This article was written by Simon Hobday, Senior Associate at Pinsent Masons and appeared in Power UK.
The Gas and Electricity Markets Authority (GEMA) has become more accountable. Decisions GEMA makes regarding modifications to gas and electricity industry codes and agreements may now be appealed to the Competition Commission, enhancing greater regulatory accountability and certainty.
Although trailed for a couple of years, the Order (the Electricity and Gas Appeals (Designation and Exclusion) Order 2005) which introduces the new appeals process and achieves this enhanced regulatory accountability finally came into effect on 14 July 2005.
The new right of appeal stems from an initial Department of Trade and Industry consultation in April 2003 entitled "Strengthening the transparency and accountability of the gas and electricity industry code modification process" which revealed widespread concern about the accountability of GEMA's decision-making process in relation to certain code modifications.
Prior to the change, the only means market participants had of appealing GEMA's decisions was to initiate a judicial review. As well as being expensive and time consuming, the judicial review route was thought to be of little value to market participants as the courts were thought to be unprepared to question the quality of a regulator's decision or require evidence underpinning the decision to be examined. The change in law now means there is a right of appeal to decisions made by GEMA relating to the designated codes and agreements being: in electricity the Balancing and Settlement Code (BSC), the Connection and Use of System Code (CUSC) and the Master Registration Agreement (MRA); and in gas the Uniform Network Code and associated short form Network Codes and the Supply Point Administration Agreement (SPAA).
The enacting Order sets out a number of circumstances where a decision by GEMA cannot be appealed, even though it relates to one of the designated documents. The exact exclusion differs depending on the actual code or agreement. In general, under the new procedure, it will not be possible to appeal to the Competition Commission where GEMA agrees with the recommendation of the majority of the body submitting an amendment to the code or agreement. GEMA may also exclude the right to appeal where the holding of an appeal is likely to have a material adverse effect on the availability of electricity or gas for meeting reasonable demands of consumers of Great Britain.
The new appeals process has beneficial implications for those operating within the energy industry – generators, network businesses and suppliers – and may also have a wider significance for companies which actively manage their purchase of energy and are signatories to the designated agreements and codes. However it is difficult to predict the degree to which market participants will use the appeals process, although the Regulatory Impact Assessment for the Order prepared for the DTI estimated the number of appeals to the Competition Commission as being in the range of five to ten per annum. However, the significance of the change can perhaps best be appreciated by a consideration of a modification decision which if it had occurred now would be appeal under the new process.
On 2 September 2002 Dynergy proposed Modification Proposal P98 "Dual Notification of Contract Positions" (the Proposal). The Proposal was for a move away from a single notification system for contract positions to a voluntary dual notification system (that is both parties to the trade submit data to the central administrator) which in Dynergy's view would increase the efficiency of the market by reducing the risks in trading – in particular by eliminating the risk of parties having notified against them trades that they do not know about, with the associated unlimited liability for such trades.
Normally the amounts resulting from notification errors are recoverable (although events such as the collapse of Enron highlighted counter-party risk in this regard), but nonetheless Dynergy believed the industry was moving millions of pounds around unnecessarily because the contract notification process was not robust. The BSC Panel, the body responsible for recommending changes to the BSC, recommended that the change should not be made as while the modification may reduce contract notification risk, the Panel considered that the costs associated with the change would outweigh the benefits to competition. This view reflected the position of the majority of the respondents to the consultations held by Elexon (as administrator of the BSC) and Ofgem.
Ofgem estimated that the costs of implementing the modification would be £750,000 to £1.3m with on-going costs of £410,000 - £540,000 per annum plus costs incurred by individual market participants in renegotiating their GTMAs (which were not estimated). Nevertheless, GEMA decided in August 2003 to direct NGC to modify the BSC in line with the Proposal on the grounds that the benefits of introducing it associated with the promotion of competition and enhanced competition outweighed the detrimental impact on efficiency associated with costs imposed both centrally and incurred by market participants in implementing the proposed modification.
At that time, there was little the market participants could do to challenge GEMA's decision. Whether or not the Competition Commission would have agreed with GEMA in this case is impossible to say but looking forward the new rights of appeal should provide more of a balance than has previously been the case between the interests of market participants and the actions of GEMA and enhance regulatory accountability while reducing regulatory uncertainty.
Note:
The new right of appeal is contained in sections 173 – 177 and Schedule 22 of the Energy Act 2004 which became effective following the designation by the Secretary of State of various industry codes and agreements to which the right applies and the setting of various exclusions to the right of appeal in the Electricity and Gas Appeals (Designation and Exclusion) Order 2005, S.I. 2005 No. 1646 (the Order).
Simon Hobday
Senior Associate
Pinsent Masons
T: +44 20 7490 6590