Gas Market Fraud
Oral Answers to Questions — Justice
Edward Davey (The Secretary of State for Energy and Climate Change; Kingston and Surbiton, Liberal Democrat)
My Department and the Treasury were informed on Friday afternoon that the Financial Services Authority had received allegations of manipulation of the UK gas market. As I said last night, I am extremely concerned about these allegations. Market abuse is always wrong, but, at a time when people and companies are struggling with high energy bills, the country would expect us to take firm action, if these allegations prove true, and we will.
These allegations of market manipulation are being taken very seriously. We will support the regulators taking whatever steps necessary to ensure that the full force of the law is applied, if they are true, so that any guilty parties are held to account. In the first instance, the FSA and Ofgem will consider these allegations. Ofgem has the lead responsibility for these physical markets, with the FSA leading on any associated financial market. Both regulators have already committed significant resources to doing this. I and my officials have been in close contact with both regulators over the weekend, and we continue to support them in their work in whatever way we can.
It is early days but the FSA and Ofgem are examining the evidence they received. Given that this evidence may be used in criminal and/or civil proceedings, however, it is important not to pre-empt the work of the FSA and Ofgem or their conclusions. At this stage, we encourage any individuals or companies to act on any concerns they have and to bring forward any evidence of market manipulation. People should know that the powers exist to protect the identity of whistleblowers, although in this instance the individual concerned has chosen to forgo his anonymity.
Ofgem and the FSA are market regulators, independent of Government and staffed by market experts. Together with the Office of Fair Trading, these organisations have a range of powers available to them, including the ability to act against the manipulation of financial markets, collusive activity and the abuse of strong market positions.
The Government have a strong record of providing regulators with the powers they need to tackle market abuse. Where regulators and others have identified gaps in their powers, we have acted quickly to address them. For example, the Government acted swiftly to tackle the attempted manipulation of LIBOR and EURIBOR by implementing in full the recommendations of the Wheatley review, including the statutory regulation of benchmark activities. We also responded to Ofgem’s request that we extend its powers to tackle abuses that take advantage of network constraints. The Government have also undertaken a wholesale review of how competition law is applied in the UK, ensuring that it is fit for purpose and can tackle collusion and abuse of strong market dominance, and so protect consumers.
The Government have also taken a leading role in the development of the EU regulations on wholesale energy markets integrity and transparency—often referred to as REMIT. Those prohibitions on insider trading and market manipulation came into force in December 2011, which will ensure that regulatory bodies across the EU
can tackle such abuse in wholesale energy markets. The UK was already aiming to be one of the first countries to implement REMIT in full, and the Government have been working with Ofgem over the past few months on the detailed implementation of these powers. In case the existing wide-ranging powers to tackle market abuse and these new REMIT powers are insufficient, however, I have written to the FSA, Ofgem and the OFT, asking them to identify any remaining gaps in their powers to deal with allegations of this sort.
At this early stage in the investigation, it is not possible to understand what the impact on consumers, companies or markets might have been, if the allegations are proven to be true, but I can assure the House of our absolute determination to clamp down on any abuse that is uncovered, wherever it might be and by whomsoever it might have been committed. It is my job to protect consumers, not least the most vulnerable, who can suffer the most when markets are abused. For now, it is right and proper to allow the independent market regulators to proceed with their investigations, with our full support, and I commit to updating the House when we learn more.
Caroline Flint (Shadow Secretary of State for Energy and Climate Change; Don Valley, Labour)
I thank the Secretary of State for advance sight of his statement.
The wholesale gas price makes up about half of the average consumer’s bill, and as we know, energy companies are quick to blame wholesale costs when they put up people’s bills. Therefore, any suggestion that the wholesale gas market has been manipulated is a serious allegation that needs a full and rapid investigation. As the Secretary of State has said, the Financial Services Authority and Ofgem are looking into those allegations.
On the investigation being undertaken by the FSA, let me ask him three clear questions. First, when did the FSA initiate its investigation, and if he was informed about the allegations on Friday, why did he not come to the House yesterday, instead of leaving the public to learn about them in the press? Secondly, can he provide the House with any more information about the investigation’s remit and terms of reference? Thirdly, when does he expect the FSA to report its findings?
Separately, I understand that Ofgem is also looking into allegations made by a price reporting agency about unusual trading behaviour on
Whatever the outcome of the investigations, the truth is that the energy companies have been allowed to run their businesses in such a complicated way that it is almost impossible to know the true cost of energy. The allegations that have been made in the past 24 hours suggest deep structural problems with the way in which our market works and is regulated. That is why over the
past year I have argued for radical reform of the energy market to make it more transparent and more competitive, as well as for the creation of a tough new regulator.
On the first point, does the Secretary of State agree that the main reason it is so difficult to work out the true cost of energy is that most energy is bought and sold through secret, back-room deals and that energy companies are allowed to generate power, buy it from themselves and sell it on to the public? Does he agree that, with the energy Bill due imminently, now is the time to force the energy companies to sell all the power they generate into an open pool, which anyone could bid to retail to the public? That would improve transparency, increase competition and put downward pressure on bills.
On the second point, if the existing regulation of the energy market was working properly, why has it taken a whistleblower to bring the allegations to light? When we last debated the energy market just two weeks ago, the Secretary of State defended the existing regulator, Ofgem, and said that my proposal to create a tough new regulator with a statutory duty to monitor the relationship between wholesale and retail prices would be
“very damaging to the interests of energy consumers”.—[Hansard, 1 November 2012; Vol. 552, c. 364.]
In light of these allegations, can he tell me today whether he still has confidence in Ofgem?
Energy bills have risen by more than £200 in the past two years and the latest round of price hikes will add another £100 this winter. Business as usual is not an option. Today’s allegations of price fixing in the gas market show that it is more important than ever that we reform Britain’s energy market to make it fairer and simpler, and create an energy market that the public can trust.
Edward Davey (The Secretary of State for Energy and Climate Change; Kingston and Surbiton, Liberal Democrat)
I am grateful for the right hon. Lady’s response. Let me try to deal with all her questions.
I understand that the FSA was approached by The Guardian and heard the information from the whistleblower last week. My understanding is that the FSA will follow the normal remit for any such investigation, considering whether an offence has been committed once it has looked at the allegations and reviewed the evidence. Of course, we cannot give detailed timing for that, and I am surprised that the right hon. Lady expects me to do so. That is a matter for the independent regulatory bodies, as they go about their process in the proper way.
The right hon. Lady asked why I did not come to the House yesterday. The reason is that we have rules to protect whistleblowers. It would have been quite wrong for me to come to the House before the whistleblower had made their statement. I hope she accepts that. We were ready to come to the House, but we were waiting for the information to enter the public domain in the proper way, and I have come to the House in the first instance after that.
The right hon. Lady asked about Ofgem’s role. Ofgem is working jointly with the FSA and it is important that it does so, because we do not yet know, as it looks at the allegations, whether there has been a problem in the energy markets—the physical markets—or the financial markets. We do not know whether financial services regulations or other regulations will have to be used, so Ofgem is engaged, just as it should be, in working with its fellow regulators.
The right hon. Lady asked whether the OFT would be involved. Again, that will depend on the nature of the allegations as they are analysed, and whether there has been an abuse—a breach—of competition powers in some way. Ofgem has concurrent powers with the OFT, as the right hon. Lady knows, but the OFT has more experience in some areas, particularly in prosecuting cartel offences. However, these are early days and this is speculation. We do not yet know whether the OFT would be involved, but clearly it stands ready.
The right hon. Lady then talked about the pool. She has concerns about the lack of transparency in energy prices, particularly electricity prices, which she and I debated in the last Opposition day debate on the issue. I explained that her proposals for a pool would not sort out the problem of liquidity. It is our proposal to bring forward reserve powers in the energy Bill, in case Ofgem’s proposals on managing auctions—or whatever it ends up deciding on improving liquidity—do not work. However, we on the Government Benches are absolutely committed to extra liquidity and more transparency of pricing, because that will drive competition, which is clearly the best way forward.
The right hon. Lady continues to suggest that the pool is the answer. These are early days, so it is certainly not clear that a pool would have helped with these offences. However, I remind her that it was the previous Government who abolished the electricity pool, partly because Labour Ministers considered it to be open to market manipulation and therefore detrimental to consumers—so her proposals for a pool are even less appealing as a result of these allegations.
The right hon. Lady now invites me to support her proposal on Ofgem, but from my experience of working with Ofgem and the FSA over the weekend and this week, and of having my officials work with them and seeing them in action, I take completely the reverse point of view. She ought to withdraw her proposal and support the role of an independent regulator. Ofgem has extensive powers; we are adding to them. Ofgem has used those powers where it has felt it necessary. Disbanding Ofgem at the moment would not speed up the investigation or help consumers with their bills now, so I am afraid I am not tempted to take up that proposal from the right hon. Lady. It would be totally unacceptable if people were profiting from manipulating energy prices, so I believe the whole House should back these investigations.
John Bercow (Speaker)
Order. A great many hon. and right hon. Members are seeking to catch my eye. I remind the House that there is a debate to follow, under the auspices of the Backbench Business Committee, on child sexual exploitation, which I can inform Members is significantly subscribed, so if colleagues are not to be disappointed now, there is a premium on brevity from Back and Front Benchers alike.
Anne Main (St Albans, Conservative)
I welcome today’s statement. Can I have an assurance that if it is proved that there has been market manipulation, there might be some form of redress for people in fuel poverty in my constituency and others who may have suffered as a consequence?
Edward Davey (The Secretary of State for Energy and Climate Change; Kingston and Surbiton, Liberal Democrat)
It is because of people in fuel poverty that we should take such allegations as seriously as we are taking them, although I should say to my hon. Friend—no doubt I shall say this to other hon. Members—that these are early days. We do not want to speculate on the exact nature of the offence or on whether it has been detrimental to individual consumers or companies, so I would guard against jumping to conclusions. However, she will know that if detriment to consumers can be proven, there are powers in competition law for different types of redress.
Frank Dobson (Holborn and St Pancras, Labour)
Does the Secretary of State not agree that since the hedge funds and banks got involved in this market and it is no longer confined to the producers and distributors of gas, it has become nothing more than a speculative racket? Would he also acknowledge that the ultimate expression of a speculative racket is somebody trying to manipulate the market?
The investigations will determine whether anyone has been involved in a racket. I will not prejudge those investigations, although the right hon. Gentleman seems to wish to do so. He is concerned about the role of people involved in hedging, but that can be quite important for a market, in that it can make it more liquid, which can reduce prices. I would counsel him against suggesting that we completely pull apart the liquidity of the gas market.
Martin Horwood (Cheltenham, Liberal Democrat)
These allegations could expose real abuse of hard-pressed families, but will the Secretary of State be wary of the Opposition’s call to break up Ofgem? As the NHS and the BBC might testify, reorganisation can sometimes make things worse, rather than better. The important thing is that the regulators take their time, reform the system if they have to, and put in place real lessons learned for the future protection of consumers.
My hon. Friend is absolutely right. It is completely wrong to jump to conclusions until the regulators—in this case, the FSA and Ofgem—have had a chance to do their work. I really cannot see that a massive reorganisation would help at the moment. We need to ensure that the regulators have the powers that they need to do their job, and we will ensure that that happens.
Pat McFadden (Wolverhampton South East, Labour)
I first raised the potential for benchmark price fixing with the FSA some weeks ago when it appeared before the parliamentary banking inquiry. Does the Secretary of State agree that it would be appalling if, despite being able to fix the LIBOR issue because the FSA has the necessary powers, we lacked the powers to prevent price fixing in areas such as the energy and food markets? I would like to ask him to do two things. First, will he ensure that any gaps in the regulatory powers are filled, if necessary through amendments to the energy Bill? Secondly, will he ensure the maximum level of international co-operation on benchmark prices, which are often set globally?
I am grateful to the right hon. Gentleman for his contribution. He is right to say that, if we find that the regulator needs more powers, we will act. I have
made that absolutely clear. He is also right to mention the issues arising from the Wheatley review and the LIBOR issue. We need to ensure that the price reference agencies, the benchmarks and the indices that are used extensively in a variety of financial and commodity markets are properly considered in the reviews. Martin Wheatley has made a number of recommendations, the European Commission has produced a consultation paper on these matters and the International Organisation of Securities Commissions is looking into them, so there is international work being done. The right hon. Gentleman is quite right to say that we must ensure that our domestic regulation and international regulation are able to tackle these issues.
Jonathan Evans (Cardiff North, Conservative)
Are the Government not in the curious position of rather wishing that the European regulation was already in force? Will the Secretary of State tell the House what the penalties would be under the remit regulation? I guess that they would be far greater than those left by the Labour Government.
My hon. Friend is right; this is an excellent EU regulation, on which we have been leading the way and which we believe has a great role to play. The regulation might not be relevant to these allegations or to the particular abuse, if abuse is found. I do not want to prejudge the investigations by Ofgem and the FSA, but he is right to say that the coalition Government are taking action to stiffen regulation in this area.
Pete Wishart (Shadow SNP Spokesperson (Culture and Sport), Shadow SNP Spokesperson (Constitution); Perth and North Perthshire, Scottish National Party)
If the allegations are true, it will mean that the hard-pressed energy consumer has suffered artificially high prices. Fining the energy companies would not be enough. Will the Secretary of State guarantee that the consumer will benefit from reduced costs, and that if he does not have the powers to achieve that, he will get them?
Again, we should not speculate. We do not know whether an offence has been committed, and we do not know what the implications of any such offence might be for individual consumers, for companies or for markets. We must not jump to conclusions but, as I said to my hon. Friend Mrs Main, if it turns out that there has been detriment to consumers, there are powers to give them redress under existing law.
Andrew Selous (South West Bedfordshire, Conservative)
LIBOR, oil markets and now gas: it is a depressing litany. Does the Secretary of State agree that we are a Government who believe in social responsibility and that, if market manipulation is proven, ignorance will be no excuse and that senior management—not just traders—should be held to account?
That will depend on what the investigations find out. There are powers to take on individuals and companies that have committed wrong-doing. Depending on what the offence is shown to be—if an offence is indeed uncovered—there are civil and criminal penalties.
Derek Twigg (Halton, Labour)
My constituents are becoming increasingly angry about the cost of living, about the rise in the cost of fuel and energy and, in particular, about the lack of Government action in
getting a grip on the energy companies that have ripped them off. May I ask the Secretary of State one specific question? Before the whistleblower came to the attention of the Department, was any other information provided to suggest that this type of fraud was possible or going on?
I am not aware of any such information. The first time I learned from the regulatory authorities about these allegations was on Friday afternoon, as I said in my statement. I have to say to the hon. Gentleman that this Government are taking a lot of action to help consumers with their electricity and gas bills, including through the warm home discount, which is helping 2 million of our most vulnerable citizens and taking £130 directly off the bills of 1 million of the lowest-income pensioners. We also have the green deal and the energy Bill, which will drive competition and ensure that we have competitive retail and wholesale energy markets.
Robert Smith (West Aberdeenshire and Kincardine, Liberal Democrat)
As Energy Action Scotland—a fuel poverty charity of which I am an honorary vice-president—has pointed out, our constituents are facing bills that have gone up on the basis of the wholesale market being a major contributor. They need to have confidence in the wholesale market. My right hon. Friend says that we cannot yet see the impact of these specific allegations, but does he acknowledge that it is important for the market that investors and consumers can put their trust in proper regulation?
I could not agree more with my hon. Friend. It is absolutely critical that markets are fair, because British consumers deserve fair markets. In my previous ministerial role at the Department for Business, Innovation and Skills, I was charged with reviewing competition law. I was responsible for a lot of the reforms in the Enterprise and Regulatory Reform Bill, because I believe that we need to ensure that our markets are working properly and in the public interest.
Sandra Osborne (Ayr, Carrick and Cumnock, Labour)
How can the Secretary of State still have confidence in Ofgem when it has signally failed to force the energy companies to pass on price cuts to consumers? Our constituents are suffering badly as a result of that.
I refer the hon. Lady to Ofgem’s “Retail Market Review”, which was published recently after a great deal of study. It contains a set of proposals for how we might reform tariffs. I commend the review to all right hon. and hon. Members. We are reading it in detail before we come forward with our own proposals to help customers around the country with their tariffs.
Robin Walker (Worcester, Conservative)
I accept that it is too early to speculate on the outcome of the investigations, but if the allegations are proven to be true, my constituents who struggle to pay their heating bills will be appalled and will expect to see large fines imposed. Will the Secretary of State clarify whether, in the case of each of the regulators involved, the fines would be returned to consumers or kept within the industry?
My hon. Friend makes a good point. At the moment, certainly so far as Ofgem is concerned, the fines do not go to the consumer. This Government have consulted on changing that, however, and we are making
provisions in the forthcoming energy Bill to ensure that any fines would go to consumers if malpractice had been proven. That might not apply to whatever offence is found as a result of these investigations, but we are changing the law so that when an energy company does not play fair by a customer, the customer will benefit from the fines imposed.
Stella Creasy (Shadow Minister (Home Affairs); Walthamstow, Labour)
The Secretary of State trumpets the work that the Government are doing to tackle abuses in the markets that affect consumers, yet just today we have found out that 5 million people are having to turn to legal loan sharks because of the Government’s failure to regulate the consumer credit market. Will he give me an assurance that there will be no delay in taking action in relation to that market, so that those who are now facing bills that push them further and further into debt can get some redress?
I am grateful to the hon. Lady for her question. She will know that consumer credit markets are regulated. I know she has been campaigning for a particular type of regulation and a particular type of credit, but it would be a caricature to say that consumer credit markets are not regulated at all. These markets are also regulated, and this Government have strengthened that regulation.
Bob Stewart (Beckenham, Conservative)
Will my right hon. Friend ensure that, if gas market fraud has occurred, the investigation identifies exactly who gave the order and who gave the instruction, because that person, in whatever company, is the person most guilty—and they most of all should have the book thrown at them?
I share my hon. Friend’s sentiments, but I stress that it is up to the independent regulators to investigate in the way that the law prescribes. I do not think my hon. Friend would expect me to do the investigations myself. We create the legal framework, and it is under that framework that Ofgem, the FSA and, if necessary, the OFT conduct their work.
Clive Efford (Shadow Minister (Culture, Media and Sport); Eltham, Labour)
The Secretary of State said in his statement that he knew that the FSA had received allegations about the fixing of gas market prices on Friday afternoon, but rumours about it existed before that time. Will he say when Ofgem first became aware of those rumours and what action it took on them? Would he not expect Ofgem to have made his Department aware of those rumours prior to this issue coming to light after the whistleblower made his information available?
Ofgem has a daily role to monitor energy markets and make sure that they operate properly. In that normal process, it encounters a number of allegations. These will not have been the first allegations that it has received. Ofgem does not announce every particular allegation; it has to go through a proper process. Now there appears to be some evidence backing these allegations, but the reason we have an independent regulator is to allow it to get on and do the investigation. I suggest that that is exactly what we should do.
David Mowat (Warrington South, Conservative)
First LIBOR and now—potentially—this. Are there other indices at which we should be looking proactively without waiting for whistleblowers to suggest market abuse?
My hon. Friend asks a pertinent question. It goes back to the question asked by Mr McFadden. The Wheatley review suggested that we had more work to do in this area—a view that is, I think, held around the world. As I said to the right hon. Gentleman, the International Organisation of Securities Commissions has a broad level taskforce looking at this issue, seeing whether we need to do more on the different indices, benchmarks and price reporting agencies. The EU also has a consultation out at the moment. My hon. Friend is right that we need to look at this in the round, learn the lessons of LIBOR and other indices that might have been manipulated and ensure that we apply those lessons to other markets, too.
Mark Lazarowicz (Edinburgh North and Leith, Labour)
The Secretary of State is absolutely right to say that lessons should be applied to other markets, but can we not have more urgency in the investigation? We do not want a long-running international investigation; we want to see action taken now, and in other markets as well, to ensure that the consumer is not being ripped off as they apparently have been in this area and in the financial services sector, too.
Action is being taken. I refer the hon. Gentleman to the consultation put out by the European Commission. It has also been suggested that ESMA—the European Securities and Markets Authority—should take interim measures. I have to tell him that not just domestic regulators but international regulators are taking a broader look, which is the correct thing to do.
Greg Mulholland (Leeds North West, Liberal Democrat)
I am delighted that the Secretary of State has said that the allegations of market manipulation are being taken very seriously, but considering the substantial evidence of abuse, collusion among large companies and price manipulation, why have Ministers so far turned a blind eye to Britain’s big pub companies? Is it that the whistles that have been blown for eight years are just pitched too high for Ministers and civil servants?
My hon. Friend and I discussed the issue of pubs and competition when I was in my last job in the Department for Business, Innovation and Skills. I think he will realise that I am no longer in charge of competition issues relating to pubs.
Jeffrey M Donaldson (Shadow DUP Spokesperson (Equality), Shadow DUP Spokesperson (Energy and Climate Change); Lagan Valley, DUP)
Given that Northern Ireland has the highest energy prices in the UK and that the allegations relate to manipulation in the UK gas market, will the investigations by the FSA and Ofgem extend to Northern Ireland?
It is my understanding that the investigations go across the whole of the country. If I am wrong about that, I will write to the right hon. Gentleman, but that is my understanding.
Philip Hollobone (Kettering, Conservative)
Domestic energy consumers may have an electricity bill, may have a gas bill and may have both, but those who have electricity bills may not realise that an increasing proportion of our electricity is generated from gas-fired power stations. This country is increasingly reliant on gas, so this potential scandal extends far further than most of our constituents might realise.
My hon. Friend is absolutely right. That shows the importance of taking these allegations seriously, because were they proven true they would have such a wide application for people’s energy bills—and, if proven true, they would relate to and impact on consumer markets.
William Bain (Shadow Minister (Scotland); Glasgow North East, Labour)
Does the Secretary of State recognise how wrong it will seem to the 800,000 people in fuel poverty in Scotland if they have been ripped off while speculators have benefited from lucrative derivatives contracts? Does that not make the case for a new energy regulator here at home and proper regulation of excessive speculation at G20 level?
I agree with the hon. Gentleman that, if it turns out that abuses have been committed that have affected prices for his and my constituents’ energy bills, that is an extremely serious matter, and we want the full weight of the law and investigatory bodies to chase down those people responsible. I have to say, however, that I do not think that makes the case for a new regulatory body. We need to make sure that the existing regulatory bodies, which have very strong and wide-ranging powers which this Government have increased, can take the necessary measures and penalise people if they are proven to have committed an offence.
Glyn Davies (Montgomeryshire, Conservative)
The biggest challenge facing many of our households today is the cost of energy, including, of course, gas prices. Tolerance of these costs depends absolutely on trust that the market is not rigged. Because manipulative behaviour in the market is so difficult to detect, punishment for illegal activity must be sufficiently severe to create real fear in the minds of potential law-breakers or criminals. Will my right hon. Friend assure us that anyone found guilty of manipulating the market will face the severest penalties—including, possibly, long jail sentences?
I share my hon. Friend’s concerns that our constituents deserve markets that are fair, deliver competitive outcomes and keep prices as low as possible. He is absolutely right on that. Again, I am being asked to prejudge the outcome of the investigations, but I can say to him that if certain offences are proved to have been committed, very serious penalties are attached to
them. If a cartel offence, for example, has been committed, it is a very serious one and it has a criminal sentence attached to it.
Kevin Brennan (Shadow Minister (Education); Cardiff West, Labour)
Does the Secretary of State understand that his laconic performance today and his rather puny response to all this will serve only to anger our constituents more? When they have already had to put up with confusion pricing, excessive prices and, now, alleged market rigging, why does the right hon. Gentleman not show some energy, get tough and introduce a new regulator that can actually take some action?
I am afraid that I am tempted to say that we are making amends for the failures of the last Government in this area. The hon. Gentleman talks about confusing tariffs, but the last Government took no action on them, and Ofgem—the regulator which, if I understand his question correctly, the hon. Gentleman wants to abolish—has put forward proposals to simplify and reduce the confusing number of tariffs, about which his party did nothing when in government.
John Pugh (Southport, Liberal Democrat)
Energy markets, financial markets, grocery markets and the pub market have turned out to be flawed markets rather than free markets. What conclusion does the Secretary of State think we can safely draw? Is it time for a new Competition Act?
I draw a conclusion that we need stiff competition powers. When I was the Minister with responsibility for competition, I looked at the competition framework, the institutions and the laws that we had inherited from the last Government, and I felt that they needed to be toughened and strengthened. I therefore hope that my hon. Friend will support the Enterprise and Regulatory Reform Bill, which this Government have put before the House to make those reforms to competition powers.
Gavin Shuker (Shadow Minister (Environment, Food and Rural Affairs); Luton South, Labour)
Was the Secretary of State personally made aware of any concerns about manipulation in the gas market—in general, not just specific terms—prior to last Friday?