In 2019 fines totalling around £9.5 million for contravention of licence conditions were imposed by the economic regulators of utilities. In March 2019, the Office of Rail and Road (ORR) imposed a £5 million fine on Govia Thameslink Railway1. In October 2019, the Water Services Regulation Authority (Ofwat) imposed a fine of £3 million on Southern Water Services2. In July 2019, the Office of Communications (Ofcom) imposed a fine of £1.4 million on Giffgaff3. The remaining major economic utility regulator, the Gas and Electricity Markets Authority (GEMA), did not impose any fines4 under domestic legislation in 2019, although it has previously done so.
This article will compare the powers of the economic utility regulators to levy fines5 for breach of licence conditions, how regulators decide whether to impose a fine, how the amount is determined, what happens to the money paid over and the mechanism for challenging fines. We will also look briefly at GEMA's power to order redress for customers which is unique among the economic regulators. We should stress at the outset that this article does not address the regulators' powers in connection with infringements of competition law, as that is a subject worthy of separate consideration in its own right.
The regulators' powers to impose fines derive from legislation. For example, ORR's power to impose penalties arises from s57A of the Railways Act19936. Pursuant to this, the ORR is permitted to impose fines for breach of a condition or other requirement imposed on regulated entities or breach of an order previously issued by the ORR to a regulated company. All the economic regulators considered here have similar powers regarding breach of conditions, which are generally found in the licences granted by the regulator to a company allowed to operate in that regulated industry, and (with the exception of Ofcom) regarding breach of other requirements. The specific statutory provision regarding breach of a previous order is, however, specific to ORR. Both GEMA and Ofwat also have the power to impose fines where a regulated entity has failed or is failing to achieve a prescribed standard of performance7.
Apart from Ofcom, the regulators are under a duty to "prepare and publish a statement of policy with respect to the imposition of penalties and the determination of their amount"8. Unusually, Ofcom's duty extends only to publishing a statement "containing the guidelines they propose to follow in determining the amount of penalties imposed by them"9. All the regulators have complied with these statutory duties and the resulting policies are available on their websites10. All are under a duty to have regard to these policies11. In line with the policy statements prepared, Ofcom's duty relates only to determining the amount of a penalty. The other regulators are under this obligation but, in addition, have a duty to consider their policies when deciding whether to impose a penalty as well.
Considering first what these policies say about the imposition of a penalty, each of the regulators stresses at the outset that deciding whether to impose a penalty will involve consideration of the relevant facts and circumstances12 of the contravention. Representations from the company under scrutiny and interested parties such as individual consumers, consumer bodies and competitors will also be considered by the regulators at this stage13. The policies then go on to discuss factors which impact on whether imposition of a penalty is appropriate. A factor which is common to all the regulators is to consider harm caused to the interests of third parties14. That this is the case is unsurprising, since protecting the interests of consumers is at the heart of the work of the economic regulators. Other factors that are mentioned among regulators include damage caused to the environment (Ofwat)15, whether the contravention would have been apparent to a person acting diligently (GEMA and Ofwat)16, whether there is a history of contraventions (Ofcom)17, and changing future behaviour and incentivising others subject to similar obligations (ORR)18. There is agreement between regulators that transgressions of a trivial nature will not lead to financial penalties19.
Guidance regarding the amount of any fine tends to require general factors to be considered followed by any mitigating and aggravating factors. These factors are similar to those listed above that go to whether a penalty should be imposed. All the regulators do however make clear that the factors listed are a starting point and additional factors may be considered depending on the circumstances of the case.
When looking at the way in which the amount of a fine is decided, there is one key principle which all regulators considered here must bear in mind. That is that the fine cannot exceed 10 percent of the turnover of the company being fined in the previous year20. However, that is as far as the similarity goes, as each regulator has a slightly different method of determining turnover. The methods are laid down in statutory instruments issued by the relevant Secretary of State21 covering each of the regulated industries. There are numerous small differences between these methods, but one point which relates to GEMA is particularly noteworthy. When calculating turnover for the purposes of imposing a penalty, GEMA can include all of an entity's turnover derived from "ordinary activities (whether or not such activities are authorised by a licence)...". This is in contrast to the position of all other regulators, which are limited to consideration of turnover from regulated activities (plus incidental business). The extension of GEMA's powers outside the scope of the regulated industry in this respect is perhaps surprising, and certainly may give those involved in the gas and electricity industries pause for thought.
In general, fines are paid to the Treasury's Consolidated Fund22. They are therefore not available to be spent by the regulator that imposed them, but by central government. In 2008, this aspect of the system prompted a company that had been fined to argue against a fine imposed by the ORR. The company suggested that it would be better for the rail industry if, instead of paying the fine, it spent the money on a series of passenger improvements. This proposal was backed by a rail consumer body but the ORR dismissed this option, saying that it would "reduce the effectiveness of the incentive that penalties place on the company to secure compliance with its licence".
Unique among the regulators considered here, since 2014 GEMA has had a statutory power allowing it to ensure that monies paid by those acting in contravention of requirements are targeted at those who suffered as a result of the contravention23. In addition to its power to levy fines, GEMA has the power to make consumer redress orders for contraventions of conditions or requirements which have resulted in consumers suffering loss or damage or being caused inconvenience. A consumer redress order may require an entity that has breached its licence conditions to do anything necessary to remedy the consequences of the contravention or to prevent a similar contravention in future. In addition to making payments to those affected, according to GEMA's financial penalties policy, a consumer redress order may require the company concerned to terminate or vary contracts, make payments to a charity or trust where those affected cannot be traced or to publish an apology. So far in 2019 GEMA has not taken any formal enforcement action resulting in a fine or a consumer redress order. However, on numerous occasions it has decided to close investigations into contraventions which could have led to formal enforcement action after the companies concerned voluntarily entered into arrangements to provide significant financial redress to consumers. For the other regulators considered here, consumer redress can be taken into account when deciding on the level of fine24 but not mandated.
After a fine has been confirmed by the regulator, an aggrieved company's route of redress is via statutory appeal25. Statutory appeals are essentially a right of appeal, conferred by statute, to a court or tribunal against a decision of a minister, government department or tribunal. As a general rule companies which have been fined can appeal against the imposition of the penalty, the amount of the penalty or the date by which they must pay the penalty. Ofcom and ORR are exceptions to this rule, having slightly different schemes. A statutory appeal will proceed on the basis of a review of the regulator's determination in connection with a contravention. For all regulators apart from Ofcom, a statutory appeal culminates in a hearing in the Administrative Court of the High Court (or an equivalent court outside England and Wales). In Ofcom's case, the appeal is to a tribunal. In reviewing the regulator's actions and reaching a decision regarding them, the court or tribunal will assess the regulator's decision but it will not seek to substitute its own decision for that made by the regulator. The system recognises that the regulator has detailed knowledge of the market which it regulates and, subject to checking that the regulator has exercised its powers appropriately, the court or tribunal will be reluctant to disagree with a regulator's exercise of discretion.
The UK Regulator's Network (UKRN), established in 2014, brings together representatives from all the economic utility regulators discussed above plus their Northern Irish and Scottish equivalents and the Civil Aviation Authority (regulator of UK aviation). UKRN's main objective is to "facilitate cooperation and communication between our members to promote better outcomes in economic regulation for consumers and the economy". As illustrated above, there are numerous minor inconsistencies in the powers and approaches of the various regulators, and this network provides an important forum for regulators to ensure that they present a united front on matters of principle affecting all of the major regulated industries.
1. Under s57A of the Railways Act 1993 re breach of condition 4 of the passenger train licence.↩
2. Under s22A of the Water Industry Act 1991 regarding breaches of licence conditions relating to management, operation and performance of wastewater treatment works (and also a breach of the Water Industries Act 1991).↩
3. Under ss96A and 96C of the Communications Act 2003 regarding billing mistakes made in contravention of general condition 11. It has also imposed fines under ss135 and 139A of the Communications Act 2003 regarding failure to comply with information requirements, but these are not licence condition contraventions as considered in this article.↩
4. GEMA has however issued a fine under REMIT (European legislation regarding wholesale energy market integrity and transparency). Arrangements regarding financial penalties under REMIT are outside the scope of this article. GEMA was also involved in several cases in 2019 which have resulted in redress to consumers as discussed further below.↩
5. Regulators may also issue performance/enforcement orders in connection with breaches, but powers to do so are outside the scope of this article.↩
6. ORR also has such a power under the Railways (Access Management and Licensing of Railway Undertaking) Regulations 2016 (the A&M Regulations); Ofwat's power to fine comes from s22A of the Water Industry Act 1991; GEMA's power to fine comes from s30A of the Gas Act 1986 and s27A of the Electricity Act 1989; Ofcom's power to fine comes from ss96 and 96A of the Communications Act 2003 (plus various other sections re specific issues and provisions under the Postal Services Act, which have not been considered for the purposes of this article).↩
7. GEMA - s30A(3)(b) of the Gas Act 1986 and s27A(3)(b) of the Electricity Act 1989; Ofwat - s22A(1)(a)(iii) of the Water Industry Act 1991.↩
8. ORR - s57(B)(1) of the Railways Act 1993 and s38 of the A&M Regulations; Ofwat – s22B(1) of the Water Industry Act 1991; GEMA – s30B(1) of the Gas Act 1986 and s27B(1) of the Electricity Act 1989.↩
9. s392 of the Communications Act 2003.↩
10. Ofwat - "Statement of policy with regards to financial penalties" November 2010 (to be read in combination with "Ofwat's approach to enforcement" 9 January 2017; Ofcom - "Penalty guidelines. Section 392 Communications Act 2003" 14 September 2017 (to be read in combination with "Enforcement Guidelines for regulatory investigations" 28 June 2017); GEMA - "[GEMA]'s Statement of Policy with respect to financial penalties and consumer redress under the Gas Act 1986 and the Electricity Act 1989" 6 November 2014; "Enforcement Guidelines" 10 October 2017; ORR - "ORR's economic enforcement policy and penalties statement – Great Britain" November 2017.↩
11. ORR - s57(B)(3) of the Railways Act 1993; GEMA - s30B(2) of the Gas Act 1986 and s27B(2) of the Electricity Act 1989; Ofwat - s22B(2) of the Water Industry Act 1991; Ofcom - s392(6) of the Communications Act 2003.↩
12. Paragraph 122 of ORR's policy; paragraph 7 of Ofwat's policy; paragraph 3.1 of GEMA's policy; paragraph 1.11 of Ofcom's policy.↩
13. Paragraph 122 of ORR's policy; paragraph 7 of Ofwat's policy; paragraph 3.4 of GEMA's policy; paragraph 1.15 of Ofcom's policy.↩
14. Paragraph 122 of ORR's policy; paragraph 15 of Ofwat's policy; paragraph 2.5(a) of Ofcom's enforcement guidelines; paragraph 4.1 of GEMA's policy.↩
15">Paragraph 15 of Ofwat's policy.↩
16. Paragraph 15 of Ofwat's policy; paragraph 4.1 of GEMA's policy.↩
17. Paragraph 1.12 of Ofcom's policy.↩
18. Paragraph 123 of ORR's policy.↩
19. Paragraph 4.3 of GEMA's policy; paragraph 133 of ORR's policy; paragraph 15 of Ofwat's policy; paragraph 2.4 of Ofcom's enforcement guidelines.↩
20">s57A(3) of the Railways Act 1993; s22A(11) of the Water Industry Act 1991; s30O of the Gas Act 1986; s27O of the Electricity Act 1989; s97 of the Communications Act 2003.↩
21. ORR - Railways Act 1993 (Determination of Turnover) Order 2005, SI 2005/2185; Ofwat - Water Industry (Determination of Turnover for Penalties) Order 2005, SI 2005/477; GEMA - The Electricity and Gas (Determination of Turnover for Penalties) Order 2002; Ofcom - Electronic Communications (Networks and Services) (Rules for Calculation of Turnover) Order 2003 SI 2003/2712.↩
22. Ofwat - paragraph 2 of the statement of policy with regards to financial penalties. GEMA – s30A(10) of the Gas Act 1986 and s27A(10) of the Electricity Act 1989; s400 of the Communications Act 2003. The ORR is in a slightly different position; penalties imposed by it are payable to the Secretary of State (s57A(2)(b) of the Railways Act 1993).↩
23. s27G of the Electricity Act 1989 and s30G of the Gas Act 1986.↩
24. See for example Ofwat's consideration of redress to consumers committed to by Southern Water Services. This led Ofwat to reduce the financial penalty it imposed by the amount of such redress (£34.7 million).↩
25. s57F of the Railways Act 1993; s22E of the Water Industry Act 1991; s27E of the Electricity Act 1989; s30E of the Gas Act 1986; s192 of the Communications Act 2003.↩
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