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The energy sector’s Libor-style scandal

13 November 2012

As David reported earlier, today’s Guardian carries allegations of price-fixing in the energy markets. The paper has an account by Seth Freedman, who worked as a price reporter at ICIS Heren, detailing how he observed suspicious trades that looked like attempts to manipulate the daily index price.

Based on Freedman’s account, the alleged manipulation looks very much like that employed by City traders in the recently-exposed Libor scandal. Ironic, then, that the ‘suspicious’ trades Freedman observed came on the same day as Martin Wheatley published his review of Libor for the Treasury: Friday 28 September. Even after bankers had resigned and as new regulations for that sector were being planned, traders in the £300 billion wholesale gas market may well have been playing a very similar game.

What Freedman saw were several trades of ‘day-ahead’ gas contracts at abnormally low prices just as his company, ICIS Heren, was collecting information to set its benchmark index. Right around the 4.30pm ‘window’, six trades were reported at 58.0p, which Freedman calls ‘a massive move, half a penny or so from the mid-point of where gas was trading at that time’. For the rest of the day — both before and after the collection window — the same contracts were trading at or above 58.5p. This graph, from the Guardian, shows the six ‘suspicious’ trades:

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‘Six times people have tried to force the price down, it appears to us,’ says Freedman. And he’s even given the Guardian a recording of a conversation in which a trader tells him ‘sometimes there is a feeling that somebody is taking the piss there on the day-ahead index’.

And why might traders try to fix that index? Freedman explains: ‘Long-term contracts for the supply of gas which are based on our closing prices can be affected to the tune of millions of pounds.’

The FSA and Ofgem are investigating the allegations, and David Cameron’s spokesman has said: ‘If there has been manipulation of the energy market then action needs to be taken very quickly… If there has been wrongdoing, the regulator should come down on those people very hard.’ Energy Secretary Ed Davey echoed those words in the Commons this afternoon, saying:

‘Market abuse is always wrong — but at a time when people and companies are struggling with high energy bills, the country would expect us to take firm action if these allegations prove true, and we will. These allegations of market manipulation are being taken very seriously. We will support the regulators taking whatever steps necessary to ensure that the full force of the law is applied, if they are true, so that any guilty parties are held to account.’

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  • Simon Bates

    Wakey-wakey! Of course the energy markets are manipulated. They have never been properly monitored or regulated. The problem has been two-fold: no law defining what’s illegal (market abuse); lack of wit and wherewithal of the regulator. However, this is changing. The law, REMIT, came into effect at the end of 2011. So, this manipulation is now illegal. The wit and wherewithal takes time but Europe, for once, is trying to do the right thing. The Agency for the Cooperation of Energy Regulators (ACER), has been given the authority to police the markets on a pan-European basis. This is the right thing to do. They are funded by the European Commission and are working on two key workstreams: getting the Implementing Acts adopted which define what data market participants have to report to them; procurement of the skills and technology necessary to gather, validate, store the data and analyse the data for market abuse. This is likely to become effective sometime between the middle of 2013 and the beginning of 2014. Until then, some market participants will continue to make money at the expense of the consumer. This is a global problem with all financial, energy, commodity and derivative markets! Some regulators are doing a better job, at trying to keep up and deal with the problem, than others.

    • itdoesntaddup

      The idea that new regulators and laws are somehow able to deal with this is quite farcical – still less that EU regulators can do so. Market manipulation has been illegal for a very long time. The most effective market regulation comes from within a market. That includes such things as being able to blackball those who behave badly – something that regulators seem in a hurry to prevent from occurring.

      • Simon Bates

        Well, I could identify it happening, if I’m given the European order and trade data as the regulators will be in the next year or so. It’s not that difficult technologically. Now the law is effective, the Competent Authority can prosecute effectively. Then, there can be no more excuses from participants, regulators, MPs and alike!
        Market Abuse Law has been lacking in European Energy Markets until REMIT in December 2011, which categorically defines Inside Information, Insider Trading and Market Manipulation. True, this has existed in European Financial Markets for a number of years, since the introduction of the Market Abuse Directive (MAD), but that regulation does not apply to the energy markets as they are not covered by MiFID.
        I’m not guarenteeing ACER will be successful but they are, in the energy market at least, now trying to do the right things to arm themselves with sound evidence to prosecute or act as a deterrent. I wouldn’t make the same statement about the other European market regulators, though.

  • Daniel Maris

    On the general issue of markets, I think we do need to grow up in our thinking on this.

    I guess it’s something to do with generations of economics students being brainwashed with those graphs of “perfect markets”, but there does seem to an infinite well of naivety about markets.

    There never has been a perfect market, any more than a perfect man, and there never will be. Feudal lords controlled the markets of market towns. Sugar companies controlled the sugar market. Electricity companies control the energy markets…to a large degree.

    There still are market forces, but they are more often the product of the tectonic plate movements of economics e.g. technological developments or freeing up of labour (as we saw in China from 1980-2000).

  • marrer

    ofgem ……ofcom as Jim would say my arse

  • TomTom

    Every “Market” is currently manipulated. It is Crony Capitalism at its best and totally corrupt – the simple fact is that Supernormal Profit is made through rigged markets and Oligopolies are masters at inflating Costs to hide rent

  • andagain

    ‘Six times people have tried to force the price down,

    Evil energy traders have been trying to force the price DOWN?

    It is not immediately obvious that lower prices are a bad thing for consumers, even if they succeeded.

    • itdoesntaddup

      Maybe what I worte on the other thread will help:

      Did anyone notice that the accusation is that prices were manipulated downwards?

      Also, as yet there is little to suggest who is being accused of
      manipulation (doubtless pending investigation). We should remember that
      large elements of trading relate to contracts for differences (CFD)
      based on price quotations – not real trades of gas – and that the
      commodities traders in banks are at least as active as those in energy
      suppliers – and they’re probably smarter.

      Here’s a scenario: Energy company buys a CFD to profit from rising
      prices. Bank sells the CFD. Bank manipulates price lower, makes a
      profit and energy company makes a loss, which it has to recoup by
      charging customers more.

      And of course Ed Davey is keen to deflect from the impact of ever
      higher ROC charges and carbon taxes and other costs of greenergy.

      • andagain

        energy company makes a loss, which it has to recoup by charging customers more.

        I should have thought that the energy company would charge customers as much as it could get away whether it was making a profit or not. Are you suggesting that if not for this transaction the energy company would have charged people lessthan it ended up doing, purely out of the kindness of its heart?

        • itdoesntaddup

          I’m suggesting that energy companies seek a markup on their effective acquisition cost. If they do badly at trading that cost goes up, and so does your bill.

          • andagain

            “effective acquisistion cost”?

            You mean, the cost of acquiring energy? Rigging the market to create lower prices would appear to create a lower cost to acquiring energy.

      • vix

        Thank you – now intelligible.

  • Olaf

    Is the effect of this on consumer bills bigger or smaller than Government environmental charges?

  • Daniel Maris

    I may be wrong but I am not sure this is really that important for the average consumer.

  • dalai guevara

    What a year it has been.

    1- G4S has demonstrated that tagging and security is no longer worth privatising.
    2- A4E has demonstarted that £8m can be found to bring its CEO back into work.
    3- Rail has demonstrated that privatisation has only allowed the bearded smiley to buy a Caribbean island, whilst far superior public transport remains in capable public hands in France, Spain and Germany
    4- Banks have demonstarted that whilst Libor is falling, mortgage rates actually go up. Again, the same bearded smiley robbed me and you of a couple of hundred million quid.
    5- privatised water companies pay eff all in taxes
    6- and now energy firms display best practice by reporting YOY record profits without anyone checking how they can actually do that.

    What a year it has been for that lobby with a privatisation agenda.

    • David Lindsay

      No one, at least outside a few rather barmy think
      tanks that enjoy a very special relationship with Newsnight and the Today programme, ever did think of privatisation as an intrinsically permanent
      arrangement, or as anything more than a kind of lease. It has always been
      understood that these things really still belonged to the public, which could
      always take them back if this experiment failed. It has failed. So take them

      The railways are going to happen. There is no
      longer any serious doubt about that. It is only a matter of when, and therefore
      by whom. Why not this, too? Even Peter Hitchens wants it. Even Simon Heffer
      supports a National Grid for water, which cannot happen outside public
      ownership. Nor can the vitally necessary mass expansion of nuclear power and
      re-opening of the pits, both of which are also advocated by Hitchens, with the former advocated by
      Heffer as well.

      • itdoesntaddup

        It’s perfectly possible to have co-ownership of a distribution network. It happens in the oil pipelines that cris-cross the country.

  • 2trueblue

    Why the surprise? It was obvious that the whole thing was being manipulated, and not for our benefit. I remember when the massive hikes happened and after Blair said he would sort it we had the prices drop by a tiny amount.

    Where was the regulator doing during this time? It beggars belief that we have got a system in place, that we pay for and guess what? It does nothing. That is an even bigger scandal. We watch MPs grandstanding on the TV in the enquiries of late and frankly if they did their job we would all be better off. MPs are there to represent us, and do their job. Why do we continually end up with all the hangers on who do not add value at all?

    We still have too many Quangos and have yet to see the result that they achieve much.

    • AnotherDaveB

      I rather liked Douglas Carswell’s suggestion that all quangos should have to apply to parliament every year to have their budgets renewed, or not.

      • 2trueblue

        Bring it on.

  • foxoles

    But energy market manipulation or ‘abuse’ is OK when governments do it?

    Does Davey actually realise it is his very own lunatic green policies which have led to a situation where ‘people and companies are struggling with high energy bills’?

    • telemachus

      OK so let us examine the value and worth of OFGEM

      In short we are all subject to the “rip-off” prices of the energy companies.

      You could best replace Ofgem with a new regulator which will insist on more transparency over the price the energy companies pay to buy fuel wholesale and to encourage the entrance of new suppliers into the market to end the existed “rigged cartel”.

      This would not remove the market from energy purchase/distribution but “make the market work” equitably.

      Simply leaving the shambles to Ofgem(strategically placed I note next to MI5 on Millbank is the most crazy scenario.

      Renationalisation,of course would offer the most effective way to exert control over prices and investment decisions

      • itdoesntaddup

        Ed Miliband changed the rules for OFGEM with his 2010 Energy Act. Thy are now legally required not to put consumer interests first, but green interests. Ed is such a hypocrite when he talks about this.

    • HooksLaw

      needlessly building windfarms that need to be subsidised on the electric bills is one thing but manipulation for profit is another. The windfarms may be useless but we are getting them for our money.

      I am fortunate in that I am an old duffer and understand none of the article above. it seems to be referring to one particular instance.

      • AnotherDaveB

        “The windfarms may be useless but we are getting them for our money.”

        No we’re not. We get nothing. The owners of the windfarms get guaranteed subsidies from the British population.

        The “price fixing” mentioned in the article seems to be attempts to lower the price of gas, not raise it, which is the goal of HMG policy.

  • eeore

    Coast to Coast had an interesting interview with James Norman on this topic.

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