Ofgem will press on with changes allowing its enforcement director to be the decision maker in settlement cases, despite strong concerns from key industry players.
The regulator has this week published its decision document outlining the changes to its enforcement guidelines and sectoral penalty statement, following a consultation issued last summer.
Previously a Settlement Committee made up of two Enforcement Decision Panel (EDP) members and one Ofgem director was the only decision making option for settlement of an enforcement case.
New rules will also allow the director responsible for enforcement, or a nominated alternative Ofgem director, to be able to make decisions for the purposes of achieving settlement. This includes issuing a settlement mandate, approving and issuing the settlement penalty notice and approving final settlement decisions.
Ofgem said it expects this will result in more cases being taken through the settlement process, where appropriate, rather than being resolved through ‘alternative action’ – a generally quicker means to address concerns and secure redress but a process which does not include a formal finding of a breach.
Ofgem said it is concerned that the deterrent message may in some cases be weakened as a result of using alternative action.
The decision was made despite concerns from trade body Energy UK about the impact it will have on the fairness of the decision-making process.
In its response to the consultation, Energy UK said: “We are concerned that this will weaken the independence of the decision-making process, and thereby increasing the risk of parties contesting cases in order to obtain a level of independence and fairness in decisions.
“The creation of the Enforcement Decision Panel was for the very purpose of improving the independence and consistency of Ofgem’s enforcement decision-making processes and therefore any proposals that weaken or circumvent these objectives should be avoided.”
The trade body also said it believed that such a move could increase the pressure on both the regulator and the party being investigated.
It added: “Rather than reducing the burden on Ofgem and investigated parties, it could unintentionally risk increasing it and force parties down alternative appeal routes, such as Judicial Review, if they are left with the impression of an inappropriate outcome as a result of the investigation, decision and penalty all being determined by the same enforcement team…”
This outcome driven by a process that lacks independence, it said, would increase enforcement costs and timescales for all parties.
Sharing similar concerns was Scottish Power, which said while it appeared that the change is designed to promote the speed and ease of decision making, this is potentially at the expense of “rigour and properly considering available evidence”, and in turn the “quality and accuracy of decisions” and the confidence that licensees and consumers can have in the enforcement process.
Meanwhile, Ovo Energy said it is concerned that allowing the enforcement director to be a decision maker in settlement cases “could jeopardise the requisite independence and objectivity leading to cases being settled”.
Energy UK, Scottish Power and Ovo all expressed concerns about Ofgem’s attitude towards alternative action.
“Ovo is concerned over Ofgem’s apparent desire to move away from the current use of alternative action, in pursuit of a stronger deterrent message.
“Alternative action is an important resolution route for all parties, it leads to quick redress for customers whilst saving resources for Ofgem and suppliers.
“We do not believe there is any evidence that this direction of travel would lead to better outcomes for consumers.”
Addressing the concerns in its decision document, the energy regulator said decision making will remain “evidence-based in accordance with the facts of the case”.
It added that the director responsible for enforcement or a nominated alternative employee of Ofgem at director level is not usually involved in the day to day running of investigations and a Settlement Committee “remains as an option for decision making in settlement”.
There is also the option for the director responsible for enforcement to nominate an alternate director to be the settlement decision maker.
“The investigatory phase of an investigation, a stage to which no changes are being made, will continue to involve the rigorous examination of all evidence, thereby ensuring all decision makers are fully informed of the circumstances of each investigation,” Ofgem added.
Addressing concerns about its approach to alternative action, Ofgem said it has secured “many successful outcomes” through alternative action and that this process will remain part of its enforcement toolkit.
“Enabling the director responsible for enforcement or a nominated alternative employee of Ofgem at director level to be the decision maker will allow more cases to go through settlement and result in a finding of breach, which sends a stronger deterrent message and secures a stronger precedent for future breach behaviours,” it said.
Ofgem has additionally published several other decisions in its document. These include removing the middle and late settlement windows, which have never been used, and the associated 20% and 10% settlement discounts.
The regulator believes this will provide a more effective alternative to alternative action, better outcomes for consumers and other energy market participants and send out a “far more significant deterrence signal” to other regulated parties.
Elsewhere Ofgem has updated its Enforcement Guidelines to provide more clarity and transparency, and has further updated the Sectoral Penalty Statement to reflect the new requirements introduced through the Supplier Licencing Review.
Ofgem’s full decision document can be read here, while full supplier responses to the consultation can be found here.