On 3 September 2020, Ofgem issued its first sanction to a participant in the wholesale energy market (SSE Generation Limited) for failure to publically disclose inside information. The obligation to make public disclosure, which sits alongside wider prohibitions on insider trading and market manipulation (the latter being subject to several enforcement cases), arises under Article 4 of the EU Regulation on Wholesale Energy Market Integrity and Transparency, commonly known as REMIT.
Who is affected?
Any company that meets the criteria to be a market participant by trading in wholesale gas or electricity products and which owns or operates energy infrastructure assets should take note of this decision. In this latest enforcement case, SSE was caught by the Article 4 public disclosure obligation as a market participant through its ownership of the Fiddlers Ferry coal-fired power station in Warrington, Cheshire.
Essentially, the obligation requires “timely and effective” public disclosure by a market participant of inside information in its possession which relates to any business or facilities which they (or an affiliate) own or control. REMIT sets out detailed rules defining inside information, which broadly covers information of a precise nature, which relates to a wholesale energy product, is not in the public domain, and if made public would be likely to significantly affect market prices. This will potentially capture information about generating plant outages and closures.
What are the facts?
In February 2016, SSE launched a consultation, announcing its expectation that it would be closing down three generating units at the Fiddler’s Ferry power station by 1 April 2016. Subsequently, on 22 March, SSE signed a set of non-binding Heads of Terms to provide ancillary services to National Grid from at least one of those units, and made a corresponding decision to retain its transmission export capacity for all three units at the power station for the forthcoming 2016/17 period.
Those Heads of Terms were followed up on 30 March 2016 with the announcement by SEE of signature of a binding ancillary services contract and its decision to retain the export capacity and enter all or part of that capacity into the 2017/18 capacity auction.
This latest decision is significant because Ofgem treated the inside information – in this case the likelihood of the three units staying open - as coming into existence on 22 March and not 30 March, notwithstanding that the Heads of Terms were non-binding.
There are 4 cumulative conditions which need to be made for inside information to arise, mentioned above. Article 4 of REMIT requires that public disclosure must be made in a timely and effective manner from that point, typically within an hour to a designated information platform. The point in time at which information becomes “inside information” is therefore critical.
In this case, Ofgem reasoned that the information, related to the operational status of the generating units, became inside information by 22 March because by then all four conditions were met. Notably, the capacity of the power station (1455MW) was significant, especially at a time when forecast margins were tight, and as a result Ofgem considered that the information would be likely to significantly affect market prices. The information was also considered sufficiently precise, taking into account the requirement in Article 2(1) of REMIT that information will be deemed to be precise if it “indicates a set of circumstances which exists or may reasonably be expected to come into existence, or an event which has occurred or may reasonably be expected to do so, and if it is specific enough to enable a conclusion to be drawn as to the possible effect of that set of circumstances or event on the prices of wholesale energy products.”
As a result, Ofgem found that SSE had contravened Article 4. Even though there was no evidence of bad faith from SSE, Ofgem imposed a significant fine on SSE, of approximately £2 million. In addition, Ofgem indicated that, reflecting that the events in question occurred shortly after REMIT was introduced, future fines would likely be much larger as REMIT is no longer ‘new’ law, and market participants can be expected to be more familiar with it.
What does “precise” mean… precisely?
Perhaps the most interesting aspect of this decision is the further clarity provided on how to interpret the “sufficient precision” condition in REMIT. This follows some recent clarification on the topic from ACER in its latest guidance on REMIT published on 8 April 2020. Read our earlier blog on the updated REMIT guidance.
This guidance advised market participants that they should still consider whether information is precise:
- If there is only a realistic prospect it will occur,
- Regardless of the amount of any potential effect on the price of the wholesale products; and
- Even if the information only relates to an intermediate step in a lengthy process.
Ofgem’s decision reinforces the first and last of these points. Although the heads of terms were an intermediate (and non-binding) step in a process designed to lead to the intended outcome, Ofgem clearly understood them (in conjunction with the decision to retain the units’ export capacity) to be indicative of a “reasonable prospect” that the intended outcome would come to pass. Apart from anything else, this is an important reminder of the significance of signing heads of terms, which can create legal obligations, even if those heads of terms are expressed to be non-binding.
Sizeable financial penalty
The other key point of interest is the further guidance it provides on how Ofgem will go about enforcing REMIT, and in particular the Article 4 public disclosure obligation, notably its approach to fixing on the level of financial penalties. On the latter, Ofgem already provides guidance, in its REMIT Penalties Statement, and applies a six-step process, which in this case resulted in a penalty of £2,627,000, assessed notwithstanding the novelty of the case and the lack of published guidance at the time. This was discounted to £2,060,000 recognising SSE’s admission of breach and agreeing to settle within the early settlement window.
What does this mean?
This case emphasises the importance of market participants having in place systemic internal frameworks that enable decisions concerning the existence of inside information, and its potential publication, to be made promptly and effectively. Those frameworks, including policies and procedures, should be considered in light of this decision (and the recent updated ACER Guidance) to ensure they kick in at a sufficiently early stage of any process affecting relevant assets that may have an impact on wholesale energy prices.
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