Distinguishing penalties from incentivising payments

21/11/14

R (Western Power Distribution Ltd.) v. Gas & Electricity Markets Authority

At a hearing on 20 November 2014, Mrs Justice Lang refused an application by Western Power Distribution (“WPD”) for permission to apply for judicial review of a decision of the electricity regulator GEMA, which if granted might have had widespread implications for electricity distribution network operators.

The claim arose from GEMA’s scheme to incentivise network operators to reduce the loss of electricity on their distribution networks over the period 2005-2010. An operator’s performance in reducing losses would affect the calculation of its regulated revenue. Difficulties arose when problems were discovered with the data used to measure performance. GEMA brought the scheme to an end. When assessing the final “close out” figures, GEMA allowed certain adjustments to ameliorate these data issues.

WPD claimed that the effect of GEMA’s decision, which required WPD to repay to its customers some £47m more than WPD had ever received under the scheme, amounted to a “penalty”. WPD submitted that penalties were reviewable on grounds of proportionality, and that this penalty was disproportionate and hence unlawful. WPD further claimed that, since GEMA had capped payments made in favour of operators when closing out the scheme, GEMA should also have capped payments which operators were required to make in favour of customers.

Mrs Justice Lang held that the claim was an impermissible challenge to the merits of a regulatory decision. It was inappropriate to compare the incentivising mechanism with a fine. The proportionality principle had limited application in the circumstances. In any event, the methodology had been established for many years and it was too late to challenge it. GEMA had legitimately exercised regulatory judgment.