Govt promises firm action as energy price manipulation scandal widens

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  By a Newsnet reporter

Following yesterday’s revelations in the Guardian newspaper that gas companies are alleged to have a price-fixing ring on the wholesale gas market, a second whistleblower has come forward to make new allegations of suspect trading and price-fixing.  Jason Torquato, who worked as a gas price reporter for ICIS Heren, has said he noted “half a dozen or a dozen” occasions over the course of 2011 when apparently suspect trading was carried out.  

Further allegations were made on ITV news last night when a former energy trader, Omar Rahim, claimed that wholesale electricity prices were also being rigged. 

Mr Rahim alleged that the price fixing going on in the electricity market was worse than that in the gas market and that it was widely known amongst the small group of energy traders involved in the market.  Mr Rahim said that unscrupulous dealers found it easier to fix the electricity market as fewer traders were involved.   

He added:  “Having traded the market…I know it has gone on for years,” and claimed that the lack of regulation made it “very easy” to fix prices.   

Public anger over rising energy prices makes the developing price-fixing scandal more politically explosive than the LIBOR bank lending rate scandal, which is still unfolding.  Consumer energy bills directly reflect the prices paid by the energy companies on the wholesale market. 

Although most allegations to have surfaced so far apparently related to manipulating the wholesale price downwards, traders will eventually have an incentive to manipulate gas prices, and interest rates, higher.  Any price fixing undermines the legitimacy of the market and further damages the UK’s standing as a major financial centre.     

Addressing the House of Commons on Tuesday afternoon, UK energy secretary Ed Davey said that energy firms which were found to have undertaken price manipulation could face large fines and could be forced to reimburse consumers through lower energy prices.  The energy secretary said that the Government had an “absolute determination to clamp down on any abuse that is uncovered, wherever and by whoever”.

A spokesperson for Prime Minister David Cameron said that if the allegations proved to be true, the price fixing was “totally unacceptable” and the regulator should “come down very hard” on those responsible.

The spokesperson said:  “These are allegations. They are being investigated by the energy regulator and the financial services regulator.

“Obviously, if there has been manipulation of the energy market, then action needs to be taken very quickly.  People in this country deserve markets that are fair and if there has been wrongdoing, that is totally unacceptable and the regulator should come down on those people very hard.”

SNP energy spokesman Mike Weir said:

“If these accusations turn out to be true then radical action must be taken against those responsible.”

“This mirrors the LIBOR manipulation by the major banks. In this case, however, it may well be that it is ordinary hard-pressed consumers who have suffered artificially high prices as a result.

“It would simply not be enough to merely swell Treasury coffers with fines against the guilty parties.  If there is any evidence of involvement by gas supply companies, the UK government must take action to force them to reduce prices to compensate consumers”

“This sorry tale demonstrates the need for strong and vigilant regulation of the energy market to protect the position of consumers, which has been so badly lacking from the UK Government.”

ICIS Heren is the major price reporting agency in the wholesale gas market.  The company provides energy companies with a daily price of wholesale gas, used in contracts for billions of pounds worth of supply deals. Two other companies, Platts and Argus, also provide prices in the wholesale gas market, but these companies more usually deal in oil market contracts.  Prices set by these agencies are hugely important because many long term deals are based on them.

The wholesale gas price is set by ICIS Heren price reporters, who call gas traders each day to collect data during the peak trading window for gas at around 4.30 pm, known as the market-on-close assessment. High trading volumes in this period are deemed to provide the best snapshot of gas prices as multiple sellers and buyers strike deals.

However this method has been criticised as being open to manipulation as it is narrowly focussed on a small window of time.  Collusion between gas traders can easily result in a false price being reported.  One gas trader described the system as “a complete Wild West”.

The gas trader said:  “It’s a complete Wild West in the market for that period, especially the few seconds before [4.30 pm]. It’s Heren’s fault for setting the price like it does on literally the closest trade to 4.30 it can find.”

He added: “If someone is buying a liquefied natural gas (LGN) cargo based on that index then you can move the index down day-by-day to lower the price you pay for the LNG.”

Price reporting agencies like ICIS Heren, Platts, and Argus, are unregulated.  When the system was investigated by the European Commission following the LIBOR scandal, the price reporting agencies claimed that their institutional independence and reliance on market transactions meant that they were less vulnerable to manipulation than a more regulated system.  If it is proven that there has been widespread collusion between gas traders to manipulate the wholesale price of gas, this argument loses all validity.  Over recent decades, British governments – both Conservative and Labour – have favoured self-regulation in these industries.    

Commodity markets have been dogged for years by accusations of price fixing and cartels.  Last week, Barclays bank was accused of rigging US power markets and faces a record fine of $470m (approx £290m).  The US federal energy regulatory commission released emails from Barclays traders who boasted of having manipulated the market.  Barclays denies the allegations.

Last month, Robert Halfon, the Conservative MP for Harlow, claimed in the Commons that petrol prices were being kept artificially high as the wholesale oil market was being manipulated by traders who placed and then reversed large trades.

The energy companies British Gas, EDF Energy, npower, Scottish Power and SSE have all insisted that they have fully complied with British and European legislation and denied that their traders have been involved in distorting the wholesale energy markets.