Posted: 05/09/2018
This note gives a brief overview of the remedies available to Ofgem when faced with non-compliance in the “sectoral” regime (detailed below).
Summer 2018 has produced a number of examples of how Ofgem uses its powers:
These examples all happen to relate to energy suppliers, but the powers and remedies used by Ofgem have a much wider application, including generators, distribution businesses and businesses that may not require a licence (eg many Capacity Market participants).
Knowing what Ofgem’s powers are, and how they are used, is important for any business subject to its regulation.
Ofgem has a wide range of enforcement powers that relate to different aspects of the downstream energy markets. For example, it has powers to investigate and punish suspected breaches of competition law and REMIT (the EU wholesale energy trading regulation), to investigate breaches of general consumer protection law or the undertaking of licensable activities without a licence, and to pursue both civil and criminal court actions. Ofgem is also the competent authority for downstream gas and electricity under the Network and Information Systems Regulations 2018. In practice, however, most of Ofgem’s compliance and enforcement work falls under what is often called the “sectoral” regime - in other words, the investigatory and enforcement powers that Ofgem (or more accurately the Gas and Electricity Markets Authority) has by virtue of the Electricity Act 1989 (EA), the Gas Act 1986 (GA), and various other primary or secondary legislation.
The provisions in the Electricity and Gas Acts are, in essence, the same and in the case of retail energy suppliers both will often apply.
The powers to impose penalties or make orders, as discussed further below, apply when “relevant conditions” and “relevant requirements” are breached, or suspected to be breached.
“Relevant conditions” mean conditions attached to licences, such as the standard licence conditions (SLCs) that attach to gas and electricity supply licences, but also conditions that attach to other licences issued for licensable activities under EA or GA (for example, electricity generation, transmission or distribution). Compliance with industry codes such as the Balancing and Settlement Code is invariably included within licence conditions, which means breaches of industry codes are also caught by the sectoral regime.
“Relevant requirements” are listed in schedules to EA (schedule 6A) and GA (schedule 4B). They include the following requirements which are imposed on entities:
The lists are long and detailed, and their coverage includes generators, network business, interconnectors, storage facilities, gas shippers, LNG import or export facilities, smart meter communication licence holders, and suppliers.
In addition, certain other regulatory requirements are treated as if they were “relevant requirements” and fall within the sectoral regime for the purposes of compliance and enforcement. For example, the Electricity Capacity Regulations 2014 (SI 20143) states at reg 67 that its requirements and those of the capacity market rules“are enforceable…as if they were relevant requirements on a regulated person for the purposes of section 25 of the EA…” (see below for s25). Note that these additional regulatory requirements that are treated “as if” they are part of the sectoral regime can also have additional remedies for non-compliance, which are not covered in this note. For example, participants in the capacity market can be excluded from auctions.
Penalties and orders can generally only be imposed on a “regulated person”, the definition of which includes licence holders under the EA and GA energy licensing regimes. However, EA s25(8) and GA s28(8) include other definitions, such as distribution or supply exemption holders, as well as owners of storage facilities. This all makes the scope of the sectoral regime fairly wide.
Orders for securing compliance (ss25 – 27 EA and s28 - 30 GA)
Where Ofgem “is satisfied” that a regulated person “is contravening, or is likely to” contravene any relevant condition or requirement, it has the power to make a “final order”. A final order contains “such provision as is requisite for the purpose of securing compliance”.
As an alternative, Ofgem also has powers to impose a “provisional order” where “it appears to [Ofgem] (a) that a regulated person is contravening, or is likely to contravene, any relevant condition or requirement; and (b) that it is requisite that a provisional order be made…” A provisional order must contain “such provision as appears …requisite for the purpose of securing compliance…”
Provisional orders have a maximum period of three months, but once made can be confirmed – that is, given the same status as a final order – if Ofgem is satisfied of the contravention or likely contravention.
Orders are potentially powerful, intrusive tools. They can allow Ofgem to direct the actions of a business, potentially on no more basis than it has concluded that a contravention seems likely (although Ofgem is, of course, subject to the usual obligations on a public body to exercise its powers properly, whether under common law or the Human Rights Act, for example).
Ofgem enforces orders by applying to the High Court or Court of Session for an injunction. If the regulated person fails to comply with the order and causes loss or damage to another entity that the order would have prevented, that failure can trigger a right of action for that third party against the regulated person.
However, before imposing a provisional order, Ofgem is required to consider whether the contravention is going to cause any loss or damage, which means a non-consequential non-compliance shouldn’t lead to an order. It is also required to keep in mind the impact of such an order in excluding other remedies for the non-contravention, save for claims of negligence. Ofgem has discretion not to impose orders for trivial breaches, where the party is taking steps to achieve compliance, or where it decides it would be more appropriate to proceed under the Competition Act 1998.
No notice is required for a provisional order, but is required for its confirmation or for the imposition of a final order. The party having the order imposed upon it must be given the opportunity to make representations. Under the current timings provided for in EA and GA, there is little time between the imposition of a provisional order, which can only last for a maximum of three months, and the requirements for consultation and representations on its confirmation. In addition, imposing an order sets a time limit of either three or six months for imposing any financial penalty (see penalties section).
The imposition of an order can be appealed to the court, although EA and GA state that an order can only be challenged on two grounds: that it was not within the powers of Ofgem to impose an order, or that the procedural requirements have not been complied with and that this has substantially prejudiced the interests of the party subject to the order.
Penalties (s27A – 27F and 27O EA and 30A – 30F and 30O GA)
Ofgem can impose “such penalty as is reasonable in all the circumstances of the case” where it is satisfied that a regulated person has contravened, or is contravening, a relevant condition or requirement.
It can also impose a penalty for failure to achieve a standard of performance prescribed under the guaranteed standards regime that is applicable to suppliers, electricity distributors and gas transporters. (Whilst some aspects of the guaranteed standards regime are relevant requirements, including the requirement to take all reasonable steps to meet the standards, meeting the actual standards is not. However, failure to meet those standards can still be subject to a financial penalty under a separate provision).
As with final orders or the confirmation of provisional orders, Ofgem is required to give notice and allow for representations before confirming any proposed decision.
Penalties are subject to a cap of 10% of the regulated party’s turnover. Ofgem is obliged to publish and apply a penalties policy (click here for the currently published policy). Penalty calculations take into account detriment to both consumers and the market, as well as what the entity allegedly gained from the breaches. Penalties can be a highly contentious point – often as contentious as the actual breaches. Detailed scrutiny of the penalty policy and its application is, however, beyond the scope of this note.
Financial penalties cannot be imposed more than five years from the relevant breach. As orders apply to current or anticipated breaches, this effectively gives a limitation period for regulatory liability. When a provisional order has been confirmed, or a final order made, there is a time limit of three months for imposing a penalty. When a provisional order has not been confirmed (and may well therefore have lapsed), the time limit is six months. It is interesting to note that the provisions on financial penalties refer to shortened time limits when the contravention in question has been subject to an order, but the provisions on orders refer to the effect of making an order to be the exclusion of other remedies.
The imposition, amount or date for payment of a penalty can be appealed to the High Court or Court of Session. The court can quash a penalty, vary the penalty sum downwards or provide an alternative date for payment. However, as with orders, GA and EA state that there are only limited grounds for appeal – again, that Ofgem did not have the power to impose the penalty, or that procedures were not followed and that this substantially prejudiced the party’s interests, or that the payment date is unreasonable.
Unpaid penalties are recoverable by Ofgem as a civil debt.
Consumer redress orders (s27G – 27N EA and 30G -30N GA)
Consumer redress orders were introduced in 2014 but have not, in practice, been used by Ofgem. This is probably because it has been able to achieve the consumer outcomes it has been looking for through its compliance and settlement approaches (see below). Nevertheless, it is important to be aware of the availability of these orders , both because they are in the Ofgem armoury and because their availability can influence thinking on voluntarily agreed alternatives.
Ofgem may make a consumer redress order when it is satisfied that a regulated person has contravened any relevant condition or requirement, leading to one or more consumers suffering loss, damage or inconvenience. The consumers in question must be identified or described, but they do not have to be customers of the regulated person.
Consumer redress orders require the regulated person to do what Ofgem says is necessary to remedy the consequences of the contravention or prevent a similar contravention in the future.
Consumer redress orders can include requirements to pay compensation to consumers, to prepare and distribute written statements and to terminate or vary contracts. As with penalties, Ofgem is required to give notice of its proposed decision and to consider any representations. Ofgem’s penalties policy also covers its approach to consumer redress orders (see here).
Again, there is a five-year time limit for the imposition of an order. Orders are enforceable by civil proceedings brought by Ofgem in the High Court or Court of Session, including for an injunction/interdict. However, where the regulated person owes a duty to someone because of an order, that person can also enforce the obligation by way of civil proceedings. Provisions for appeals against Consumer Redress Orders are similar to those for provisional/final orders and financial penalties.
Consumer redress orders therefore give Ofgem further powers to enforce compliance and impose penalties. The regulated party can be compelled to take action to address the consequences of the contraventions and to avoid a similar contravention in the future. In practice, though, Ofgem has tended to achieve the same outcomes without using its consumer redress order powers.
Revoking a licence
As noted, Ofgem has powers to enforce final and provisional orders, financial penalties, and consumer redress orders via the civil courts if necessary. Ofgem may also revoke a licence for failure to comply, as a provision for this is included in the terms of its licences (see here and the relevant licence if necessary). This would have serious consequences for an active business as it is a criminal offence to conduct a licensable activity without a licence.
Detailed procedural requirements apply to the imposition of the remedies discussed above. In addition, Ofgem has developed its own administrative procedures for how to decide whether to open or prioritise investigations and how these are conducted and settled. Ofgem’s enforcement guidelines are available via its website and we have also produced a separate note summarising Ofgem’s enforcement processes.
What is important to highlight is that Ofgem has developed approaches to (potential) non-compliance which mean that it is common for action to engage with an entity to be taken before formal, statutory enforcement is needed. Investigations which are opened invariably settle.
Alternative action
Alternative action is the label Ofgem gives to steps taken in lieu of opening an investigation and/or using its formal powers, although it tends to be defined in different ways in different contexts.
Ofgem is willing to consider alternative action as a way of remedying non-compliances, particularly when the non-compliance is less serious, when the regulated party reported the issue itself and has been proactive in seeking to remedy it, and when there is not a wider concern about the business.
Alternative action essentially involves the business voluntarily taking actions to end the non-compliance and to remedy any harm caused. The details will vary on a case-by-case basis, but are likely to include:
Compliance
Subject to Ofgem’s criteria when opening a case, as set out in its enforcement guidelines, engagement with the relevant policy or compliance team can result in a decision not to take any formal enforcement action at all. This is more likely to happen when the regulated party has self-reported or been proactive in responding to an issue or when Ofgem is confident that all the issues are fully understood and can be properly and appropriately dealt with through agreed actions.
Taking action during an investigation
When an investigation is opened, alternative action may still be an appropriate way to deal with some, or all, of the issues. The response of the business, in particular in addressing the concerns of Ofgem, and the results of Ofgem’s own investigations may lead Ofgem to decide that a continued investigation is no longer a priority and that agreed alternative remedies are more appropriate. This may be true for the whole of a case, or for distinct parts of it.
Even where a case is unlikely to be closed, taking steps to solve any non-compliance and to deal with the consequences continues to be an advisable step. Stopping the non-compliance means that provisional or final orders are less likely to be imposed; taking steps to remedy the harm to consumers and the market (including paying compensation) makes a consumer redress order less likely and reduces the (wrongful) “gain” and (consumer/market) “detriment” elements of any eventual penalty calculation. More generally, engagement and attempts to address the non-compliance and its consequences will go towards mitigation.
Settlement
The Ofgem enforcement process includes settlement once the investigation phase has been completed and the party under investigation has had a chance to respond to the case team’s summary statement of initial findings. A settlement committee will form an independent view on whether there have been breaches and, if so, what penalty is appropriate. The party under investigation will be given the opportunity to accept this decision, with a 30% discount on the penal element of any penalty figure – which decreases if the process moves to a fully argued-out contested case in front of an independent Enforcement Decision Panel.
Settlement will only be available if the party under investigation has accepted it was non-compliant. This is highly likely to mean that the party has “voluntarily” taken steps to remedy the non-compliance either before the settlement stage, or as a condition of settlement. It is also highly likely to mean steps have been taken to provide compensation and other remedies for those affected. In non-financial terms this might mean, for example, that the business has already issued apologies, changed its practices etc, or that it has agreed to do so as a term of settlement. In financial terms, this is likely to mean that compensation has already been paid, that compensation is included within the settlement sum (see below), or both.
Invariably, settlement involves the imposition of a nominal penalty (£1) for the breach and “voluntary” remedies to be completed prior to settlement and/or as part of the overall settlement package in lieu of Ofgem using its formal redress powers. The settlement sum will be used to compensate consumers as far as possible and also put towards schemes or funds that are targeted at vulnerable consumers in the energy market, including social or environmental schemes and energy innovation.
Prior to the formal settlement stage, if Ofgem identifies a more urgent issue that requires attention, it may also agree voluntary steps in lieu of the imposition of a provisional order.
Redress fund
Ofgem has now established a redress fund for the receipt of monies paid in lieu of a penalty. The redress fund is independently run and is to be used to support energy consumers in vulnerable situations and for innovation (see here).
The “sectoral” regime has a broad scope that gives Ofgem a range of powers to impose remedies in the event of non-compliance. This includes potentially significant financial penalties and orders that require businesses to take action. It is important to understand these powers. However, it is also important to understand the alternative remedies approach Ofgem has developed.
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