- REMIT is an EU-level framework for identifying and penalising insider trading and market manipulation in wholesale electricity and gas markets in the EU.
- REMIT applies to any person/entity whose conduct affects these markets, irrespective of where the person/entity is based.
- There has been an increase in the number of investigations into violations of REMIT, as well as the scale of sanctions for non-compliance. Indeed, regulators have issued six decisions regarding market manipulations in violation of REMIT in the past twelve months, and dawn raids for suspected violations have become more common.
- To date, regulators have investigated and fined a variety of market participants, including energy exchanges, gas and electricity suppliers, and traders. Regulators have issued fines to both companies and individuals.
- Despite the uptick in enforcement, there remains considerable uncertainty over, for example, the scope of certain provisions of REMIT, and the boundaries between REMIT and competition law.
- To mitigate risk, companies can implement comprehensive, tailored compliance programs.
- These programs ensure that companies respect their reporting and registration obligations, and handle inside information properly.
- In designing a compliance program, companies should bear in mind that REMIT operates in parallel with other European regulatory regimes, including competition law, and companies can draw from experience in the competition law field.
The EU Regulation on Wholesale Energy Market Integrity and Transparency ("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. This 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.
In recent months, there has been a clear increase in the number of investigations into violations of REMIT, as well as the scale of sanctions for non-compliance. However, there remains significant uncertainty regarding the precise scope and application of certain key provisions. This note summarises the latest developments in the REMIT sphere and shares best practices, as notably discussed at the recent intensive training session by the Florence School of Regulation*, which brought together representatives from the energy industry and from EU and national energy agencies, as well as lawyers, economists, and academics.
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.
III. 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 to a company for non-compliance is €25 million, although sanctions are typically more modest.2 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 redlines 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 50,000 m3 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 REMIT3. 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. As further described in this article, 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. Baker Botts advises clients in their interactions with EU regulators across different sectors, and has an experienced EU litigation team.
ACER is also expressly authorized 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.
IV. Practical implications
The most effective way for a company to limit the risk of REMIT infringement is through a comprehensive, tailored compliance program. Companies may also look to competition law compliance and enforcement for guidance, in light of the similarities between the two regimes described above. With in-depth experience in energy regulation and competition law, Baker Botts is perfectly placed to assist companies with their compliance programs and REMIT enforcement issues.
In designing the right compliance program, companies may wish to consider the following points. First, the market for wholesale energy products is a multilevel environment in which European and national legal rules interact. REMIT notably operates in parallel with other European regulatory regimes, including competition law, financial regulations, and the EU market abuse regulation ("MAR"), each of which carries sanctions for non-compliance. The impact of these parallel European regimes should be included in any REMIT compliance program. Second, although certain technologies can generate alerts regarding suspicious market activity, it is key to have an internal operative manual on how to deal with these alerts. This can simplify compliance with REMIT's reporting obligations under EU law, and (for example) market monitoring under the MAR. Third, it is important to designate clear internal procedures and communication channels to ensure inside information is acted upon rapidly and handled appropriately.
Finally, given the extensive market monitoring under REMIT, there is a risk of investigations of both "false positives" (market activity that appears suspicious but is in fact legitimate), as well as investigations of actual violations. In light of this risk, it is important that companies pro-actively train their staff to increase the culture of compliance, and to ensure staff are prepared in the event of a dawn raid.
*Baker Botts LLP is a sponsor of the Florence School of Regulation.
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 In 2015, Iberdrola was fined €25 million by the Spanish Competition and Markets Authority for raising the prices for its hydroelectric plants by reducing the quantity it dispatched in the day-ahead market. Iberdrola has appealed this decision.
3 For advice regarding LNG contracts, see ACER FAQ II.3.1.49: https://kb.acer-remit.eu/faqs-on-transaction-reporting-question-ii-3-1-49/
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