It is almost ten years since Ofgem's last unsuccessful attempt to incorporate a Market Abuse Licence Condition (the 'MALC') in the licences of the largest GB electricity generators. Under new powers contained in the recently unveiled Energy Bill the MALC could now well become a reality in the course of the coming year.

The market abuse debate
Ofgem, the GB energy regulator, has long been concerned about the risk of the liberalised electricity wholesale market being exploited by unscrupulous industry players, taking advantage of grid 'bottlenecks' to gain undue advantage and earn excessive profits at the expense of National Grid, the GB system operator (GBSO), and ultimately electricity customers as a whole.

In 2000 Ofgem sought to modify the licences of a number of large generators to require them to refrain from conduct amounting to 'market abuse' of this sort. Given the refusal of a number of these generators to consent to the modification, Ofgem referred the issue to the Competition Commission (then, the MMC). Rejecting Ofgem's proposals, the Commission took the view that the Competition Act 1998 (CA98), which prohibits abuse of a dominant position, offered sufficient protection against the mischief in question. Ofgem had failed, in the Commission's eyes, to make out a sufficiently compelling case for imposing a further layer of regulation on top of the CA98 prohibition (particularly given the risk that the MALC could potentially lead to the 'blunting' of key market signals).

In March 2009, following the closure of a CA98 investigation into suspected abuse by generators (and in the light of fresh interest at EU level in the issue), Ofgem launched a fresh consultation on the possible introduction of a MPLC (or Market Power Licence Condition). Matters have now taken a new twist with the Department of Energy and Climate Change tabling proposals in the Energy Bill which will leapfrog the Competition Commission and allow the Government to legislate the MALC/MPLC into existence.

The new powers
Under clause 18 of the Bill, the Secretary of State will have the power to modify generation licences (or documents, such as codes, maintained under licences) by order following consultation.

The power under clause 18 may only be exercised for the purpose of limiting or eliminating the circumstances in which a generation licence holder may obtain 'excessive benefits' from electricity generation in a particular period. Clause 18 goes on to provide that a generator will be taken to obtain an excessive benefit if it has entered into arrangements regarding the generation of electricity with the system operator and one of the following conditions is met:

• withholding plant – the licence holder does not notify electricity generation that would have been economic to carry out and may receive excessive payments in connection with an increase in electricity generation in the relevant period;
• low or negative bids – the licence holder may pay an excessively low amount, or may receive an excessively high amount, in connection with a reduction in electricity generation in the relevant period;
• excessive inter-trip payments – the licence holder is paid an excessively high amount for an inter-trip arrangement (under which the GBSO pays the licence holder to allow particular plant to be taken off the system if the network becomes overloaded); or
• sleeper bids/offers – there is an increase or reduction in the licence holder’s electricity generation in a specific period, compared to their notified generation, as a result of which the licence holder may obtain an excessive benefit.

Proposed safeguards
The Bill contains a number of safeguards designed to protect the interests of those at the receiving end of the new powers:

• sunset provision – the powers will lapse at the end of five years (subject to one further extension of two years) from their commencement
• guidance – Ofgem will be obliged to publish advice and information on its approach to interpretation and enforcement of the powers
• appeals – enforcement decisions and decisions imposing financial penalties under the powers will be subject to expanded rights of appeal to the Competition Appeal Tribunal

However, it will not be possible to judge the full effectiveness of these safeguards until the terms of the regulatory and enforcement framework for the new powers becomes clearer.

Some questions
These new proposed provisions raise a number of interesting and important questions about the nature and effect of the exploitation powers, their implementation and their interaction with other parts of the regulatory regime.

These include the following:

• How should the concept of 'exploitation' (and related concept of 'excessive benefit') which underpins the new powers be interpreted? What is the relationship between this concept and similar ones used in competition law?
• What regulatory approach will the proposed modifications take? Will they involve detailed price regulation, for instance, or will they take the form of broad prohibitions?
• How will the powers be used to alter key industry codes (such as the Balancing Services Code and Connection and Use of System Code) and what safeguards will be available to code participants affected by them?
• How will the Secretary of State's (and Ofgem's) statutory duties, as amended by the Bill, affect the use of the powers and any decisions on their implementation? These duties relate to matters such as the financeability of licence holders.

What next?
The Bill will now undergo scrutiny in the House of Commons before moving on to the House of Lords. It will be interesting to see how quickly it moves through its Parliamentary stages, whether it makes it onto the statute book before the upcoming General Election.

Meantime, there will be scope for the Government and Ofgem to begin work, once the Bill receives its Second Reading, to lay out their plans for implementing the wide powers contained in the Bill.

09 December 2009

« Back to Article index