Gas prices-fixing probe: Government pledges firm action

Energy Secretary Ed Davey has promised tough action if allegations that firms manipulated the wholesale gas market turn out to be true.

The Financial Services Authority (FSA) and Ofgem are looking into the claims, which were made by a whistle-blower who was active in the market.

Mr Davey said he was "extremely concerned" and would apply the "full force of the law" if needed.

All of the UK's big six energy suppliers have denied any involvement.

Mr Davey told MPs: "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."

The body that represents the companies, Energy UK, said its members would co-operate fully to rebuild trust.

Its chief executive, Angela Knight, said: "This is a very serious issue which must be investigated swiftly. The gas market is an international one with many overseas companies trading on it, as well as organisations that are not energy companies.

"Customers need to have confidence in markets and authorities need to have the powers to regulate well and take action if required."

The wholesale gas market includes everything from the UK's own North Sea gas supplies, to gas from Norway or elsewhere, or arriving in the UK by ship as LNG, liquefied natural gas.

Widespread

The alleged manipulation is said to have reduced the wholesale price.

The whistle-blower, Seth Freedman, worked at ICIS Heren, a financial information company that publishes energy price reports.

His concerns are focused on one instance on 28 September this year.

But he told the BBC he thought that price-fixing was widespread: "Having spoken to traders and other market participants, it seems like manipulation is rife in the gas market."

He said even though the alleged instance may have not added to customers' bills, it was still damaging: "There's certainly a link. They [the power companies] are telling you: 'Look, in order to make our profits and cover our costs and so on, we have to give a price to retail customers which reflects the cost to us.'

"But if you can't trust the market at a wholesale level, it becomes a crisis of confidence. People at retail level are just thinking, 'I don't trust these companies' - and it needs to be scrutinised."

'Less transparent'

Energy companies buy gas at the wholesale price and then sell it on to businesses and domestic users.

The allegation is that the market was rigged in a similar way to the fixing of Libor, the inter-bank lending rate.

It is claimed that on 28 September, dealers made unrealistic bids, at the time when information was being gathered to set the wholesale gas price, to suit their own trading position.

David Hunter, an analyst at M&C Energy Group, said that most wholesale trading is done directly between companies, rather than via an electronic trading system, and that this system is, in theory, easier to manipulate.

He told the BBC: "This sort of trading is less transparent than a fully-fledged market. Hypothetically, someone could seek to artificially lower the price by making small trades below the prevailing market price that may benefit them."

The cost of wholesale gas makes up the majority of our energy bills - 45% of the average energy bill is made up of the cost of wholesale gas, supply costs and profit margins.

'Considering evidence'

The Guardian reported that investigations were taking place into "some of the big six" energy providers, but the brief statements released by both the FSA and Ofgem did not identify any companies.

The FSA said: "We can confirm that we have received information in relation to the physical gas market and will be analysing the information."

Ofgem also said it had "received information" and added that it would "consider carefully any evidence of market abuse that is brought to our attention as well as scope for action under all our other powers".

The government is currently increasing regulation of the energy market.

Its Enterprise and Regulatory Reform Bill is intended to improve the competition regime and the protection of consumers and is currently with the House of Lords.

It is also working with Ofgem on the implementation of the EU Remit (Regulation on Wholesale Energy Markets Integrity and Transparency) which may lead to giving Ofgem greater powers to act against market abuse.

'Unusual'

Labour's shadow energy secretary, Caroline Flint, said that if the reports proved to be true, they "suggest shocking behaviour in the energy market, that should be dealt with strongly".

She said that gas and electricity companies should be forced to sell the energy they generate into a pool, in order to open up the market and ensure fairer consumer prices.

ICIS Heren said it had "detected some unusual trading activity on the British wholesale gas market on 28 September 2012, which it reported to energy regulator Ofgem in October".

It added: "The cause of the trading pattern, which involved a series of deals done below the prevailing market trend, has not yet been established.

"If anyone was to benefit from this, it would have been derivatives traders."