Ofgem: The three degrees

Tackling climate change has been a longstanding issue for Ofgem’s legal team, but it’s just one of many challenges facing the regulator

The recent floods in Gloucestershire and Yorkshire have put global warming and climate change firmly on the agenda in the UK. But for the legal department of energy watchdog Ofgem, which regulates the gas and electricity industry in the UK, the environment has never been far from its mind.

Duncan Sinclair, the legal director of markets, says the regulator has been dealing with these issues for some time. One consumer-friendly provision the energy body’s legal team has been helping pilot is the launch of the ‘smart meter’, which allows users to track their energy use.

“Apparently basic models are available in B&Q now,” says Sinclair.

The legalities of smart meters, although important at a consumer level, are perhaps small fry for Ofgem’s legal team, which is often working on multibillion-pound energy issues.

David Ashbourne, the legal director of networks, for instance, is in the midst of a five-year project that will ensure wind farms to be built off the shores of the British Isles can provide energy to the UK.

Ashbourne and Sinclair are two of the trio of lawyers who head Ofgem’s legal department, the third being the associate director of corporate affairs Irene Hurrell.

Three years ago Ofgem’s legal team experienced a massive structural overhaul, the result of its new chief executive Alistair Buchanan undertaking a cost-cutting review for the whole of the energy watchdog.

The review led to the general counsel role previously held by Nicola Northway being made redundant and the organisation moving into five new divisions – corporate affairs, corporate strategy, markets, networks and operations – with the legal function forming embedded teams in markets, networks and corporate affairs.

Since then corporate strategy has been dropped as a separate practice area for the organisation. The watchdog’s legal department still operates without a general counsel and instead the team of three senior lawyers manages the arena.

Competition Commission battles
Unlike Sinclair’s markets and Hurrell’s corporate affairs departments, Ashbourne’s role perhaps needs more explanation, as he looks after the legalities for any energy infrastructure issues, such as transmission or connection price controls.

The former BG Transco senior counsel has been in the thick of it recently with a Competition Commission review brought by energy supplier E.on, which could potentially see Ofgem face a flood of legal proceedings.

As reported by The Lawyer last week (30 July), Ofgem lost a crucial hearing before the Competition Commission, which could leave the regulator open to a deluge of judicial reviews in relation to any modification to industry codes.

E.on brought the proceeding under the Energy Act 2004, the first to go the full course against the watchdog under its statutory name of the Gas and Electricity Markets Authority (Gema). The energy supplier was victorious in challenging Ofgem’s decisions to modify the Uniform Network Code, which sets out arrangements for the transportation of gas in the UK.

E.on’s win means that a new, more speedy appeals system through the Competition Commission has now been firmly established and it could see others in the energy industry bringing challenges.

Sinclair explains that, in principle, the regulator is in favour of the concept of a quick appeals process, but that the timetable was “particularly burdensome for all parties”.

“More than 100 grounds of appeal were raised in an issue that involved complex economic and legal issues,” he says. “The sheer pressure of time will have escalated the legal costs on all sides.”

Cost saving
As a government-funded body, Ofgem’s legal team has to ensure it has one eye on costs. Like with all areas in the civil service, Ofgem’s budget, which currently stands at around £35m, is squeezed on an annual basis.

Ashbourne explains that each government body’s budget is worked those who know anything about finances, the watchdog’s funding allowance is RPI-X. Clear as mud?”The formula’s meant that our budget’s been shrinking, but it’s flexible,” says Ashbourne. “Our legal spend varies year to year, depending on the cases and investigations that we have to undertake, so if this increases, which is possible, then it can be accommodated for.”

The result of losing the E.on case before the Competition Commission is one reason why the regulator’s legal spend could potentially increase. Sinclair says last year’s legal spend, when external lawyers were used, was “relatively low” and in the region of £600,000.

“This year the Competition Commission appeal involved costs, on its own, that are potentially not far off that, although it depends upon the costs decision,” explains Sinclair. “We’re now facing a judicial review and the prospect of further appeals across a number of areas. So we anticipate a much higher spend, although it’s not clear how high this will go.”

Since the regulator’s cost-cutting review, Ofgem has seen its legal capability drop from a 20-plus-strong legal team to between 15 and 18 lawyers.

Sinclair says the budgetary constraints have meant that the legal department, like the rest of Ofgem, has had to “square the circle” while still recruiting and retaining the best lawyers.

“By reducing the size of the legal team a little over the past few years, the legal function has managed to offer more to the best individuals: it’s a leaner and keener group” says Sinclair.

External advice
Budget constraints, however, have not led to the watchdog scrimping on its law firm panel.

Ofgem’s current nine-firm panel has been in situ since 2005, although positions on the panel are likely to be up for grabs next year, explains Ashbourne. The firms, except Nabarro, are brought in on a range of energy and general issues. Nabarro’s role is purely employment.

Ashbourne says the panel is used when the need arises, since much of the work can be undertaken by the in-house team. “An example would be the wind farm offshore project at the moment,” explains Ashbourne. “We have a Herbert Smith secondee on this at the moment.”

The legal director of networks, however, adds that the regulator also goes directly to the bar, using sets such as Blackstone Chambers, Brick Court Chambers, Matrix Chambers, Monckton Chambers and 39 Essex Street.

Ashbourne says: “Our team, the majority having come from City firms in the past, has a good knowledge of the different abilities of chambers, so it often makes sense to go straight to them.

“On discrete pieces of advice, where perhaps we ourselves are better to brief counsel, it makes sense to go direct, and also the bar does offer value for money.”

Law firms and barristers’ chambers, however, are not the only areas of the legal profession from which Ofgem has taken secondments. Recently the energy regulator took on a secondee from the Office of Fair Trading (OFT), who has now joined the markets legal team permanently.

Ashbourne says Ofgem and all the other regulators’ legal teams, including those from Ofcom, Ofwat and Postcom, are in continual dialogue.

“Occasionally the areas that one body is working on will overlap with another, so it’s important we know what the other’s doing,” says Ashbourne.

Sinclair adds: “It’s also about sharing expertise. We may come across a problem which one of the other regulators has seen before, so they can help out and vice-versa.”

European importance
Ofgem’s legal expertise has also come in handy on the European stage. A European single market in energy supply is some way off. Sinclair explains: “We’re currently in the foothills, or at best at base camp, in our endeavours to reach that single market goal.”

Liberalisation across Europe is slowly taking place, but many of the actions kicking off to date were taken in the UK in the late 1980s.

“To continue the metaphor, we had the experience of climbing K2 on our own,” says Sinclair.

The benefit of this, however, is that Ofgem has been able to use its experience to assist the European Commission as it pulls together a third package for all EU memebr states. “There’s a lot to play for,” says Sinclair. “We have a legitimate and important advocacy role, given our expertise in this area, about what might be achieved and how.”

The legal team at Ofgem may be looking at the more international stage when it comes to the UK’s energy needs, but it has not forgotten to do its bit to conserve energy closer to home.

The regulatory body was the first to meet an international ISO standard for efficiency: it uses a combined heat and power plant in its Millbank office, saving hundreds of tonnes of carbon, and has installed sensor-activated lighting.

Perhaps most impressively, the government-funded body will even put its hand in its pocket: it will give anyone 10p off a drink if they bring the cup back to its canteen.

Names: David Ashbourne, Irene Hurrell and Duncan Sinclair

Organisation:

Ofgem (statutory name: the Gas and Electricity Markets Authority – ‘Gema’ for short)

Sector:

Energy regulation

Organisation’s budget:

Approximately £35m

Legal spend:

£600,000 in 2006

Number of employees:

Approximately 300

Legal capability:

15-18

Main law firms:Brodies

, Burges Salmon, Herbert Smith, Lovells, Maclay Murray & Spens, Nabarro, Norton Rose, Olswang , Simmons & Simmons

David Ashbourne’s CV
Education: 1977-81: University of London, LLB 1981-82: Trent Polytechnic (now Nottingham Trent University), solicitors’ finals
Work history: 1988-94: Regional solicitor, British Gas 1994-2002: Senior counsel and manager of regulatory compliance, BG Transco 2002-03: Senior solicitor, Wright Hassall 2003-present: Legal director networks and head of profession, Ofgem

Irene Hurrell’s CV
Education: 1981-85: University of Edinburgh, MA English Literature and Language 1989-90: School of Oriental and African Studies, University of London, MA Modern Turkish Studies 1990-92: College of Law, London, CPE and London Society Finals
Work history: 1992-94: Trainee solicitor, Denton Hall Burgin and Warrens 1994-98: Solicitor, Denton Hall 1999-2003: Senior solicitor, Denton Wilde Sapte 2003-06: Senior legal adviser, Ofgem 2004-05: Acting director, markets legal, Ofgem 2006-present: Associate director, corporate affairs legal, Ofgem

Duncan Sinclair’s CV
Education: 1991-93: Downing College, Cambridge University, BA (Hons), 1994: LLM Downing College, Cambridge University 1995: Inns of Court School of Law bar course 1996: Called to the bar
Work history: 1996-98: Pupillage, Littleton Chambers and trainee in European Commission 1999-2001: Senior associate, Simmons & Simmons 2001-03: Senior associate, Lovells (Brussels) 2003-05: Senior associate, Simmons & Simmons April 2005-present: Legal director of markets, Ofgem