News

The Office of Gas and Electrical Markets (Ofgem) has highlighted possible “market abuse” in the wholesale market for energy. An open letter, published on the regulator’s website raised a number of concerns about the behaviour of traders in the industry. Generally, the letter dealt with market manipulation by wholesale traders and other market participants. It listed a number of more specific concerns including the non-disclosure of inside information and a technique known as ‘layering’ whereby traders enter bonus bids and offers to control prices. One of the most concerning abuses highlighted by Ofgem is reminiscent of a recent scandal in the bank-traded foreign exchange rate. The open letter reveals a technique known as “marking the close” where participants buy or sell in such a way so as to deliberately drive prices up or down, when closing prices are being set. This type of underhanded trading technique was used by a number of banks around the world in a recent foreign exchange scandal that implicated, amongst others, Barclays and RBS. In one specific case of FOREX abuse the US Attorney General Loretta Lynch said currency traders had manipulated exchange rates “almost every day” for five years. She went on to say that their actions directly harmed “countless consumers, investors and institutions around the world”. If abuse in the wholesale energy market holds a mirror up to foreign exchange abuses in the banking system, then it can reasonably be assumed that wholesale energy traders are hurting millions of domestic and non-domestic consumers in the UK. Suppliers and traders could also face some stiff fines in the future.

A warning for the wholesale energy market

Since 2013, Ofgem has had the power to levy unlimited fines on traders which break market rules. So far it is a power which they avoided using in any high-profile way but the penalties for market manipulation are historically very steep. The renewed focus on market abuse comes a short while after the ‘big-six’ energy providers were cleared of price fixing and monopolistic behaviour by the Competition and Markets Authority. In this case, the CMA did not charge any of the suppliers, but they did highlight some problems and a growing concern that millions of energy customers were being overcharged for their gas and electricity. While Ofgem has, so far stopped short of launching an investigation into market abuse and failed to level any specific allegations, they have fired a warning shot at wholesale market participants. Market commentators believe that publishing this open letter is the regulator preparing to take action. Karen Anderson, a regulatory partner at lawyers Herbert Smith Freehills said “Wholesale market participants should consider the letter as a warning, effectively a shot across the bows, which, if unheeded, is likely to be followed by enforcement action.” Concern about the state of the wholesale energy market is nothing new. Regulators in the US and elsewhere have already brought cases against some large international traders like Deutsche Bank, JPMorganChase and Barclays. Whether the Ofgem probe results in legal action remains to be seen. Hopefully, the threat of action will be enough to squash malicious trading, relieving some upward pressure on the price of energy.