REMIT and Artificial Prices: Is Guidance from the Case Law Finally Emerging?

On Wednesday, 23 June 2021, the FSR Debate discussed whether the prohibition of market manipulation under the Regulation on Wholesale Energy Market Integrity  (REMIT) and especially the notion of “artificial” price levels (art 2(2)(a)(ii)), had been rendered more easily applicable by recent case law and guidance.

The Debate was hosted by Alberto Pototschnig (FSR) and opened by Leigh Hancher (FSR), who introduced the Debate and presented the speakers: Martin Godfried (Head of the Market Surveillance and Conduct Department, ACER), and Guillermo Pérez Almendral (Associate, Simmons & Simmons Madrid).

ACER Guidance on REMIT

In his presentation, Mr Godfried drew on the recently updated  ACER Guidance on REMIT. He focused in particular on the notion of artificiality when determining whether market manipulation had taken place. He stated that, in general, if non-competitive practices result in a price that is not the result of the market fundamentals, i.e. of the interplay of supply and demand, such a price may be deemed artificial. The ACER Guidance indicates that counterfactual reasoning may be used in determining such artificiality. Mr Godfried also stressed that a degree of causality between a market participant’s behaviour and the artificial prices should be established by the entities applying REMIT. Artificial prices can occur as a result of several different types of behaviour by market participants. Mr Godfried said that this means that regulatory authorities must be careful in their assessment of market manipulation, as it can sometimes be difficult, for example with practices such as capacity withholding, to determine whether and when they turn manipulative.

The application of REMIT: an example from Spain

The next speaker, Mr Pérez, provided participants with a recent example of the application of REMIT, the decision of the Spanish Comisión Nacional de los Mercados y la Competencia (CNMC) to penalise Rock Trading World for several manipulative practices between 3 and 7 November 2018. After a detailed analysis, the CNMC found that Rock Trading had conducted transactions involving wholesale energy products traded on the MIBGAS market that were providing false or misleading indications and that Rock Trading had set the price of a wholesale energy product at an artificial level. Mr Pérez highlighted that the manipulative transactions of Rock Trading could have been due to inexperience in the MIBGAS market, which, however, is not an excuse for infringing REMIT. He further stressed the wide margin of discretion regarding penalties that can be imposed by CNMNC for REMIT infringements in MIBGAS, with a penalty range from one euro to six million euros, an important difference to the Spanish electricity market.

Insights from the Panel

After the initial presentations, Prof. Hancher introduced the panel speakers for the second part of this event: Fabien Roques (FSR and Compass Lexecon), Camilla Berg (Nord Pool) and Nils-Henrik von der Fehr (University of Oslo).

Dr Roques highlighted that this is an area of relatively intense activity for NRAs. He said that, in addition to the ACER Guidance, there have also been useful publications from individual NRAs, for example by the Bundesnetzagentur, or by market operators themselves, such as Nord Pool. He agreed with Mr Godfried that assessing market manipulation requires careful case-by-case economic analysis that should take into account the competitive incentives of market participants, who may behave in a way that, at first glance, might seem suspicious, but which a more detailed analysis shows to be legitimate. Ms Berg also welcomed the ACER Guidance, stating that it has been extremely important to have pan-European support on the application of REMIT. This Guidance will be further enhanced by the input from other stakeholders. Ms Berg, too, emphasised the importance of taking into account conditions on the ground and stated that market-specific circumstances always have to be considered. Here, it is crucial to distinguish design flaws in the market itself from manipulative behaviour by its participants. Care also needs to be taken to distinguish between markets for different commodities: it is not straightforward what lessons electricity market regulators can learn from the Spanish Rock Trading decision regarding manipulation of the gas market. Prof. von der Fehr then said that it is useful to draw a distinction between market manipulation and anticompetitive behaviour. The Rock Trading decision underlines this, as it was a case more about a market participant’s conduct rather than price levels as such. This makes the Rock Trading decision very different from a competition case, where the fundamental question is one of price deviation. The Rock Trading case was, however, about manipulating prices by making bids intended to influence the behaviour of other market participants. In this sense, market manipulation is really about integrity and trust between market participants and thus a problem for highly organised markets, which typically have rules of conduct and penalise participants that do not abide by these rules.

The views of the audience

In the third part of the event, polls were used to gauge participants’ opinions on market manipulation under REMIT. A first poll revealed that a majority of event participants agreed with the fact that a REMIT-like regulation would be required for a wholesale market in hydrogen, though a sizeable portion of participants was still undecided in this matter. In a second poll, participants were asked if they agreed with statements made in a recent decision by Ofgem. Participants agreed both with Ofgem’s statement that it was difficult to develop a robust counterfactual and with Ofgem’s decision to reach a settlement with the National Grid Electricity System Operator rather than to impose a financial penalty. In the final poll of the event, participants were asked whether they agreed with the tests recommended by ACER in section 6.4.1 (i) of its Guidance to determine whether a behaviour involving generation capacity withholding amounts to a breach of REMIT. These two tests are: first, determining whether the market participant concerned is able to influence the price or the interplay of supply and demand of a wholesale energy product by engaging in such behaviour; and, secondly, whether the market participant has no legitimate technical, regulatory and/or economic justification for its behaviour when it does not offer its available generation capacity or has offered it above marginal cost. The poll revealed that the majority of participants agreed with the two tests and thought that the burden of proof for their establishment should lie with the regulatory authorities concerned.

In providing his concluding remarks, Prof. Pototschnig drew from the results of the second and third polls, arguing that if it were indeed difficult for NRAs to develop counterfactuals while having the burden of proof for establishing manipulation, the task of NRAs for enforcing REMIT in the area of artificial prices would seem extremely challenging. This signifies that, while the ACER Guidance is a very important and useful product for market participants, there still remains much room for debate regarding REMIT.

In closing, Professors Hancher and Pototschnig thanked all panellists and participants for their contributions. The next series of FSR Debates will commence in September 2021 and details will be published on the FSR website in due course.