COMMISSION STAFF WORKING PAPER SUMMARY OF THE IMPACT ASSESSMENT   Accompanying document to the   Proposal for a  REGULATION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL   on energy market integrity and transparency    {COM(2010) 726 final} {SEC(2010) 1510 final}
Date: 2010-12-08
Institutions: European Commission
Subjects: energy policy, energy production, energy saving, energy supply, security of supply, thermal energy

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EUROPEAN COMMISSION 

Brussels, 8.12.2010 
SEC(2010) 1511 final 

COMMISSION STAFF WORKING PAPER 

SUMMARY OF THE IMPACT ASSESSMENT 

Accompanying document to the 

Proposal for a 

REGULATION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL 

on energy market integrity and transparency 

{COM(2010) 726 final} 
{SEC(2010) 1510 final} 

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Reliable  prices  formed  on  liquid  wholesale  markets  send  crucial  short  term  signals  for  the 
optimal operation of energy production facilities and consumption units. They also give long 
term  guidance  where  future  investments  in  energy  infrastructure  are  needed.  They  give 
confidence to businesses that they will be able to respond to changes in the markets. This will 
be vital, since tomorrow's low carbon economy will require long term visibility to underwrite 
high  capital  investments  in  new  generation  facilities.  Last,  but  not  least  outcomes  on 
wholesale  markets  serve  as  a  reliable  benchmark  for  retail  prices  for  household  consumers 
and industrial users, and encourage efficient use of energy. 

Because they are crucial to the well being of Europe's citizens, and to the competitiveness of 
Europe's  businesses,  it  is  of  central  importance  that  citizens,  businesses  and  national 
authorities  can  have  confidence  in  the  integrity  of  energy  markets.  Unless  effectively 
addressed, the potential for unfair trading practice undermines public trust, deter investment, 
increases volatility of energy prices and may lead to higher energy prices in general. This in 
turn may also reduce competitiveness of other sectors and energy intensive industries.  

EU level financial regulation, the Market Abuse Directive (MAD), only partly covers energy 
markets  as  it  is  designed  for  financial  markets.  Though  its  measures  are  currently  under 
review,  due  to  its  overarching  nature  it  will  not  fully  capture  energy  specific  market 
misconducts  (e.g.  strategic  withholding  of  generation  assets).  Internal  energy  market 
legislation does not set out standards to ensure the integrity of such markets. Some other rules 
may exist on the level of Member States but they are only limited in scope, often relating only 
to a single trading platform and covering a single Member State. 

In  summary,  the  rules  governing  energy  markets  are  insufficient  to  ensure  their  stable  and 
orderly functioning. Markets cannot be comprehensively monitored and specific misconducts, 
such as cross-border,  cross-commodity  and cross-market misconducts are  difficult to detect. 
This view is supported by sectoral regulators in their advice to the Commission, and by the 
respondents to the Commission's consultation. 

Objectives 

(1) 

(2) 

There  should  be  an  efficient  and  effective  framework  which  ensures  that  Europe's 
traded  energy  markets  function  properly,  i.e.  their  outcomes  are  not  distorted  by 
abusive  market  behaviour,  but  truly  reflect  market  fundamentals.  This  shall  generate 
an  increased  level  of  trust  of  all  stakeholders,  which  in  turn  will  lead  to  higher 
participation, more depth and liquidity and lower transactional costs. 

The rules need to effectively capture energy specific market misconducts. They need 
to  be  consistent  throughout  Europe  so  as  to  ensure  that  traders  are  able  to  apply  the 
same  compliance  standards  and  are  not  faced  with  diverging  rules  and  requirements 
when trading in different Member States. Furthermore, they have to be also complete 
and cover all relevant transactions. This also means that rules have to be compatible 
with existing financial legislation. To this end the present initiative will introduce the 
concepts of insider dealing and market manipulation, enshrined in MAD, to wholesale 
energy market. The detailed rulebook will, however, be specified in delegated acts. 

(3) 

In order  for market misconduct to be  detected, wholesale energy markets need to be 
regularly  monitored  To  this  end,  an  effectively  functioning  market  monitor  would 
need  to  have  timely  access  to  complete  and  verified  sets  of  transactional  data.  Once 
market  misconduct  is  detected,  compliance  with  the  rules  needs  to  be  enforced.  For 

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this  purpose,  competent  enforcement  authorities  need  to  be  defined  who  can 
effectively investigate and prove instances of market abuses on energy markets. They 
would  need  to  have  effective  sanctioning  powers  to  deter  market  participants  from 
future  misconduct.  To  tackle  complex  cross  border  and  cross  commodity  market 
abuses  a  proper  coordination  mechanism  between  financial  and  energy  regulators 
needs to be established. 

Policy options 

Apart from the 'Business As Usual' scenario we considered seven options with the following 
features: 

Option 0: Business as usual 

Under  this  option  no  sector-specific  initiative  is  taken,  regulatory  authorities  supervise  only 
some parts of the traded market. There are no market conduct rules agreed at EU-level which 
could  be  coherently  implemented  in  Member  States.  The  supervisory  frameworks  are 
different  between  each  Member  State,  and,  although  national  energy  regulatory  authorities 
will  increasingly  cooperate  within  the  Agency  for  the  Cooperation  of  Energy  Regulators 
(ACER), there is no established process of data access and exchange for market monitoring 
purposes.  Therefore,  market  misconducts  taking  place  in  several  markets  and  involving 
different but interrelated products/commodities are difficult if not possible to detect. 

No EU action does not mean that actions will not be taken on Member State level. Already 
national  legislators  have  already  started  filling  this  gap  and  introduced  national  measures 
including  transactional  data  collection,  regulatory  monitoring  and  reporting  schemes.  These 
schemes, though clearly increase the scope of regulatory supervision, will inevitably remain 
incomplete.  By  monitoring  transactions  relating  to  a  single  Member  State,  the  cross-
commodity and cross-border aspects of traded energy markets remain uncovered and certain 
market manipulations will go undetected. 

Option 1a – Rules defined at EU level, Member States monitor and enforce 

This option foresees market misconduct rules defined at EU-level. Markets are monitored on 
the Member State level based on decentralised transaction reporting to competent regulatory 
authorities. National Regulators would assume monitoring responsibility for transactions that 
are  delivered  in  (or  related  to)  the  Member  State  in  which  they  have  jurisdiction1. 
Transactions  are  reported  to  each  Regulator  separately  by  traders  or  third  parties.  Traders 
and/or  brokers  would  report  all  their  wholesale  energy  transactions  to  the  Regulator  where 
they are established irrespective where the delivery takes place2. Reported transaction details 
and data formats are defined on EU-level. Transactional data are stored in different ways, in 
separate systems of the 27 national regulatory authorities. Regulators operate a decentralised 
data exchange mechanism which enables them to monitor all transactions which are delivered 
in their jurisdiction and enforce the tailor-made market conduct rules. In case the transactions 
concern a number of Member States (e.g. contracts for location price differences), appropriate 

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If a trader established in Country A engages in a transaction with another trader established in Country 
B  concerning  electricity  for  delivery  in  Country  C,  the  Regulator  of  Country  C  would  assume 
monitoring responsibility.  
If  a  trader  established  in  Country  A  engaged  in  transactions  which  are  delivered  in  (or  relating  to) 
Country B, C and D it would have to report these transactions to the Regulator having jurisdiction in 
Country A. 

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rules and coordination mechanisms would have to be put in place. Such rules and mechanisms 
would  also  define  enforcement  responsibilities  and  obligations  to  cooperate.  Regulatory 
cooperation can be supported by an EU body (e.g. ACER).  

Option  1b  –  Rules  defined  at  EU  level,  Member  States  report,  monitor  and  enforce,  EU 
Agency process data and monitors cross-border and cross-commodity misconduct 

In this option, just like under Option 1a, market misconduct rules, reporting obligations, data 
formats and monitoring and enforcement obligations are defined on EU-level. However, when 
comparing with Option 1, there are two differences. 

Firstly,  while  competent  authorities  of  the  Member  States  continue  monitoring  transactions 
for which they assume responsibility, there is an additional layer of monitoring introduced on 
EU  level.  This  monitoring  function  would  concentrate  on  the  detection  of  market  abuses  of 
cross-border and cross-commodity nature. 

Secondly, instead of operating a decentralised data exchange mechanism, Regulators directly 
send transactional data to the EU Agency which sorts them by place of delivery. The sorted 
data sets are then sent back to the respective competent Regulator. A copy of all received data 
remains with the EU Agency enabling it to monitor the referred market abuses. 

Option 2 – Rules defined at EU level, shared monitoring in a unique EU Agency and Member 
States, enforcement by Member States  

Unlike  in  Option  1b,  transactions  are  reported  to  the  EU  Agency.  No  direct  reporting  to 
Regulators is foreseen, but national authorities have access to the data held by the EU body. 
In the same process as described under Option 1b, the EU Agency sorts the transactions and 
sends  the  dedicated  data  sets  to  the  respective  regulators.  This  enables  them  to  monitor 
transactions in their jurisdiction without collecting data themselves. 

Option  3  –  Rules  defined  at  EU  level,  shared  monitoring  by  ACER  and  Member  States, 
enforcement by Member States 

This option is equivalent to Option 2, however, all functions and competences of the EU level 
body are assumed by ACER. 

Option 4 – Rules defined at EU level, monitoring and enforcement by ACER or unique EU 
Agency in cross-border cases 

This option is equivalent to Options 2 and 3, however,  in  all cross-border cases  of detected 
misconduct,  ACER  or  the  EU  Agency  would  assume  responsibility  for  enforcement.  This 
option  is  however  discarded  for  further  analysis  because  the  Commission  has  no  reason  to 
believe that in case misconduct is detected, Member States would not be able to enforce rules 
as  efficiently  as  the  Agency  or  ACER.  In  accordance  with  the  subsidiarity  principle  where 
abuse is detected national authorities should take enforcement action.  

Option 5 – Self-regulation of the markets.  

This option assumes that there will be no action undertaken  by public authorities at the EU 
level or by Member States, neither regarding definition of rules nor regarding monitoring. It is 
assumed  that  the  industry  itself  will  agree  upon  some  market  integrity  rules.  In  case 
misconduct  would  become  known,  national  Courts  or  public  authorities  on  level  of  general 

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market oversight could get involved in enforcement of such rules. It cannot be excluded that 
in some ways the industry would agree to establish market misconduct rules. Monitoring and 
enforcement of such rules would be expected however, a priori ineffective as the incentive to 
transfer data by market participants and have them monitored by other market participants or 
private  companies  without  the  level  of  independence  of  public  authorities  will  be  limited. 
Weak  monitoring  is  likely  to  result  in  an  ineffective  market  integrity  regime.  For  these 
reasons this option is discarded.  

Option 6 – Extension of MAD (No sector specific action)  

Extension  of  financial  market  legislation  to  cover  all  relevant  energy  markets  would  bring 
these  markets  within  the  financial  regulatory  framework.  Notwithstanding,  the  close  links 
between energy markets and some financial markets, including physical energy markets and 
defining  prohibitions  of  energy  specific  misconducts  (e.g  witholding  of  production  assets, 
definition  of  inside  information)  within  MAD  is  not  desirable  and  would  fragment  its 
overarching  character.  This  was  recognised  by  CESR/ERGEG  in  their  advice  to  the 
Commission where they state "A mere extension of the scope of market abuse regulations…in 
MAD  to  physical  products  is  not  reccomended…  [it]  would  bear  the  risk  of  leading  to  an 
inappropiate  application  of  MAD  in  other  areas"3.  It  the  light  of  this  strong  advice,  and  the 
distinct scope of MAD, this option was not considered in detail. 

Evaluation of options 

In  general,  options  1-3  examined  proved  to  be  better  as  the  BAU  scenario  as  they  can,  to 
varying degrees, detect better and deter market misconduct and reduce related costs to society. 
At the same time all of these options involve higher administrative costs. Policy options 1b, 2 
and  3  have  the  significant  advantage  over  option  1a  that  they  better  enable  the  detection  of 
cross-border and cross-commodity abuses. Options 2 and 3 have the advantage over option 1b 
that  they  have  the  potential  to  increase  the  efficiency  of  the  overall  monitoring  exercise. 
Directly  and  centrally  captured  data  would  simplify  and  speed  up  overall  data  handling  by 
reducing  the  number  of  data  supply  routes.  This  would  also  reduce  the  occurrence  of  data 
transmission and handling errors. 

Option 3 is likely to detects and deter energy specific market abuses most effectively because 
of  ACER's  the  overall  regulatory  expertise  and  its  special  energy  focus.  As  ACER  already 
exists the administrative cost of running the market monitor attached to this agency will also 
be lower when compared to option 2 where a new Agency would need to be set up. Therefore 
option 3 matches best the identified objectives. Though the overall benefits of the proposed 
measures  are  difficult  to  quantify  it  appears  that  they  clearly  outweigh  the  cost  of 
administrative burden they generate. 

Other Issues 

Elaboration of sector specific rules – legal form 

Because  important  venues  for  energy  trading  are  already  covered  by  MAD,  definitions 
relating to market misconduct specifically covering the physical energy markets will need to 
interact very well with MAD. To the extent possible and logical, the rules should be inspired 
by the concepts underlying the definitions in MAD. However, it is essential that a tailor made 

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CESR ERGEG advice to the European Commission – response to Question F.20 – Market Abuse. 

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regime takes account of the specific characteristics of energy markets, in particular, their high 
level  of  susceptibility  to  significant  changes  in  price  as  a  result  of  economic  or  physical 
withholding of capacity. 

In order to allow for flexibility and legal certainty the rules should be elaborated in guidelines 
in consultation with market participants. These could then be made binding through delegated 
acts  adopted  by  the  Commission.  This  suggestion  was  reflected  in  the  majority  of  industry 
responses.  This  represents  a  sensible  approach  for  each  of  the  options  requiring  EU  level 
rules.  It  fits  in  with  the  approach  taken  in  financial  sector  regulation  under  the  Lamfalussy 
arrangements, and would therefore also aid interaction between financial regulation and sector 
specific regulation. Where an EU agency is responsible for monitoring, and the elaboration of 
more detailed guidelines, the most appropriate form for the basic act would be a Regulation.  

Commodity scope 

Electricity and gas markets are interlinked with other commodity markets, in particular with 
markets  for  primary  energy  products  and  for  emission  allowances  (EUAs)  within  the  EU 
Emissions Trading System (EU ETS). 

Coal is an important primary fuel used in power generation, while oil and oil product prices 
influence electricity prices through their role as reference in long-term gas supply contracts. 
However,  these  markets  are  globally  traded  with  major  participants  established  in  third 
countries. An isolated, EU-level market monitoring would remain incomplete and misconduct 
rules partly unenforceable. This view was also shared by the respondents to the consultation.  

This is, however, different in case of the emission allowances. Emission trading under the EU 
ETS  is  by  definition  European  in  scope.  With  its  introduction,  carbon  became  central  to 
European electricity markets. The power generation sector is the single largest emitting sector 
in the EU, representing around 40% of the emissions under EU ETS. The supply of emission 
allowances impacts generators' fuel choice and, with that, the demand for different fuels; just 
like relative price developments of fuels influence plant dispatch and, as a result, determine 
the demand for carbon. The two markets are therefore mutually interdependent. Recognising 
these interlinkages and the growing importance of traded carbon markets the Commission has 
decided to initiate an in depth review into how best to ensure the integrity of these markets. 
The results of the review are due in 2011. 

Monitoring and evaluation 

Ongoing  evaluation  and  monitoring  of  the  implementation  of  a  tailor  made  regime  for 
ensuring the integrity of energy markets will need to cover a number of areas including the 
appropriateness  of  market  abuse  rules  covering  energy  markets,  interaction  with  financial 
market  regulation,  the  impact  on  MS  level  market  oversight  and  how  coordination  of 
enforcement  works  in  practice,  the  effectiveness  of  EU  level  monitoring,  and  the  actual 
impact of transaction reporting on market participants. 

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We envisage a monitoring and review schedule along the following lines:  

After two years a report from ACER to the Commission on the impact of on new regime on 
MS  level  oversight,  experience  on  the  cooperation  between  national  level  authorities 
including  in  enforcement  and  the  impact  of  new  arrangements  on  market  participants, 
particularly  with  respect  to  transactions  reporting.  Building  on  the  ACER  report,  the 
Commission shall review the effectiveness of EU level monitoring. 

After five years, a joint review by ACER and financial regulators of the interaction between 
the  tailor  made  integrity  regime  for  energy  and  wider  financial  regulation  at  an  EU  and 
national level.  

Based  on  the  joint  review  by  ACER  and  financial  regulators,  the  Commission  should  then 
review the overall effectiveness of the tailor made market integrity regime. 

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