Documents considered by the Committee on 19 January 2011 - European Scrutiny Committee Contents

3 Energy market integrity and transparency


+ ADDs 1-2

COM(10) 726

Draft Regulation on energy market integrity and transparency

Legal baseArticle 194(2) TFEU; co-decision; QMV
Document originated8 December 2010
Deposited in Parliament16 December 2010
DepartmentEnergy & Climate Change
Basis of considerationEM of 7 January 2011
Previous Committee ReportNone
To be discussed in CouncilNo date set
Committee's assessmentPolitically important
Committee's decisionNot cleared; further information awaited


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.


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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