New developments of CRU's enforcement powers

The Energy Act 2016 (the 2016 Act) gave the CRU powers to address “improper conduct” by certain licence holders. These include powers of investigation and powers to impose administrative sanctions. In this article, members of our energy regulatory and disputes team answer some key questions about the arrangements for gas and electricity suppliers.

 

The CRU recently published a proposed decision for consultation on setting financial penalties (the Proposed Decision). What is the background to this?

The 2016 Act added a new Part IX to the Electricity Regulation Act 1999 (the 1999 Act) which gave the CRU powers of investigation and to impose administrative sanctions for certain improper conduct for the first time. As the media has noted in recent reports, these sanctions can be substantial. The 2016 Act provides for “major sanctions” which include payment of the CRU’s investigation costs up to EUR50,000 and/or a fine of 10% of turnover.

As we discuss below, the CRU is now developing the methodology for setting penalties subject to these upper limits.

 

What is “improper conduct”?

Improper conduct can arise in connection with a number of different CRU licences, including gas and electricity supply licences, gas and electricity transmission system operator/owner and distribution system operator/owner licences and electricity interconnector operation licences (the holders of these licences are referred to as “Specified Bodies”).

The CRU has been given powers to specify standards of performance for suppliers of electricity and gas to final customers (more on this below). For electricity and gas supply licences, “improper conduct” means a failure by the holder of the licence to comply with those standards of performance.

 

Are the Standards of Performance available?

The CRU engaged in a consultation process to develop the standards of performance for both electricity and gas supply licences. The CRU stated that any proposed modifications to electricity and gas supply licences would be published and that parties would be permitted to make objections and representations to those proposals in accordance with the 1999 Act.

The CRU published decisions on the supply licence conditions that will be subject to standards of performance in December 2022.

For electricity supply, unsurprisingly, the consumer protection condition will be subject to a standard of performance. Other conditions that will be subject to a standard of performance include provisions related to security and safety of supply, provision of information to the CRU, the duty to offer supply and compliance with laws and directions. The CRU also included provisions for dominant suppliers in relation to prohibitions on cross subsidies and discrimination.

 

What has the CRU said regarding consumer protection?

In the consultation process, the consumer protection conditions attracted interest from respondents. The CRU decided to implement a prescriptive approach and will modify Condition 18 to require suppliers to comply with the requirements set out in the Suppliers’ Handbook as well as their codes of practice, customer charter and household customer terms and conditions approved by the CRU.

At present, Condition 18 requires suppliers to prepare and submit terms and conditions and customer charters for household customers to the CRU for approval. For all customers, suppliers must publish their terms and conditions and submit codes of practice to the CRU. The codes of practice and customer charter must be prepared in accordance with the Supplier’s Handbook published by the CRU.

The Suppliers’ Handbook addresses matters such as billing, disconnections and vulnerable customers.

The CRU had put forward an alternative option of a principles-based approach under which suppliers would have been required to adhere to a set of principles. However, ultimately the CRU opted for the prescriptive approach on the basis that it will provide a clear and transparent regulatory environment for suppliers.

 

What powers of investigation does the CRU have in connection with improper conduct?

In summary, the CRU can appoint members of its staff to investigate and identify improper conduct by the holders of any of the licences mentioned above. The CRU will define the scope of the investigation and the investigators are required to report to the CRU following completion of the investigation. Investigators appointed by the CRU have extensive powers, including the power to:

1. Search or inspect certain premises;
2. Access certain records, including obtaining account records from banks;
3. Require a person to fully and truthfully answer questions, including under oath; and
4. With the consent of the CRU, apply to the Circuit Court for an order requiring a person to comply, or comply fully, with requirements of inspectors.

 

What actions can the CRU take following an investigation?

If the CRU is satisfied that improper conduct has taken place, it can impose major sanctions (as described above) or minor sanctions on the Specified Body. The CRU may also conduct an oral hearing or give the Specified Body a copy of its investigation report and an opportunity to make written submissions to the CRU on the investigation report (if it considers it proper to do so in order to make a decision or to observe fair procedures).

As noted above, major sanctions consist of:

1. Payment to the CRU of its costs of investigation up to EUR50,000;
2. Payment to the CRU of a specified sum up to 10% of the turnover of the licensee;
3. A combination of both.

However, the CRU must apply to the High Court to confirm a decision to impose a major sanction.

Minor Sanctions that the CRU can impose are:

1. Advice;
2. Caution;
3. Warning;
4. Reprimand; or
5. Any combination of the above.

 

Has the CRU published any guidelines on investigations and enforcement?

The CRU has published an Information Paper setting out its Investigation and Enforcement Guidelines (the Guidelines). However, the CRU has stated that it may depart from the approach set out in the Guidelines if the circumstances justify it or its enforcement methods are better met by a different approach.

The Guidelines set out the CRU’s various pre-existing powers to carry out an investigation and take enforcement action(s). However, it also details the new investigation process introduced in Part IX of the 2016 Act (as amended). These powers are in addition to the CRU’s existing investigation powers and the Guidelines contemplate situations where both types of investigation might occur, effectively operating like two phases of an overall investigative process.

Investigations can start in a number of ways; self-reporting by the licensee, a complaint from a customer or industry, a protected disclosure, the CRU’s own compliance monitoring, or, significantly, through information provided by third parties such as other regulators like the CCPC or EPA.

At the end of the investigation phase, the CRU may decide on an enforcement action, or may close the investigation, eg if there is insufficient evidence, the matter is not a priority for the CRU or the licensee is taking action which deals fully with the CRU’s concerns. (The latter is a significant opportunity for a licensee to mitigate its position before formal enforcement action is imposed.) At this point the CRU may decide to use its additional powers under Part IX. This involves the following steps:

1. An inspector will issue a written notification to the licensee as soon as practicable after their appointment and provide the licensee with copies of any documents relevant to the investigation. This differs from the CRU’s other investigation powers where the Guidelines state that the CRU might not inform the licensee that an investigation is taking place.
2. The licensee has 30 days to respond. The investigator has the discretion to extend this timeline by a further 30 days.
3. The investigator has wide-ranging powers:
1. Attend at premises;
2. Request production of documentation, information and assistance;
3. Examine persons on oath;
4. Apply to the District Court for a warrant to enter a private dwelling;
5. The investigator has the power to conduct an oral hearing, but this can also be requested by the licensee. The may involve evidence on oath and cross-examination.
4. The investigator then prepares a draft investigation report and will provide it to the licensee who has 30 days to respond. This can also be extended by the investigator by a further 30 days.
5. The CRU will then consider the report and may conduct a further oral hearing or invite the licensee to make further submissions. The CRU may then decide: (1) that no further action is necessary; (2) require a further investigation where insufficient evidence has been gathered; or (3) if the CRU is satisfied, on the balance of probabilities, that improper conduct has occurred, it will impose a minor or major sanction (as detailed above).
6. As noted, major sanctions must be confirmed by the High Court. If the CRU decides to impose a major sanction, the licensee has 30 days to appeal to the High Court. If no appeal is made, the CRU must wait for the 30 days to elapse and then must make its own application to the High Court “as soon as practicable” to confirm its major sanction decision.

One final point to note is that the Guidelines specifically note that the CRU will usually publish its enforcement decisions on its website (but noting there may be occasions when this is not appropriate) and can utilise newspapers and media to publicise its decisions. The licensee will be informed in advance.

 

What does the Proposed Decision say about setting penalties?

The CRU has proposed to take a “formula-lite” approach to setting financial penalties.

This is described as a pre-determined formula to calculate penalties. It is less prescriptive than the “formula-heavy” approach that was also considered (see below) and the approach is intended to give a degree of discretion to the CRU.

The other approaches considered by the CRU were:

1. “Formula-heavy” which the CRU describes as a series of pre-determined formulae to calculate penalties for a range of circumstances;
2. “Hybrid” using a pre-determined formula to calculate penalties for minor breaches. For major breaches, there would be defined principles for calculating the appropriate penalty; and
3. “Principles-based” would involve a set of principles defined by the CRU which would be used as a guide to calculate the appropriate penalty. Principles include a measure of consumer harm and/or determined and consumer redress.

In evaluating the approaches, the CRU considered its regulatory principles (certainty, proportionality, adaptability and usability). The CRU concluded that the formula-lite approach would require reduced workload relative to other approaches for individual breaches while providing sufficient flexibility to adjust outcomes to specific breaches and also providing a signal as to the CRU’s intent as regards penalties.

The CRU proposed two methodologies for setting financial penalties:

1. “Gain” methodology, which would assess the financial gain as a starting point (i.e. the additional profits or avoided costs); and
2. “Relevant fine” methodology, which applies a fixed fine plus a weekly fine based on the duration of the breach as the starting point.

In each case, a series of further factors would then be applied to adjust the penalty (such as the gravity of the breach, or if there are aggravating or mitigating factors).

The proposal is that the “gain” methodology will be the default applied by the CRU and the “relevant fine” methodology will be used if a monetary financial gain cannot be assigned to a breach or where there is no financial gain.

 

What are the next steps?

The CRU has invited suppliers and the public to comment on the Proposed Decision. The closing date for responses is 21 February 2024. The CRU will consider these responses and then make a final decision on its approach to setting financial penalties. However, the CRU has not indicated a timeline for this final decision.

The Proposed Decision is available here.