UK: Ofgem to implement changes to Enforcement Guidelines and Sectoral Penalty Statement

• United Kingdom

• Energy and infrastructure

31-03-2022

On 23 March 2022 Ofgem announced its decision to implement changes to its Enforcement Guidelines and its Statement of Policy with respect to Financial Penalties and Consumer Redress. Ofgem published a consultation on the changes last summer (see our earlier briefing) and is proceeding with its proposed changes.

In summary, Ofgem has decided:

To remove the middle and late settlement windows from the settlement process

Under the amended process there will be only one settlement window which will close on expiry of a “reasonable period” (usually 28 days) which will be notified to the business when the settlement mandate, draft penalty notice and/or redress order and press notice are provided to it. The settlement window may be reopened at Ofgem’s discretion in exceptional circumstances, however if the settlement window is reopened there is no guarantee that a settlement discount will remain available. The only offer of discount available will be 30% (usually) and settlement must be achieved within the settlement window to receive it. However, Ofgem says it may consider offering a discount outside of the settlement window in exceptional circumstances.

To allow the Director responsible for Enforcement to be the sole decision maker in settlement, in addition to Settlement Committees

The Director responsible for Enforcement or a nominated alternative Director will be able to make decisions for the purposes of achieving settlement, including, but not limited to, the decision to issue a settlement mandate, to approve and issue the settlement penalty notice and to approve final settlement decisions. The EDP will remain the decision makers in contested cases.

To amend its Enforcement Guidelines to reflect the above changes and other general updates, including changes to the section on provisional and final orders

To amend its Sectoral Penalty Statement in accordance with the changes proposed in its consultation

The changes being introduced include condensing the “large number of prescriptive factors currently listed” into more concise paragraphs with higher level descriptions, amending the gain and detriment considerations and updating the Penalty Statement to include details of the proposed amendments to the settlement process.

Ofgem is proceeding with the implementation of the above changes notwithstanding concerns expressed by respondents to the consultation. Whist several respondents were supportive of Ofgem’s stated objectives of speeding up and streamlining the enforcement processes, many were concerned that this would come at a cost to the quality of decision-making and the fairness of the process. Other concerns related to the move to a “principles-based” approach to the Penalty Statement and a reduction in the enumerated prescriptive factors, which some felt would be a less transparent approach. Ofgem’s decision to calculate gain and detriment in setting financial penalties only “where it is proportionate, reasonable and practicable to quantify it”, with “unquantified” detriment and gain being reflected through the Authority’s assessment of seriousness, was also perceived by some respondents to be less transparent, with a number of respondents voicing the concern that this change would undermine the ability of licensees to challenge Ofgem’s calculations.

Louise Howarth, Partner, comments: "Following the initial consultation, it is not a surprise that Ofgem is proceeding as planned, given its view that these changes will streamline the process and result in a stronger deterrent effect, as more cases may now be taken through the formal enforcement mechanism as opposed to Alternative Action. In our experience of advising licensees on potential enforcement action, it is the additional flexibility that Ofgem has now built into the assessment of penalty that in practice may have the greater impact, rather than the removal of the later settlement windows".