GEMA v Npower: lessons for challenging regulatory decisions and obligations

Posted: 23/11/2018

It is rare for Ofgem’s enforcement activity to make it into the courts. But the short 5 October judgment in GEMA v Npower[1] contains some important lessons for any party potentially faced with Ofgem enforcement action, or wishing to challenge a regulatory decision.

Background

After the CMA investigation found a lack of consumer engagement in the energy market, and on the CMA’s recommendation, in January 2017 Ofgem introduced standard supply licence condition (SLC) 32A. SLC 32A requires that suppliers comply with directions from Ofgem to undertake trials testing consumer engagement measures.

In August 2018 Npower was formally told that Ofgem would be issuing a direction requiring it to identify 100,000 of its customers on standard variable tariffs who would be eligible to take part in a collective switching trial. Npower raised objections to the trial and to its selection as a participant and ultimately refused to fully comply with the issued direction.

Npower’s refusal led Ofgem to issue a provisional order (PO), ordering compliance. Compliance with a PO is, in turn, enforceable by way of an injunction or interdict[2] and when Npower failed to comply with the PO Ofgem promptly applied to the High Court. A few days later Npower issued a claim seeking relief under the statutory provisions to quash the PO.

The High Court granted an injunction requiring Npower to comply with the PO (and thus the direction); it dismissed Npower’s appeal.

The expected impact of the switching trial on Npower was significant: the judgment refers to potential losses ‘in the region of £30 million’ if switching rates seen in a smaller trial were repeated. Equally, the judge accepted Ofgem’s argument that if the trial were to happen, it needed to start as a matter of urgency, in order to be completed by year end before the forthcoming retail price cap.

Wider interest

The judgment discusses points of interest, albeit that they had to be decided with less time for reflection than would otherwise be desirable:

• Basis for challenging Ofgem - is the challenge really about the remedy imposed, or the substantive obligation?

Npower had objected to Ofgem about the scale and timing of the switching trial. It is also reported to have taken counsel advice and then presented to Ofgem reasons why it thought the direction was unlawful. The judgment only makes brief reference to Npower’s arguments that:

• ‘… the direction could not be ordered under SLC 32A..’ [SLC 32A directions have procedural requirements and can (only) be made for a (widely) defined purpose of considering consumer engagement measures]

• ‘… Ofgem had not followed its own guidance…’ [always worth considering when faced with an unwanted regulatory decision]

• ‘…Ofgem had not considered proportionality at all, in breach of public law…’ [an important principle to explore when faced with what seems an unreasonable regulatory decision]

• ‘…and that Article 1 of the first protocol to the Human Rights Act was engaged’. [This has been described as the ‘blue chip’ human rights provision for commercial public law. The right to peaceful enjoyment of possessions has been used many times to thwart government or regulator measures that would otherwise have deprived businesses of income or assets and where that deprivation was not ‘in the public interest’ or ‘subject to the conditions provided for by law…’ [including due process].]

However, none of these arguments were tested in court.

It was accepted that Npower’s s27 challenge was the only basis for resisting Ofgem’s injunction application. As a statutory remedy for non-compliance with a PO, the usual exercise of court discretion over equitable injunctions did not arise and therefore Npower could not use it as a route to bring in points on which it would wish to challenge Ofgem more widely. Challenge to the PO was only available via s27.

The judge accepted that a s27 challenge to a PO, on the basis that it was not within the powers to issue a PO set out in s25 was ‘a kind of statutory judicial review’. Since, on the facts, it was within Ofgem’s powers to decide that there had been a contravention and as procedural steps had been complied with, Npower had to argue that it was not ‘requisite’ for Ofgem to issue the PO in this case.

However, the judge did not accept that Npower’s arguments were really about whether the PO was requisite or not, rather they were about the direction itself. The problem for Npower was that the direction was not open to a s27 challenge.

Npower argued that the only way it could challenge the direction was via a s27 challenge. However, the judge highlighted that prior to the direction there ‘…had been extensive engagement over many weeks….’ And ‘….the urgency [of the switching trial] …made the final order route inappropriate in the circumstances [FOs requiring a period of consultation, unlike POs]….Instead Npower’s attack is in reality on the direction itself [not per se the PO], including…insufficient reasons [being given for the direction] … [and] …a failure to address the proper legal test of proportionality by reference to the legitimate aims of [Ofgem].

The judge thought that the direction could have been challenged by a judicial review application at any time, including before and after the PO and that this would have been the proper route for Npower to mount the challenges to the direction that it wished to make. The judge noted that a s27 challenge would, if successful, remove the PO but it would leave the direction, the real focus of Npower’s unhappiness, in place.

• Timing and nature of challenges…

….if the challenge is to the PO or FO

As the judgment highlights, a key difference between POs and final orders (FOs), is that POs do not require consultation before they are issued, but they are time-limited and Ofgem needs to satisfy itself a PO is ‘requisite’. The consequence of this is that a regulated party should be more able to set out its case before an FO is made, as compared to a PO. 

Although POs and FOs are mandatory, if the conditions for one are met (there are several hurdles to jump in terms of what has to be considered), few are actually imposed by Ofgem. This undoubtedly reflects the fact that Ofgem will usually engage with the party in advance and seek to secure compliance.

When faced with a potential FO, a regulated party needs to pay close attention for procedural irregularities or for Ofgem acting beyond its powers (s27 grounds). On the substance of the alleged breach, it needs to ensure it makes evidenced and persuasive submissions in response to the consultation. The same applies in respect to a potential PO, in so far as the party is given the opportunity to make representations; a potential challenge also lies in arguing a PO is not ‘requisite’.

‘Except as provided by this section, the validity of a final or provisional order shall not be questioned by any legal proceedings whatever’ (s27(3)).

…if the challenge is to the substantive regulatory obligation

Challenges to the creation of regulatory obligation – for example to a new licence condition - need to be made at the time that obligation is created, and using the challenge mechanisms provided. This is likely to mean, for example, an appeal to the CMA over new licence conditions, judicial review in certain circumstances etc.

• Interaction of an Ofgem injunction application to enforce a PO/FO and a s27 challenge to the PO/FO

Ofgem appears to have argued that Npower’s s27[3] challenge should not affect the granting of the injunction, since it was clear the PO had not been complied with and the challenge to the PO could be separately decided. This was rejected. Equally, having accepted there was urgency in the PO and therefore the injunction, the judge rejected delaying deciding the injunction pending a s27 decision. He did however accept that in less urgent injunction applications it may be appropriate to delay a decision, pending argument of the s27 challenge to the underlying PO or FO.

Conclusion

It is important to engage at an early stage with (potential) regulatory decisions which create obligations. Engage before the decisions are made and present your case. When a regulatory obligation is created – for example, a new licence condition, a direction, or a regulation - consider potential challenges at that stage.

Provisions for challenging Ofgem’s ‘sectoral’ enforcement decisions are limited to challenging the penalty or order imposed; they are unlikely to provide a route to challenge the underlying obligation, whatever its merits.

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