Posted: 26/07/2018
Ofgem has an active enforcement function. Downstream gas and electricity market participants need to understand how the regulator goes about compliance and enforcement, and how to respond, to protect their positions.[1]
Ofgem has significant powers to impose orders compelling businesses to take actions, and to impose penalties. In recent years there have been some very significant financial penalties. Ultimately, licences may be withdrawn, orders enforced via injunctions and penalties pursued as civil debts.
Equally, Ofgem has a duty to conduct fair investigations before making final decisions on liability and remedies. It has published Enforcement Guidelines[2] setting out the procedures it will follow. Successfully navigating the investigative and decision making procedures reduces the likely negative impact on your business of regulatory action.
Generally, early engagement with the relevant policy team is advisable, to understand any compliance issues, to show that you are taking matters seriously and to crystallise what the real issues are (is it a simple misunderstanding, a temporary business process problem, a difference of legal interpretation?). Ofgem claims to now have an increased focus on helping businesses achieve compliance. In appropriate circumstances, 'alternative action' such as a commitment to take certain steps and compensation payments will resolve the issue.
Decisions on whether to open an investigation, and on whether to continue once opened, are taken by the Enforcement Oversight Board (EOB). EOB contains senior civil servants from across Ofgem. Ofgem’s published criteria for deciding whether to open a case are:
Recent anecdotal evidence suggests that sometimes businesses that were already engaging with Ofgem have been surprised to learn that an investigation has been opened. Sometimes Ofgem may not engage at all before moving to open an investigation.
Once Ofgem decides to open a case the regulated entity is informed and Ofgem’s policy is that it will then also publish news of the case opening on its website. Informing the regulated entity and issuing a press notice will not happen if this would be prejudicial to the investigation or consumer interests and subject to confidentiality and other considerations.
As soon as you learn of an investigation you should engage with Ofgem in respect of any press notices. You should also engage to make sure you understand the breach allegations, the scope of the investigation and the provisional timetable. Ofgem will often offer an initial meeting with the case team. As the case progresses, Ofgem should be asked for updates.
Ofgem invariably uses its powers to require the production of documents, in order to investigate the suspected breaches and their impact. Site visits and meetings are sometimes also used to gather information and to engage with parties. Engaging with this process will mean you can have some input on the approach Ofgem takes (eg the scope, timings and detail of information requests). It also shows you are taking the matter seriously and allows you to understand and potentially address concerns (hopefully reducing the likelihood of the case continuing, and the size of penalty if it does). Being cooperative does not mean you shouldn’t also challenge Ofgem where necessary on the alleged breaches, the information being requested and the conduct of the investigation. Taking legal advice on strategy, procedure, and questions of breach and remedies is important.
After carrying out enquiries Ofgem will usually issue a Summary Statement of Initial Findings (SSIF), setting out the case team’s analysis of any breaches and its thinking about the resulting detriment and/or gain. You will be invited to make written representations in response. This is usually followed by a case direction meeting with the case team, to discuss points from the SSIF and response, and next steps.
Under Ofgem’s Settlement Procedure, once the SSIF has been responded to, the investigation will usually be taken to a Settlement Committee.
Settlement Committees are usually made-up of two members of the EDP[3] and one very senior Ofgem civil servant, although for less significant investigations one of the senior executives of Ofgem may act in place of a Committee.
The Settlement Committee will consider the case team’s findings and recommendations, and the responses of the party under investigation and decide:
Ofgem’s policy is to offer a discount on the element of any penalty not accounted for by gain/detriment, if the case is settled at the first settlement window. The discount starts at 30% in the first 'settlement window', dropping to 20% and then 10% in successive windows which continue to run during the process of moving towards a decision in a contested case.
Assuming a settlement mandate is granted, the case team will outline this to the party under investigation and there is usually a 21 day period for acceptance (the first settlement window). Settlement is not like a commercial negotiation: Ofgem requires acceptance of breaches by the party and the remedies are not negotiable. There is usually some scope for negotiation on points of detail and less negative press notices than in the event of a contested finding of breach.
If a settlement is not reached in the first settlement window, Ofgem will serve a Statement of Case on the company which sets out their findings and the case alleged against the company. There is also a disclosure process, although most of the documents relied upon are likely to already be known (and most likely have been provided) by the company.
The party under investigation has the opportunity to make written representations and submit additional new evidence in response to the Statement. Additionally, there is an option for an oral hearing at the company’s request.
A panel of EDP members which will not include any member who sat on the settlement committee, will decide on (i) whether there have been any breaches, (ii) any orders required and (iii) any financial penalties.
Ofgem’s powers to impose remedies require it to consult on proposed penalties and some orders. In the event that remedies are being imposed at the end of a contested case, there will therefore be a period of consultation, during which time third parties may make representations on the proposed decision; in response to these representations the EDP may vary or confirm its proposed decision. This process invariably also arises in a settlement, because Ofgem imposes a nominal £1 penalty on which it is required to consult.
As a public body making regulatory decisions, Ofgem is subject to public and administrative law obligations and, potentially, to judicial review. However, under the Gas Act 1986 and Electricity Act 1989 appeals against decisions in sectoral cases can be made, on limited grounds, to the High Court/Court of Session. Appeals against financial penalties and against provisional or final orders are subject to a 42 day time limit.
[1] This note gives a brief introduction and overview to the Ofgem enforcement processes for 'sectoral' cases. These investigations account for the majority of Ofgem’s casework and effectively cover everything except REMIT and competition investigations, and actions in the civil or criminal courts. This note does not constitute legal advice and detailed consideration of procedures and the substantive law is advised in the event of a suspected non-compliance or potential investigation.
[2] The Guidelines cover both sectoral and competition investigations.
[3] The Enforcement Decision Panel is a 'pool of…employees of [Ofgem]…employed specifically for EDP duties and are independent from the case team...'
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