First wave of fines set precedent for REMIT enforcement

Almost four years after its inception, two European energy regulators recently handed out the first penalties for non-compliance with the EU’s Regulation on Energy Market Integrity and Transparency (REMIT).

An important piece of European law, REMIT imposes a market conduct regime and transparency requirements on participants in Europe’s wholesale energy markets. Designed largely around the market abuse regime governing the financial markets, REMIT prohibits insider trading and market manipulation of Europe’s energy markets, and imposes extensive trade reporting requirements on market participants. REMIT also requires operators of energy facilities to publish certain information concerning availability and use of those facilities.

While this first wave of enforcement has happened outside of the UK, in Spain and Estonia respectively. These initial rulings provide valuable insight into the approach to enforcement likely to be adopted by national regulators, including Ofgem here in the UK. In particular, they relate to two of the key elements of REMIT: public disclosure of inside information and market manipulation.

REMIT’s regulators are keen to ensure prompt and proper disclosure of information that would be of interest to market participants in order to preserve integrity and transparency of energy markets. The Estonian Transmission System Operator, Elering AS, is the first company to be fined for falling foul of the obligation to publicly disclose inside information. Article 4 of REMIT specifies that market participants must publicly disclose inside information regarding their business or facilities in an ‘effective and timely manner’. In June 2014, Elering performed maintenance on the Estlink2 sub-sea electricity interconnector between Estonia and Finland, causing an outage. These works and the resulting outage were deemed by the Estonian Competition Authority to constitute inside information; it was judged that by failing to publish this information in ‘due time’ the firm was in breach of REMIT and was duly issued a €10,000 fine.

Elering chief executive Taavi Veskimagi confirmed the firm would contest the decision, claiming the Elering control centre made a disclosure within an hour of the relevant decision about the outage being made. Veskimagi also labelled the ruling “incompetent”, stating that “basing one’s actions on it in the forwarding of market announcements in the future would cause a lot of confusion.”

The facts of this case hinge on whether information presented at a specific Elering board meeting was precise enough to fall within the scope of inside information. This is one of the key tests in REMIT, and an area that has an inherent element of subjectivity to it. The difficulty is that, once the criteria for the existence of inside information have been established, there is ordinarily only an hour for that information to be published and shared with the markets. This requires those caught by Article 4 of REMIT to carefully analyse their rules and procedures, especially around planned asset outages and returns to service, to ensure compliance.

The most salient penalty, however, lies with Iberdola Generaciὀn, which on 24 November 2015 was issued a massive €25million fine by the Spanish National Markets and Competition Commission (CNMC) following allegations of market manipulation. It was alleged the firm had deliberately withheld water at its Duero, Sil and Tajo hydroelectric plants, which collectively account for nearly half of Spain’s hydroelectric power. This action was suspected to have taken place from 30 November to 23 December 2013, after which time energy prices rocketed and pushed up electricity costs for consumers by 10 per cent.

Article 5 of REMIT states that ‘any engagement in, or attempt to engage in, market manipulation on wholesale energy markets’ is strictly prohibited. Therefore, by increasing wholesale energy prices to coincide with a government tender process Spain’s CNMC deemed Iberdola Generaciὀn’s infringement to be “very serious”, hence the magnitude of the resulting penalty.

While UK energy firms will be aware of the role of REMIT in guarding against abuse and manipulation of wholesale energy markets, this judgement, and the magnitude of the fine issued, should act as a stark warning of the potential consequences of non-compliance. The issue of pricing and market behaviour is of course never far from the surface. Supplier behaviour in the retail market remains under the spotlight, with the Competition and Market Authority’s conclusions on the health of the energy markets eagerly awaited later this year. In the wholesale market industry commentators were raising concerns as recently as October 2015 about generator offer prices in the Balancing Mechanism as winter approached with margins tight.

Now that REMIT has added to the regulators’ toolbox of remedies and sanctions, including the potential for criminal prosecution, energy companies should ensure that they maintain transparent pricing strategies and adopt appropriate policies and training programmes to be sure that staff fully adhere to REMIT and the guidelines published by ACER and Ofgem.

We can expect these two enforcement actions to be the first of many. At the end of 2015, the European energy regulator ACER had 47 REMIT investigations ongoing, and REMIT enforcement in the UK is likely to be an Ofgem priority over the coming year.

For UK energy firms, now is the time to re-examine systems and procedures, and focus on staff awareness, to ensure compliance strategies are fit for purpose.

Jonathan Richards is an associate and energy sector specialist at law firm Shakespeare Martineau