Implementation of REMIT into Ukrainian legislation

by Natalia Hutarevych

In 2015, Ukraine introduced a new natural gas market model based on the European Union model. In 2019, a new electricity market model was launched in line with EU rules. At the same time, Ukrainian energy market models have their specifics, which have been caused, among other things, by a desire to mitigate the impact of dramatic changes in energy market rules on the least protected participants and consumers. Legislation governing energy markets is constantly evolving. To meet international obligations under the Association Agreement with the EU, Ukraine strives to bring it closer to European legislation.

In addition, Ukraine is a Contracting Party of the Energy Community, within the framework of which a number of obligations to implement European rules into national legislation should also be fulfilled. One such obligation within the Energy Community is the implementation of the adopted Regulation (EU) No. 1227/2011 of the European Parliament and of the Council of 25 October 2011 on wholesale energy market integrity and transparency. The EU Regulation is also known as “REMIT” or “REMIT full” and it establishes rules for preventing and combating abuses (manipulation, improper use of insider information) in the wholesale energy (electricity and gas) market. REMIT was adapted by the Decision of the Ministerial Council of the Energy Community D/2018/10/MC-EnC of 29 November 2018. The adopted by the Energy Community version of REMIT is also known as “REMIT light”.

The deadline for the obligation to transpose and implement REMIT light was set for Contracting Parties (including Ukraine) on 29 May 2020. Due to the fact that REMIT light was neither transposed nor implemented into Ukraine’s national legislation, on 25 March 2021, the Energy Community Secretariat initiated ex officio dispute settlement procedure against Ukraine.

It should be noted that an official translation of REMIT into Ukrainian appeared in February 2021. At the same time, there is no official translation of the adopted version of REMIT, which does not help to accelerate its implementation in Ukrainian law, as also noted by the Ministry of Justice.

Overall, REMIT light provides:

— prohibition of abuse in the wholesale energy market;

— monitoring of wholesale energy market;

— requirements to wholesale energy products;

— cooperation of regulatory, competition and other relevant authorities;

— prohibition of insider trading;

— obligation to publish inside information;

— prohibition of market manipulation;

— registration of market participants;

— obligation to ensure that the regulator has the necessary authority to investigate and enforce requirements on insider trading/information and market manipulations and the relevant regulator decisions can be appealed;

— obligations of persons professionally arranging transactions;

— professional secrecy;

— liability (penalties).

The REMIT version adopted by the Energy Community for Contracting Parties (the so-called REMIT light version) provides for exclusion of some rules of REMIT full (e.g. requirements for the collection and exchange of data, reporting on wholesale energy markets, interaction with the Agency for the Cooperation of Energy Regulators (ACER).

A list of draft laws has been developed to implement REMIT in Ukraine.

It is interesting to note competition in the initiative to prepare and submit the listed draft laws between two Ukrainian parliamentary committees — the Committee on Economic Development Issues (D. Natalukha, L. Buimister) and the Committee on Energy and Utilities Issues (A. Herus).

All developed draft laws generally contain the basic requirements of REMIT light. However, they do not implement all its 100% provisions — as they contain some additions and/or amendments to the provisions of REMIT regulations.

National Energy and Utilities Regulatory Commission (the “NEURC”) — Ukrainian Regulator in the energy sector, supports the Draft Law No. 5322, as it is based on the draft law of 18 February 2021 developed by the NEURC. Therefore, based on the Draft Law No. 5322, NEURC has developed a roadmap for elaborating key regulations for transposition and implementation of REMIT. NEURC plans to develop and approve the bylaws necessary for the operation of REMIT instruments within six months of entry into force of the respective legislative amendments. These regulations are the following:

— Procedure for registration of wholesale energy market participants;

— Procedure for investigating abuses on the wholesale energy market;

— Requirements for wholesale energy market integrity and transparency;

— Procedure for providing information on the performance of business and trade operations with wholesale energy products;

— Procedure (methodology) for determining penalties;

— Requirements for the surveillance systems of persons professionally arranging transactions with wholesale energy products;

— Procedure for acquiring, suspending and terminating the status of a person providing information on behalf of wholesale energy market participants;

— Procedure for determining limit fee for the services of persons providing information on behalf of wholesale energy market participants.

A feature of REMIT itself and the draft laws on its implementation is the lack of a clear list of prohibited and permissible actions. This means that manipulation can involve a very wide range of market activities, while the regulatory framework merely sets out a general description of the purpose (intention) of those activities and consequences whereby abuses can be identified. Experienced European experts point out that it is not possible to determine abstractly whether an action is a form of abuse, e.g., manipulation, without considering all the surrounding circumstances of a specific case. The difficulty here is that there is a high probability of subjectivity in deciding whether or not market behaviour constitutes abuse, which requires a high level of independence from the regulatory authorities when making decisions. At the same time, it allows participants to use a wide range of tools to prove the legitimacy of their behaviour.

It is worth mentioning the amount of liability envisaged by the draft laws for abuses on energy markets. According to REMIT, penalties are determined at the national level and must serve a number of functions: they must be effective, dissuasive, and proportional to the violation — i.e. reflecting the nature, duration and seriousness of the violation, as well as taking into account the damage caused to consumers and the profits obtained from the violation.

Draft Laws No. 4503-д, No. 5322-1 establish the following penalties:

— UAH 850,000 — 1.7 million for violation of restrictions on the use of inside information;

— UAH 1.7 — 2.55 million for market manipulation;

— UAH 340,000 — 850,000 for non-disclosure/disclosure of inside information in violation of established requirements.

In case of manipulation or illegal use of inside information, the Regulator may additionally decide on the return of income obtained as a result of the offense.

Draft Law No. 5322 provides for the following penalties:

— up to UAH 102 million for violation of restrictions on the use of inside information, market manipulation, attempt to manipulate;

— up to UAH 51 million for non-disclosure/disclosure of inside information in violation of established requirements.

Penalties may not exceed 10% of the annual income — the total value of product (goods, works, services) sale.

The amount of penalties for REMIT breaches in European countries varies. For example, the highest penalties are imposed by the UK regulator OFGEM (EUR 42.5 million fine imposed in March 2020). Fines imposed by the French regulator are also calculated in the millions of euros, while fines in other countries are many times lower, amounting mainly up to EUR 150,000.

Some elements of REMIT are already present in Ukrainian legislation. The Law of Ukraine On Capital Markets and Organised Commodity Markets establishes the concept of wholesale energy products along with the procedure for cooperation between the NEURC, the National Securities and Stock Market Commission, and the Antimonopoly Committee of Ukraine. In addition, Ukrainian legislation already provides for administrative and criminal liability for abuses in the wholesale energy market. Administrative liability is provided for in the form of a fine, while criminal liability is provided for in the form of a fine and deprivation of the right to hold certain positions or engage in certain activities.

Hopes of actively combating energy market manipulation are pinned on legislation implementing REMIT. Manipulations are often mentioned in the context of the electricity market (January, October 2020, May, July 2021). Based on these cases, NEURC is already developing the practice of clarifying what market behaviour is manipulative. Thus, in June 2021, NEURC issued a statement that manipulation in the electricity market, as opposed to legitimate trading, is the sale of electricity volumes production of which is not confirmed. The transmission system operator (Ukrenergo) monitors all trading transactions and the origin of the volumes that are put up for sale. However, given the experience of other European countries, prosecution under REMIT is based on ex-post analysis and is a lengthy process that sometimes takes years. It can therefore be seen from recent cases that in 2021, national regulators held market participants liable for actions that the latter committed in 2019 (OFGEM in the UK) decision of 24 August 2021 in breach of Art. 5 of REMIT “Prohibition of market manipulation” in market participants’ actions starting from March 2019). Therefore, REMIT instruments cannot be identified as the quickest way to address the issue of manipulation in energy markets.

The introduction of hardware and software infrastructure to collect and analyse information on market participant behaviour, as well as to report, is one of the key problematic issues discussed in the context of REMIT implementation.

Draft laws No. 4503-д and No. 5322-1 establish the concept of “market management system” — a software and information complex, which includes a number of subsystems that ensure management of all necessary databases, registries and calculations, as defined by market rules. These draft laws also provide for periodic auditing of the market management system by the Regulator. However, they do not specify who operates the system, for what purposes, or in what order.

Also, draft laws No. 4503-д, No. 5322-1 provide for the operation of a system to detect violations in the wholesale energy market by the market operator, the transmission system operator, and persons professionally arranging transactions in wholesale energy products.

For EU energy markets, ACER uses the ARIS system. However, it is not available for the Ukrainian energy market. At the same time, the relevant Ukrainian system needs to be comparable with the European system to bring these energy markets closer together.

Systematic analytical work of ACER to prepare clarifications and recommendations based on information on the behaviour of European wholesale energy market participants should also be noted. Furthermore, Draft Law No. 5322 provides that Regulator has the right to apply ACER recommendations on the REMIT application.

In conclusion, it would be symbolic that the adoption of legislation on the implementation of REMIT in Ukraine was back-to-back with the tenth anniversary of REMIT adoption in the EU. However, there is a current lull in the process of REMIT implementation in Ukraine.

Therefore, it is important to optimise and increase the efficiency of legislative drafting work, where the work is done with a minimum number of drafts, but in a systematic and continuous manner. The process of REMIT implementation will only begin with the adoption of the necessary legislative changes.

Natalia Hutarevych is a senior associate at Sayenko Kharenko