Utility Week

Policy & Regulation UTILITY WEEK | 18TH - 24TH MARCH 2016 | 13 Market view A lmost four years aer 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 Transpar- ency (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 mar- kets, and imposes extensive trade reporting require- ments on market partici- pants. Remit also requires operators of energy facilities to publish cer- tain information concerning availability and use of those facilities. This first wave of enforcement has hap- pened outside the UK, in Spain and Estonia. These initial rulings provide insight into the approach to enforcement likely to be adopted by national regulators, including Ofgem. In particular, they relate to two of the key ele- ments of Remit: public disclosure of inside information; and market manipulation. Remit's regulators are keen to ensure prompt and proper disclosure of informa- tion that would be of interest to market par- ticipants in order to preserve integrity and transparency of energy markets. The Esto- nian transmission system operator, Elering, 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 facil- ities in an "effective and timely manner". In June 2014, Elering performed maintenance on the EstLink2 subsea electricity intercon- nector between Estonia and Finland, caus- ing an outage. These works and the resulting outage were deemed by the Estonian Compe- tition Authority to constitute inside informa- tion. 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 (£7,800). Elering chief executive Taavi Veskim- agi said the company would contest the decision, claiming the Elering control cen- tre made a disclosure within an hour of the relevant deci- sion about the outage being made. Veskimagi also labelled the ruling "incom- petent", stating that "basing one's actions on it in the forwarding of market announce- ments 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 care- fully 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 Generacion, which on 24 November 2015 was issued a massive €25 million fine by the Spanish National Markets and Competition Commission (CNMC) fol- lowing allegations of market manipulation. It was alleged the firm had deliberately with- held water at its Duero, Sil and Tajo hydro- electric 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, aer which time energy prices rocketed Get on the right side of Remit Four years after coming into force, the EU's Remit regulations are starting to bite – with some massive fines being doled out. Jonathan Richards warns UK energy firms to be on guard. and pushed up electricity costs for consum- ers by 10 per cent. Article 5 of Remit states that "any engage- ment in, or attempt to engage in, market manipulation on wholesale energy markets is strictly prohibited". Therefore, by increas- ing wholesale energy prices to coincide with a government tender process Spain's CNMC deemed Iberdola Generacion'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 mar- kets, 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 never far from the surface. Supplier behav- iour in the retail market remains under the spotlight, with the conclusions of the Com- petition and Markets Authority on the health of the energy markets being delivered just this week. In the wholesale market, indus- try 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 regu- lators' toolbox of remedies and sanctions, including the potential for criminal prosecu- tion, energy companies should ensure they maintain transparent pricing strategies and adopt appropriate policies and training pro- grammes 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, associate and energy sector specialist, Shakespeare Martineau "Iberdola Generacion was issued a massive €25 million fine following allegations of market manipulation"

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