Climate change and the role of regulators

In November 2020, the government announced an ambitious ten-point plan to boost green jobs and reach net-zero. The plan was a recent recognition at a national-level of the pressing need to combat climate change. It addresses an expansive set of topics: from offshore wind to walking and cycling; from carbon capture to finance. The proposals suggest regulatory changes in respect of nuclear power, buildings and finance form part of the plan.

The Climate Change Committee expects that businesses will be the primary drivers of the net-zero emissions target and provide the majority of investment required for the green transition. Therefore, any new regulations and regulatory action in this area must take into account the reality for businesses and consumers. This will provide the most effective means of switching to low-carbon solutions in circumstances where businesses are expected to be significant contributors to reach net-zero.

We have prepared a paper focusing on the extent to which regulators are currently obliged to take into account climate change policy when making decisions to better inform businesses of the direction of travel in this area. We provide an overview of the general legislative landscape in respect of climate change, considering whether and how regulators are impacted by that high-level legislation. We then consider the variety of tools that regulators are using in respect of climate change in the energy, transport, finance and construction sectors.

Please click here to read our paper on these issues.

Andrew Lidbetter
Andrew Lidbetter
Partner
+44 20 7466 2066
Nusrat Zar
Nusrat Zar
Partner
+44 20 7466 2465
Jasveer Randhawa
Jasveer Randhawa
Of Counsel
+44 20 7466 2998
Shameem Ahmad
Shameem Ahmad
Associate
+44 20 7466 2621

The importance of correctly approaching regulations and guidance in regulatory decisions

The High Court held in Havant Biogas Ltd & Ors v Gas & Electricity Markets Authority [2021] EWHC 84 (Admin) that Ofgem’s refusal to register the claimants as producers for a subsidy scheme contained public law errors in relation to the registration requirements and so remitted the applications to Ofgem for reconsideration. The case demonstrates the importance of properly interpreting and applying key provisions in regulations and any applicable guidance.

Background

The Claimants were four (of thirty seven) special purpose vehicle companies owned by Qila Holdings Limited (“Qila”) who each made applications to Ofgem to be registered as a producer of biomethane for injection in the national gas work under the Renewable Heat Incentive subsidy scheme (the “Subsidy Scheme”).

The Subsidy Scheme was governed by the Scheme Regulations made under section 100 of the Energy Act 2008. Two sets of Regulations were relevant to the case:

  • the Renewable Heat Incentive Scheme Regulations 2011 (SI 2011 No.2860) (the “2011 Regulations”) which were in force on 9 May 2018 at the time the Claimants made their applications; and
  • the Renewable Heat Incentive Scheme Regulations 2018 (SI 2018 No.611) (the “2018 Regulations”) which took effect from June and October 2018.

The Claimants’ applications were rejected by Ofgem, following which the Claimants requested a Statutory Review which was refused by the Statutory Review Officer (“SRO”).

Qila had earlier successfully registered other special purpose vehicles in 2016 which Ofgem had granted in 2017 (the “2017 Decisions”).

Both the 2017 Decisions and the Claimants’ applications were based on the ‘Two-Phase Model’ which was a form of staggered commissioning by which the applicant would carry out initial short-term steps for biomethane production in Phase 1 with registration preceding Phase 2. Phase 2 then involved funding being secured and the substantive assets being built. The Two-Phase Model was permissible under the 2011 Regulations but not under the 2018 Regulations.

The Claimants sought judicial review of the SRO’s decision to reject their applications for registration (the “Operative Decision”).

Judgment

The Court was faced with five grounds for judicial review.

Fordham J found that there was no breach of the provisions which prevented prior involvement in the decision making process by the SRO; there was no legitimate expectation based on prior decisions allegedly constituting a practice tantamount to a clear and unambiguous representation; there was an error in the Operative Decision considering whether to apply the test of “properly made” in the 2018 Regulations but the error was not material; and the Operative decision was not tainted by legal irrelevancies. Four grounds for judicial review were therefore rejected.

However, the Claimants succeeded on the ground that the SRO had misappreciated and overlooked the objectively correct meaning and effect of certain key provisions of the Regulations and the applicable guidance as to the requirements of a properly made application, and this had led to the SRO failing to ask the right questions and making public law errors.

Fordham J emphasised the Court’s limited supervisory function relating to interpreting the law (i.e. identifying its objective, legally correct meaning and determining whether Ofgem had acted compatibly with its relevant public law duties) as distinct from questions of application of the legislation and Ofgem’s applicable guidance, and matters of evaluative judgment which were squarely for Ofgem to decide, provided it acted consistently with its public law duties (para 23).

Ofgem argued that there had been no public law error in the Operative Decision and that it had involved matters of appreciation which Ofgem was entitled to regard as highly material as an exercise of reasonable judgment within the ambit of the SRO’s evaluative judgment.

However, Fordham J held that there were ‘core and recurrent themes in the SRO’s reasoning’ (para 79) from which it was possible to ‘trace certain problems lying at the heart of the public law errors in the SRO’s approach’ (para 90).

These recurrent themes related to the requirements of a properly made application. The Operative Decision emphasised the absence of certain elements of the application, such as the absence of identifying a site for producing biomethane and the absence of firm arrangements with any third party for the production of biomethane as reasons for the rejection of the Claimants’ applications.

Fordham J considered each strand of Ofgem’s decision in turn and held that the Operative Decision erroneously treated certain elements as pre-conditions required for registration when they did not appear as such in either the Scheme Regulations nor in any of Ofgem’s guidance, and therefore were not preconditions in law. He emphasised in particular Ofgem’s public law duty of adherence to guidance (absent good reason to depart from it), and highlighted that in making the Operative Decision, the significance of the relevant guidance (which clearly articulated the standard of sufficiency and requirements for applications) was not appreciated.

He noted that certain elements were pre-conditions required for applications made on or after 20 June 2018 (i.e. after the Claimants’ applications) and that these preconditions were not compatible with the Two-Phase Model, but that there was no express or implied previous requirement of that kind under the 2011 Regulations and applicable guidance.

Fordham J concluded that as a result of recurring themes that permeated the Operative Decision as a whole, he could not be convinced that Ofgem’s reasons for rejecting the applications in the Operative Decision would have independently justified a refusal of the applications, and therefore was not satisfied that a lawful decision would be ‘highly likely’ to be ‘not significantly different’. He therefore declined to refuse relief under section 31(2A) Senior Courts Act 1981.

Conclusion

This case serves as a reminder of the Administrative Court’s well-established approach of considering what is required by the legal provisions and also the correct approach to guidance. Fordham J emphasised Ofgem’s public law duty to adhere to its applicable guidance (unless it has good reason to depart from it). In this case, the Court considered that Ofgem had failed to ask the right questions or give due regard to its own guidance, and so when the Operative Decision was looked at as a whole, it contained public law errors in respect of the relevant requirements against which the applications should have been judged.

 

Andrew Lidbetter
Andrew Lidbetter
Partner
+44 20 7466 2066
Nusrat Zar
Nusrat Zar
Partner
+44 20 7466 2465
Jasveer Randhawa
Jasveer Randhawa
Of Counsel
+44 20 7466 2998
Catherine Bagge
Catherine Bagge
Associate
+44 20 7466 7499

“Public Authorities” for the purposes of the EIR

The Information Commissioner recently published two decision notices in short succession which found that gas and electricity supplier, E.ON UK plc (“E.ON”), and Heathrow Airport Ltd (“HAL”) were both “public authorities” for the purposes of the Environmental Information Regulations 2004 (the “EIR”) under regulation 2(2)(c). Public authorities under regulation 2(2)(c) are “any other body or other person, that carries out functions of public administration”. As a result, any companies with licences for the supply and/or generation of gas and/or electricity should consider themselves at significant risk of being subject to the EIR.

Since the Upper Tribunal’s decision in Fish Legal in 2015, a group of water companies have been public authorities under regulation 2(2)(c). The wide-reaching implications of that decision for other privatised, regulated industries was recognised at the time. The last year has also seen the Information Commissioner advocate for extension of the information access regimes to more companies in the private sector (see, for example, her report titled “Outsourcing Oversight? The case for reforming access to information law”, which was laid before Parliament on 28 January 2019).

Last year, we wrote about the First-tier Tribunal’s (“FTT”) decision in Poplar Housing Association and Regeneration Community Association (“Poplar”) v Information Commissioner and Peoples Information Centre (EA/2018/0199), which provided some further clarity on when a private organisation may be considered a “public authority” for the purposes of regulation 2(2)(c) of the EIR. Poplar is a housing association and registered provider of social housing. The Information Commissioner had decided that Poplar was a public authority under regulation 2(2)(c) but the FTT disagreed. The FTT derived a test for determining this issue from Cross v Information Commissioner [2016] UKUT 153 (AAC) (“Cross“) in which the Upper Tribunal (“UT”) provided guidance on Fish Legal v Information Commissioner (C-279/12) [2014] QB 521 (“Fish Legal EU”), the Aarhus Convention, Directive 2003/4/EC and the EIR (see [94]). Poplar fell down at the “first hurdle” of the test, namely whether it had been “entrusted with the performance of services under a legal regime”. As explained in our previous note, the FTT found that a body performing public administrative functions must be empowered to do so by virtue of “a legal basis specifically defined in national law” for it to be a “public authority” under regulation 2(2)(c) of the EIR. This requires an “explicit statutory delegation of power”, which it found Poplar did not have: “We do not accept that the regulatory framework, even including the direct statutory regulation and the powers granted to registered providers, can be described as ‘a legal basis specifically defined in national legislation’”.

The FTT felt bound by previous case law, in particular Cross and Fish Legal EU, to reach this conclusion and made clear that it would have preferred to take a broader approach to regulation 2(2)(c). The Information Commissioner is currently appealing the FTT’s decision to the Upper Tribunal.

E.ON and HAL as “public authorities”

Poplar, and more so Cross as a decision of the Upper Tribunal, surprisingly do not feature in the Information Commissioner’s consideration of whether E.ON and HAL satisfied the first hurdle of regulation 2(2)(c), namely whether they were “entrusted by law with the performance of services in the public interest”. In both decision notices, the Information Commissioner interpreted this to mean that the body must be empowered with a relevant function under statute. There was no mention of any requirement for an explicit statutory delegation of power à la Poplar, which was the requirement that the FTT felt bound to follow as a result of Cross and Fish Legal EU.

In respect of E.ON, the Information Commissioner considered whether E.ON had any functions which might bring it within the scope of regulation 2(2)(c). The Information Commissioner noted that the Electricity Act 1989 and Gas Act 1986 made it an offence to carry out certain activities without being authorised by Ofgem under a licence. In light of this, the Information Commissioner considered that Ofgem was, in effect, entrusting licence holders with the performance of a public service when granting licences that related to the supply of either gas or electricity to consumers. As E.ON held an electricity supply licence, electricity generation licence and gas supply licence at the time of the EIR request, the Information Commissioner found that E.ON had been “entrusted with services under statute”. The Information Commissioner went on to find that E.ON satisfied two further limbs of the test, namely that E.ON’s performance of these services was in the public interest and that some of its services related to the environment. The final hurdle was whether E.ON was vested with “special powers” to perform at least one of its services that were in the public interest and it did not have to be those services that related to the environment. In this regard, the Information Commissioner relied on the FTT’s obiter comments in Poplar. For a power to be “special”, it simply had to be a power which is not available under private law. The Information Commissioner was satisfied that E.ON enjoyed a number of powers that met this description by virtue of its various licences.

As regards HAL, the Information Commissioner considered the “history” of the privatisation of Heathrow Airport to determine whether HAL’s operation of Heathrow Airport was entrusted to it by statute. The Commissioner found that there appeared to be a “direct and continuing link” between the original transfer of functions, powers and responsibilities from the British Airport Authority by way of the Airport Act 1986 to the private sector and ultimately to HAL. As it had in E.ON, the Information Commissioner went on to answer the questions of whether HAL performed its services in the public interest, whether any of its services related to the environment and whether it was vested with “special powers”, in the affirmative.

In both decision notices, the Information Commissioner concluded her analysis with carrying out a “cross-check” (a term coined in Cross and applied in Poplar) which entailed “standing back and looking at whether having conducted all the tests above, there is a sufficient connection between the functions of the body under examination and those which entities that organically are part of the administration or executive of the state do”. She was satisfied that the test had been met in both cases.

What happens next?

Each of E.ON and HAL can appeal the respective decisions to the FTT. E.ON had previously challenged an information notice that the Information Commissioner issued upon it (in connection with the EIR request in question) all the way up to the Upper Tribunal so an appeal to the FTT on this further decision may not be out of the question. These new decisions certainly underscore the importance for some clarity from the Upper Tribunal in its determination of the Poplar appeal (which was heard in February 2020).

In the meantime, companies operating in these sectors in similar circumstances should carefully consider the implications for their businesses and consider seeking advice on the EIR where necessary.

Contacts

Andrew Lidbetter
Andrew Lidbetter
Partner
+44 20 7466 2066
Nusrat Zar
Nusrat Zar
Partner
+44 20 7466 2465
Jasveer Randhawa
Jasveer Randhawa
Of Counsel
+44 20 7466 2998
Christine Iacono
Christine Iacono
Associate (Australia)
+44 20 7466 2379

 

Labour’s plans for energy and medicines – public law analysis

We have published two papers which consider the impact of the Labour Party’s recently announced policies on two heavily regulated sectors, namely the energy and pharmaceutical industries. The policies proposed in relation to both sectors, which are similar to those now also proposed in other industries (such as the water industry and in relation to Royal Mail) are central aspects of Labour’s nationalisation agenda. Taking forward such policies would engage key public law principles and would give rise to likely challenges on the basis of the level of compensation payable, amongst other things.

In Labour’s recent report entitled “Medicines for the Many”, Labour has proposed using existing powers of “Crown Use” and “compulsory licenses” to acquire patented information for the state’s purposes. Labour’s report also suggests that a future Labour government would seek to limit the basis on which compensation would be payable to holders of such patents. In addition to concerns which these proposals raise under intellectual property and investment treaty law, they give rise to questions about the compatibility of such measures with the right to property, which is protected by the common law, the EU Charter, and the European Convention on Human Rights (as incorporated into domestic law by the Human Rights Act 1998). For more information please see our briefing paper here.

Similarly, in its manifesto, the Labour Party has set out in more detail the measures which it proposes in relation to the energy industry. Broadly these measures would involve the nationalisation of significant parts of the energy sector (including the network companies and the energy supply businesses of the Big Six). As with its medicines proposals, if a future Labour government sought to implement these policies, we envisage challenges being brought on public law and human rights grounds given that they would involve interference with the companies’ and investors’ property. For more information on these issues, including in relation to steps that can be taken to protect property rights, please see our briefing paper here.

Andrew Lidbetter
Andrew Lidbetter
Partner
+44 20 7466 2066
Nusrat Zar
Nusrat Zar
Partner
+44 20 7466 2465
Jasveer Randhawa
Jasveer Randhawa
Of Counsel
+44 20 7466 2998
James Wood
James Wood
Senior Associate
+44 20 7466 2306

Watt’s the issue here? High Court dismisses challenge to Government smart meter programme

In R (on the application of Utilita Energy Ltd v Secretary of State for Business, Energy & Industrial Strategy [2019] EWHC 2612 (Admin), the High Court dismissed Utilita Energy Ltd (Utilita’s) application for judicial review of three decisions relating to the Government’s smart metering programme.

Key Points

  • Public authorities are entitled to delay public consultation on matters where they lack the necessary information to proceed.
  • Wider policy objectives can be taken into account when determining if a public authority has given due regard to specific factors, even if those policy objectives are broad and high level.

Background

The Smart Metering Implementation Programme (“SMIP”) set out the Government’s policy that every British home should have a smart electricity meter by the end of 2020, in order to encourage greater energy efficiency and facilitate switching to cheaper tariffs. Unlike first generation smart meters (“SMETS1”), second generation meters (“SMETS2”) are not tied to a particular supplier’s operating system, meaning customers can switch suppliers without losing smart functionality. Some SMETS1 meters are eligible to be enrolled in a universal communications system run by the Data Corporation Company (“DCC”), which means that they do not require a replacement with SMETS2 to gain interoperability.

The Government imposed a duty (the roll-out duty) requiring energy suppliers to take all reasonable steps to ensure that all SMETS1 meters are either DCC enrolled or upgraded to SMETS2 on or before 31 December 2020. This duty required a change to the standard licence conditions for gas and electricity suppliers.

The Government’s decision followed the issuing of two consultation papers in April 2018. The first dealt with achieving interoperability via the roll-out-duty whilst the second discussed whether the DCC should offer enrolment services to four of the six brands of SMETS1 meters. The two other SMETS1 brands, which include the ‘Secure’ meter, were not considered at this point but the Government noted its intention to consult on these once it had sufficient commercial and technical information available.

The Claimant, Utilita, is an energy supplier which uses Secure meters. Utilita’s customer base consists largely of pre-payment customers, who are more likely than other customers to be elderly, disabled, or from a low-income background. Utilita sought to challenge three Government decisions relating to SMIP:

1). The 4 October 2018 decision to modify the standard licence conditions in order to impose the roll-out duty (the First Decision);

2). The 4 October 2018 decision that SMETS1 meters installed after March 2019 would not count towards an energy supplier’s installation target (“the Second Decision”);

3). The 23 May 2019 decision that the DCC should be required to provide services to the type of SMETS1 meters used by Utilita (“Secure Meters”) in order to enrol them (“the Third Decision”).

Judgment

Utilita sought to challenge the decisions on the grounds of irrationality because the Government had left it in a materially different position to suppliers who, by virtue of using the four DCC-eligible brands, knew for a fact that they were not required to replace their SMETS1 meters by the end of 2020. Utilita argued that since the need to replace the SMETS1 meters was contingent on there being no option to enrol with the DCC, all consultations should have occurred simultaneously.

Lewis J rejected Utilita’s submissions. Suppliers using eligible brands were in a different factual position by virtue of the level of information the Government had on these brands. The Government had made clear its proposal to consult later on Secure Meters once it had the relevant information. The Government’s decision to require mandatory SMETS1 enrolment or replacement within a specified timeframe, and to consult on DCC enrolment only when it had sufficient information was neither irrational nor unlawful; it was a regulatory policy decision within the Secretary of State’s discretion. As a matter of law consultations on decisions which are linked do not need to proceed at the same time. The Court held that the fact that decisions could have been taken differently or in an alternative order did not render them irrational or unlawful.

Utilita’s attempt to challenge on the grounds of inadequate consideration of SMIP’s environmental impact also failed. Lewis J noted that Section 3A(5)(c) Electricity Act 1998 required the Secretary of State to “have regard to the effect on the environment of […] the provision of smart meter communication service”. This duty had been met as the Government’s underlying policy objective was the promotion of more efficient energy use. The Government’s broad policy objective was sufficient to prove that it had considered its specific duties under the Act.

The Court further rejected Utilita’s submission that the Government had breached its duties under s.149 Equality Act 2010 requiring the consideration of individuals with protected characteristics. 93% of Utilita’s customer base were on pre-payment plans and were statistically more likely to fall into these categories. In reaching this conclusion the Court confirmed that the Government must have regard to the need to consider those with protected characteristics, but is not duty bound to achieve a specific result. Lewis J noted that the Government had clearly factored in considerations about the benefits to consumers generally, which included those with protected characteristics, and had considered pre-payment customers specifically.

The submission that the Government, whilst calculating the cost-benefits of the Third Decision, made material errors of assessment and factored in irrelevant considerations was also rejected. Utilita failed to establish any public law error in the Government’s approach to the calculations. In any event Lewis J considered, under section 31 of the Senior Courts Act 1981, that the outcome would not have been substantially different if the costs Utilita wanted had been included, as there was still a calculable net cost-benefit to the policy.

The High Court dismissed Utilita’s claim for judicial review of the First and Second Decisions on all grounds. The Court also held that there were no arguable grounds for challenging the Third Decision’s validity and therefore refused permission for that aspect of the challenge.

Comment

The decision reflects the wide discretion afforded to the Government on matters of consultation and policy. Even though replacing SMETS1 meters was contingent on them not being enrolled in the DCC scheme, the Government had no duty to consult on these issues simultaneously. The Claimant was able to identify various aspects of the decisions that could have been done differently, such as the timing of consultations and the matters to be included in the cost-benefit calculations. However such arguments will not usually be sufficient to justify the court overturning the decision of a public body.  A claimant needs to identify a matter that has been dealt with unlawfully rather than simply one which could have been done differently. The case therefore serves as a reminder of the difficulties in challenging decisions made following a thorough consultation process and where broad policy objectives are involved.

 

Andrew Lidbetter
Andrew Lidbetter
Partner
+44 20 7466 2066
Nusrat Zar
Nusrat Zar
Partner
+44 20 7466 2465
Jasveer Randhawa
Jasveer Randhawa
Of Counsel
+44 20 7466 2998

Difficulties in challenging regulatory action demonstrated again by High Court

In Npower Direct Ltd v the Gas and Electricity Markets Authority and the Competition Markets Authority [2018] EWHC 3576 (Admin), the High Court dismissed Npower’s claim for judicial review of a Direction by the Gas and Electricity Markets Authority (“Ofgem“) that Npower was required to circulate information to its customers designed to make them consider Npower’s terms of supply and potential alternative sources of supply. Mr Justice Freedman “rejected each of the grounds” on which Npower made its submissions and accepted “substantially” the arguments made by the regulator, noting in particular that it had a “wide margin of appreciation” and that the court should be slow to interfere.

Key points:

  • Both reasons given for a decision and the proportionality of a measure taken by a regulator must be evaluated in their whole context.
  • The regulator’s wide margin of appreciation extends not only to whether to make the decision but also in the assessment of its proportionality. The margin extends to the regulator’s methodology and the balancing of legitimate aims and their potential adverse effect.
  • Even where the Human Rights Act is engaged, the margin of appreciation afforded to the regulator is not transformed.
  • In reviewing the adequacy of a regulator’s analysis, the court should read the analysis generously.
  • In order for the court to quash a decision, the relevant perceived flaw in the regulator’s analysis must satisfy a materiality test.
Background

Npower is one of the “big six” gas and electricity suppliers to homes and businesses in Great Britain. Ofgem has broad regulatory powers including, when granting the necessary licences to Npower, the power to include conditions which appear to it to be requisite or expedient in undertaking its regulatory duties.

The Competition and Markets Authority (the “CMA“) had identified that competition in the energy market was impacted negatively by a lack of consumer engagement and it recommended that Ofgem implement measures to address this. Ofgem decided to impose a new broad condition which would require licensees to comply with directions issued by it in relation to measures on consumer engagement. In January 2017 Ofgem sent several letters explaining its reasons for adopting a new licence condition and the selection criteria for new market switching trials. Selection was to be based on whether the supplier had enough of the types of customer of relevance to the specific research questions and whether the burden of the trial was “proportionate” to the particular supplier.

In February 2018, Ofgem ran the first of several collective switch trials under its new licence condition, during which 22% of 50,000 customers switched to a cheaper tariff after receiving information. Ofgem then proposed a second collective switching trial in July 2018. On 1 August 2018, Ofgem issued a draft Direction to Npower requiring participation in that trial, explaining the basis of the proposed trial and reasons for selecting Npower (including that out of the big six’s earlier trials Npower had engaged the smallest customer base and therefore been exposed to the lowest potential customer losses so far). On 31 August 2018, the final Direction was issued to Npower.

Npower was concerned that the trial was disproportionate as it was to involve 100,000 customers, but Ofgem contended that the figure was reasonable, as it would test whether the results achieved in the first collective switching trial were scalable. On 19 September 2018, Npower confirmed that it would comply with a trial of 50,000 customers only. Ofgem therefore made a Provisional Order to secure compliance under its statutory powers which Npower failed to comply with by its deadline. In October 2018, Npower decided to challenge the underlying Direction by judicial review, as well as requesting a statutory review of the Provisional Order.

Judgment

Npower put forward various grounds of challenge, all of which failed.

Firstly it argued that Ofgem failed to give adequate reasons for its decision. However the court noted that there had been a lengthy period of engagement and correspondence on the issues, including why 100,000 customers were necessary, and therefore the reasons stated in the August documents accompanying the Direction had to be seen in the context of previous extensive communications. The court found that Ofgem gave adequate and sufficient details which meant Npower would have been in no genuine doubt about why the Direction had been given.

Secondly, Npower alleged that Ofgem had an improper purpose in ordering Npower’s participation in the trial because it was aimed at procuring customer switching even where that may not be in the customer’s best interests, when the purpose should have been to “obtain rigorous and robust data”. This was not accepted; it was not an improper purpose to address the lack of consumer engagement by facilitating customer switching.

Npower also contended that Ofgem’s decision had been irrational in that no rational body could decide to proceed with the collective switching trial on any sensible basis. This ground was said to be “parasitic” on the other grounds and therefore failed for the same reasons.

Proportionality

Npower further argued that there had been an unlawful interference with its rights under Article 1 Protocol 1 of the European Convention on Human Rights (the right to property/possessions) (“A1P1“) because Ofgem had failed to undertake a “lawful structured proportionality analysis”.

Ofgem denied that there had been any interference with property rights because the trial did not alter any contractual rights. Npower’s customers had contracts which could be terminated. The trial did not affect those rights – it simply gave the customers information. The court declined to make a finding on whether there was a property right attaching to the relationships with customers but simply assumed that to be the case and went on to consider the proportionality argument.

Npower made various submissions as to the alleged failures of Ofgem on proportionality including that it had failed to assess the costs and benefits of the trial and failed to strike a fair balance between the collective good and Npower’s rights.

The court noted previous case law explaining that proportionality is not an exact science, particularly when it comes to balancing the aims of the proposed measure on one side and any adverse effects it may produce on the other, emphasising a regulator’s wide margin of appreciation and the court’s reluctance to interfere with its assessment. That margin of appreciation also extends to the methodology used to apply its proportionality analysis.

It was a given that participation in the programme would entail costs to suppliers and this was recognised by the CMA who nevertheless found Ofgem’s programme to be proportionate. The new licence condition itself was also considered in terms of proportionality and Ofgem stated that the potential for commercial impact on suppliers was not a valid reason for failure to participate in a trial. Ofgem stood by their statement that cost to suppliers was unavoidable and the way to deal with this would be to ensure the burden was spread fairly across suppliers and that the size of trials was proportionate. This had already been recognised at prior stages in the series of unchallenged regulatory decisions made before Npower’s participation in this particular trial was ordered. The Court also noted that it was telling that there was no detailed analysis or criticism of Ofgem’s calculations from Npower. Ultimately the court was satisfied that Ofgem had undertaken a structured proportionality analysis, engaged in uncriticised calculations and therefore justified its position.

Comment

This case demonstrates the reluctance of the courts to intervene where regulators are exercising their wide margin of appreciation in their relevant fields of expertise. This was helped by the fact that in this case the regulator was able to evidence a detailed and thorough proportionality analysis at every stage of the process, as well as having engaged with Npower’s concerns and given reasons for its actions throughout.

Regulators must weigh up their own legitimate aims with any potential adverse effects arising from their decisions and ensure they have conducted an appropriate proportionality analysis and given sufficient reasons so that those affected are left in no genuine doubt as to why particular regulatory action has been taken.

 

Andrew Lidbetter
Andrew Lidbetter
Partner
+44 20 7466 2066
 
Nusrat Zar
Nusrat Zar
Partner
+44 20 7466 2465
 
Jasveer Randhawa
Jasveer Randhawa
Of Counsel
+44 20 7466 2998