Rising claims risk for utilities

Britain’s utilities will face heightened regulatory risks and public scrutiny when the Consumer Rights Act 2015 comes into force says Catriona Munro.

Set to come into force on 1 October this year the Consumer Right Act 2015 will had consumers and small and medium sized enterprises (SMEs) new powers to bring claims for damages for any overcharge paid for goods or services due to anti-competitive behaviour.

Representatives will be able to bring collective actions on behalf of a group of consumers and, for the first time, actions for damages may be brought on an opt-out basis, with those that have suffered loss being automatically included in the claim, unless they specifically withdraw. In parallel, new EU law will also make it easier to recover any alleged overcharges.

A rise in the number of claims against utility providers – whose billing errors still cause common aggravation – is therefore expected, especially where large numbers of consumers have suffered loss which though individually is small, is cumulatively large. The pending changes reinforce the importance of effective competition compliance and corporate governance, against the prospect of fines of up to 10 per cent of worldwide turnover and unlimited damages claims.

The utilities sector has already witnessed cases of alleged collusion among competitors or abuse of dominance by an incumbent market player and cartels and anti-competitive practices have previously been found in a range of activities, from meters to power exchanges.

One of the longest running claims was brought in 2008 by National Grid against ABB, Siemens and others, relating to alleged losses suffered as a result of an EU-wide cartel in gas-insulated switchgear. This claim, which saw ABB seeking damages of £108 million, ran for five years, with an undisclosed settlement agreed just ahead of the trial.

Other claims include Albion Water securing damages of £1.7 million from Dŵr Cymru Welsh Water, following a decision by the UK competition authorities, which found that the company had abused a dominant position across its water supply network.

The Consumer Rights Act 2015 brings further changes. From October, the UK’s specialist competition court, the Competition Appeal Tribunal (CAT), will be handed new powers to order that anti-competitive behaviour is stopped and the right to hear a wider range of cases. Significantly, cases brought by small or medium sized undertakings will be considered for a fast track procedure, designed to make it cheaper and quicker for SMEs to seek redress. The CAT may place a cap on costs and can also restrict the amount of evidence and number of expert witnesses. The new Act also introduces a mechanism for infringing companies to propose voluntary redress schemes to provide compensation to victims, which may be approved by the CMA.

Coinciding with the UK legislation, the EU has adopted a directive on antitrust damages actions, which will help remove obstacles for claimants across Europe. This must be implemented into national legislation by 27 December 2016.

Leniency statements containing admissions by whistleblowers will, from then onwards, receive blanket protection from disclosure. This recognises that whistleblowers are more likely to participate in leniency schemes if their confessions of wrongdoing are safe from disclosure to damages claimants. Currently, before disclosing leniency statements, national courts must balance the interests of leniency schemes and the claimant’s right to damages.

The protection of leniency statements may appear to deter, rather than encourage, damages claims. However, the expectation is that more leniency applications will be made, which will in turn drive the number of damages claims.

The directive also protects leniency applicants against the liability, where each cartelist is generally held to be responsible for the entire loss caused by the cartel. This makes leniency applicants who do not fight cartel charges vulnerable to early claims. While the directive offers leniency applicants protection from damages claims for the loss caused by the other cartelists, claimants will be required to have exhausted redress from the other cartelists before such action.

Importantly, there will be a rebuttable presumption that established infringements have caused harm. The courts will be able to quantify the harm suffered by the claimant where it may be practically impossible or excessively difficult for the claimant to quantify harm on the basis of the evidence. The new law also places beyond doubt some important legal issues about who is able to sue, for example, by clarifying the availability of a defence that a purchaser passed on any cartel overcharge to its own customers, with no loss suffered by the claimant. In such cases, the indirect purchaser to whom the overcharge was passed may be able to claim.

Finally, decisions of national competition authorities will carry greater weight than they currently do before the courts of other Member States.

To understand the potential risks of the new landscape, utilities should assess where they might encounter competition risk. While a company can gain protection from fines by seeking leniency from a competition authority, there is no similar protection available against damages claims.

Faced with the prospect of a significant reputational and financial fallout, companies across the utilities sector should revisit their compliance programmes, to ensure these are sufficiently robust. At board level, directors must also take an even greater role in ensuring that effective compliance is embedded in the corporate culture, across the entire organisation.