New EU Energy Market Rules

The European Commission last week proposed new rules for wholesale energy markets, dealing with potential issues such as market abuse and insider trading.

The proposed legislation would take the form of a Regulation aiming to enhance market transparency by setting out clear market rules at EU level for energy traders. Wholesale markets, where gas and electricity are traded between companies producing energy and traders, are key to the prices consumers finally pay.

Market prices in this sector fluctuate depending on the availability of production and transmission capacities. More than in other sectors, prices can be easily influenced by false information on the availability of capacities or by actually reducing production.

The Commission says that the interdependence of the EU’s energy markets makes it even more important to lay down clear and comprehensive rules since market abuses taking place in one Member State can have deterrent effects on the prices in another Member State. The proposed rules aim to set up a well-functioning EU-wide internal energy market.

EU Issue Tracker takes a look at this important new legislative initiative in the energy sector.

Subject Matter and Scope

The Regulation sets out rules prohibiting abusive practices on wholesale energy markets in line with the ones applying in financial markets. The overall monitoring of the energy markets will be assured by the European Agency for the Cooperation of Energy Regulators (ACER or ‘the Agency’), which will cooperate with national regulatory authorities and competent financial authorities.

The proposed rules apply to wholesale electricity and gas contracts including contracts for the transposition of these commodities. However, contracts for the supply of natural gas or electricity for the use of final consumers are not included under the scope of the proposed Regulation. The wholesale energy market is to be understood as any marketplace within the Union on which wholesale energy products are traded.

Insider Trading and Inside Information

The proposed legal framework explicitly prohibits market abuse on wholesale energy markets, namely on the electricity and gas markets. Actions such as trading on insider information thereby misusing confidential information are strictly forbidden under the new rules.

Accordingly, persons who have inside information in relation to a wholesale energy product cannot use that information by for instance acquiring or disposing of wholesale energy products to which that information relates. In principle they may also not disclose that information to other persons unless it is done in the exercise of their profession. It is also not allowed for persons holding inside information to recommend another person, on the basis of that information, to acquire or dispose of wholesale energy products to which the information relates.

These prohibitions apply to members of the administrative, management or supervisory bodies of an undertaking, persons holding the capital of an undertaking, persons having access to the information through their profession, persons who illegally acquired such information and persons who know or should have the diligence to know that it is inside information.

Market participants have to disclose publicly inside information regarding their business or facilities which they own and are responsible for in terms of operational matters. The inside information includes the capacity of facilities for production, storage, consumption or transmission of electricity or natural gas.

The specification of the definition of inside information is left to the Commission, which has the power to adopt delegated acts. These allow for future developments in the wholesale energy markets to be taken into account by adopting new rules adjusting the legal framework in the future.

The delegated acts adopted by the Commission will address the specific functioning of wholesale energy markets, the potential impact on wholesale energy market prices of actual or planned production, consumption, use of transmission of storage capacity as well as network codes and framework guidelines.

Market Manipulation

The new rules applying to the energy sector also prohibit manipulating the market by giving false information about the supply, demand or prices in the wholesale energy markets. Any attempt of engaging in market manipulation is prohibited leading to appropriate sanctions where necessary.

Also as regards the prohibition on market manipulation the Commission may adopt delegated acts specifying the rules set out in the proposed Regulation. In that way, the specificities of the energy markets, which are subject to change over time, can be taken into account.

The delegated acts will as mentioned above cover the specific functioning of wholesale energy markets, the impact on the energy market prices of actual or planned production, consumption, use of transmission of storage capacity and the network codes and framework guidelines.

Market Monitoring

To uncover possible cases of abuse an effective market monitoring system has to be put in place. This role is left, at EU level, to ACER. The Agency will have timely access to the complete information on the transactions taking place at wholesale energy markets, including information on the price, quantity and counterparties involved.

The information will be shared with Member State authorities, i.e. national regulatory authorities, financial regulators and competition authorities, who will also be responsible for the detailed investigation of suspected abuses.

ACER will work closely with these national authorities in order to ensure an effective monitoring and that coordinated enforcement action is taken. It will be up to the Agency to coordinate investigations in highly complex cross-border situations.

Data Collection

The Commission proposal foresees that market participants are under an obligation to provide ACER with a record of their transactions in wholesale energy products. ACER will in due course present guidelines on how the reporting of data is to be processed, which will then serve as basis for the Commission to adopt delegated acts laying down the form, content and timing of the information to be given.

The data has to be provided by the following entities: the market participant, a third party on behalf of the market participant, an organized market, a trade-matching or a trade reporting system, registered trade repositories and a competent authority which has had access to this information.

Sharing of Information

The Agency will set up mechanisms to share the information it receives with national regulatory authorities, financial authorities, competition authorities and any other relevant authorities in the Member States. In addition, trade repositories have to provide ACER with information regarding wholesale energy products collected by them. 

Data Protection

ACER has to ensure the confidentiality and protection of the data received in order to avoid any possible misuse of the sensitive information provided by the participants in the market. In that exercise ACER has to comply with strict EU rules on the processing of personal data.

It is up to the Agency to decide to make publicly available some of the information it maintains in its systems. However, it may not disclose commercially sensitive information on individual market participants or individual transactions.

Implementation of Prohibitions against Market Abuse

Whenever market abuse is suspected, it is necessary to carry out a diligent investigation, where necessary leading to appropriate sanctions. It is up to the Member States’ regulatory authorities to investigate and apply proportionate and dissuasive penalties in case of violation.

Given the cross-border nature of energy markets it is ACER’s role to ensure that a consistent approach is taken when addressing suspected market abuses. This includes alerting national authorities whenever it identifies a potential market abuse and facilitating the information exchange.

EU Level Cooperation

It is for ACER to assure that national regulatory authorities carry out their tasks under the Regulation in a coordinated way and closely cooperating with the Agency. National authorities have to inform ACER if they suspect market abuses affecting wholesale energy markets are taking place in their Member State or in another Member State.

In order to adopt a coordinated approach to possible breaches of this Regulation ACER can request national authorities to supply any relevant information, request them to start an investigation or in cases involving several Member States, set up an investigatory group. This group would be made up of representatives of the concerned national authorities and be under the coordination of ACER.

Professional Secrecy

Under the proposed rules persons working or who have worked for the Agency, auditors and experts instructed by the Agency, persons working or who have worked for national regulatory authorities and auditors and experts instructed by national regulatory authorities who possess confidential information are under an obligation of professional secrecy.

Confidential information may only be used by the Agency and other national authorities in the performance of their duties for the purpose for which it was provided to them. Only if the person disclosing the information consents thereto, the authority receiving the information may use it for other purposes.

Penalties

The Member States are responsible for laying down the rules on the penalties to be applied in case of violation of the provisions set out in the Regulation. These penalties have to be communicated to the Commission and be effective in order to avoid breaches of the rules set up at EU level.

Relations with Third Countries

Whenever necessary the Agency may establish contacts with supervisory authorities from third countries. Accordingly, it may enter into administrative arrangements with international organisations and the administrations of third countries.

Exercise and Revocation of the Delegation

The power to adopt delegated acts lies with the Commission. Once the delegated act is adopted the Commission notifies the European Parliament and the Council, which may object to the measure within a period of two months. If none of the institutions objects, the Commission can formally adopt it.

The delegation of powers can be revoked by the European Parliament or by the Council at any time. If one of the institutions decides to revoke the delegation of powers it has to inform the other institution and the Commission providing possible reasons for the revocation.

Next Steps

The proposed Regulation will now follow the ordinary legislative procedure (co-decision) in 2011. It will first be presented to the European Parliament for an opinion and afterwards the Council will be invited to submit its views. Once the institutions agree on a text it will then be adopted and should enter into force by 2012.