'Bang, bang, bang: six times people have tried to force the price
down' – the suspicious trading behaviour that led to an FSA
investigation Link to this video
The City watchdog, the Financial Services Authority, is investigating
claims by a whistleblower that Britain's £300bn wholesale gas market
has been "regularly" manipulated by some of the big power companies,
exploiting weaknesses that echo the recent Libor scandal.
Separately,
the energy regulator Ofgem has been warned by a company responsible for
setting so-called benchmark prices, ICIS Heren, that it had seen
evidence of suspect trading on 28 September, a key date as it marks the
end of the gas financial year and can have an important influence on
future prices.
The whistleblower, who worked for ICIS Heren,
raised the alarm after identifying what he believed to be attempts to
distort the prices reported by the company. These benchmark prices are
critically important because many wholesale gas contracts are based on
them and small changes in the price can cost or save companies millions.
The
revelations come at a highly charged time for Britain's energy sector,
with many of the big six suppliers under public fire for alleged
profiteering on household
energy bills and mis-selling on the doorstep.
The
energy secretary, Ed Davey, said : "I am extremely concerned about
these allegations and will be keeping in close touch with the
regulators while they get to the bottom of this."
In
a statement, the FSA said: "We can confirm that we have received
information in relation to the physical gas market. We take market
misconduct seriously and will be analysing the material."
Ofgem
said it had been given material "relating to trading in the gas market
and is looking into the issue". The energy regulator said it had limited
powers in this area but would "consider carefully any evidence of
market abuse brought to our attention as well as scope for action under
all our other powers".
The City and energy regulators are keenly
aware of the growing political concern that high energy prices, which
are linked to wholesale values, can increase fuel poverty and undermine
economic growth. , he Green MP Caroline Lucas said: "If these
revelations stand up to analysis by the FSA and Ofgem, then this is
corruption on a massive scale and a shameful case of corporates coming
together to exploit a public utility."
The market abuse concerns
were initially raised by Seth Freedman, a former City trader who worked
as a price reporter at ICIS Heren for nine months. He told the Guardian
he believed problems he spotted in a frenzied half-hour of trading on 28
September were more widespread.
"Traders have made clear to me that manipulation of gas prices is taking place on a regular basis.
"They
name big companies among those they accuse of trying to rig prices and
reap profits. Market participants claim the fixing of prices is an open
secret," he said.
He also claimed that:
• The big six
companies are among those whose names are quoted by traders as being
involved in attempts to raise or depress wholesale gas prices.
•
The key benchmark indices produced by at least one price reporting
agency (PRA) and used increasingly in massive UK supply contracts are
unreliable, and undermined by poorly-trained staff and over-cosy
relationships between traders and price reporters.
• Traders regularly put price reporters under pressure to change prices they disagree with.
•
Price reporters struggle to set accurate benchmarks because they lack
detailed information about trading in the opaque so-called
"over-the-counter" market and are dependent on what traders tell them
about market activity.
An energy markets trader explains, in a conversation recorded by
whistleblower Seth Freedman, that there are widespread suspicions of
attempts to manipulate price indices Link to this video
The disturbing issues raised by the traders he spoke to daily in his
job at ICIS led Freedman to tape conversations about the 28 September
price gyrations, which he has handed over to the FSA.
In one, a
trader from one power firm says: "There's a feeling among some people
that somebody's taking the piss a bit on the day-ahead index. Between us
I think [Company X] got in a bit of trouble for that about six months
ago." It has not been possible to establish if any company was censured.
A recording obtained by the Guardian reveals discussions inside a
Price Reporting Agency about apparent market manipulation on September
28. Here a manager at ICIS Heren explains why the company can't correct
a price despite suspicions that it was manipulated. ICIS Heren did
report these suspicious trades to Ofgem Link to this video
Another trader told Freedman, who has previously been a freelance
contributor to the Guardian, in an instant messaging exchange: "There
are a few shops that continually try to distort closes from what I see …
some of the range of quotes I hear sometimes are criminal."
After price reporting agency ICIS Heren told energy watchdog Ofgem it
had concerns about possible attempts to manipulate the benchmark gas
price, the regulator said it was interested but had no powers to act.
Here an ICIS manager tells colleagues: 'There is no official thing to do
when we think something's gone wrong, or looks odd' Link to this video
When Freedman flagged up a series of suspiciously low trades that he
believed were designed to depress ICIS's "day-ahead" price on 28
September, a senior ICIS manager acknowledged they appeared to be an
attempt to manipulate the price but said "actually we did a bad job
investigating it".
.
ICIS Heren did notify Ofgem about the suspicious trades. But, in
another recorded conversation, the manager said there was "no official
thing to do" when PRAs saw what they believed to be evidence of price
manipulation.
The whistleblower's information, handed over to the
FSA, shows that on 28 September the price at which so-called day-ahead
gas contracts were being bought and sold dropped sharply at precisely
the time – 4.30pm – at which ICIS Heren attempts to take the pulse of
the market.
One explanation for this could be that traders were
deliberately dealing below the prevailing price in order to drag the
benchmark down, perhaps because they stood to gain more from other
contracts linked to this benchmark.
It is not possible for price
reporters to establish who did the suspicious deals as they were
conducted through a third-party brokerage firm.
In a statement,
ICIS confirmed that it had detected some "unusual trading" activity on
the British wholesale gas market on 28 September, which it reported to
energy regulator Ofgem in October.
"The cause of the trading
pattern, which involved a series of deals done below the prevailing
market trend, has not yet been established. ICIS welcomes the
seriousness with which the regulator has so far responded to this
information and we have provided all the evidence at our disposal to
help determine what happened."
ICIS said it welcomed the
additional powers that are to be assigned to national energy regulators
as of next year under the EU's regulation on energy market integrity and
transparency (Remit), and the additional market oversight provided by
the pan-European energy regulator ACER.
A spokesman for the
Department of Energy and Climate Change said: "The government takes
alleged abuse in our markets very seriously. It's important not to
pre-empt the work that the enforcement agencies already have under way
to assess the detail of the allegations made. The FSA and Ofgem have a
range of powers available to them and have our full support in applying
the law and ensuring that any wrongdoers are held to account."
It is understood Davey, will make a statement to the Commons on Tuesday about the price manipulation allegations.
In
Europe, energy firms have been trying to fight off attempts by Brussels
to introduce tighter regulation of the gas market which would ensure
there can be no repeat of the Libor scandal – where banks manipulated
the rates at which they borrowed money.
Arlene McCarthy, the North
West England MEP, said she feared Freedman had unearthed another case
of apparent market abuse and manipulation in gas prices. "For some time
I have feared there is an extensive cartel culture of market-rigging
and price-fixing in the
commodities markets.
"Companies guilty of abuse must face the full force of penalties and sanctions and jail for criminal behaviour," she said.
"The
FSA must take action but as the UK gas is the benchmark for gas traded
at EU level I will be asking European commissioners [Joaquín] Almunia
and [Michel] Barnier to take urgent action on cartels and price-fixing
and introduce tough rules on the setting of benchmarks and indices in
the commodities markets."
Chris Cook, a former compliance officer
at the International Petroleum Exchange and now a senior research fellow
at University College, London, said the problems highlighted by
Freedman in the gas market echoed those in the oil sector.
"There
is a structural issue here that over-the-counter markets with low
liquidity can be manipulated by traders putting through visible trades
at a duff price. We need to make sure the market is more transparent
through a transaction registry," Cook said.
The way energy prices,
which are used for key benchmarks in much larger multibillion-pound
supply contracts, are formulated has been under scrutiny from the G20
group of leading global economies.
The PRAs' (PRAs) work in the
oil markets was scrutinised by an organisation working for the G20
nations amid widespread concern about oil trader speculation. There is
no suggestion that ICIS or any other PRA has been involved in
speculation themselves, but there are fears their reporting could be
distorted by misleading information provided by energy traders, or by
anomalously priced trades designed to move the benchmark price.
A
report published last month by the board of the International
Organisation of Securities Commissions (IOSCO) talks about the "opacity
and variations" in PRA assessment methodologies.
"The need for
assessors to use judgment under methodologies creates an opportunity for
the submitter of data deliberately to bias a PRA's assessment in order
to benefit the submitter's derivatives position," it says, adding: "For
example, a trader seeking to manipulate a price might attempt to
influence the personnel responsible for assessment."
The French
oil group Total said in a letter to the IOSCO: "Sometimes the criteria
imposed by PRAs do not assure an accurate representation of the market
and consequently deform the real price levels paid at every level of the
price chain, including by the consumer."
Meanwhile, energy
companies have been working hard to fight off any new initiatives from
Brussels about the way gas prices are set.
A European gas hub
report just published by ICIS says: "The recent London interbank offered
rate (Libor) scandal engulfing major financial institutions also
prompted a European commission consultation in early September on the
regulation of key indices, including those for coal, natural gas and
electricity. However, strong industry resistance to many of the
proposals has so far resulted in the watering down of many elements of
the current regulatory proposals."
In the past, because there were
relatively few "spot" short-term contracts to give ideas about current
prices, these British and other European longer-term import deals with
the Norwegians or the Russians were tied to prevailing oil prices. But
increasingly major long-term and high-volume contracts have been linked
to spot prices set by ICIS and other agencies.
Although some deals
with corporate customers are specifically linked to benchmark prices
such as ICIS Heren's, industry experts say it is difficult to assess
what impact wholesale manipulation – if it were going on – would have on
household bills.
EDF
and SSE, two of the big six, contacted by the Guardian, denied that
they would be involved in any attempt to manipulate prices or be
involved in other bad practice. Two others, E.ON and RWE, have made
similar statements in the past.
A spokesman for the French-based
energy group said: "EDF Energy does not participate in loss-leading
trading activity and considers it to be against existing market
regulation. We make information likely to impact market price formation
publicly available on our website in compliance with Remit."
SSE said: "We are entirely confident that our energy portfolio management team operate in a fair and legitimate way."
A
spokesman for British Gas owner Centrica, said: "Our compliance
procedures and trading principles are clear. They require us to comply
with all EU and UK laws and we have done so."
A spokesman for
Scottish Power said: "Scottish Power has never engaged in trying to fix
wholesale gas trading markets. Our trading division always acts with
integrity and follows all rules in all of its engagements with the
market."
The political temperature over domestic energy bills is
likely to hot up again when a British Gas price rise of 6% for gas and
electricity comes into effect on Friday. The average household bill for
a dual-fuel British Gas customer will go up from £1,260 to £1,336 a
year, according to the energy account transfer service uSwitch.
Ann
Robinson, director of consumer policy at
uSwitch.com, said (Mon 12):
"The timing could not be worse – as winter makes its presence known, the
cost of heating our homes will be taking its toll on cash-strapped
consumers. With bills reaching an all-time high, it's no surprise that
almost nine in 10 households will be rationing their energy usage this
winter."
McCarthy, the MEP, said any upheaval in the wholesale
markets was dangerous because domestic supply companies cited the rise
in wholesale prices as a reason for household prices to increase. "If in
the end wholesale prices are being manipulated to increase the profits
of the energy companies then consumers will end up the victim of this
great gas ripoff. Families have seen gas and energy prices rise on
average by between six and 9% this year, adding on average £200 to their
bills."
Freedman has worked as an FSA-approved trader in the City
and contributed to the Guardian from Israel. He was not working for the
Guardian while employed as a price reporter by ICIS Heren.
• Do you or have you worked in the gas market? Can you help us with this story? If so please email
terry.macalister@guardian.co.uk
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