The Queen on the application of (GWYNT-Y-MÔR v THE GAS AND ELECTRICITY MARKETS

When a regulator exercises a discretionary power under an income-adjusting condition, it must apply its published policy consistently and within the statutory and contractual framework. The relevant comparison may focus on the regulated licensee rather than require a general comparison with other parties. However, a hypothetical, probability-based assessment must engage carefully with the evidence, material differences between comparators, timing, and relevant independent advice. A regulator cannot adopt a high-level approach where the decision turns on whether a particular event could have been managed within a tightly defined period. Material factual errors, omissions, or irrational exclusion of relevant evidence may render the decision unlawful.

The claimant, operator of the Gwynt-y-Môr offshore wind farm, challenged Ofgem’s decision that the failure of a subsea cable owned by the first interested party constituted an income-adjusting event under the relevant transmission licence condition. The decision permitted associated repair costs to be passed through the regulatory charging regime, substantially affecting the claimant.

The challenge alleged that Ofgem had failed to apply its own policy and had unlawfully or irrationally assessed whether hypothetical LEG3 insurance could have been obtained or amended between the examination of an earlier cable failure and the later failure. The central issue was whether Ofgem’s affirmative answer to that hypothetical question was lawful.

1. Ground 1. Ofgem’s policy under limb (c) required it to focus on whether the licensee was the most appropriate party to manage the relevant risk. It did not require a comparative assessment of the financial position, insurance, or capitalisation of the generator. The private contractual allocation of risk under the sale and purchase agreement was relevant only insofar as recoveries by the OFTO would reduce the amount passed through. Ofgem was not required to await the outcome of related Commercial Court proceedings, particularly given the three-month decision period.
2. The court rejected the argument that Ofgem’s wider consideration of future regulatory policy had unlawfully entered into the SSEC2 decision. The evidence was consistent with Ofgem deciding the individual case by reference to the BTLAL factors while separately reviewing the implications for future policy.
3. Ground 2. The court accepted that Ofgem was not required to adopt an entirely hands-off approach to its answer to the hypothetical insurance question. Ofgem was not an expert in the insurance-market issue it had identified. Its task remained one of judicial review, not substitution of the court’s decision for that of the regulator.
4. Nevertheless, Ofgem materially erred in its evaluation. It misunderstood the Thanet chronology by treating a negotiated exclusion reached after 22 days as an exclusion imposed within seven days. It failed to distinguish the contractual process for changing policy wording from an insurer’s decision that existing wording did not cover a claim. It failed adequately to consider the effect of multiple insurers, the materially different circumstances at Thanet, and the mechanisms by which exclusions had actually been achieved at the comparator sites.
5. Ofgem was entitled to take previous cable issues at Gwynt-y-Môr into account, and it was not irrational to use Thanet as a comparator. However, the tightly confined 23-day period required detailed analysis, careful attention to differences between the examples, and protection against hindsight. Ofgem’s high-level treatment of the comparator evidence was inadequate.
6. It was also irrational to disregard the independent JLT advice. The advice was relevant, authoritative, and independent, and indicated that LEG3 cover could have remained available in 2015, with restrictions more likely at renewal. The court could not conclude that the decision would inevitably have been the same without the errors.
7. The SSEC2 Decision was therefore quashed and remitted to Ofgem for reconsideration.

First-instance judicial review in the Administrative Court. The judgment quashed Ofgem’s decision dated 8 September 2017 and remitted the matter for reconsideration.