seek to align the statement to the Sectoral Penalties Statement. They include:

• an explanation that, where a person may be in breach of other conditions in addition to REMIT, Ofgem reserves the right to pursue such person under the wider Enforcement Guidelines as opposed to under REMIT.
• A clarification that Ofgem “may impose a financial penalty even where the gain to the person, or the detriment caused to other market participants, cannot be reasonably calculated or estimated, or where it can be calculated and it is shown to be zero”. This is in line with the proposed changes explained above in relation to the calculation of gain and detriment.
• an inflationary adjustment (rounded to the nearest thousand) to the figures quoted as the starting point for assessment to serious financial hardship in relation to individuals.

Comment

As with the updates proposed by the June Consultation, Ofgem’s proposals show a desire to increase flexibility, free up resources, and speed up enforcement. While a more efficient and streamlined process would be welcomed, this should be balanced against the substance of the proposals.

The Consultation generally looks to reduce the burden on Ofgem. There is a danger that in an effort to increase simplicity and speed, valuable safeguards have been removed. For example, removing the role of independent EDP members is unlikely to be seen as a change that improves the settlement process.

Furthermore, the removal of the middle and late settlement windows seems unnecessary. Ofgem itself acknowledged in the June Consultation that settlement and contest currently move in parallel, so it is difficult to understand how the removal of these latter windows will increase efficiency in practice. Depriving participants of the opportunity to settle at a later stage may have the opposite effect of increasing the length and complexity of the process through protracted contest.

Ofgem’s proposals to, in most cases, no longer calculate the “detriment and gain element” of penalties may cause concern. While this calculation is indeed more challenging where Ofgem seeks to enforce attempted breaches of REMIT, this does not apply where actual breaches have occurred. While we acknowledge that the current process could be seen as complex, the detailed calculation supporting the quantum for penalties allows both market participants and consumers to ensure that these accurately reflect the gain and detriment. If Ofgem’s main concern relates to enforcing attempted breaches of REMIT, it may be more proportionate to limit the calculation carve-out solely to that type of breach.

Despite these concerns, we note Ofgem’s intention that the changes will reduce the scope for Alternative Action, which is sometimes perceived as a more discretionary and arbitrary process with fewer protections and safeguards. That said, it is worth highlighting that the revised sectoral Enforcement Guidelines consulted upon in June provide greater detail regarding Alternative Action than is currently set out in the draft REMIT Procedural Guidelines. Market participants would no doubt welcome similar clarity on this enforcement route in the context of REMIT breaches.

We also welcome Ofgem’s confirmation that it will continue to interpret REMIT with regard to ACER’s non-binding ‘Guidance on the application of REMIT’ until further notice (and that any proposed departure will be clearly publicised).

As with the June Consultation, the proposals come against the backdrop of Ofgem increasingly utilising its enforcement powers, and market participants would be well advised to ensure that regulatory compliance functions are sufficiently resourced and alive to new licence and statutory requirements.

Industry participants wishing to respond to the Consultation should do so soon as the deadline for responses is 28 September 2021.