Record REMIT penalty forces a transaction surveillance rethink

In April the UK energy regulator sent a shockwave through the market by announcing a record £47.8 million fine (1) for a UK-based power generator for market manipulation under Article 5 of REMIT. While the final penalty was reduced to £37.2 million ($46 million), both the magnitude and timing of the anouncement caught many in the market off-guard.

Ofgem, the UK energy regulator responsible for enforcing REMIT, noted in their findings (2) that the firm concerned had “demonstrated weaknesses in InterGen’s procedures, management systems and internal controls with respect to REMIT compliance”. This has resulted in many firms re-evaluating whether they have sufficient controls in place to detect and prevent market abuse – and for good reason. This is the second REMIT fine announced by Ofgem exceeding a million pounds in the last 8 months after another utility (3) was fined £2.1M for Spoofing in UK gas markets in September 2019.

This most recent case relates to activities in the winter of 2016 where the firm in question was deemed to have deliberately sent “false and misleading information” to the System Operator. They indicated the intent not to generate for certain peak periods in a tight system (despite being contracted to other parties to do so) in order to benefit from the more profitable Balancing Market used by the System Operator to balance supply and demand close to delivery.

Key takeaways for power and gas traders:

Over the last year energy regulators have stepped up aggressive enforcement, particularly under REMIT with multiple million-plus fines being issued. This case clearly demonstrates that regulators are becoming more confident to pursue more complex market abuse cases in the physical market where assets are involved. A trend which the power and gas industry operating in European markets should pay attention to.
Recent fines bring in to question whether the need for a surveillance capability is all but compulsory for firms operating in EU power and gas markets. While such a capability is not obligatory for regular market participants under REMIT (unlike MAR), it seems clear that the equation of cost versus risk is changing rapidly to the point where it is hard for firms to justify not having a credible capability in this area.
Surveillance of physical energy market activity is complex and requires different capabilities from those typically used for trading in other asset classes. Indeed, the case described above involved illicit activity in the Balancing Market where contracts are not reportable under REMIT (4) and which intrinsically involved ancillary data such as Physical Notifications to the System Operator. The ability to detect physical market abuse as defined under Articles 3 and 5 of REMIT, including the likes of Insider Trading and Physical Withholding, is the preserve of a very small number of surveillance vendors.
As with many REMIT cases in the recent times, the alleged abusive activity took place some years before the public announcement of the penalty. This significant time lag between regulatory precedent being communicated to the market and the actual occurrence of the illicit activity should cause concern, particularly those firms with a weak or non-existent control environment and the inability to systematically scrutinise their traders’ behaviour. This is elevated further by the fact that under REMIT the Regulator already holds a significant trove of your data and is mandated to search through it retrospectively should suspicious activity be identified at any point.
This case, like many others, was initially alerted to the Regulator by a whistleblower. Tip-offs remain a significant initiator of market abuse investigations. It highlights once again that Regulator and Exchange market abuse surveillance teams are not the only stakeholders firms should be cognisant of. The ability to effectively detect and investigate abusive behaviour before external stakeholders do, should be your first line of defence against financial and reputational harm.

[1] Comprising a restitution payment and a fine

[2] https://www.ofgem.gov.uk/publications-and-updates/finding-intergen-has-breached-article-5-prohibition-market-manipulation-regulation-eu-no-12272011-european-parliament-and-council-25-october-2011-wholesale-energy-market-integrity-and-transparency-remit

[3] https://www.ofgem.gov.uk/publications-and-updates/ofgem-fines-engie-global-markets-egm-21-million

[4] Unless requested by the Regulator