Energy policy has been plunged to new levels of confusion today by accusations that energy traders may be manipulating the daily price of gas in order to save millions of pounds on long term contracts.
The evidence so far doesn't point to energy companies artificially inflating the wholesale price. Actually it suggests the reverse.
If there is wrongdoing the evidence suggests that traders have worked to artificially lower the price paid by utilities buying gas for customers in the UK. It could even have saved consumers money.
Investigations
The allegations from a whistle-blower published in the Guardian have prompted action by energy regulator, Ofgem and the Financial Services regulator the Financial Services Authority (FSA).
The Secretary of State, Ed Davey is to give a hastily prepared statement to Parliament as his opposite number, Caroline Flint, has called again for the abolition of the regulator charged with investigating the abuse - Ofgem.
Energydesk has learned that any investigation - and currently there is no actual investigation - would be split between the two regulators.
Ofgem is charged with examining the physical market - actual trades in gas - whereas the FSA's job is to look at any impact those trades may have on the futures prices.
The two are linked. The price paid by utilities who burn gas or provide it to customers in many futures contracts is often set in relation to the daily - or spot - price at a particular time.
But during a day traders buy and sell at a range of prices - offers and bids are made - there is no one price.
Breaking the system
So for any long term deal tied to the daily market to work - you need a daily reference price which broadly and accurately reflects the price on that day.
The reference price is set by firms like ICIS Herren who look at the actual trades at a particular time and particular day and, based on those trades, produce a price which can be used in contractual negotiations. The whistle-blower in the Guardian story, Seth Freedman, worked at ICIS.
It's fairly easy to see how the system can break.
If traders working for utilities find a way to manipulate the price - perhaps by offering to sell gas at well below the going rate just when ICIS are looking to set the level - they can secure big savings on longer term deals.
It only works, if the market is un-transparent and dominated by relatively few trades, and relatively few traders. Most analysts would agree the UK's gas market broadly fits that criteria.
Implications
What's harder to know is what it means.
If the market can be manipulated down, it could probably also be manipulated up buy traders putting through trades at artificially high prices. But there isn't yet any evidence of this.
The same logic also applies to other markets.
The government is about to put in place a system for the entire electricity sector based on bill payers subsidising the difference between a market 'reference' price and an agreed strike price.
If that price can be pushed down artificially, bill payers would be on the hook for more than they should do.
Ultimately it's a problem with small, un-transparent markets dominated by large companies which are frequently on both sides of the deal buying and selling gas to each other, before passing the bill on to consumers.
It's a very similar dynamic to that seen in the banking industry.
So long as government policy doesn't tackle this there is a risk that regulators will be forever chasing the trader’s tails.
