3rd Energy Market Integrity and Transparency Forum - My Thoughts (Part 2)

September 5/6, 2019 – Ljubljana, Slovenia

Today I’m providing my thoughts on the Forum’s discussions and debate around “Enforcing REMIT”.

As mentioned in my previous article, what follows is my personal assessment of, and reflection on, the two days of discussion and is not intended to reflect any official pronouncements by ACER or any of the stakeholder interventions by the industry associations present. ACER’s conclusions on the Forum have now been published on its website at https://acer.europa.eu/Events/ACER-Energy-Market-Integrity-and-Transparency-Forum-2019/Documents/06092019_EMIT%20Forum%20Conclusion_.pdf

Enforcing REMIT

This section opened with ACER providing an overview of what it considered, principally over the last 18 months, to be a period of credible deterrence with reference to seven cases where market abuse sanctions have been applied in wholesale energy markets. What I found to be of real interest, albeit with a limited population of real-life examples, was an apparent lack of consistency in how market abuse in the wholesale energy markets is being enforced by the National Regulatory Authorities (NRA). This is perhaps best exemplified in the range of financial sanctions being applied to individual market participants and the extent to which there is substantive disclosure of the detail of the “REMIT breach” to allow market participants to better understand, from a practical perspective, what standard they are being held to. I would contend that, in a period of ever tighter budgets and resource availability on the part of ACER, NRAs, trading venues and market participants, fuller disclosure of fact patterns and control weaknesses identified in settled market abuse cases, to the extent permissible, will serve the interests of market education, improved consistency of REMIT enforcement as well as allowing market participants to make informed and appropriate enhancements to their systems and controls.

In any event, it appears to me that, as the enforcement landscape matures across the EU, there does need to be some qualitative assessment to ensure that all NRAs are discharging their duties with equal vigour and consistency. Again, while still perhaps early days and given the “length of the enforcement life-cycle” (of which more below), I found it interesting that 40% of the EU NRAs have 80% of all pending REMIT cases.

ACER described the division of labour between itself and the individual NRAs and the coordination of monitoring activities, investigations and enforcement, and that description was what one would have expected:

1. ACER – EU wide market monitoring and coordinating conduct activities from NRAs

2. NRA – Investigation and enforcement

The Danish Utility Regulator (DUR) provided its perspective on the REMIT enforcement strategy and how it cooperated with other authorities and prioritised its caseload. It was interesting to note the interplay, and there are probably variations of this across many other EU member states, between DUR, the State Prosecutor and the police when it comes to case handling, administrative orders and investigatory powers. When this is coupled with coordination with ACER and, by way of example, other NRAs and competition law authorities, it becomes easier to see why the enforcement cycle is measured in half years and years rather than weeks and months.

DUR expressed its mission in terms of prevention and awareness training as well as enforcement. It came as no surprise to the Forum that the REMIT enforcement process is time-consuming and resource intensive. DUR described some of the factors that it had regard to when considering progressing with a REMIT case, including:

1. Severity and character of the possible REMIT breach

2. Market impact of the case in terms of impact on the market, to competition or overall economic welfare

3. Preventative considerations or potential importance of the case e.g. pursuit of the case may provide important clarification around the scope of REMIT or how it should be interpreted

4. Probability that a REMIT breach can be proved

5. The resources required to prosecute the matter. This will be assessed on a case-by-case basis having regard to factors like collection and analysis of data, the legal questions to be answered and, this is my take, the administrative priority of the matter versus other matters being considered by the NRA or other prosecuting authority

Moving onto the timeline of the enforcement process, ACER illustrated this with reference to the two recent capacity hoarding cases (Energi Danmark A/S and Neas Energy A/S). Investigation of these cases, in terms of elapsed time from the conduct in question to the final press release, took some 3½ years broadly broken into the following thematic components (time periods may overlap and are not necessarily one block of consecutive time):

1. DUR and state prosecutor:

a. Investigation (3 years)

b. Handover of case from DUR to state prosecutor (6 months)

c. Final decision of the state prosecutor (6 months)

2. ACER:

a. Bilateral discussions between DUR and ACER (2½ years)

b. Multilateral discussions between ACER and EU NRAs (1 year)

c. Multilateral discussions between ACER and Persons Professional Arranging Transactions (PPAT) (1 year)

3. Development of ACER capacity hoarding guidance:

a. Drafting (6 months)

b. NRA consultation (1 year)

c. Publication (6 months)

4. Dissemination of information:

a. Development of new alert scenarios in relation to capacity hoarding (6 months)

b. Press release coordination (1 year)

It was also noted during the discussions that these Danish capacity hoarding cases had been initiated based on suspicions escalated by a PPAT.

From my perspective, I understand the need for fair investigative and enforcement processes but I do wonder, again having regard to the scare resources experienced by all stakeholders in the wholesale energy markets, whether learning around market conduct surveillance, and associated data collection/analysis and investigative techniques, could be shared by regulatory authorities, trading venues and market participants. While specific enforcement cases may take on “adversarial-type” characteristics between the regulatory authority/trading venue and the market participant, outside of that context I think there is a lot of collective experience and skill that could usefully be shared around market conduct surveillance. I think we are starting to see some useful starting points in this space with scenario-based output from some of the power exchanges. However, I think areas of cooperation and knowledge sharing could usefully be extended as fair and orderly markets are in everybody’s interest.

Continuing with the theme of cooperation and knowledge sharing, and this is outside of the EMIT Forum discussions, as a Head of Compliance, I was continually surprised by the number of requests for information (RFI) received from regulatory stakeholders or trading venues where the principal purpose seemed to be to provide “education” around a market participant’s commercial activities, rather than a concern about its market conduct per se. I accept that a market participant is not necessarily in possession of all the facts or data that a regulatory authority or trading venue has available to it and this will be the subject of a future article. However, when this is frequently accompanied with a lack of feedback from regulatory stakeholders or trading venues on the firm’s response to the RFI, which often requires significant effort on behalf of the market participant, it often seemed to me that there should be a better way for stakeholders to cooperate to improve everybody’s understanding of how wholesale energy markets operate or should be expected to operate. These potential inefficiencies, and the need for enhanced cooperation and knowledge sharing, are only brought into sharper focus when “investigations” are closed on the grounds of administrative priority, or similar rationale, often having incurred 10s or 100s of thousands of £/€ for the fees of external counsel and forensic advisors, as well as significant management time, lost commercial opportunities and the adverse health and well-being impact on concerned individuals. I’m sure there must be a corresponding impact on the agency that makes the decision that an “investigation” should be discontinued after, on occasion, a significant investment of time and resource.

My next update will be on the EMIT Forum discussions around market surveillance.

I’ve already had positive and constructive feedback on my previous article on the EMIT Forum and that is appreciated. Clearly a lot of ground was covered during the EMIT Forum and there was also a lot of informed debate and feedback on the Forum’s agenda items, which these articles don’t have space to cover. If you would like to discuss any of the agenda items, or other topics that I have touched upon, in further detail then please email at iain@theregulatorycompliancespecialists.comand I’ll get in touch.