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Ofgem consults on changes to the way enforcement cases may be settled and the determination of penalties

  • United Kingdom
  • Energy and infrastructure

23-07-2021

Ofgem is reviewing aspects of its enforcement work which in practice may see a shift towards an increase in formal enforcement action. It has published a consultation, proposing a number of changes to the settlement process and its guidance on penalties, including a change in the way it assesses the overall penalty level in sectoral cases. We set out the key proposals below and comment on the potential implications for licensees.

Settlement Process

Ofgem may open a so called “sectoral” investigation or enforcement case in respect of a licensee’s compliance with relevant licence conditions or other related legal requirements (this is separate to its competition powers). Ofgem’s Enforcement Guidelines set out the steps it will take to investigate and enforce and include a formal settlement route which currently runs in parallel to a contested process.

In summary, once Ofgem has investigated the background, if it considers the licensee is in breach of licence condition(s), it will issue a Summary Statement of Initial Findings (“SSIF”). This is not a formal determination of breach. The licensee is given the opportunity to respond to the SSIF, and once Ofgem has reviewed the licensee’s response, it will decide whether or not to proceed with the case. If it does, at the same time, Ofgem will (usually) issue a settlement offer, indicating the proposed level of penalty it would seek at a final enforcement hearing, with a discount on the penalty element available for early settlement. Critically, settlement requires the licensee to accept it was in breach of licence(s).

There are currently 3 settlement windows. These discounts are available on a sliding scale depending how quickly settlement is agreed (early (30%), middle (20%) and late (10%)). Ofgem is proposing to remove the middle and late settlement windows on the basis that that no party has settled in the middle or late windows since the guidelines were introduced in 2014. Therefore, there would only be one opportunity to settle, within 28 days (typically) of Ofgem’s issue of the proposed settlement offer. If the licensee does not accept the settlement terms, the case would be expected to move forward to a contested final hearing before the independent Enforcement Decision Panel (“EDP”).

Ofgem also proposes to change its decision-making process in making settlement offers. Currently, any settlement offer is set by a Settlement Committee. The Settlement Committee usually comprises two members of the EDP and an Ofgem Director. Instead, Ofgem now proposes a process whereby the Director responsible for Enforcement can be the sole decision-maker, with the Settlement Committee being retained as an option only “for cases where it is considered the EDP’s specialist expertise may bring benefit to the case”. Ofgem claims this will streamline the process, and notes that an Ofgem Director as decision maker has worked well where Ofgem resolves cases through Alternative Action (where a case is dealt with without Ofgem using its formal statutory enforcement powers, typically when Ofgem considers the potential breaches are not serious).

The consultation notes that parties under investigation may value the ”visual separation” from the enforcement case team provided by the Settlement Committee. The absence of such separation may be a concern for some parties, however Ofgem suggests that the Director responsible for Enforcement is not involved in the day-to-day running, or oversight, of the investigation and it emphasises the benefits it hopes to realise from the change, e.g. resource savings and swifter outcomes for consumers. The EDP will remain the decision-maker in contested cases1.

Penalties Following a Confirmed Provisional or Final Order

Ofgem also proposes to update the Enforcement Guidelines to provide further information on the use of provisional and final orders, which it notes has increased in recent years. In particular, it is seeking views on amendments to the Enforcement Guidelines which are intended to provide greater clarity and transparency on how it imposes penalties and/or redress orders following the making of a final order or confirmation of a provisional order.

Sectoral Penalty Statement

Finally, Ofgem proposes to amend the Sectoral Penalty Statement (“SPS”) to:

  • clarify how licence condition changes (including those introduced by the Supplier Licensing Review will interact with its determination on the level of penalty imposed upon regulated businesses;
  • condense the prescriptive factors currently listed in the SPS into more concise paragraphs with higher level descriptions. Ofgem describes this as a “principles-based approach”. It believes this approach will work to “clarify and future-proof” the SPS;
  • update the SPS to reflect the following principles
    • Ofgem will only calculate supplier gain and/or consumer detriment where it is proportionate, reasonable and practicable to quantify it; and
    • Ofgem will consider unquantified gain and/or detriment qualitatively through its assessment of seriousness.

Ofgem states that it often has to rely on the use of assumptions, estimates and complex calculations when calculating licensee gain and consumer detriment resulting from a breach behaviour, which is often a lengthy process. It sets out that proposed changes will prevent significant time and resource being spent on calculating gain and detriment in circumstances where “it is not proportionate, reasonable and practicable to do so”. We consider below the potential impact of this proposed move away from the calculation of supplier gain and consumer detriment.

Comment

If these proposals are implemented, a licensee would (typically) only have 28 days to agree a settlement of the case, otherwise it would proceed to a contested hearing, and settlement will only be offered after that in “exceptional” circumstances.

It appears from the consultation that Ofgem would like to see more cases settled through the formal enforcement process, given the precedent value of a licensee being required to accept the breach in order to receive the 30% discount on the proposed penalty element. Ofgem states that it expects to see less Alternative Action, sending stronger deterrent signals.

From our experience of acting in contested EDP proceedings, Ofgem has been criticised by the EDP in the past for being unable to justify its quantification of supplier gain. The proposed softening of the need for Ofgem to quantify any such supplier gain or consumer detriment may provide more flexibility to Ofgem when considering a proposed penalty level (and corresponding settlement), given Ofgem’s indication that any unquantified assessment will still feed into its view of the overall seriousness of the alleged breach. Coupled with the new streamlined approach to determining the level of settlement offer (which would not involve the EDP Settlement Committee unless Ofgem chose to do so) Ofgem may have more scope to settle cases at an early stage and the pressure on licensees to do so will likely increase.

Licensees will therefore need to have carefully assessed the merits of the case at an early investigatory stage, in order to be able to make a swift decision on whether to settle or contest Ofgem’s position.

The consultation remains open until 4 August 2021. The consultation details and corresponding consultation document are available here.


  1. The Enforcement Guidelines set out that a EDP member who has sat on a Settlement Committee could not take part in any contested hearing of the same case.