3 Energy market integrity and transparency
(32345)
17825/10
+ ADDs 1-2
COM(10) 726
| Draft Regulation on energy market integrity and transparency
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| Legal base | Article 194(2) TFEU; co-decision; QMV
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| Document originated | 8 December 2010
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| Deposited in Parliament | 16 December 2010
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| Department | Energy & Climate Change
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| Basis of consideration | EM of 7 January 2011
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| Previous Committee Report | None
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| To be discussed in Council | No date set
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| Committee's assessment | Politically important
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| Committee's decision | Not cleared; further information awaited
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Background
3.1 According to the Commission, one of the benefits from the
liberalisation of the electricity and gas markets has been the
development of power exchanges and standardised over-the-counter
contracts involving generators and suppliers, large energy users,
pure traders, financial institutions and other trade facilitators,
which it says has supported innovation and efficiency and enabled
businesses to respond flexibly to changes in market conditions.
However, it also says that, since wholesale energy markets not
only serve as a benchmark for retail prices, but also send important
signals for future investments in energy infrastructure, there
must be confidence in the integrity of those markets, since the
potential for unfair trading practice—arising (among other
things) from the cross-border nature of the markets, the involvement
off both physical and derivative trading, and the separation of
trading locations from where the energy is delivered and consumed—is
liable to undermine trust, deter investment, and increase the
volatility of energy prices, leading to higher energy prices in
general.
3.2 In view of this, the Commission sought advice
in 2007 from the Committee of European Securities Regulators (CESR)
and the European Regulators Group for Electricity and Gas (ERGEG)
on issues of transparency and market abuse. This in turn led to
the suggestion that it should consider developing proposals for
a basic tailor-made market abuse framework for all electricity
and gas products not covered by the Market Abuse Directive (2003/6/EC),
which applies to financial instruments, but not to physical energy
market products or to energy derivatives unless they are admitted
to trading on a regulated market.
The current proposal
3.3 In the light of that recommendation, the Commission
has now put forward this draft Regulation, which applies to trading
in wholesale energy products (other than those to which Directive
2003/6/EC applies), including contracts for the supply and transport
of natural gas or electricity and related derivates. In doing
so, the Commission reiterates that action at EU level is justified,
as energy markets increasingly cross national boundaries. As a
result, prices are set on the basis of supply and demand in several
countries, and abuses on a specific market will not be confined
to a single Member State, requiring authorities to have access
to information across the EU, and action at EU level.
3.4 The proposal establishes rules prohibiting abusive
practices, notably insider trading and market manipulation, which
are consistent with those applying in financial markets, whilst
giving the Commission the power to amend the relevant definitions
to take into account future developments in wholesale energy markets.
In particular, it would:
- provide for the monitoring
of wholesale energy markets by the Agency for the Cooperation
of Energy Regulators (ACER) established under Regulation (EC)
No 713/2009, in order to detect and prevent abusive practices;
- specify that the Agency should ensure such action
is taken in cooperation with national regulatory authorities designated
under Directives 2009/72/EC and 2009/73/EC and competent financial
authorities designated under Directive 2003/6/EC, in order to
ensure a coordinated approach to enforcement;
- require the Agency to establish mechanisms enabling
national regulatory authorities to have access to relevant information
held by it (subject to suitable systems being in place to protect
the confidentiality of data);
- require Member States to ensure that the relevant
national regulatory authorities have the investigatory powers
needed to enforce fully the prohibitions on abusive practices,
including access to any relevant documents or information;
- require national regulatory authorities to cooperate
with the Agency and with each other, and in particular to inform
the Agency if they have reasonable grounds to suspect that market
abuse is occurring: they must also inform the Agency and their
own financial authorities if they suspect an offence under the
Market Abuse Directive has occurred in wholesale energy markets
and affects financial instruments (with a similar obligation on
the Agency to inform European Securities and Markets Authority
(ESMA) and the appropriate financial authorities), whilst a Member
State's competent financial authority must inform EMSA and the
Agency if it suspects that a breach has occurred;
- enable the Authority, after consulting interested
parties, including the EMSA and relevant national authorities,
to make recommendations regarding the records of transactions
it considers are necessary to monitor wholesale energy markets
effectively and efficiently;
- specify that participants in the wholesale energy
market should provide the Agency with a record of transactions,
with the Commission setting out in delegated acts the timing,
form and content of this information (as well as, where appropriate,
the thresholds for the reporting of transactions, and the types
of contracts for which reporting is required);
- require anyone professionally arranging transactions
in wholesale energy markets to notify the national regulatory
authority if they suspect that a breach of the Regulation has
occurred.
The Government's view
3.5 In his Explanatory Memorandum of 7 January 2011,
the Minister of State for Energy and Climate Change (Mr Charles
Hendry) says that the increasing level of cross-border trading
means that market abuse will inevitably have an impact across
the EU, and that there is therefore a need for consistent rules
across the EU and EU-level data collection, monitoring and coordination
by ACER. However, he points out that Member State regulatory authorities
have a detailed understanding of their own energy markets, and
so must have access to this data and responsibility to enforce
the prohibition on market abuse and insider trading, whereas the
proposal would make national regulatory authorities responsible
for enforcing the provisions of the Regulation, but also puts
a duty on ACER to ensure that they carry out their tasks in a
coordinated way. He says that, in order to do this, ACER is required
to request national regulatory authorities to investigate possible
breaches and take action to remedy any such breaches, and that
national regulatory authorities must comply immediately with any
such request, thus effectively giving ACER a power of direction,
which he considers is not consistent with the principle of subsidiarity.
3.6 More generally, the Minister says that the Government
welcomes this proposal, and supports the Commission in its work
to ensure that wholesale energy markets are monitored effectively
to deter and prevent abuse. He notes that the proposal forms part
of the Commission's review of three financial Regulations and
Directives, which aims at strengthening the regulation of financial
markets where justified and proportionate, with it having already
published a proposal[19]
for a Regulation on over-the-counter derivatives, central counterparties
and trade repositories, and is intending to propose in 2011 revisions
of the Market Abuse Directive and the Markets in Financial Instruments
Directive. He says that the UK will need to ensure that the two
regimes are coherent, and do not conflict or impose undue regulatory
burdens, and to consider whether Ofgem will require further enforcement
powers. In the meantime, further detailed analysis of the proposal
will be carried out.
3.7 The Minister adds that, due to the complex nature
of this proposal, it has not been possible to produce an impact
assessment and financial assessment within the usual time given
for response, but that the impact assessment will be forwarded
separately by 28 January.
Conclusion
3.8 This proposal obviously deals with an area
of some economic and social importance, and, for that reason,
we are reporting it to the House. In doing so, we note that, whilst
the Government has generally welcomed the proposal, it has some
subsidiarity concerns about the potential relationship between
the Agency for the Cooperation of Energy Regulators and national
regulators, and that it intends shortly to produce an Impact Assessment.
In view of this, we propose to consider the proposal further when
we have received that Assessment, and in the meantime we are holding
it under scrutiny.
19 (31988) 13917/10: see HC 428-iv (2010-11), chapter
4 (20 October 2010). Back
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