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Europe’s energy regulators work together to tackle market abuse and insider trading

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Supported by the market monitoring and coordination activities of the Agency for the Cooperation of Energy Regulators, ACER, in the last few months, Europe’s energy regulators have increasingly used their powers to police behavior in the European wholesale energy market. This article discusses the joint efforts of ACER and Europe’s national energy regulators to ensure compliance with specific market regulations. In the last quarter of 2018 and the first quarter of 2019, we have seen fines and sanctions imposed for alleged abuses in the European wholesale energy market, and a dawn raid in a potential case of insider trading.

REMIT, the EU Regulation on the Wholesale Energy Market Integrity and Transparency, prohibits, inter alia, insider trading and market manipulation in the wholesale energy market in accordance with Articles 3 and 5 respectively.  Willingness to enforce REMIT has been increasingly demonstrated by national regulators in the course of the last few months.

REMIT’s definition of and prohibition of market manipulation (excerpts):
Article 2
Definitions
For the purposes of this Regulation the following definitions shall apply: 1…]
2) ‘market manipulation’ means: :
a) entering into any transaction or issuing any order to trade in wholesale energy products which:
(i) gives, or is likely to give, false or misleading signals as to the supply of, demand for, or price of wholesale energy products;
(ii) secures or attempts to secure, by a person, or persons acting in collaboration, the price of one or several wholesale energy products at an artificial level, unless the person who entered into the transaction or issued the order to trade establishes that his reasons for doing so are legitimate and that that transaction or order to trade conforms to accepted market practices on the wholesale energy market concerned;
1…]
Article 5
Prohibition of market manipulation
Any engagement in, or attempt to engage in, market manipulation on wholesale energy markets shall be prohibited.

REMIT has been in place since the end of 2011. While there were few, if any, proceedings during the first seven years, the situation has now changed, with the means to detect market manipulation becoming more sophisticated and an increase in alerts raised by market participants. Crucial here has been the increased data gathered by national regulators and ACER, Europe’s Agency for the Cooperation of Energy Regulators, since reporting obligations came into effect in 2015/2016.

According to ACER, 60-80 suspicious events have been notified to national energy regulators and the number of cases currently under investigation rose significantly from just three in 2012 to 189 by the end of Q2 2019. Out of the seven cases on market manipulation that have been decided by national regulators, six have been decided since October 2018.

In 2015, in the first decision in this field taken by a national regulatory authority, CNMC, the most active national regulator in REMIT enforcement activities, concluded that a Spanish energy company withheld water at its hydropower plants without legitimate reason and justification and thus manipulated the electricity day-ahead prices resulting in an increased market price.

ACER’s guidance on the application of Regulation (EU) No 1227/2011, REMIT, provides further guidance on the withholding of capacity, now 6.4.1 i) 4th edition:

“Actions undertaken by persons that artificially cause prices to be at a level not justified by market forces of supply and demand, including actual availability of production, storage or transportation capacity, and demand (‘physical withholding’): This is for example the practice where a market participant decides not to offer on the market all the available production, storage or transportation capacity, without justification and with the intention to shift the market price to higher levels, e.g. not offering on the market, without justification, a power plant whose marginal cost is lower than the spot prices, misusing infrastructure, transmission capacities, etc., that would result in abnormally high prices.”

This very early decision of the CNMC in 2015 on market manipulation was followed, starting in October 2018, by a series of decisions from various national regulators, namely the Spanish, French, Danish, German and most recently the UK national regulators, which fined companies for alleged cases of market manipulation. Some of these decisions are under appeal. These cases deal with allegations of transmission capacity withholding, commercially non-rational use of otherwise legitimate trading methods, price setting at artificial levels, exclusion of market participants from trading and placing bids or offers with no intention to execute them, but to buy at a lower or sell at a higher level. National regulators have also decided other cases where prices have been above marginal costs and higher than those of comparable combined cycle plants on the basis of national regulation of the electricity market rather than based on the provisions of REMIT.

In addition to various infringement decisions on market manipulation that have been issued since October 2018, there has also been an increase in action on insider trading. More recently, the Netherlands Authority for Consumers and Markets (ACM) stated that it had conducted a dawn raid at a company active in the electricity sector. Echoing the Danish and the German national regulators, the Director of ACM’s energy department, Remko Bos, made it clear that national energy regulators are making joint efforts in their enforcement activities. Remko Bos was quoted as follows:

“By enforcing compliance with REMIT, we help boost consumer confidence and that of other market participants in the energy market. We do so in cooperation with our fellow European regulators.”

Cooperation between European regulators demonstrated by the rise in policing activities has been assisted by the increased amount of guidance and publications from ACER and national regulators on the topic of REMIT. Recently, ACER published the fourth edition of its Guidance on REMIT (https://documents.acer-remit.eu/wp-content/uploads/20190321 4th-Edition-ACER-Guidance updated- final-published.pdf) and its Guidance on layering and spoofing (https://documents.acer-remit.eu/wp-content/uploads/Guidance-Note Layering-v7.0-Final-published.pdf). The German Federal Network Agency, “BNetzA’” and the German Federal Cartel Authority “BKartA” have published their joint draft guideline on the supervision of antitrust and wholesale energy law abuse in the realm of electricity generation/wholesaling. The object of the document, when finalized, will be to provide market participants with guidance on the permissibility of price peaks in the wholesale market for electricity.

The series of fines imposed on energy companies for market manipulation, the high number of investigations currently pending, the likelihood that fines may become more substantive once sufficient case law has been established and the chance that cases may even result in serious criminal proceedings, demonstrate the importance of REMIT and other market regulations. To the extent that recent supervisory activities by national regulators and publications from ACER and other regulators show the way forward, it is very much in energy companies’ own interests to reexamine the robustness of their current programs, policies and processes. As in other compliance areas, it is critical to implement and maintain effective and sufficiently resourced programs that support employees taking relevant commercial decisions and ensure decision makers have a thorough understanding of violations in terms of scope, prohibitions and consequences. This will help companies avoid investigations, administrative fines, confiscation of earnings and possibly criminal sanctions, both on a corporate and an individual level, not to mention potential claims for damages brought by other market participants, as regularly seen in cartel cases. In short, companies and their decision makers would be well advised to examine whether their current compliance management systems and processes are still fit for the purposes of REMIT and other market regulations.

More to come.

If you have any question about any of the issues raised in this post, we are happy to assist you. Please contact Dr. Gabriele Haas (mailto: Gabriele.Haas@Dentons.com)