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Ofgem should have power to order compensation payments to be issued by energy firms, Government says

Gas and electricity companies that breach regulations could be forced to compensate customers directly under plans being consulted on by the Government.11 Apr 2012

The Department of Energy and Climate Change (DECC) said it wants to give the UK's energy regulator Ofgem, the power to "compel" the companies to pay compensation if it deems it to be appropriate.

"The Government is proposing that Ofgem should be provided with a power which would enable it to order an energy business to remedy the adverse effects on consumers of a breach of a relevant obligation," DECC said in its consultation (18-page / 556KB PDF). "We would still expect voluntary agreements on redress to be the norm but the proposed power would strengthen Ofgem’s hand during negotiations and also give it a means of ensuring consumers are compensated where energy businesses are unwilling to provide this voluntarily."

"Redress orders could require consumers to be compensated on a 'pound for pound' basis where consumers have suffered a measurable loss, good will payments where it is not easy to determine the extent of the loss and public apologies or other remedies. Ofgem would have discretion to determine what form of redress is appropriate," it said.

The new power should enable Ofgem to force gas and electricity companies to compensate "any entity that has suffered adverse consequences as a result of a breach" including "businesses, generators, networks and suppliers", according to DECC's proposals.

"The power to obtain redress for other market participants will enable Ofgem to ensure that any unfair advantages gained through misconduct are removed, fostering healthy markets and growth," it said. "It is important that those who play by the rules are incentivised to continue to do so rather than witness companies benefitting from rule-breaking."

Ofgem currently has the power to fine energy companies up to 10% of its annual turnover for breaches of its regulatory requirements. Those requirements are principally set out in the Electricity Act 1989, Gas Act 1986 and regulated company licences, and include rules on sales practices and complaint handling.

Currently companies can voluntarily choose to compensate consumers that lose out as a result of their wrongdoing. The Energy Ombudsman can also force the firms to pay consumers up to £5,000 if it deems complaints about "energy bills, sales activities, problems arising from switching supplier, or with the supply of gas and electricity" to be legitimate, according to DECC.

Consumers can also currently seek redress for some aspects of wrongdoing, such as breach of contract, through the courts. However, the Government now wants to give Ofgem the power to order compensation to be paid.

Energy law specialist Matthew Collinson of Pinsent Masons, the law firm behind Out-Law.com, said that it was doubtful that Ofgem would utilise any new powers it is granted for breaches of the regulatory framework where only a few consumers are affected.

"DECC’s proposals are likely to be welcomed in principle by consumers, but the question is how DECC’s thinking will develop, how any new powers will be implemented by Ofgem, and how they relate to existing rights under both legislation and licence conditions," Collinson said.

"The current proposal is that a new legislative power would be granted to Ofgem to require compensation to be paid in circumstances where it has investigated and found a breach of the regulatory framework. However, in a reflection of the tensions in current policy, Ofgem can currently decline to investigate a complaint on, for example, resource prioritisation grounds, in which case it presumably could not force a compensation payment," he said. "The proposals may therefore have limited effect for individual consumer complaints, but may be of more concern for energy companies which face accusations of systematic infringements such as the connections and miss-selling breaches referred to in the consultation." 

"However, given the potential energy crunch being faced by the UK, it will be interesting to see how Ofgem would make use of such a power in practice.  Nevertheless, energy companies should be aware that if the plans are implemented as envisaged, they will not only need to provide for a possible penalty but also for associated consumer redress, should they be accused of an infringement," Collinson said.

DECC has said the Ofgem is "well-placed" to decide whether companies should pay compensation.

"In certain circumstances, Ofgem can and does impose substantial fines on businesses for breach of their regulatory obligations," DECC said. "But the Government believes that where individual consumers have suffered a direct loss as a result of such breaches the ideal remedy should be compensation."

"When Ofgem investigates an alleged breach it is well-placed to establish whether any consumers have suffered a loss and whether compensation is appropriate. It regularly negotiates with businesses to obtain compensation for consumers but there is currently no obligation on businesses to provide redress and no formal mechanism by which Ofgem can make them do so," it said.

DECC said that Ofgem has been able to negotiate with companies over compensation payments in the past and has taken such redress into account when taking enforcement action, such as issuing fines. However, this has not always enabled the regulator to "secure appropriate levels of redress", it said.

The new powers would be used mainly as a "backstop" and would instead "act as an incentive on companies to offer redress", DECC said.

"Giving Ofgem these powers sends a strong message to the market that companies should themselves be considering ways to compensate consumers disadvantaged by the breach of a relevant obligation as a matter of course," it said. "The Government believes that it is good practice for businesses to recognise where they are in the wrong and offer compensation on a unilateral basis where appropriate."

DECC's consultation on its plans is open until 2 July.

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