Updated Guidance on REMIT
The Agency for the Cooperation of Energy Regulators (ACER) released the 5th edition of its REMIT Guidance on 8 April 2020, covering the application in the EU of EU Regulation No 1227/2011 on wholesale market integrity and transparency (REMIT).
By virtue of the European Union (Withdrawal) Act 2018, the provisions of REMIT (and its accompanying implementing regulations) are now part of the body of retained EU law in the UK, and so this Guidance, which is addressed to the EU energy regulatory bodies, will continue to be followed by Ofgem in its monitoring and enforcement of REMIT’s prohibitions and obligations in Great Britain.
Despite REMIT being in force now for several years, its practical application can still be problematic, which can be a concern when non-compliance can in certain cases amount to a criminal offence. Even where no criminal sanctions are involved, enforcement activity by Ofgem (and EU energy regulators), has seen some sizeable fines, most recently a £2.1m penalty handed down by Ofgem to Engie Global Markets in September 2019 for infringement of REMIT’s market manipulation prohibition.
Much of REMIT applies to companies which trade in wholesale energy market products, such as electricity generators, wholesale trading companies, gas shippers, transmission system operators, as well as operators of gas storage facilities and liquefied natural gas (LNG) import terminals. These companies, termed “market participants”, have a specific obligation [REMIT, Article 4(1)] to disclose via public transparency platforms certain inside information related to their assets, as well as report so-called fundamental data and report certain common types of traded products defined by the implementing regulations [REMIT, Article 8].
For this purpose, wholesale energy products include power and gas products, but not green certificates and emission allowances. There are also complex rules governing the interaction between REMIT and financial services legislation insofar as the latter governs wholesale energy products which are financial instruments. But REMIT is much wider than that, and applies to any person – whether or not a market participant - coming into possession of inside information, or engaging in market manipulation (which can include disseminating false information).
As with previous editions of the Guidance, this latest edition focusses on particular aspects of REMIT, in this case the meaning of the crucial concept of “inside information”. This follows a consultation by ACER back in the summer of 2019.
This concept is fundamentally important when considering two central elements of REMIT:
- Article 3, and the prohibition on insider trading (which includes a prohibition on disclosure of inside information), and
- Article 4, and the obligation on market participants to make timely and effective public disclosure of inside information which relates to their business or facilities.
What’s changed in this new Guidance?
The principal changes cover the following areas:
REMIT defines inside information as essentially facts (i.e. circumstances, events, incidents or any other type of information) which satisfy two tests. First, the fact must constitute a type of information falling within one or more of four defined categories, and second that fact must go on to meet each of four cumulative conditions in order to become “inside information”.
As for the first limb, the four information types can be broadly summarised as:
- information required to be disclosed under the EU Third Package electricity and gas regulations (including the Network Codes and Guidelines)
- planned or unplanned changes in capacity or output of any electricity or gas production, storage, consumption or transmission facility
- facts required to be disclosed by law, contract or market practice
- any other information a reasonable market participant would be likely to use as part of the basis of a decision to enter into a wholesale energy transaction.
The new Guidance provides further clarity on these descriptions. Notably, previous Guidance downplayed the importance of this fourth limb, at least whilst market practice and awareness of REMIT implementation was evolving. But this new Guidance now includes a “reasonable market participant test” to help determine whether a fact which does not fall within the other limbs might still nonetheless constitute “information”.
It also confirms that, whilst information on an outage which is of a size falling below accepted disclosure thresholds might not therefore constitute information under the third limb, it could still be caught by the other three.
As mentioned, any fact which is to be treated as “information” will only be “inside information” for the purposes of REMIT if each of four cumulative conditions are satisfied. These conditions are that it must be precise; not public; related to one or more wholesale energy products; and likely to significantly affect prices.
Most of the new Guidance is providing clarity on these four conditions.
This has always been a difficult concept to apply in practice. In summary, the new Guidance suggests that, whilst the information must always be assessed on a case by case basis and taking account the surrounding context, the assessment may be that:
- it is precise because there is a realistic prospect that the fact will occur (for example a strike impacting workers operating a power plant)
- it is precise even if it is only an intermediate step in a lengthy process (for example board and regulatory approvals leading up to plant commissioning).
Also, whilst the concepts of precision and effect on prices are linked, the new Guidance stresses that the former must be assessed regardless of the potential price effect of the information disclosure.
“Not made public”
It has been a feature of previous Guidance that email or other news boards to selected market participants (for example exchange members) do not satisfy this test, and this is re-emphasised.
“Relates to wholesale energy products”
The new Guidance makes clear that information will meet this condition if it has a possible effect on (or on the expectations of) the demand, supply and/or prices of a wholesale energy product. This is enough to create a linkage between the fact and wholesale energy products, so that it “relates” (directly or indirectly).
“Likelihood of significant price effect”
Along with precision, this is often a difficult condition to assess in practice, and like much else in REMIT must always be considered on a case by case basis. The new Guidance expands on some of the factors that are typically relevant here, including size of event, market characteristics (size, timeframe etc.), relevant network constraints, TSO announcements, weather conditions, fuel prices, and even geo-political events. Market participants are advised to have a systemic framework in place to make this assessment as and when needed, based on their specific activities and the information they typically handle. Examples are offered of how this analysis should work in relation to a status update of a previously announced generator outage, and a transmission system operator despatching balancing reserves.
Also included in the new Guidance is further clarity on the statement in REMIT that information regarding a market participant’s own plans and strategies for trading should not be considered as inside information.
Building on the 4th edition, which focussed on the rules around PPATs (Persons Professionally Arranging Transactions) [REMIT, Article 15], this latest update to ACER’s Guidance provides a little more clarity on some of REMIT’s trickier concepts.
Given that so much depends on how REMIT is applied in practice to particular circumstances, the additional examples offered are useful, although best compliance practice remains to have in place systemic frameworks to enable real-life decisions to be made promptly and effectively. Those frameworks, including policies and procedures, should be reviewed in light of this latest Guidance.
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