The hunt for gas price riggers shouldn’t be directed at the Big Six

The alleged rigging of wholesale gas market seems to involve a deliberate manipulation of the price for gas for delivery the following day. More precisely, the whistle-blowers allege that unspecified traders successfully forced down the spot price at 4.30pm on a specific day in September at the end of the gas year.

Some commentators have darkly asserted that this suggested manipulation might influence gas prices paid by UK consumers. The assumption seems to be that it might be in the interests of the Big Six suppliers to force down spot prices at a particular moment. This theory doesn’t bear examination and needs to be immediately abandoned.

There may be good reasons why a trader or group of traders tried to illicitly force down the price for immediate delivery but there is no basis for thinking that this price-fixing would affect retail gas prices in a way beneficial to the Big Six. Though the amount they actually need will depend on the weather on each day, these companies buy most of their gas well in advance. That is, they enter into contracts with suppliers to buy defined amounts for each specific future period. Some contracts will be struck for delivery several years into the future. (If the Big Six didn’t do this, they wouldn’t be able to offer retail fixed price offers).

Their retail prices, which were all recently adjusted upwards, reflect among other things their costs of buying gas from wholesale suppliers in this way. Below, I’ve extracted statements from their press releases on how they look at wholesale gas prices and the effect these have on costs to retail customers. I’m afraid their comments are written in technical language but I think they give a reasonably clear impression of how they estimate their future gas costs and what is the consequent effect on consumer prices. The utilities say that they look almost exclusively at a range of what are called ‘forward’ prices that reflect gas markets well into the future. The spot price for delivery on one particular day has no influence on their perception of prices they will have to pay over the following months and years.

SSE

‘..it is the two year rolling average price that is the most relevant in determining future domestic energy prices’.

Figures for increased gas costs are ‘(b)ased on the average forward price for winter 2012 during the 24 months prior to July 2012 compared to the average forward price for winter 2011 during the 24 months prior to July 2011′

Scottish Power

Scottish Power’s estimates of the rising wholesale cost of gas is derived from a calculation of the ‘Average percentage (rise) based on the 12 month forward wholesale energy cost as at September 2012 compared to the 12 month forward wholesale energy cost as at January 2012′

British Gas

‘The 13% rise in the wholesale market is based on the average forward price for winter 2012 during the 18 months prior to October 2012 compared to the average forward price for winter 2011 during the 18 months prior to October 2011..’

EDF

‘Wholesale gas energy costs based on the average wholesale gas prices for delivery in each quarter in the coming year.’

Last point: we may believe that the Big Six aren’t completely open (see the previous post on this web site) but how can market rigging that reduces the market quotation encourage them to increase their prices?

  1. Roddy Campbell’s avatar

    I haven’t read enough on this to think very hard about it, but one way in which a low spot price can benefit is when you contract with a supplier to buy X of Y over a certain period, with the price of Y fixed on a certain day by reference to a market price.

    A food producer might require X tons of cocoa per day from a wholesaler/supplier. The price for a 3 month period might be struck on one benchmark day by reference to the cocoa market, rather than the price varying each day, giving both parties certainty.

  2. Roddy Campbell’s avatar

    What I mean by this, with ref to gas market, is that the Big Six could have a profit incentive to collude, although in my example it would be the gas producers who would suffer, with the possibility even of benefit to UK consumers.

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