There has been significant publicity over allegations of price fixing in the UK energy markets. We look at the evidence presented and give a view on what can be concluded from it.
Here is the graph that has been widely used by the media to illustrate the allegation that there was an attempt to influence the main Price Reporting Agency in making their assessment of the market price.
Source: The Guardian Website
The trades that have been circled show gas trading at 58p/therm in 6 non sequential transactions at around 4.30pm.
Are these trades significantly out of step with the prevailing market on the day?
Not really, especially if we consider the entire day’s trading as the above graph represents trading from 9am only. Here is a graph that shows the entire day’s trading through one of the main trading platforms.
Data Source: Marex Spectron
For a trader to sell gas at 58p/therm during this particular day does not appear to be significantly out of step especially if this were done in order to correct a “long” position—see below.
Is the timing of the trades significant?
If the allegation is that trades were deliberately enacted at this time in order to try and influence the market then no. Much more likely is that these trades represent the actions of market participants correcting a “long” position for the next working day. It would be natural to do this towards the end of the day (when for example demand forecasts are refined and the position is clearer). If however this was an attempt to influence the assessment of the closing price (presumably because the assessment is made at 4.30pm) then any trades significantly above or below market value would not be used in the assessment. The Price Reporting Agency concerned, has a publicly documented assessment process that excludes unrepresentative data.
What is the Day Ahead market?
This is where the market trades Gas for delivery the following working day. By definition therefore these contracts are only traded on one day for any given day of delivery. Any trader who needs to adjust their position must therefore do it at some time during the only day the contract trades (or alternatively, do so on the day of delivery – “the Within Day market”).
Is it significant that the 28th September is the last trading day before the start of the new Gas Year?
If the allegation is that this was a deliberate attempt to influence the Gas Year pricing then no. Even if Day Ahead prices were being manipulated this would have had no effect on the yearly price commencing 1st October.
Could this affect consumer pricing?
This could only affect the price paid by a larger consumer, whose contract is specifically indexed to the price assessment for the gas delivered on the 1st October. The effect would be to reduce the delivered price for that day only.
It is scarcely conceivable that domestic prices could be affected.
Regulation of the market
In common with other traded commodities, there are different types of counterparties in the Energy Market all regulated by the Financial Services Authority (FSA). There are at least 50 authorised participants trading in the Gas Market including the Energy Suppliers.
The FSA and OFGEM are responsible for detecting and preventing any collusion amongst participants as well as any other market abuse. Our understanding is that both parties are considering whether the evidence presented is sufficient to warrant any further investigation. Price Reporting Agencies in this or any other commodity market do not currently fall under regulation since they are the market “score keepers” rather than market “players”.
Assuming OFGEM are officially nominated by DECC (Department of Energy and Climate Change) as the regulator for REMIT (Regulation on Energy Market Integrity and Transparency) as expected, it will give new investigatory and enforcement powers that will enable OFGEM to take enforcement action against companies found to have breached the new rules. The implementation of this is expected to be complete by mid 2013.
We take no position on whether or not the Energy Markets are subject to manipulation by the Energy Suppliers or any other market participant. No doubt the appropriate authorities will make their judgement on whether further investigation is required.
However based on the evidence considered here, our opinion is that if there is a “smoking gun” then this is not it.
19th November 2012