Introduction
Regulation nº 1227/2011 (EU), better known as the Regulation on Wholesale Energy Markets Integrity and Transparency (REMIT), aims to prevent market abusive behavior in the electricity and gas market. This regulation comes as part of the effort to create an European internal market in the energy sector, which in turn requires a framework to ensure prices reflect the fair interplay between demand and supply[1]. Unlike non sector specific competition law, it applies to all trading parties[2] in these sectorial wholesale markets, not just to market participants with dominant positions. Regarding market manipulation, article 5 of the Regulation prohibits it and article 2(2) (a) and (b) further defines the conduct. When it comes to the enforcement of this prohibition, fines imposed by national authorities under article 5 of REMIT have not yet had widespread expression.[3] Nonetheless, it is important to understand how this Regulation is being applied by national authorities, a topic largely underdeveloped in the literature. In this context, the Iberdrola Generación S.A.U v. CNMC case provides fruitful insights on capacity withholding as market manipulation and the challenges in understanding whether such witholdment may be legitimate and justified.
Factual background
Iberdrola S.A. is a Spanish multinational electricity company that operates on the generation, transmition and distribution of electricity. At the time of the proceedings, Iberdrola Generación S.A.U was the subsidiary in charge of managing the hydroelectric power plants in the Duero, Tajo and Sil rivers in Spain. This case concerns the reduction in electricity output from these power plants from the 30th of November until the 23rd of December 2013. From the 1st until the 29th of November, the plants had an average dispatch of approximately 33,5 GWh[4], while from the 30th of November until the 23rd of December, it was approximately 21,5 GWh. There was a reduced dispatch of electricity because Iberdrola was making more offers above the clearing price for the day ahead market, offers that were not matched and dispatched. During this period, the market price of electricity went from 53 €/MWh to consistently over 80 €/MWh until the 23rd of December.[5] The market price lowered again on the 23rd of December due to heavy rain and wind, causing higher energy production from renewable power plants.
Legal background
The Spanish competition authority, CNMC[6], typified the conduct as an administrative offence under article 60 a) of Ley 54/1997, a “very serious” infraction consisting of “fraudulent manipulation aimed at altering the price of electricity or the measurement of supplied quantities”.[7]This norm sanctions market manipulation in Spain, prohibited under the Regulation nº 1227/2011 of the EU (REMIT). Article 5 of the Regulation prohibits “Any engagement in, or attempt to engage in, market manipulation on wholesale energy markets (…)”.[8] Recital 13 of the Regulation clarifies that “Manipulation on wholesale energy markets involves actions undertaken by persons that artificially cause prices to be at a level not justified by market forces of supply and demand, including actual availability of production, storage or transportation capacity, and demand.”[9] As for soft law, the third edition of the ACER guidance on the application of REMIT is invoked, more specifically paragraph 6.4.2.d),[10] defining physical withholding as a type of market manipulation.
Legal reasoning
CNMC considered that the reduction in electricity production in the Duero, Sil and Tajo power plants, caused by the higher priced offers in the market that were not matched and thus not dispatched, was not justified by rational economic behavior.[11] The authorities reach this conclusion by comparing past behavior from Iberdrola in analogous situations. They conclude that the reduction in production could not be justified by low levels of water in the dams, since, in previous years, production was higher even though water levels were lower and market prices were also lower. CNMC compares water reserve levels and dispatched energy from November and December of 2011, 2012 and 2013. Most notably, highlighted that water reserves in December of 2013 were almost double of the reserves in December of 2012 but the average energy output was lower.[12] The authorities also found that the behavior could not be justified by expectations of better prices in the future, which could explain the decision to not dispatch as much energy.[13] The prices in the daily market were significantly higher than those for the futures market.
The authorities found that Iberdrola was deploying a strategy to make entry of more expensive energy producers in the market by withholding offer. The withholding of energy production was made indirectly, by consistently making higher offers than usual, above the clearing market price, ensuring that less offers were matched. Since the day ahead market is a marginally priced market, this caused an increase in the market price since the price is determined by the last producer needed to meet demand. CNMC considered that the hydropower plants in question could have significant effects in the pricing of the market since they accounted for 20% of total hydraulic production in Spain.[14] The estimated increase in price caused by this behavior was of 7 €/MWh during the period of production withholding, leading to an estimated benefit to Iberdrola of 21,5 million euros.[15] This type of practice, which leads to artificial prices in the wholesale market, is prohibited in article 5 of REMIT as market manipulation and constitutes a very serious infraction under the Spanish Ley 54/1997, article 60.a).15. Moreover, this specific behavior is described in the ACER guidance on the application of REMIT in paragraph 6.4.2 d) as capacity withholding, where a market participant decides, without justification, to not offer on the market all the available production capacity, causing market prices to surge. Bearing in mind the benefits derived from the infraction, the impact on the market and its duration, the authorities set the fine in 25 million euros.[16]
Critical assessment
This was first case[17] in which a fine was imposed for a violation of article 5 of REMIT and it is a seminal case-study of capacity withholding as market manipulation, especially considering the significant fine imposed. Nonetheless, it ends up raising more questions over the feasibility of sanctioning these practices rather than providing solid answers. The central issue is the possible justification for the conduct. Market players need to be afforded the possibility of justifying why they decided to withhold production, since there may be rational economic reasons for doing so. In the case of dams, management of water reserves and future market prices are the key elements. The CNMC found it impossible to justify Iberdrola’s conduct, based on past contradicting behaviour from Iberdrola on this management, coupled with a particularly favorable market landscape, which should have had the opposite impact on dispatch. A parallel criminal procedure that has reached the Spanish appellate Court, on these same facts, has been ruled (which now allows the administrative appeals against CNMC to resume). In this decision, the Court contradicts CNMC’s conclusion that the conduct was economically unjustified. Through the depositions of Iberdrola’s employees, the Court concludes that the lower dispatch was justified by predictions of the continuation of the ongoing drought and that the storm that ended the reduced dispatch had not been predicted.[18] In this decision, the validity of CNMC’s approach is put into question, an approach that had not been used before this procedure. The Court rightfully notes that just because lower water levels have not warranted reducing production in past situations, it does not overrule possible predictions of dangerously low water levels in the future.[19] The Court also considered that since the conduct only consisted in raising the offer prices and that such offers were below the 180 €/MWh legal limit, they cannot be considered crimes, since the market is free[20]. This may be true for criminal responsibility, which naturally requires conducts of higher levels of harm and severity, due to the principle of minimum intervention of criminal law, but this rationale cannot be transposed to other forms of responsibility when dealing with market manipulation. It is settled by REMIT and densified in the guidance that offer pricing (even under legal limits) may be used to artificially alter wholesale market prices (economic withholding[21]). Thus, offer pricing is not done completely freely, it cannot be done with the aim of manipulating market prices.
It is also relevant to analyze the case considering the updated ACER guidance on REMIT, given that it has further regulated capacity withholding. It provides with two elements to identify a breach of article 5: ability to influence the market price and legitimacy for withholding (economic, regulatory, or technical justifications).[22] The ability to influence was justified by CNMC through Iberdrola’s share in Spanish hydropower production. The second element is the more contentious point. Regarding economic justifications, opportunity costs are given in the guidance as an example to an economic justification for withholding. In this case, opportunity costs were analyzed, when the authorities state that there was no expectation of better future prices that could justify deferring production. This seems to be a reasonable conclusion, since market prices were abnormally high, making it almost impossible to expect even higher prices in the future. The main issue is, then, the technical justifications.
Conclusion
CNMC applies a novel approach in the Iberdrola case to find that the reduced output in electricity constituted market manipulation under REMIT. This approach, which consists in a comparative analysis with past behaviors in analogous situations has now been criticized by the Spanish appellate Court. While the more stringent rationale in analyzing proof is not completely transposable to the administrative procedure of imposing a fine, it sends the message that where there is testimonial proof that the behavior was justified, inconsistent or alarming conduct is not sufficient to overrule such justifications. If the conclusion that the conduct was justified is transposed to the administrative appeal, Iberdrola will be acquitted from the totality of the fine. While CNMC’s decision has its weak points, the Court’s decision is not exempt from concerns. It seems to point to a view of complete freedom in setting offer prices, as an invariably licit conduct if it does not exceed the 180€/MWh limit. This goes against REMIT’s view of market manipulation and the ACER guidance, which explicitly consider economic withholding as a form of market manipulation.
[1] On the history and context of REMIT see, Alberto Pototschnig, ‘The origin of REMIT and its initial implementation’ (Florence School of Regulation, 9 February 2024) https://fsr.eui.eu/the-origin-of-remit-and-its-initial-implementation/ accessed 16 December 2024.
[2] Regulation (EU) 1227/2011 on wholesale energy market integrity and transparency [2011] OJ L 326, article 2(8).
[3] There are only 70 recorded public decisions taken by NRA’s on article 5 breaches, see ACER, ‘enforcement decisions’ https://www.acer.europa.eu/remit/coordination-on-cases/enforcement-decisions accessed 16 December 2024.
[4] Data from Table 2, Iberdola Generación S.A.U v CNMC SNC/DE/0046/14 (2015) 18-19.
[5] Ibid 15-16.
[6] Comisión Nacional de los Mercados y la Competencia
[7] Author’s translation, original version: “Son infraciones muy graves: Cualquier manipulación fraudulenta tendente a alterar el precio de la energía eléctrica o la medición de las cantidades suministradas.”
[8] Regulation on wholesale energy market integrity and transparency, art 5.
[9] Interestingly, CNMC does not mention article 2 of the Regulation which defines market manipulation, instead mentions the Recital.
[10] “Actions undertaken by persons that artificially cause prices to be at a level not justified by market forces of supply and demand, including actual availability of production, storage or transportation capacity, and demand (“physical withholding”): (…)” Agency for the Cooperation of Energy Regulators, Guidance on the application of Regulation (EU) No 1227/2011 of the European Parliament and of the Council of 25 October 2011 on wholesale energy market integrity and transparency (3rd edn 2013) 37.
[11] Iberdrola v CNMC 38.
[12] Ibid 28-29.
[13] Ibid 29-33.
[14] Ibid 80.
[15] Ibid 36.
[16] Ibid 80-81.
[17] Taking into account the list of publicly available cases: ACER, ‘enforcement decisions’ https://www.acer.europa.eu/remit/coordination-on-cases/enforcement-decisions accessed 16 December 2024.
[18] “(…)la ciclogénesis explosiva, cuya aparición no estaba prevista por los meteorólogos, (o por lo menos no se acredita en juicio lo contrario)”, Procedimento Abreviado nº11/2022 Audiencia Nacional SAN 52/2024(2024) 7
[19] “(…)resulta de mero sentido común que, por mucha que sea el agua embalsada, si no llueve y no se espera que llueva, las reservas se agotaran con rapidez, y si se usa toda en un mes no se va a tener en los siguientes, hasta en tanto vuelvan las precipitaciones que nutran de agua a los embalses.”, Ibid.
[20] Ibid 5.
[21]Agency for the Cooperation of Energy Regulators, Guidance on the application of Regulation (EU) No 1227/2011 of the European Parliament and of the Council of 25 October 2011 on wholesale energy market integrity and transparency (6th edn 2021) 90.
[22] Ibid 90-91.
