Leave it to the experts? High Court finds more expected from regulators on matters where they lack expertise

The Administrative Court in R. (on the application of Gwynt-y-Môr Offshore Wind Farm Ltd) v Gas and Electricity Markets Authority [2019] EWHC 654 (Admin) has criticised a regulator for failing to sufficiently analyse the differences between precedents and the case at hand and for failing to properly consider the views of the independent expert that it had commissioned. The regulator's decision had turned on a matter outside its area of expertise and it made serious public law errors in reaching its decision.

Key Points

• Regulators will not be afforded deference or given a wide margin of appreciation for determinations on which they lack expertise.
• In appropriate circumstances, regulators should seek advice from independent experts on such matters, and should give proper consideration to that advice.
• Where previous examples are used as comparators for a decision, regulators should engage in in-depth analysis to draw out the differences between those examples and the case at hand.

Background

Gwynt-y-Môr Offshore Wind Farm Ltd (the "GyM Windfarm") owns and operates a wind farm generating electricity off the coast of North Wales. Following construction, the assets which transmit the electricity onshore were sold by the GyM Windfarm to a separate company, Gwynt-y-Môr OFTO plc (the "GyM OFTO"), following a competitive tender run by the Gas and Electricity Markets Authority ("Ofgem"). The GyM OFTO owns and operates the transmission assets in return for a regulated revenue payment agreed through the tender process.

Ofgem has the power to approve an event as an Income Adjusting Event ("IAE"), allowing the GyM OFTO to "pass through" the costs of the event to network users, and the offshore generator in particular.

In 2015, two of the cables owned by the GyM OFTO suffered failures in quick succession. Engineers concluded that the failures were caused by manufacturing faults, and accordingly the insurers of the cables refused to pay out in reliance on an exclusion in the policy (the "LEG2 policy"). The GyM OFTO invited Ofgem to determine whether each of the cable failures was an IAE.

In its decision dated 23 May 2017, Ofgem concluded that the first failure was not an IAE, as under the tender document the risk of a major default event was to be addressed by the OFTO. Ofgem found that the GyM OFTO could have opted for a higher level of coverage (the "LEG3 policy") which would not have excluded the claim.

In its decision dated 8 September 2017, Ofgem concluded, in contrast, that the second failure was an IAE. Ofgem's decision turned on whether, had the GyM OFTO opted for the LEG3 policy, a hypothetical insurer would have managed to obtain an exclusion or downgrade cover mid-term within the period of 23 days after the finding of design fault in the first cable and before the second cable failure (the "Hypothetical Question"). In reliance on three examples where other OFTOs had had exclusions placed on their insurance directly after such a failure, Ofgem found that the hypothetical insurer would have done the same with GyM OFTO's policy prior to the second failure. As such, it was not a risk that the OFTO could be expected to manage.

As a result, it was expected that around 75% of the cost of repairing the second cable (c. £13.2m) would be passed through to the GyM Windfarm. The GyM Windfarm applied for judicial review of Ofgem's decision in relation to the second cable failure.

Decision

GyM Windfarm unsuccessfully argued that Ofgem had failed to follow its policy on IAEs set out in an earlier decision and that Ofgem had taken into account irrelevant considerations regarding macro-economic factors affecting OFTOs generally.

The ground on which the claim succeeded was that Ofgem's affirmative answer to the Hypothetical Question was irrational. In considering its approach to reviewing Ofgem's decision, the Court determined that although Ofgem is an expert regulator, it is not an expert on the insurance market. As such, it was not necessary for the Court to accord particular respect or deference to Ofgem's decision on the Hypothetical Question.

In considering the three examples of other OFTOs that Ofgem relied upon, the Court found that Ofgem had made material factual errors that had informed its decision. These errors arose in part from Ofgem's failure to consider in sufficient depth the differences between the examples relied upon and the GyM OFTO case. The Court considered that Ofgem may have reached a different conclusion had it fully considered the differences in the comparator case.

Furthermore, it was held that Ofgem's failure to give proper consideration to a report it had commissioned from JLT, an independent insurance broker with wide experience of the OFTO insurance market, was irrational. Ofgem had recognised that it did not have the relevant expertise itself, and had sought assistance from JLT. JLT's report had concluded that an insurer was only likely to impose a restriction following a cable failure at renewal, rather than mid-term. Ofgem had ignored JLT's report.

The Court therefore quashed the decision and remitted it to Ofgem for reconsideration.

Comment

The case confirms that courts will not defer to complex factual determinations by regulators on matters when those factual determinations are beyond the regulator's expertise.

In the circumstances of this case, the Court felt able to undertake its own comparison between the three examples relied on by Ofgem and the GyM OFTO case, given what it considered to be Ofgem's inadequate and insufficient analysis. Where previous examples are relied on to guide a regulator's decision, an in-depth analysis should be undertaken to draw out the differences and similarities between the comparators and the case at hand.

The decision highlights that, in appropriate circumstances, regulators should seek the views of experts where that assists or is necessary to reach a determination. Once experts' views are sought, regulators should ensure that they are given proper consideration in the decision-making process.