Gas price reporting methods used by industry media flawed, say traders

The reporting method used by industry media in the British gas market to assess daily prices — which are at the centre of a regulatory probe — is flawed and easy to manipulate, some traders in the sector say.

The Financial Services Authority and energy regulator Ofgem are investigating allegations by a whistleblower that traders have manipulated wholesale prices on Europe’s biggest gas market, a trend-setter across the continent.

Although the example highlighted in the probe relates to the benchmark price on a certain day being lowered and not raised, the issue is a political tinderbox in Britain, where five of the six dominant energy distributors increased retail energy bills for this winter.

“I don’t think it’s possible to exaggerate how serious this would be if the allegations turn out to be true at a time when so many people are struggling to pay their bills, are making huge efforts just to make ends meet,” deputy British prime minister Nick Clegg said on Sky News.

The allegations have also been compared to an uproar this year over rigging of the Libor interbank interest rate, raising questions about the reliability of market mechanisms that directly affect everyday transactions by the public.

Whistleblower Seth Freedman — who works for price reporting agency ICIS Heren and spoke to the Guardian newspaper — sought to show how traders submitted erroneous bids and offers at the end of the day to skew the day-ahead gas contract, which is used to guide a wide-range of physical and futures gas prices.

“Traders always try to jerk the day-ahead close,” the company’s founder, Patrick Heren, now retired, said on Twitter.

“The effects are minuscule compared to the way the government is trying to rig the market,” Heren added, apparently referring to energy market reforms, to encourage renewable sources, that add to prices.

ICIS Heren itself reported “unusual trading activity” to regulators back in October, several weeks before Freedman approached the FSA, regarding UK gas trades done on Sep 28 — the end of the gas financial year, a sensitive period for gas prices.

“The cause of the trading pattern, which involved a series of deals done below the prevailing market trend, has not yet been established,” it said in a statement.

ICIS Heren is the leading price reporting agency, which aims to provide energy company clients with a transparent, daily price of wholesale gas used in contracts for billions of pounds worth of supply deals.

A spokesperson for Bord Gáis said they are monitoring the situation.

— Reuters