Court of Appeal advocates a practical approach for regulators faced with non-compliant legal systems

In R. (on the application of SSE Generation Ltd) v Gas and Electricity Markets Authority (GEMA) [2022] EWCA Civ 1472, the Court of Appeal allowed the appeal and cross appeal brought by the Gas and Electricity Markets Authority ("GEMA"), and SSE Generation Limited ("SSE"), respectively, in the context of amendments made to an energy code.

Key Points

• A regulator seeking to bring a non-compliant legal system into compliance with the law may have an element of discretion as to managing that transition, such that brief periods of non-compliance may be permitted by the courts.
• If there is a conflict between a private law contract, such as the Connection and Use of System Code ("the Code"), and the statutory duties of a relevant regulator, the latter will prevail. A public law decision maker cannot prevent itself from complying with its statutory duties by entering into, or approving, an inconsistent contract.
• Despite having power to rectify errors in legislation, the court will not repair such errors if there is a complex and uncertain regulatory environment where the legislative intent cannot be certain and will be wary of straying into judicial legislation.

Background

The appeals concerned GEMA's decision on a modification to the methodology for setting transmission charges payable to network operators by electricity generators using the network in Great Britain ("the GEMA Decision"). In the GEMA Decision, the modification of the Code: (i) required a methodology to be adopted for the setting of charges which was not compliant with the relevant law but which was intended to constitute an interim position pending a fresh decision which would be legally compliant; and (ii) adopted a definition of the expression "congestion management" which meant that the costs attributable to the management of "congestion" on the transmission system within Great Britain were not taken into account when calculating limits on the transmission charges which could be levied.

Following the GEMA Decision, one affected electricity generator, SSE, brought a statutory appeal to the Competition and Markets Authority ("CMA") which upheld the GEMA Decision. Consequently, SSE sought judicial review of the CMA's decision. The High Court held that it was unlawful for the CMA to approve the GEMA Decision endorsing the imposition of unlawful charges, even as an interim measure. However, it upheld the CMA and GEMA's decision that the only congestion management costs falling outside the exclusion for ancillary services were those relating to the management of congestion on interconnectors between EU member states (see our blog post on this case here).

There were therefore two appeals against the High Court's judgment:

1. The first appeal was brought by GEMA in relation to its power to adopt interim "stop gap" measures, which include non-legally compliant components in respect of a modification to the Code ("Issue I").
2. The second cross appeal was brought by SSE concerning the meaning of "congestion management" costs ("Issue II").

Judgment

The Court of Appeal (Green LJ giving the leading judgment) allowed both the appeal by GEMA on Issue I and the cross appeal by SSE on Issue II.

Issue I

Issue I concerned the powers and duties of a regulator when confronted with a system which is not compliant with the law but where the regulator then seeks to bring the system into compliance, which may be a complex exercise that cannot be done immediately.

There is a statutory duty on GEMA to both comply with the law and ensure compliance by its regulated community. The existence of a duty does not, however, preclude the decision maker also having a discretion as to how to go about ensuring compliance; the two are not mutually exclusive.  In managing that transition from non-compliance to compliance, the court concluded that the judge erred in ruling that GEMA's staged approach was unlawful. It was implicit in the judge's reasoning that there was no discretion or power for GEMA to do anything more than demand immediate 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, as the judge did, begs the question of what regulators are meant to do in a case such as the present in order to meet their statutory duty.

The court concluded that under the relevant legislation GEMA had power as to how it went about performing its duty to secure compliance with the law. This power came with a relatively broad margin of judgment or discretion in identifying a solution to turn non-compliance into compliance.

It was also important to bear in mind that the Code is a private law contract. The facts of the case suggest that the Code is capable of hindering the discharge by GEMA of its statutory duty.  However, in light of the fundamental principle of public law that a decision maker cannot prevent itself from complying with its statutory duties by entering into, or approving, an inconsistent contract, 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 will prevail.

Therefore, GEMA is not bound by the Code when it comes to taking the steps necessary to ensure compliance with the law, and, 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.

Issue II

Issue II was about the meaning of the phrase "congestion management" and whether the costs of managing certain aspects of network congestion must be taken into account in the calculation of transmission charges.

Upon the expiry of the post-Brexit implementation period, the relevant EU measure ("the 2019 Regulation") was translated into EU retained law. Whilst purporting not to change anything, the drafter of the EU retained law, instead of using the definition of "congestion" in the 2019 Regulation, used a definition from a 2009 repealed version of that regulation ("the 2009 Regulation") whilst also noting that this reversion was not intended to bear a meaning differing from the 2019 Regulation. There were discrepancies between the 2019 definition and 2009 definition of "congestion" which, if applied, would risk creating market distortions.

Despite detailed consideration the court found the legislative approach "baffling" in light of the general rule of legislative drafting, that a measure should not be amended unless it is intended to convey a change of meaning. The court concluded that the definition of "congestion" in the EU retained law reflected an error which lies in the assumption made that the new 2019 definition was not intended to bring about any substantive change to that in the old, repealed, 2009 Regulation. In other words, the legislature had not intended to define "congestion" in narrow terms linked to congestion on international interconnectors.

Lord Justice Green also noted that despite the court having powers to correct errors in legislation, it will always ensure, to the greatest extent possible, that the legislative intent is fulfilled and should only undertake legitimate purposive interpretation and not stray into judicial legislation. The court noted that here the task would involve seeking to replicate the exercise of a statutory power conferred upon the Minister in a complex and uncertain regulatory environment and in an area of relations between Great Britain, Northern Ireland and the EU which is currently beset with political complications. Therefore, the court concluded, with some hesitation, that it was best to leave it to the Secretary of State to make any changes that were considered necessary to achieve the stated present purpose of the measure of EU retained law.

The court also considered a procedural issue concerning the admissibility of the views of officials in London and in Brussels on the meaning of the 2019 Regulation. The court noted that the views of officials do not fall within the class of documents traditionally treated as admissible as a guide to legislative intent. Views of officials do not necessarily represent the views of responsible Ministers or the institutions that employ them and play no part in the legislative process. To take them into account would be inconsistent with the principles upon which purposive interpretation operates.

Comment

The judgment in this case, despite being concerned with a specific legislative regime in the energy sector, raises broader issues of importance across public law.

The Court of Appeal's practical approach to the impossible situation the regulator found itself in shows that a degree of flexibility and common sense often needs to accompany the strict legal analysis. This will be welcomed by regulators.

This judgment is also notable as it shows the court's apprehension towards using its power to correct errors in legislation when the error is related to a complex and uncertain regulatory environment. This will be particularly relevant in the case of EU retained law where, as the court itself explained, "the legislature pushed through literally thousands of complex and highly technical measures, overwhelmingly in subordinate legislation, in record time and invariably with but scant Parliamentary scrutiny of the detail, in order to meet the deadline for the end of the post-Brexit implementation period".