In a judgment handed down on 8 November 2022, the Court of Appeal in London ended the third and latest round of the contest to review the decision of the Gas and Electricity Markets Authority (GEMA) approving changes to the GB grid charging methodology under the Connection and Use of System Code (the CUSC or the Code).
Following an appeal to the Competition and Markets Authority (which upheld the decision) and a judicial review ruling by the High Court (which struck it down), the Court of Appeal reinstated the GEMA decision – it remains to be seen whether the UK Supreme Court may now weigh in on the matter.
In many ways, the most interesting and consequential aspect of the latest ruling concerns the powers and duties of a regulator (such as GEMA) when confronted with a situation whereby a system (here a charging methodology) is not compliant with the law (in this case, the provisions of Annex B to the retained version of the EU Commission Regulation 838/2010 (Annex B)) and cannot be rendered compliant easily or immediately. In this case, GEMA’s expert judgment was that the transition to a state of compliance was best achieved in two stages with the first being a “stop gap” applicable in the short term pending a full resolution of the issue (with the corollary being that, because the stop gap was a staging post it would, unavoidably, not yet be fully compliant with the law). It was, though, a significant improvement upon the status quo ante and it was expected to lead in due course to a state of full compliance.
The issue arising (as Green LJ put it) was whether, in adopting such a non-compliant stop gap, the regulator was acting lawfully. The High Court had held (finding memorably that 'a miss was as good as a mile') it was not; the Court of Appeal took a different view.
At the core of Green LJ’s judgment (with which the two other members of the court agreed) are three key paragraphs (64, 65 and 66) which are worth reproducing:
“At base this appeal turns upon the duty of regulators, once non-compliance has come to light, to ensure observance with the law. There is a statutory duty on GEMA to both comply with the law and ensure compliance by its regulated community, which duty has not been changed by the exit of the UK from the EU. The existence of a duty does not however preclude the decision maker also having a discretion or power as to “how” to go about ensuring compliance; the two are not mutually exclusive. This flows from the proper interpretation of the legislative regime as a whole. For example, Article 37 of the 2009 [Electricity] Directive refers to the taking of “reasonable measures” in the framework of the duty to ensure observance of the law […]) indicating that there might be a range of different “reasonable” ways in which compliance can be secured. The conclusion of the Judge however was that the GEMA Decision was unlawful because during the glidepath to adherence - the stop gap - an unlawful methodology would temporarily subsist and be incorporated into the Code. It was implicit in the Judge’s reasoning that there was no discretion or power for GEMA to do anything more than demand immediate or instantaneous observance, even if this was impossible to achieve in any realistic and practical sense and left the state of observance with the law in a worse situation. To prohibit the interim stage upon the basis that it reflects a degree of temporary (diminishing) non-observance begs the question of what, if the Judge is correct, regulators are meant to do in a case such as the present in order to meet their statutory duty.
In my judgment under the relevant legislation GEMA had a power as to how it went about performing its duty to secure compliance with the law. A decision whether GEMA acted unlawfully in the exercise of this power is fact and context specific. Under EU law the test to be applied would be proportionality. It is unnecessary in this case to devote time to determining whether proportionality remains the right test or whether the test is simply one of domestic law rationality. In either case a relatively broad margin of judgment or discretion will be implied into the test and in my view both lead to the same end result.
On the present facts, the relevant questions to be posed include: (i) whether there was a proper basis for GEMA to conclude that there was non-compliance which needed to be cured; (ii) whether compliance could be achieved forthwith or, alternatively, had to be staged over time involving the use of a stop gap; (iii) whether the solution adopted was the best available including how it compared with other proposed solutions and what it meant in practical terms for the risk of future non-observance; (iv) whether a non-compliant stop-gap was avoidable: and (v) whether the solution finally adopted was reasonably certain and practicable”.
Applying the four-part test laid out above, Green LJ found that GEMA had acted lawfully, even though its decision contained, "as part of the transition to observance the temporary adoption of a methodology which might have created a transient risk of non-observance".
He emphasised, however, that adoption of the stop gap could not, of itself, satisfy GEMA's duty to secure compliance with the Annex B even although doing so would (as the CMA had argued) meet the regulatory objective imposed by the Code of “better facilitating” compliance with the law. Nothing in the Code – which Green LJ characterised as a private law contract - could in his view override or permit a departure from an overarching obligation to secure compliance with the law as set out in the Annex B. As he put it, "A contract, such as the CUSC, cannot serve to dilute the obligation to “ensure” compliance with Annex B by a contractual obligation to adopt a proposal which is no more than an improvement on that which went before. The duty is not to choose the best of a pack of bad options; it is to ensure adherence to Annex B" (para.73).
In further comments in which he criticised the CUSC as a ‘hindrance’ to GEMA complying with Annex B, Green LJ also appeared to suggest that GEMA would have residual power, notwithstanding the limited role prescribed for it under the present GB code governance arrangements (which are scheduled for reform under the Energy Bill currently before Parliament), unilaterally to drive through a compliant solution if the code parties ultimately failed to come up with one in reasonable time. As he put it at paragraphs 77 and 78 of his judgment:
"GEMA has throughout considered itself bound to seek remedies using the powers of modification under the Code. [...] But, as this case shows, returning the resolution of the problem into the hands of the regulated community under the Code can serve to generate dissension, delay and multi-layered litigation. This appeal is the third level of review and appeal. It seems obvious that there is a substantial risk that the CUSC modification system permits market participants to game the system. Even the one Code mechanism which allows GEMA to initiate a modification process [...] still involves a process governed by the Code. There is no Code power for the Authority simply to take (subject to a fair procedure) the relevant decision and then impose the required result.
The facts of this case suggest that the Code is capable of hindering the discharge by GEMA of its statutory duty. The Code cannot take precedence over the duty of GEMA to ensure timely compliance with the law. Insofar as there is a conflict between the Code and the statutory duties of GEMA, the latter prevail. With respect to the Judge I do not therefore agree that GEMA is bound by the Code when it comes to taking the steps necessary to ensure compliance with the law. If the Code is an impediment to proper enforcement it is either inoperative and GEMA should deploy other powers at its disposal to give effect to its duty, or it needs to amend the Code, or both".
Whether GEMA will be prepared to take up this radical invitation from Green LJ remains to be seen; it would certainly seem to be a step likely to provoke further litigation.