On 13th November 2012 the Financial Services Authority (‘FSA’) and the Office of Gas and Electricity Markets (“OFGEM”) confirmed that they are investigating claims that energy firms have manipulated the wholesale gas market.
The claims have been made by a whistle-blower, Seth Freedman, who worked at ICIS Heren (‘ICIS’), a financial information company that publishes energy price reports. He believes that attempts were made by energy companies to distort the benchmark prices reported by ICIS. He specifically identified suspect activity on 28th September 2012, a key date as it marks the end of the gas financial year and can have a huge impact on the future price of gas. The information provided by Mr Freedman allegedly shows that on 28th September 2012 the price at which “day-ahead” gas contracts were being bought and sold dropped at the exact time at which ICIS attempted to “take the pulse of the market” to set its average price.
It is alleged that traders deliberately tried to lower the average price of wholesale gas so that it would in turn lower prices of gas derivatives, financial products similar to shares, so that they could profit from this movement.
ICIS has confirmed that it had detected some “unusual trading” activity on the British wholesale gas market on 28th September which it reported to OFGEM in October 2012. Both OFGEM and the FSA have released statements stating that they are looking into information brought to their attention and are considering whether the behaviour reported amounts to market abuse.
OFGEM has the lead responsibility on physical markets whilst the FSA has the lead responsibility on associated financial markets. OFGEM has faced criticism for not investigating this matter when it initially received the information from ICIS.
The FSA has powers pursuant to s. 123 of the Financial Services and Markets Act 2000 (the “Act”) to impose financial penalties where it finds that a person has engaged in market abuse. Insider dealing and market manipulation are also potential criminal offences for which an individual can be sentenced to a maximum of 7 years imprisonment. The investigations being carried out are at far too early a stage to determine what action regulators will take.
All of the UK’s six major energy providers have denied any involvement in the alleged market manipulation.
The allegations made by Mr Freedman come at a time when the Government is looking to increase regulation of the energy market. The Enterprise and Regulatory Reform Bill is intended to improve the competition regime and protection of consumers and is currently with the House of Lords. There are also new initiatives being considered by the European Commission on how gas prices are set, however, energy companies are said to be attempting to fight off these initiatives and strong industry resistance to many of the proposals has resulted in many elements of the proposals having to be watered down.
The Energy Secretary, Ed Davey, has also suggested that the FSA and OFGEM should identify any gaps in their regulatory powers, including those under EU Regulation on Energy Market Integrity and Transparency (Regulation 1227/2011) (REMIT).
It is not clear whether the activity reported by Mr Freedman would in fact have increased consumer’s bills, however, the spotlight has been on the energy sector for some time now in respect of how prices are fixed. Energy companies report profits and household bills continue to rise. These allegations, whatever the outcome may be, are damaging for the industry as whole and the regulators will now be expected to take action. Given the public awareness this is not a matter which can be swept under the carpet.