Investigation procedures for market abuse in the wholesale energy sector: A brief overview and future outlook

On September 26, 2023, Resolution No. 1756 of the National Energy and Utilities Regulatory Commission (hereinafter referred to as the NEURC or the Regulator) approved the Procedure for Investigating Abuses in the Wholesale Energy Market (hereinafter referred to as the Procedure).

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This Procedure defines the process for conducting investigations into abuses within the wholesale energy market.

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Experts from the legal and consulting firm FEDOTOV&PARTNERS have conducted a detailed analysis of the aforementioned Procedure and have highlighted several key aspects, which are outlined below.

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The body responsible for conducting investigations is defined as the Structural Unit of the NEURC (hereinafter referred to as the NEURC SU).

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The NEURC SU investigates market conduct, circumstances, and factual data that indicate potential abuse by participants in the wholesale energy market.

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Abuse in the wholesale energy market includes:

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· violations of established restrictions regarding the use of inside information.

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· manipulation and attempted manipulation in the electricity and/or natural gas markets.

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· failure to disclose inside information or disclosure of such information in violation of established requirements.

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· engaging in wholesale energy product transactions without being registered as a participant in the wholesale energy market.

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NEURC conducts investigations into the wholesale energy market based on reports from applicants or on its own initiative, provided there are sufficient grounds. The purpose of these investigations is to prevent, detect, and stop unfair practices in the energy market, establish all objective circumstances that led to such activities—including any aggravating or mitigating factors—identify any parties that have suffered losses, and hold the responsible parties accountable in accordance with the law.

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An investigation consists of several stages. Let's briefly look at each of them.

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1.       Conducting a preliminary assessment

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A preliminary assessment is carried out by gathering information regarding potential abuses in the wholesale energy market. This stage includes:

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·         collecting, processing, and analyzing information to evaluate the market behavior of participants and actions that indicate potential abuse in the wholesale energy market;

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·         identifying potential abuses committed by other wholesale energy market participants;

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·         the Regulator sending requests to wholesale energy market participants and other parties for information and explanations;

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·         determining the type of potential abuse in the wholesale energy market;

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·         submitting a proposal for a wholesale energy market participant to acknowledge their involvement in market abuse.

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Based on the preliminary study, the NEURC structural unit prepares proposals regarding the feasibility of conducting an investigation.

2.   Decision to initiate an investigation

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Based on the results of the preliminary study, the NEURC structural unit submits a draft decision to the NEURC to either initiate an investigation or decline to conduct one.

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If a decision to initiate an investigation is made, the NEURC shall publish it on its official website within five business days from the date of its adoption.

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Within five business days from the day following the publication of the decision to initiate an investigation, the NEURC shall send a notification of the investigation to the subject of the investigation, along with a copy of the decision.

3.       Organization and conduct of the investigation

An investigation commission (hereinafter referred to as the Commission) shall be established from among the employees of the NEURC structural unit to conduct the investigation. The Commission may also involve employees from other government agencies, as well as expert institutions whose competence includes the consideration of relevant issues.

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The Commission sends requests to the subject of the investigation for information, copies of documents, explanations, and a proposal to admit the violation under investigation. The Commission may also send these documents to other participants in the wholesale energy market.

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During an investigation, the Commission establishes whether abuse has occurred, including practices that may have been approved by the Regulator at the time of wholesale energy market transactions but are now considered manipulative or attempts at market manipulation. If new methods of wholesale energy market manipulation are identified, the Commission will initiate amendments to the relevant regulations, upholding the principles of market integrity and transparency.

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4.   Organization and Procedure for Hearings

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Upon completion of an investigation, the Commission organizes hearings to conduct an in-depth review and identify any previously unknown circumstances.

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Hearings may be held at the Commission's own initiative or at the request of the subject of the investigation. The Commission may also hold separate hearings with wholesale energy market participants, complainants, persons professionally arranging transactions in wholesale energy products, data reporting service providers, and inside information platforms.

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Hearings are used to review explanations from the subject of the investigation and other participants, as well as any documents, statements, or objections relevant to the investigation. 

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At the scheduled time, the Chair of the Commission or an authorized member opens the hearing and asks the subject of the investigation or other participants whether they have any additional explanations, objections, documents, or information relevant to the investigation that have not been previously submitted.

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If the subject of the investigation or other participants provide new evidence, supporting documents, or information, the Commission may adjourn the hearing to allow for a full and comprehensive review.

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Any new evidence, supporting documents, and information provided are added to the hearing minutes. The date of the next hearing will be communicated to the subject of the investigation and other participants. During the hearing, the Commission, the subject of the investigation, or other participants may propose suspending or adjourning the hearing if there are reasonable grounds to do so.

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The results of the hearing are recorded in minutes, which specify the individuals present and summarize the explanations and objections provided. A copy of the hearing minutes will be sent to the subject of the investigation and other participants within five business days of the hearing, in accordance with established legal procedures.

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The subject of the investigation and/or other hearing participants may submit comments on the hearing minutes within five business days of receipt. Such comments shall be added to the investigation file.

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5.   Investigation Findings Report

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Upon completion of the investigation, the Commission shall prepare an investigation report.

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The report shall be sent by mail or email to the subject of the investigation. If the subject of the investigation has objections to the report, they may submit them to the NEURC within 20 calendar days of receiving the report. If no objections are submitted within the timeframe specified by the Procedure, the report shall be deemed agreed upon by the parties.

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Any objections received regarding the investigation report shall be attached to the report. Within the timeframe for submitting objections, the subject may file a request with the Commission to review the investigation materials.

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After receiving objections from the subjects of the investigation regarding the investigation report, the Commission shall prepare a final report on the investigation results.

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A copy of the final investigation report, signed and approved by the head of the relevant NEURC structural unit and the NEURC Chairperson/Commissioner, shall be sent to the subject of the investigation by mail or email within five business days of signing.

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6.   NEURC Decision-Making Procedure

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Based on the investigation results and the final investigation report, the NEURC shall issue a Resolution containing one or more of the following decisions:

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1) remediation of the identified violations;

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2) imposition of sanctions and implementation of measures as provided by law;

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3) imposition of administrative penalties on officials of wholesale energy market participants in accordance with the Code of Ukraine on Administrative Offenses;

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4) referral to law enforcement agencies with a report on the commission of a criminal offense (if grounds exist); 

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5) referral to the Antimonopoly Committee of Ukraine with a report on violations of legislation on the protection of economic competition (if grounds exist);

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6) referral to the National Securities and Stock Market Commission regarding instances of market abuse in the wholesale energy market that may impact financial instruments.

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If the investigation results establish, in particular, the absence of market abuse, and/or insufficient evidence to prove such abuse, and/or upon the expiration of the general investigation period, the NEURC shall, based on the final investigation report, decide to close the investigation.

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The Regulator shall make a decision on the imposition of sanctions within 30 days from the date the final report is prepared.

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Decisions made by the NEURC following an investigation may be appealed in court.

Conclusion

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In our view, this Procedure will align Ukrainian energy legislation with European standards and facilitate the integration of Ukrainian energy markets into European ones, which is vital for the development of Ukraine's energy sector.

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At the same time, the question remains as to what exactly should be understood by the terms "wholesale energy market manipulation" and "inside information." These concepts remain ambiguous and open to interpretation, even with their definitions provided in the Law of Ukraine "On the Electricity Market." This law does not provide a concrete or clear interpretation, leaving room for varying understandings of these terms.

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Ultimately, the effectiveness of the Procedure will only be revealed through its practical application. We will be monitoring how effectively the investigation process is conducted. A final assessment of the Procedure's effectiveness will only be possible after its implementation, an analysis of the NEURC's activities, and the development of case law resulting from its application.

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The legal consulting firm FEDOTOV&PARTNERS specializes in providing services to participants in the electricity and natural gas markets. Our experience in supporting energy companies allows us to say that we not only know what energy laws state, but we also understand how the energy business works in practice. If you have any legal questions, we are always ready to help and offer you the most optimal solutions.

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