As published in the Financial Times:
UK regulator sees no evidence of gas price rigging
The UK’s market watchdog has found no evidence the country’s gas prices were manipulated in September last year, offering some relief to an energy industry beset by allegations of price rigging across the world.
For the past year, the Financial Conduct Authority and Ofgem, the energy regulator, have been investigating claims by a whistleblower that natural gas traders tried to manipulate the UK’s National Balancing Point gas price, published by ICIS Heren, a price reporting agency.
The NBP price is what wholesale buyers such as the UK’s big six energy companies, banks, commodity traders and hedge funds pay. It contributes to the setting of household energy bills and also has an impact on mainland European gas prices, because of trading between countries.
The FCA said: “It has been concluded that no evidence of the alleged market manipulation could be found and therefore that the interests of consumers have not been harmed.”
The finding comes at a time when energy companies are at the centre of a political storm, because bills are increasing much faster than wholesale energy prices. Separate investigations into commodity price setting are as yet unresolved.
Since the start of the UK investigation, the European Commission has also begun a probe whether big oil companies BP, Royal Dutch Shell and Statoil of Norway manipulated the oil prices published by Platts, a commodity price reporting unit of McGraw-Hill Financial.
In the US, regulators have levied fines of hundreds of millions of dollars on banks including JPMorgan Chase and Barclays for manipulating electricity prices.
This conglomeration of investigations has drawn attention to price-setting in commodity markets, whereby lightly regulated reporting agencies such as ICIS Heren, Platts and Argus, assess prices based on bids and offers from market participants. Traders are not compelled to submit price data, and benchmarks are not necessarily based on completed transactions.
The robustness of those methods is crucial, because the prices of physical commodities underpin billions of dollars in derivative contracts, which also influence what consumers pay for electricity, gas and petrol.
The UK regulators had been examining a series of unusual trades on 28 September last year: the NBP fell 1.7 per cent, after six bids were submitted to ICIS Heren at below market prices at the end of the trading day, when the organisation publishes a daily benchmark price.
After Seth Freedman, a price reporter who worked at ICIS Heren, alerted Ofgem, ICIS reported “unusual trading activity” to regulators.
In a statement at the time, the agency said: “The cause of the trading pattern, which involved a series of deals done below the prevailing market trend, has not yet been established.”
The FCA on Thursday said the companies that submitted the six bids: “provided explanations for the transactions they entered into, supported by relevant confidential information, to demonstrate that their trading activity was not improper.”
“These explanations are credible and no evidence was found which disputes the explanations provided,” the FCA added.
However, the gas market continues to feel the effects of the investigation.
In the aftermath of the allegations of NBP manipulation, high-profile companies including Statoil, several investment banks and commodity traders stopped submitting quotes to price reporting agencies, raising further concern about whether they would be able to publish accurate prices.
Centrica, the owner of British Gas, which prohibits its traders from communicating with price reporting agencies, said on Thursday it would not change its policies.
ICIS Heren and Platts both acknowledged a fall in contributions by price submitters after the investigation was revealed last November, and an executive at one agency said: “In the weeks after our job was really difficult.”
As recently as October, David Davis a senior conservative MP, told the BBC he expected the FCA to find evidence of manipulation:
“My hunch is that’s going to come out and it’s going to find evidence that there was some rigging in the gas market,” he said to the BBC, adding that he was speaking with, “a little bit of inside knowledge”. Mr Davis was not available for comment on Thursday.
A rival pricing mechanism called Tankard, was launched by the brokers Tullett Prebon, ICAP and Marex Spectron. This is based on data from transactions they facilitate.
But price reporting agencies say they have been able to find new sources to provide them with bids and offers, and traders say that most gas transactions continue to reference prices published by Heren.
Price reporters have also taken steps to reassure market participants and governments about their processes, undergoing external audits and publishing more information.
The UK government announced last month that it will consult on introducing criminal sanctions for energy market manipulation, while the European Commission investigation into oil market manipulation is likely to continue for years.
Copyright The Financial Times Ltd. All rights reserved. Please do not cut and paste FT articles and redistribute by email or post to the web.