Written by Ella Adler from Baker Botts, a participant in our recent training on REMIT.
Introduction
On 12 April 2019, the Florence School of Regulation hosted an intensive training session on the EU Regulation on Wholesale Energy Market Integrity and Transparency (“REMIT”).
REMIT introduced a sector-specific legal framework for identifying and penalising insider trading and market manipulation in wholesale electricity and gas markets in the EU. The broad framework applies to any person/entity that participates in, or whose conduct affects, EU wholesale energy markets, irrespective of whether the person/entity resides or is based in the EU.
The training brought together representatives from the energy industry and from EU and national energy agencies, as well as lawyers, economists, and academics. It provided an important forum in which to share best practice and analyse latest developments. While there is a clear increase in the number of investigations into violations of REMIT, as well as sanctions for non-compliance, there remains significant uncertainty regarding the precise scope of certain key provisions.
Background
REMIT prohibits abusive practices in wholesale energy markets. Specifically, REMIT prohibits insider trading, and requires market participants (“MPs”) to publicly disclose inside information. REMIT also prohibits “market manipulation”, which includes false/misleading transactions, price positioning, transactions involving fictitious devices/deception, and disseminating false or misleading information.
MPs are required – under pain of fines – to register with the relevant national agency.[1] The requirement applies to all MPs who participate in wholesale energy markets within the EU, or whose conduct has an effect on these markets, and includes MPs residing outside the EU. To date, over 14,000 MPs have registered.
MPs are also required to report suspected violations of REMIT to the relevant national authority. All wholesale energy market transactions, including orders to trade, must be reported at EU-level to the Agency for the Cooperation of Energy Regulators (“ACER”). ACER then screens this information to identify possible market abuses and, where necessary, alerts and coordinates with national agencies, which are responsible for enforcing compliance and imposing sanctions.
Latest developments
2018 represented the first full year of market monitoring by ACER, during which it received approximately 3 million data records per day. ACER has cited improving the quality of this data as a key priority. ACER has now also been given legal powers to introduce registration fees for MPs, to ensure that it has sufficient resources to undertake its market-monitoring role.
National agencies, including the Spanish Commission for Markets and Competition (Comisión Nacional de los Mercados y la Competencia), and the German energy regulator (Bundesnetzagentur), have issued six decisions regarding market manipulations in violation of REMIT in the past twelve months. This demonstrates a clear trend towards more active enforcement by national agencies. The German regulator notably fined two individual traders €1,500 and €2,000 respectively for gas market manipulation. To date, the highest fine issued for non-compliance is €25 million, although sanctions are typically more modest. REMIT violations are also widely publicised.
This enforcement trend includes investigating certain practices, particularly those involving high prices and unusual price spikes, as violations of REMIT, rather than as violations of competition law (as was traditionally the case). That said, there are no clear red lines between the two regimes, and abuses such as capacity withholding may violate both competition law and REMIT. Dawn raids under REMIT have also become more common, but it is not always clear to what extent the rights of defence under REMIT are the same as the rights of defence under competition law.
Given the lack of precedents, the boundaries between legitimate and illegitimate market behaviour may also be unclear. An example is legitimate arbitrage between markets, which in certain circumstances may be captured by REMIT’s broad prohibition of “manipulation” (Article 5).
The broad and arguably vague definition of “inside information” is also problematic, as it can be unclear to MPs when the obligation to disclose such information comes into play. To facilitate compliance, there is debate regarding the introduction of thresholds for the disclosure of inside information (e.g., information concerning greater than 50,000m3 of LNG or 100MW of electricity would have to be disclosed). However, there are significant practical difficulties to introducing a threshold, such as determining the territorial scope of the threshold (e.g., per country or per bidding zone), and its legal effect (e.g., whether a soft law guideline or a strict legal safe harbour would be more effective).
ACER advises companies to report transactions even in cases where there is doubt that the transaction is reportable under REMIT. MPs have noted that companies are also erring on the side of caution regarding the publication of insider information, and are arguably over-publishing, with the effect that the utility of such information is greatly diminished. Processing the sheer volume of information available, be it inside information or reported transactions, is likely to be a continuous challenge for both regulators and those they regulate.
The recent increase in enforcement by national regulators may also pave the way for private actions for damages before national courts for breaches of REMIT. Both ACER and national agencies collect large amounts of data from MPs, which would be very useful to a party bringing a private action. However, these agencies are generally bound by strict confidentiality provisions which prevent them from releasing certain information to third parties. The European courts have set out criteria for determining whether the regulator can disclose information to a third party. However, the case law and relevant regulations have not been harmonised, with the effect that different European agencies may be subject to different EU rules.[2]
ACER is also expressly authorised to share information with other national and European regulators, including financial regulators and competition authorities. MPs should be aware that the information ACER collects may therefore open the door to liability under these other bodies of law.
[1] The relevant agency is typically the national energy regulator, such as the Office of Gas and Electricity Markets (Ofgem) in the United Kingdom. However, in certain Member States, a single agency is responsible for both competition law and REMIT. Examples include Estonia, the Netherlands, and Spain.
[2] Sohra Askaryar and Ella Adler, Handle with Care? The Treatment of Confidential Information Under EU Law Following Bundesanstalt für Finanzdienstleistungsaufsicht v Ewald Baumeister, OGEL 2 2019.
