The U.K. government said it’s prepared to legislate to clamp down on wholesale natural-gas trading should price-fixing allegations prove true.
The Financial Services Authority, or FSA, is investigating claims last month by the price-reporting company ICIS Heren that “unusual trading activity” may have affected gas prices, according to a statement yesterday. Energy Secretary Ed Davey said he’s asked regulators whether they need more authority.
“If we find we need more powers for the regulator, we will act,” Davey said today in Parliament in London. “Depending on what the investigations find out, there are powers to take on individuals and companies that have committed wrongdoing.”
The probe raises questions about how market prices are determined and whether the biggest utilities, which are involved in setting prices, may also profit by manipulating them. Prime Minister David Cameron’s government has been pressing electricity and gas suppliers to rein in costs after Centrica Plc (CNA) and SSE Plc (SSE) raised customer prices.
“I don’t think it’s possible to exaggerate how serious this would be if this turns out to be true,” Deputy Prime Minister Nick Clegg said today in an interview on Sky News. “At this time of year gas is one of people’s biggest bills. If there’s evidence that there was price-fixing in the market, people would be enraged.”
The investigation broadens the efforts of British financial regulators to curtail market abuses. The gas-market allegations follow the recent Libor-rigging scandal, which led to a record 290 million-pound ($461 million) fine for Barclays Plc (BARC) for manipulating the benchmark interest rate. Several other banks have also faced accusations of colluding to set Libor.
“If the allegations are true, then there do seem to be some connections,” Greg Clark, a junior Treasury minister, said today on BBC Radio 4’s “Today” program. “It’s very important we get to the bottom of whether the allegations are true, but if they are then action needs to be taken very quickly.”
Martin Wheatley, a managing director at the FSA commissioned to investigate the Libor abuse, had raised concerns it may spread to energy markets. He has begun work with international regulators to ensure the “same grip that’s been taken on Libor can happen to any other indicators,” Clark said.
Energy Secretary Davey said he wrote to regulator Ofgem, the FSA and the Office of Fair Trading to ask whether they need more powers to oversee the energy markets. Any recommendations could be included in draft energy legislation due to start its path through Parliament next month.
“The country will expect us to take firm action if these things are proved true, and we will,” Davey said. “This evidence may be used in criminal or civil proceedings. We encourage any individuals or companies to bring forward any evidence they have.”
ICIS, a unit of Reed Elsevier Plc (REL), said it identified a “series of deals done below the prevailing market trend” on Sept. 28 and hasn’t yet determined a cause. ICIS is the smallest of three independent price-reporting companies that monitor energy markets. The others are Argus Media Ltd. and Platts, a unit of McGraw-Hill Cos. (MHP:US)
The opposition Labour Party urged the government to act.
“Customers are getting a raw deal,” said Caroline Flint, the Labour member of Parliament who speaks on energy. “These companies have been allowed to run their businesses in such a complicated way that it’s almost impossible to know what the true cost of energy is. Most energy is bought and sold through secret backroom deals.”
Flint’s comments follow a Guardian report yesterday that a former trader who worked as an ICIS reporter gathering prices raised concerns after spotting irregularities. It said some of the six biggest utilities were among those attempting to alter gas prices and that the production of key market benchmarks by one price-reporting company makes them unreliable and vulnerable to conflicts of interest between reporters and traders.
“The allegations are likely to spark fresh criticism of the lack of competition among the Big Six utilities in the U.K.,” Roderick Bruce, an industry analyst at IHS Energy, wrote in a note to clients. “The most scrutiny is likely to fall on price-reporting agencies, whose unregulated role in energy price-setting is again being questioned.”
The price of next-day gas in the U.K. has risen 24 percent this year amid seasonal gains in demand and supply disruptions from Norway.
U.K. utilities said they comply with regulations.
“Centrica has very robust governance and compliance policies, which regulate its market participation and behavior,” Britain’s biggest energy supplier said today in a statement. “Centrica’s traders are prohibited from providing price information to price-reporting agencies.”
SSE, Britain’s second-largest energy supplier, said it’s “entirely confident that our energy portfolio management team operate in a fair and legitimate way.” SSE raised consumer gas prices by 9 percent from August. Centrica said last month it would increase them about 6 percent starting Nov. 16.
EDF Energy, a unit of Electricite de France SA, said “EDF Energy does not participate in loss-leading trading activity and considers it to be against existing market regulation,” according to a statement. “We make information likely to impact market-price formation publicly available on our website,” in compliance with European Union regulations.
Georg Oppermann, a spokesman for EON AG (EOAN), said “if there was such behavior it is illegal in our view. However, we are confident our traders behaved correctly.”
RWE AG (RWE) said it supports the probe, and that the company wasn’t involved in “any of the trades which we understand are under investigation.”
Ofgem said in a statement it “received information relating to trading in the gas market and is looking into the issue.” The FSA also confirmed it received information and will analyze it, while the Serious Fraud Office said it would consider whether to investigate the allegations.
“If these revelations stand up to analysis by the FSA and Ofgem, then this is corruption on a massive scale,” said Caroline Lucas, a lawmaker from the Green Party. “It’s about time we had full transparency and accountability in the energy market. For far too long, the big energy companies have called the shots on government policy.”
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