Britain’s top energy companies have been accused of fiddling the price of gas and electricity. Hundreds of millions of dollars are at stake. The UK Government is looking into it.
But has the same thing been happening in America?
British bank Barclays Barclays has been fined $470m by US regulators for manipulating the American electricity market.
The US Federal Energy Regulatory Commission (FERC) has provisionally fined the bank￼ $435m and ordered it to repay $34.9m in “unjust profit.”
It accused the lender of engaging in a “coordinated scheme to manipulate trading at four electricity trading points in the western US”. Four Barclays traders, including Scott Connelly, managing director of North American power￼ at Barclays, were named and fined a total of $18m for taking part, said reports. Barclays said it would fight the allegations “vigorously”, but its boss recently resigned when the bank was caught fixing the Libor rate, a crucial number, fixed by market agreement each morning, that determines how much you and I pay our credit card companies
In the UK whistleblower Seth Freedman has taken a dossier of data and documents allegedly showing price manipulation by the big six energy companies in the wholesale gas market to the Financial Services Authority.
Both the FSA and the energy regulator, Ofgem, which was separately approached by Freedman’s employer ICIS Heren, at his request, have now launched investigations.
A former college of Seth Freedman, Tim Fettis, who had acted as an electricity market price-setter at ICIS Heren, said he had left the company after a couple of months because he felt uncomfortable about taking on such a responsible job with little training.
“The current energy system is open for manipulation, there’s no doubt, not just in gas but in electricity, also because the market is so illiquid [ie low trading volumes],” he added.
And a former energy trader has made other allegations about the electricity and gas markets to ITV News. Nick Grealy, an energy consultant who publishes the No Hot Air website but formerly worked for EDF Energy, said “they [traders from non-EDF companies] would also openly manipulate the market via the price reporting agencies,”
Jason Torquato, who also worked at ICIS Heren as a gas-price setter, said he was certain any manipulation of indices created by the price-reporting agencies could “influence retail gas prices”.
He said he had noted “half a dozen or a dozen” occasions over the course of a year.
In another enforcement action against a major financial institution alleging an increasingly familiar electricity market manipulation scheme, the Federal Energy Regulatory Commission this week accused Deutsche Bank of scheduling phantom power flows in California to benefit its financial positions in the transmission rights market operated by the state’s grid operator.
In an order issued late Wednesday, the commission proposed fining Houston-based Deutsche Bank Energy Trading LLC $1.5 million and ordering it to disgorge $123,198 in “unjust profits” for an allegedly fraudulent plan concocted by two of the bank’s energy traders to make money on positions held by the company in the “congestion revenue rights” (CRR) market operated by the California Independent System Operator (CAISO).
Deutsche Bank said it would fight FERC’s allegations, with a spokesman saying Thursday: “Deutsche Bank Energy Trading engaged in transactions that it believed were appropriate and beneficial to the energy markets and consumers. We believe that the FERC enforcement staff’s conclusions are erroneous and we intend to contest them.”
Markets exist to enable electricity buyers and sellers to hedge their risks against grid congestion. However, the markets are also open to speculators to bet on whether certain power lines will become congested at various locations.
The financial transmission rights are separate from physical electricity markets also operated by grid operators in which power buyers and sellers schedule actual power flows on specific power lines.
FERC’s complaint against Deutsche Bank details a manipulation scheme similar to those outlined by the agency in previous enforcement actions against Barclays Bank plc and the former Constellation Energy Group, now part of Exelon Corp. In all three cases, traders scheduled fraudulent or money-losing power flows in physical electricity markets to put their associated financial positions into the black.
The biggest penalties were levied against Constellation, which FERC in March fined $135 million and ordered disgorgement of $110 million in profits for a 2007-2008 scheme in which the Baltimore-based company manipulated electricity prices or power flows in three U.S. markets and one Canadian market to benefit its financial positions in the New York and New England markets.
While Constellation is an energy company, FERC recently set up a new market data analysis office that appears to be closely scrutinizing some of the big financial institutions that increasingly have entered a variety of energy markets, carrying out both physical electricity and natural gas transactions and trading futures and derivatives linked to physical energy markets. Movements in physical markets can affect the financial energy products and vice-versa, and both FERC and the Commodity Futures Trading Commission have increased their surveillance of interactions between those markets.
FERC in July disclosed in court filings that it is investigating bidding behavior by JPMorgan Chase & Co. in California and Midwest power markets.
And FERC Chairman Jon Wellinghoff made clear this week that his agency’s market data analysis office is combing carefully through past market activity for possibly suspicious trading patterns.
“It is fair to assume that [investigators in FERC’s market data analysis office] are looking everywhere they can, including at past events, to determine if we can reveal any actors that may have been acting in an inappropriate manner in the market…,” he said at a press breakfast Wednesday sponsored by IHS The Energy Daily and the law firm of SNR Denton. “Those people are…very willing to go back and dig into data in depth to determine if there is anything that we need to do with respect to fraud and manipulation in markets.”
The case against Deutsche Bank is considerably smaller in scope than the allegations against Constellation, and it involves a scheme that lasted less than two months in early 2010.
An investigation report by FERC’s Office of Enforcement says two of the bank’s energy traders developed a manipulation scheme to assure that CRR positions held by the company at the so-called Silver Peak location in CAISO’s grid remained profitable.
The FERC report said the bank profited on the CRR positions if there was no congestion affecting power imported at Silver Peak, and that the company made money on those positions until Jan. 19, 2010, when CAISO surprised the Deutsche Bank traders by “derating” import capacity into CAISO at the Silver Peak gate, which was located on California border. The grid operator reduced import capacity so maintenance could be done on its system.
The derating caused import congestion, leading Deutsche Bank to lose money on its CRR positions.
After unsuccessfully arguing with CAISO officials about whether the grid operator should have accepted import bids given its derating action, the two Deutsche Bank traders developed “the export scheme” to put its CRR positions back in the black. The scheme involved scheduling power flows into CAISO at the so-called Summit interchange and then exporting the power through the Silver Peak gate, with those increased exports having the effect of reducing import congestion.
However, FERC investigators said they learned that Deutsche Bank was not “wheeling” power into and out of the CAISO system to serve real customers or due to supply and demand fundamentals, as was legally required. Rather, the bank’s traders simply were buying power on the neighboring grid system of Sierra Pacific Power, sending it through the CAISO system and then scheduling it to return to the Summit interchange through the Sierra Pacific system.
“Deutsche Bank falsely submitted the wheeling-through transactions,” the FERC investigative report said. “In fact, Deutsche Bank was not wheeling power and its transactions did not have a resource or a load outside the CAISO, as required by the tariff. Instead, outside the CAISO on the Sierra Pacific Power system, [the Deutsche Bank traders] scheduled power from Silver Peak to Summit, thus creating a circular schedule.”
Further, the FERC report said that once the traders realized they could reap profits from their fraudulent export scheme, they increased their CRR positions to make even more money from their phantom power flows.
“Having figured out how to avoid the consequences of their losing CRR position through false wheeling-through transactions, [the traders] then sought to capitalize on this strategy beyond avoiding losses on previously-purchased CRR positions
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