The energy sector was all over the news last week after the Financial Services Authority (FSA) confirmed it is investigating claims made by a whistleblower in relation to trades that appear to manipulate the wholesale price of gas. Ofgem has also raised competition concerns that the dominance of the big six power companies is placing consumers at a disadvantage by allowing the leading industry players to dictate the tariffs they want. So what format are these investigations likely to take?
The claims relating to the supposed price-fixing of wholesale gas were made by Seth Freedman, a market reporter at Icis Heren. Icis Heren is a price reporting agency that collates information from traders each day in order to set a benchmark for the wholesale price of gas. In basic terms, this is obtained by reference to the trading price at 16.30 each day. The daily benchmark price is used as the basis for derivative contracts entered into by energy companies. The lower the rates, the cheaper the contracts are, so traders have a vested interest in the benchmark on any given day.
It is this “trading window” that Freedman alleges has been manipulated not only generally, but also specifically on 28 September 2012. This date is significant because it is the last day of the financial year for the gas industry and the benchmark on this date could be influential in the setting of future prices. Freedman’s allegations include tape recordings with traders, which suggest that manipulation of this sort is widespread and an open secret in the industry.
There are more than vague echoes of the recent Libor investigation, where banks were accused of manipulating the rates at which they borrow money. As we saw in the Libor case, it is not only the FSA that could become involved. Last week, the Serious Fraud Office (SFO) confirmed it was investigating those involved in the Libor manipulation and that arrests would be likely within a month if there was any suspicion of criminal conspiracy to defraud. There is the real possibility that this current gas market case could follow suit.
Individuals proved to be the guiding minds of companies that engage in criminal conduct can face sentences of imprisonment, fines and confiscation of assets. Furthermore, if there is any evidence of incentives or kick-backs, this could provide the first big Bribery Act 2010 prosecution that the SFO has been waiting for.
Both Ofgem and the FSA are currently considering whether to take action on the wholesale price-fixing allegations but, as with the Libor case, the SFO may also claim jurisdiction. If all three bodies get involved in the energy pricing case, they will each have a slightly different focus and different powers of investigation and enforcement.
Primarily, the FSA will be focused on the traders and the extent to which there have been breaches of the regulatory regime. The body will be assessing the extent to which firms authorised by the FSA have failed in their obligations to maintain systems and procedures to prevent this sort of behaviour. The energy companies are going to have to prepare themselves to answer questions about what incentives were provided to the traders to manipulate the benchmark – and they will need evidence to back up their responses.
Ofgem’s interest, on the other hand, is likely to be more competition based. The big six energy companies have a 99 per cent market share in total, and Ofgem will want to establish whether there has been any collusion or acts done in concert – and if so, to what extent – as well as what effect their behaviour has had on competition. The watchdog has the power to impose fines on companies of up to 10 per cent of their global turnover. Interestingly, Ofgem also has criminal powers under the Enterprise Act 2002, which, if invoked, could see individuals facing prison sentences and confiscation proceedings on which there is no financial cap.
As industry-specific regulators, Ofgem and the FSA have powers that can be technical and need to be narrowly construed, which is why the SFO is often brought in to deal with cases like this. This particular case has a broad remit. Between them, the three bodies are able to bring criminal prosecutions against individuals and companies for offences such as conspiracy to defraud.
The main challenges for the companies and individuals involved in the alleged gas price-fixing case is to manage the publicity fallout while dealing with demands from regulators to provide information and evidence. This is usually done alongside an internal investigation aimed at identifying whether there is substance to the allegations and whether there will be any liability as a result. It is often useful to get ahead of the prosecution in terms of knowledge and understanding so that if it is possible, things can be brought to a swift conclusion to limit the reputational damage.
Joanne Hall is an associate partner in DWF’s regulatory team
This article first appeared in Utility Week’s print edition of 23rd November 2012.
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