Electricity and Gas (Market Integrity and Transparency) (Criminal Sanctions) Regulations 2015

Baroness Worthington Excerpts

Tuesday 3rd March 2015 Grand Committee

[The Parliamentary Under-Secretary of State, Department of Energy and Climate Change (Baroness Verma) (Con)]

My Lords, our liberalised energy markets, which are underpinned by robust independent regulation, are a critical part of the UK economy. Effective competition in the wholesale energy markets is a key driver of lower prices, which is why this Government are continuing to take steps to strengthen competition so that markets work more effectively for consumers. The Government have made clear their commitment to maintaining a strong and stable regulatory framework that delivers transparent and competitive markets and has the right penalties for those who step out of line. One component of this is having strong sanctions against those who abuse energy markets.

The UK wholesale energy markets are of great significance to the UK economy and to Europe as a whole. For example, trading on the GB wholesale energy markets has been estimated to be worth between £297 billion and £333.5 billion each year. In addition, a significant volume of trading of European energy products is done through London-based brokers. The UK acts as a hub for gas; the GB gas market is used as a reference price for gas delivered elsewhere in Europe and into the electricity market, where gas is a significant and sometimes marginal price-setting fuel. The large figures involved and the importance of the wholesale energy market for financial services, industry and UK and European consumers make the integrity of the market a matter of national and international importance.

The EU REMIT regulation has been in force since 28 December 2011. REMIT prohibits insider trading and market manipulation in wholesale energy markets across the EU. The wholesale energy market regulators in Great Britain and Northern Ireland have civil powers to deal with market manipulation and insider dealing in wholesale gas and electricity, including the ability to impose unlimited financial penalties, access to information and the power to enter premises. To strengthen this regime the Government set out the case for new criminal offences of insider dealing in and the manipulation of wholesale energy markets.

In June 2013, the Government made civil enforcement regulations for REMIT. They then signalled their intention in October 2013 to consult on strengthening this civil enforcement regime by creating new criminal offences in line with the prohibitions relating to market abuse in REMIT. That consultation ran through August and September 2014 and included a joint stakeholder event on the proposals with Energy UK which 30 industry organisations attended. Fourteen responses were received to the consultation from a range of organisations, including large vertically integrated energy companies, trade associations, sector services organisations, legal organisations, a small supplier and a private individual. Having considered views expressed through the consultation and stakeholder event, the Government have prepared and laid before Parliament these regulations under the powers in Section 2(2) of the European Communities Act 1972. These regulations would be enforced by Ofgem for Great Britain and the UK offshore marine area, and by the Northern Ireland Authority for Utility Regulation for Northern Ireland.

I think it would be helpful if I briefly set out for the Committee the effect of these regulations. Regulation 3 would make it a criminal offence for a person to breach the prohibition on insider dealing set out in the EU REMIT regulation. A person would be committing the offence if they intentionally or recklessly: used inside information to acquire or dispose of wholesale energy products to which that information relates, either on their own account or on behalf of others; disclosed inside information except in the normal course of their duties; or used inside information when recommending that another person acquire or dispose of wholesale energy products, or when inducing them to deal in wholesale energy products.

Similarly, under Regulation 4, a person would be committing a criminal offence if they breach the REMIT prohibition on manipulation of wholesale energy markets. A person who enters into a transaction or issues an order would commit the offence if they had the intention to send misleading signals or to secure the price of a wholesale energy product at an artificial level, or were reckless as to whether their actions would have that result. A person would also be committing this offence if they disseminated information with the intention of giving, or reckless as to whether it would give, false or misleading signals as to the supply of, demand for, or price of a wholesale energy product.

These behaviours are already within the scope of the existing civil penalties regime, but we believe that it is right to strengthen the enforcement regime because there is a real risk that, for a small number of organisations or individuals, civil sanctions alone may not have a sufficiently strong deterrent effect because, as I am sure we are all aware, there can be very strong incentives to break the rules. By framing these new criminal offences around the prohibitions in REMIT, we have ensured that these criminal offences cannot be wider than the matters subject to existing civil sanctions. This addresses one of the key concerns raised by industry during the consultation. Conduct that becomes a criminal offence under these regulations will remain covered by the civil regulations too, so that the regulators will have a choice of which regime to pursue offenders under. The regulators would be expected to act proportionately and take into account the seriousness of the conduct and all other relevant factors in choosing whether to prosecute or impose a civil penalty.

I would like very briefly to outline the effect of the other regulations. Regulations 5 and 6 will ensure that the regulators, Ofgem in Great Britain and the Northern Ireland Authority for Utility Regulation in Northern Ireland, are able to investigate these proposed offences. Regulations 7 and 8 ensure that, in line with the REMIT regulation, the regulators can pursue legal persons as well as natural persons if they have committed these offences. If an offence is committed by a legal person, such as a company, because of the commission or omission of an officer of that person, the regulators would also have the power to pursue prosecution of that officer. Regulation 9 would require the regulators, in consultation with others, to produce enforcement guidance about how they would propose to handle these offences.

Regulation 10 would enable the Serious Fraud Office and the Director of Public Prosecutions to institute criminal proceedings for these offences as well as the energy regulators. Regulation 11 sets out that the maximum penalty available to courts for breach of these offences is two years’ imprisonment. This is less than the penalty that is available for similar offences in the financial services industry. We have already indicated our intention to consider whether this discrepancy is right as financial services regulation develops.

I hope that noble Lords agree that this is a measured and sensible strengthening of our existing regulatory regime to address a small but real risk of serious abuse of wholesale energy markets. These new offences would mean that energy markets and the consumers that rely on them have similar safeguards to those in place in financial markets in which the relevant regulator has the ability to prosecute for criminal offences. I therefore commend these regulations to the Committee.

[Baroness Worthington (Lab)]

My Lords, I am grateful to the noble Baroness for introducing the regulation. This is a good example of why it is good to be part of Europe. Here we have some sensible interventions, with criminal offences being acted against by the European Union as a whole. It shows why the UK should be a strong and leading voice in Europe. My first question is: why has it taken us so long? The regulations in Europe were passed in 2011, and it is now 2015. The only other question, which is broader, is: given that there is a need for such regulation in the wholesale energy market for gas and electricity, does the Minister think that there is a case for us to apply our sights to the transport fuel sector? It would be interesting to know, whether at EU or UK level, whether the way in which the wholesale markets work in transport fuels has ever been explored. I have said this before, but I feel that there is a strong case for our energy regulator to look into the transport fuel markets, because energy is more than just gas and electricity.

[Baroness Verma]

My Lords, I am grateful for the noble Baroness’s support for this instrument. She asked a couple of questions. First, why not before? Although it is really good that Europe has come together on this, the remit does not set out how member states should create penalties. We went through that process for the benefit of the UK, and the provisions are now ready to be put in place, if approved. That sends a clear message that we will not tolerate any breach or any market manipulation but will take this very seriously, as we always have, but now the regulators will have the power to reel in any improper behaviour.

The noble Baroness also asked a question that completely escapes me. I should have written it down, but I have not. I may have to come back to her on that in writing after I have read Hansard. In the mean time, I commend the regulations.