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On Heels of European Raids, Energy Companies Face U.S. Class Actions

by Megan Morley

White Oaks Fund LP, an Illinois private placement fund, filed a class action suit last week against BP PLC, Royal Dutch Shell PLC and Statoil ASA in the Southern District of New York.  White Oaks Fund v. BP PLC, et al., case number 1:13-cv-04553.  The complaint alleges that the energy companies colluded to distort the price of crude oil by supplying false pricing information to Platts, a publisher of benchmark prices in the energy industry, in violation of the Sherman and Commodity Exchange Acts.  Plaintiffs claim that defendant companies are sophisticated market participants who knew that the incorrect information they provided to Platts would impact crude oil futures and derivative contracts prices traded in the U.S.

This action follows at least six civil litigations that have been filed against BP, Shell and Statoil after the European Commission (EC) and Norwegian Competition Authority raided the companies in May.  The London offices of Platts were also searched.  After the surprise raids, the EC has stated that it is investigating concerns that the companies conspired to manipulate benchmark rates for various oil and biofuel products and that the companies excluded other energy firms from the benchmarking process as part of the scheme.  In addition, at least one U.S. Senator has requested that the U.S. Department of Justice look into whether any of the alleged illegal behavior occurred in the U.S.

The private actions filed against these energy companies in the U.S. on the heels of an investigation by the European Commission are not uncommon.  Any company that transacts business in the U.S. and undergoes a raid or investigation by a foreign competition authority should prepare to face these civil litigations and defend itself against similar allegations.




Increased Fracking on the Horizon in UK Gas Sector?

 by Charlotte Doerr

The United Kingdom has seen significant steps forward on the shale gas exploitation front.  In light of recent discoveries of substantial reserves in the north-west of England, the ongoing debate on hydraulic fracturing (fracking) has once again come to the fore.  With recent studies from the British Geological Survey estimating that the capacity of the yet-untapped reserves of shale gas could climb to 170 trillion cubic feet (tcf), this is a significant discovery for the United Kingdom and could have important ramifications for the country’s energy supply and policy for many years to come.  The sheer size of these reserves is put sharply into context when viewed alongside the remaining gas reserves in the UK North Sea, judged to be as little as 7 tcf.

The UK’s decision to lift a temporary moratorium on fracking in May 2013, which had been in place since the previous year after shale gas exploration resulted in two minor earthquakes, now paves the way for a flurry of preliminary activity.  Some commentators predict that full-scale exploration will get underway in 2015.

Comments from the UK Chancellor of the Exchequer, George Osborne, that the government would “make the tax and planning changes which will put Britain at the forefront of exploiting shale gas,” suggest that fracking in this sector could become more widespread, as the government relaxes restrictions over the practice.  Supporters have pointed to increased job creation, substantial tax revenues, and reduced reliance on imported energy.  However, critics have been quick to highlight the environmental concerns linked to fracking, such as water contamination and seismic risk.

Everything must be read in light of a governmental Energy and Climate Change Committee inquiry that concluded in April 2013 that any firm determination on the end-result for consumer energy prices based on these gas discoveries is still premature.  Therefore, much work remains to be done and substantial political wrangling will likely follow, before a clear path appears for the UK’s future direction on revitalizing its domestic gas industry.




Italy: Government Extends Scope of Application of “Robin Hood Tax”

by Carsten Steinhauer

Law Decree no. 69 of 21 June 2013 (theDecree), published in the Official Gazette on 21 June 2013  would expand significantly the application of the “Robin Hood Tax” on electricity production companies, including renewable energy companies (solar, wind and biomass) originally exempt from the tax, by lowering the turnover and taxable income thresholds.

The “Robin Hood Tax” was originally introduced by Section 81, Paragraph 16 of Law Decree no. 112 of 2008, converted by Law no. 133 of 2008.  It provided for a 6.5 per cent increase of the corporate income tax rate (IRES) payable by electricity production companies other than renewables with annual gross revenues exceeding Euro 25 million.

Earlier, Law Decree no. 138 of 2011, converted by Law no. 148 of 14 September 2011, eliminated the exemption for renewable energy companies and reduced the annual gross revenue threshold to Euro 10 million, provided the electricity production company had a taxable income of Euro 1 million.

The new Decree further reduces the gross revenue and taxable income thresholds so that the “Robin Hood Tax” would apply to any energy production company, including renewable energy companies, with:

  • gross revenues in the preceding year of more than Euro 3 million
  • taxable income for the same year of more than Euro 300,000

The additional tax only applies to legal entities that are organised as corporations and are therefore taxable pursuant to Article 73 of the Consolidated Income Tax Code, but does not apply to special purpose vehicles (SPVs) that are organised as limited partnerships.

If confirmed by the Italian Parliament, these changes will increase the IRES for a great number of renewable energy production companies that initially had been exempt from the “Robin Hood Tax.”   In order to become definite, the Decree—which was enacted by the Italian Government—must be converted into law by the Italian Parliament.  The timeline for conversion is 60 days, i.e., 20 August 2013, and the Italian Parliament is entitled to make amendments to the Decree.  Provided that the Italian Parliament confirms the current wording of Section 5, Paragraph 1 of the Decree, renewable energy companies that exceed the new turnover and income thresholds in 2014 will have to pay the increased IRES of 34 per cent, instead of 27.5 per cent.

It is worth noting that the compatibility of the “Robin Hood Tax” with the Italian Constitution has been challenged and an action is currently pending before the Constitutional Court.  In particular, the “Robin Hood Tax” would seem to be in breach of the principles of equality and contribution pursuant to economic capabilities.  The Constitutional Court has not yet scheduled a date for the hearing so that it is impossible to foresee when a decision will be made.




REMIT Set to be Enforced in the UK

by Prajakt Samant and Simone Goligorsky

If the UK Government meets the implementation deadline of 28 June 2013, then the United Kingdom will be one of the first EU Member States to implement the EU regulation on wholesale market integrity and transparency (REMIT). Market participants should ensure that all compliance procedures and trading functions are kept fully up to date with the stricter market abuse regime.

To read the full article, click here.




EU State Aid Investigation into German Renewable Energy Law

by Martina Maier and Philipp Werner

The European Commission (Commission) is likely to open a formal EU State aid investigation into the German Renewable Energy Source Act. According to the Commission, the Act may have given unlawful advantages to renewable energy producers and energy-intensive companies (those producing chemicals or steel) in Germany. Producers and companies that benefited from the Act are therefore exposed to the risk of the alleged benefit being recovered, which is likely to amount to a figure in at least the tens of billions of Euros.

The European Commission is currently examining whether or not the German Renewable Energy Source Act infringes EU State aid law. The Commission is expected to reach a decision on whether or not to open a formal investigation procedure in autumn 2013, following its summer break.

The German Renewable Energy Source Act aims to support renewable energy by fixing the tariffs that electricity providers, such as E.ON, RWE, Vattenfall or EnBW, must pay for energy from renewable sources, e.g., solar panels or wind turbines. These tariffs are higher than those for energy from traditional sources. The Act also exempts energy-intensive companies, e.g., those producing chemicals or steel, from the EEG surcharge that electricity providers are entitled to charge their customers. These higher tariffs and the EEG exemption could be in breach of EU State aid law and are currently the subjects of a Commission examination.

Should the Commission come to the conclusion that they do infringe EU State aid law, it can order Germany to recover the advantages from the companies that benefitted from these rules. The potential State aid involved is likely to amount in total to a double-digit billion Euro figure.

In a separate but similar case, in March 2013 the Commission opened an in-depth investigation into the exemption of large electricity consumers from network charges in Germany, dating back to 2011. This exemption was financed by the final electricity consumers, who, since 2012, must pay a special surcharge. A German court, recently declared this exemption and the surcharge as unconstitutional and the legal provisions will be changed. The Commission may, however, still conclude that, up until the German court ruling, large electricity customers were benefitting from State aid. It could therefore order Germany to recover the past benefit from these customers, which is estimated at around Euro 300 million for 2012.

These investigations by the Commission expose renewable energy producers, energy-intensive companies and large electricity consumers in Germany to the significant risk of the recovery of the alleged benefit. Such companies are therefore strongly advised to co-operate with the Commission during this examination phase and if a full investigation is launched.




Italy: Euro 6.7 billion Cap for Photovoltaic Incentives Reached

by Carsten Steinhauer and Riccardo Narducci

On June 6, 2013, the Italian Authority for Electricity and Gas (AEEG) announced that the overall annual expense cap of €6.7 billion for incentive payments payable to photovoltaic (PV) plants in Italy has been reached.

As a consequence, the latest feed-in tariff (FiT) regulation—the Conto Energia V—will cease to apply on July 6, 2013, i.e., 30 days from the AEEG’s announcement.  PV plants that connected to the grid and started operations before July  6 will remain entitled to the currently applicable FiTs, as long as the relevant application is filed with the Gestore dei Servizi Energetici (GSE) before July 6.  Any application received after July 6 will be rejected.

The July 6 deadline also relates to PV plants installed on public land or public buildings that, pursuant to Section 1, Paragraph 425 of Legislative Decree no. 3584/2012 (the Stability Decree 2013), were entitled to an extension of the FiTs under the Conto Energia IV  (see our Hot Topic from January 3, 2013).

Exceptions

Notwithstanding the Euro 6.7 billion cap being reached, certain PV projects are exempted from the 6 July deadline:

  1. PV plants that are included in the first or second GSE register under Conto Energia V remain entitled to the Conto Energia V FiT and can apply to the GSE even after July 6, 2013, provided they start operations within one year of the publication of the register.
  2. Special extensions also apply to PV plants that are located in certain Municipalities in the regions of Emilia Romagna and Lombardy, which were struck by earthquakes on May 20 and May 29 2012:

a)  Roof top PV plants that started operating prior to the earthquakes remain entitled to the applicable FiT rate, even if they have to be rebuilt.

b) PV plants that were authorized on or before 30 September 2012, but had not started operating before the earthquakes, remain entitled to the FiT provided by the Conto Energia IV for the first semester 2012, provided they start operations before December 31 2013.

c) PV plants located on agricultural land are only entitled to the extension in b) above if the projects were authorised on or before March 25, 2012.  They must still conform with the limits set forth under Article 10, Sections 4 and 5 of Legislative Decree no. 28/2011.

Finally, it is worth noting that the 6 July deadline does not apply to PV plants that applied for incentives or to be included in the registers but were rejected unlawfully.  In these cases, where the applicant wins the appeal against the GSE, they will benefit from the FiT and the timelines provided under the Regulations as they were in force at the time of application.  




European Parliament Endorses EMIR Technical Standards

by Simone Goligorsky

On February 7, 2013, it was announced that the Economic and Monetary Affairs (ECON) Committee of the European Parliament (EP) was withdrawing its objection to the technical standards (TS) for the regulation on over-the-counter derivatives, central counterparties and trade repositories, commonly known as the European Markets Infrastructure Regulation (EMIR). 

The TS supplement the level 1 text of EMIR, which came into force in August 2012.  It is the TS that define who exactly will be affected by EMIR, and how. 

Following the endorsement of the TS in December 2012 by the European Commission (EC), after they were published by the European Securities and Markets Authority in September 2012, the TS were undergoing the last review prior to their publication in the Official Journal of the European Union.  Many market participants expected the EP’s review to a procedural, rubber-stamping exercise. 

However, on January 24, 2013, it was confirmed that the ECON Committee was to publish a motion for a resolution to reject certain TS.  One of the reasons given for mooting the rejection was the view that the EC had gone beyond its remit for the TS, set out for it in the level 1 text of EMIR, when drafting the TS.

The TS in question related to matters including, inter alia:

  1. The clearing threshold for non-financial counterparties, particularly the condition that if the clearing threshold for one asset class was exceeded by a counterparty, then the counterparty would be automatically held to have exceeded the threshold for all asset classes; and
  2. The requirement for timely confirmations, in particular how this obligation would affect smaller, non-financial counterparties.

If the TS had been rejected, then the EC would have been required to put forward new TS.  This may have, in turn, have delayed the publication of the TS, and ultimately, the coming into force of EMIR. 

However, on February 7, 2013, the EP withdrew the resolution calling for the rejection of the draft TS.  The withdrawal of the objection was based on certain assurances given by the EC, including the assurance that the EC would publish frequent ‘questions and answer’ booklets to cover any matters over which there arose legal uncertainty.

EMIR has been tabled as the US equivalent of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd Frank).  As currently drafted, market participants undertaking activities in both the US and European markets may be subject to both Dodd Frank and EMIR, requiring, them, for example, to report trades to both European and US regulators. 

To avoid market participants having to report to two sets of regulators, European regulators are meeting with their US counterparts over the course of Q1 and Q2 2013, to advise the United States that EMIR should be accepted as being as strict as Dodd Frank.  If accepted, market participants complying with EMIR would be deemed to comply with Dodd Frank, and vice versa.

As the publication of the TS will not be delayed as much as initially thought, EMIR’s [...]

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New Developments in The UK Shale Gas Sector

by David Birchall and Simone Goligorsky   The shale gas sector in the United Kingdom is still in its infancy, but the UK Government has announced recently new measures and incentives to encourage its growth.  On 13 December 2012, the Government lifted a temporary suspension of drilling at the only drilling site in the United Kingdom, introduced tighter regulations to manage risk associated with hydraulic fracturing (fracing), set out new tax incentives to help accelerate the growth of the industry, and announced that it would establish a new Government office dedicated to the shale gas sector.   Background   Fracing involves the pumping of water, sand and chemicals into shale rock at high pressure, for the purpose of extracting reserves of natural gas.  Many European countries have been wary of fracing and the practice is currently banned in several countries, including France.  The French Government banned fracing in May 2011 in response to pressure from environmental groups.  Reports have suggested that exploration permits were revoked from three companies that had announced they were intending to undertake fracing activities, and seven applications for permits were rejected.  It should be noted that by the French Government has not banned the exploration of shale gas, just the practice of fracing.    Apart from the United Kingdom, the only other European country that has allowed energy companies to undertake exploratory drilling is Poland.  Poland is said to have the largest reserves of shale gas in the European Union.  As of June 2012, it had granted over 100 licences to foreign companies wishing to undertake exploratory drilling activities in the country.     The exploitation of onshore gas reserves has already revolutionised the energy sector in the United States, and the UK Government now hopes that Britain will be able to service some of its future gas demand through the use shale gas obtained by fracing.  Europe, as the world’s second-largest gas market, has become increasingly dependent on imported gas, which not only is expensive, but also carries with it all the risks generally associated with an imported product, including the potential for a sudden termination of supply.    Reports on Shale Gas   The UK Government has commissioned several reports on shale gas in order to assess the potential risks of fracing.  These include, inter alia   In addition to these reports, the British Geological Survey (the BGS) conducts ongoing research into shale gas.  The BGS estimated in 2010 that if shale in the United Kingdom was as productive as shale in the United States, an estimated 150 billion cubic metres of gas could be produced.  The [...]

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Conto Energia IV Deadline Extended for Photovoltaic Plants on Public Administration Property

by Carsten Steinhauer

On 20 December 2012, the Italian Chamber of Deputies approved Legislative Decree no. 228/2012, known as the Stability Decree 2013.  Section 1, paragraph 425 of the Stability Decree 2013 extends the deadline by which photovoltaic (PV) plants built on property belonging to the Public Administration must be connected to the grid in order to benefit from the favourable feed-in tariffs under the Ministerial Decree of 5 May 2011 (the Conto Energia IV).    The transitional rules of Section 1 paragraph 4 of Ministerial Decree of 5 July 2012 (the Conto Energia V) provided that installations on public land or rooftops would  only benefit from the Conto Energia IV feed-in tariffs if they were connected to the grid by 31 December 2012.  The extension of the deadline protects investments made by and with the Public Administration that were unable to meet the 31 December 2012 deadline and would otherwise have defaulted.     Pursuant to the Stability Decree 2013, in order to benefit from the Conto Energia IV tariffs, PV plants installed on public property will now have to be connected to the grid by the following deadlines: 
  • 31 March 2013 for all PV plants that are not subject to an Environmental Impact Assessment (Valutazione di impatto ambientale)
  • 30 June 2013 for all PV plants that are subject to an Environmental Impact Assessment (Valutazione di impatto ambientale) and have obtained the relevant building permit on or before 31 March 2013
  • 30 October 2013 for all PV plants that are subject to an Environmental Impact Assessment (Valutazione di impatto ambientale) and have obtained the relevant building permit after 31 March 2013.
The Stability Decree 2013 does not limit the deadline extensions to property that was owned previously by the Public Administration.  The extensions also apply to projects developed on property that the Public Administration will acquire after the  new rules come into force.    The overall annual expense cap of €6.7 billion for incentive payments payable to PV plants in Italy has not changed.  As a consequence, and notwithstanding the deadline extensions, both the Conto Energia IV and the Conto Energia V will cease to apply 30 days after the announcement by the Italian Authority for Electricity and Gas (AEEG) that the cap has been reached.

 




European Commission Adopts EMIR Technical Standards

by Simone Goligorsky

On December 19, 2012, the European Commission (EC) adopted the technical standards (TS) for the regulation on over-the-counter (OTC) derivatives, central counterparties (CCPs) and trade repositories, commonly known as the European Markets Infrastructure Regulation (EMIR). 

The level 1 text of EMIR came into force on August 16, 2012, and will now be supplemented by the newly adopted TS.  The TS were initially proposed by the European Supervisory Authorities in September 2012, and the texts of the TS have now been adopted by the EC without amendment. 

However, in a press release from the EC, it is stated that one TS, submitted by the European Securities and Markets Authority (ESMA), has not been endorsed.  This particular TS relates to colleges of CCPs.  There are concerns over the legality of this provision, therefore ESMA has been asked to redraft this provision.  The redrafting is not expected to delay the coming into force of the obligations prescribed by the other TS.  No date has been set for the publication of the redrafted provision. 

The TS cover matters, including, inter alia: (i) the clearing of trades by financial, and in certain circumstances, non-financial counterparties, by central counterparties; (ii) the reporting of all trades that come within the scope of EMIR; and (iii) putting in place risk mitigation techniques for OTC derivatives contracts that are not cleared by CCPs.  

By adopting the TS now, the EC has met the deadline set at the G20 summit in Pittsburgh in 2009.  At the summit, it was agreed that global regulators would put in place legislation necessitating the mandatory clearing and reporting of transactions, in order to reform the derivatives market, which was, at the time, subject to very little regulation.  EMIR, and its US equivalent, the Dodd-Frank Wall Street Reform and Consumer Protection Act, are intended to improve the transparency of the derivatives trading markets.   

The TS are divided into two categories: regulatory TS and implementing TS.  The former are subject to review by the European Parliament and Council, who will have a month from December 19, to review the provisions.  The review period may be extended by a month, if necessary.  The implementing TS are not subject to review by the European Parliament and Council.  However, the implementing TS will not enter into force before the regulatory TS comes into force, since the two sets of standards complement each other, and are not stand-alone obligations.  The TS will enter into force on the twentieth day following their publication in the Official Journal of the European Union.   

Compliance with the provisions of EMIR by market participants may require, amongst others, the implementation of new IT systems, registration with a CCP and trade repository, and, for non-financial counterparties, an analysis of the trades that they undertake (as non-financial counterparties whose trading activities are below the thresholds prescribed in the TS will not be required to clear those trades).  As these activities may take some time, market participants are encouraged to actively engage [...]

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