Difficulties in challenging regulatory action demonstrated again by High Court

Npower is one of the "big six" gas and electricity suppliers to homes and businesses in Great Britain. Ofgem has broad regulatory powers including, when granting the necessary licences to Npower, the power to include conditions which appear to it to be requisite or expedient in undertaking its regulatory duties.

The Competition and Markets Authority (the "CMA") had identified that competition in the energy market was impacted negatively by a lack of consumer engagement and it recommended that Ofgem implement measures to address this. Ofgem decided to impose a new broad condition which would require licensees to comply with directions issued by it in relation to measures on consumer engagement. In January 2017 Ofgem sent several letters explaining its reasons for adopting a new licence condition and the selection criteria for new market switching trials. Selection was to be based on whether the supplier had enough of the types of customer of relevance to the specific research questions and whether the burden of the trial was "proportionate" to the particular supplier.

In February 2018, Ofgem ran the first of several collective switch trials under its new licence condition, during which 22% of 50,000 customers switched to a cheaper tariff after receiving information. Ofgem then proposed a second collective switching trial in July 2018. On 1 August 2018, Ofgem issued a draft Direction to Npower requiring participation in that trial, explaining the basis of the proposed trial and reasons for selecting Npower (including that out of the big six's earlier trials Npower had engaged the smallest customer base and therefore been exposed to the lowest potential customer losses so far). On 31 August 2018, the final Direction was issued to Npower.

Npower was concerned that the trial was disproportionate as it was to involve 100,000 customers, but Ofgem contended that the figure was reasonable, as it would test whether the results achieved in the first collective switching trial were scalable. On 19 September 2018, Npower confirmed that it would comply with a trial of 50,000 customers only. Ofgem therefore made a Provisional Order to secure compliance under its statutory powers which Npower failed to comply with by its deadline. In October 2018, Npower decided to challenge the underlying Direction by judicial review, as well as requesting a statutory review of the Provisional Order.

Npower put forward various grounds of challenge, all of which failed.

Firstly it argued that Ofgem failed to give adequate reasons for its decision. However the court noted that there had been a lengthy period of engagement and correspondence on the issues, including why 100,000 customers were necessary, and therefore the reasons stated in the August documents accompanying the Direction had to be seen in the context of previous extensive communications. The court found that Ofgem gave adequate and sufficient details which meant Npower would have been in no genuine doubt about why the Direction had been given.

Secondly, Npower alleged that Ofgem had an improper purpose in ordering Npower's participation in the trial because it was aimed at procuring customer switching even where that may not be in the customer's best interests, when the purpose should have been to "obtain rigorous and robust data". This was not accepted; it was not an improper purpose to address the lack of consumer engagement by facilitating customer switching.

Npower also contended that Ofgem's decision had been irrational in that no rational body could decide to proceed with the collective switching trial on any sensible basis. This ground was said to be "parasitic" on the other grounds and therefore failed for the same reasons.

Proportionality

Npower further argued that there had been an unlawful interference with its rights under Article 1 Protocol 1 of the European Convention on Human Rights (the right to property/possessions) ("A1P1") because Ofgem had failed to undertake a "lawful structured proportionality analysis".

Ofgem denied that there had been any interference with property rights because the trial did not alter any contractual rights. Npower's customers had contracts which could be terminated. The trial did not affect those rights – it simply gave the customers information. The court declined to make a finding on whether there was a property right attaching to the relationships with customers but simply assumed that to be the case and went on to consider the proportionality argument.

Npower made various submissions as to the alleged failures of Ofgem on proportionality including that it had failed to assess the costs and benefits of the trial and failed to strike a fair balance between the collective good and Npower's rights.

The court noted previous case law explaining that proportionality is not an exact science, particularly when it comes to balancing the aims of the proposed measure on one side and any adverse effects it may produce on the other, emphasising a regulator's wide margin of appreciation and the court's reluctance to interfere with its assessment. That margin of appreciation also extends to the methodology used to apply its proportionality analysis.

It was a given that participation in the programme would entail costs to suppliers and this was recognised by the CMA who nevertheless found Ofgem's programme to be proportionate. The new licence condition itself was also considered in terms of proportionality and Ofgem stated that the potential for commercial impact on suppliers was not a valid reason for failure to participate in a trial. Ofgem stood by their statement that cost to suppliers was unavoidable and the way to deal with this would be to ensure the burden was spread fairly across suppliers and that the size of trials was proportionate. This had already been recognised at prior stages in the series of unchallenged regulatory decisions made before Npower's participation in this particular trial was ordered. The Court also noted that it was telling that there was no detailed analysis or criticism of Ofgem's calculations from Npower. Ultimately the court was satisfied that Ofgem had undertaken a structured proportionality analysis, engaged in uncriticised calculations and therefore justified its position.

This case demonstrates the reluctance of the courts to intervene where regulators are exercising their wide margin of appreciation in their relevant fields of expertise. This was helped by the fact that in this case the regulator was able to evidence a detailed and thorough proportionality analysis at every stage of the process, as well as having engaged with Npower's concerns and given reasons for its actions throughout.

Regulators must weigh up their own legitimate aims with any potential adverse effects arising from their decisions and ensure they have conducted an appropriate proportionality analysis and given sufficient reasons so that those affected are left in no genuine doubt as to why particular regulatory action has been taken.