This article is written by Rishika Rathore, B.A., L.L.B. student, from the school of law, Jagran Lakecity University. It talks about how price manipulation and its kinds affect the global energy sector while studying the laws and regulations against price manipulation along with global instances of the same.
Price manipulation has always been a disputable issue in all commodity markets, but largely in the energy market. The ultimate goal of a refined energy market is to suffice the consumer’s demand for resources like electricity, gas, oil, etc. at minimum cost by providing the right quantity of the same, without any manipulation of the market.
There’s a famous quote by Mahatma Gandhi, which says, “Earth provides enough to satisfy every man’s need, but not every man’s greed”. Thus, due to the greedy intentions of receiving unfair profits, some individuals deliberately try to influence the market by using untrue and misleading information about the price of an asset or market standard.
Therefore, to bring down this frequent unethical manipulation, it is necessary to adopt effective laws and regulations along with numerical models to estimate the harms and damages in the market.
Understanding the energy sector
The energy sector has played a significant role in industrial growth over the past few decades, providing fuel to power the rest of the economy. It is a prime category of capital that deals in producing and supplying energy, having companies involved in the research and development of oil or gas reserves, drilling as well as refining oil and gas. The energy sector includes unified power value companies which get based on how the energy is sourced, generally separated into two categories: renewable and non-renewable. Moreover, it includes secondary sources like electricity. Energy prices are typically driven by supply and demand, along with the revenue performance of energy producers, for global energy.
Categories in the energy sector
Non-renewable resources are those natural resources that took a long time to replenish and are limited or fixed in amount, for example, fossil fuels. These resources normally get used up before getting restored. Also, it creates harmful wastes that are not easy to dispose of.
Renewable resources derive their existence from natural resources or activities that get regularly replenished. These resources have an unlimited supply and are sufficient in amount, for example, sunlight or wind.
Examples of natural resources:
Natural Gas and diesel Fuels
Petroleum products and oils
Biofuels such as ethanol
What price manipulation means
When traders, stockbrokers, bankers, or analysts make the intentional attempt to artificially increase or decrease the price of an asset, security, or market benchmark, aiming to make greater profits, it is called price manipulation or market manipulation. The word “artificially” is used here because the manipulator seeks to tilt the curve of the demand and supply to drive the price in accordance with his desires.
This manipulation is done by spreading false information, misrepresentations, illegal revenue reports, posting fake orders, or by failing to disclose relevant information about the market prices. For example, a merchant X bought stocks of a company ABC, and soon after this, merchant Y trade-off spreads false information that the price of ABC’s stock is going to decline. Merchant X and many other traders, who bought such stocks, sold them to merchant Y at loss. Here, the market price of stocks got manipulated and that resulted in stock manipulation.
Kinds of price manipulations
When any trader or stockbroker attracts more investors by putting down buy and sell boards simultaneously, in order to get higher commission or profit, it indicates churning. This act is illegal and moreover, a violation of ethical relationships among parties. Here, the returns remain inert or even decrease, but due to continuous trading, the traders are able to get huge commissions.
When traders spread false rumors or perform fake illegal activities to either inflate or deflate the price of any stock or asset, it is called ramping, metaphorically known as painting the tape. It affects both long-term as well as short-term traders, along with company fundamentals.
Bear raiding is done when a trader sells a security and then repurchases the same security, generating a boost in price and activity as well.
When insiders use confidential and crucial information of a company in order to get benefits or to avoid any losses, it is known as front running or insider trading.
When a trader buys enough of a particular commodity, stock, or security with the intention of gaining a price, controlling the supply, or setting up the market price for it.
Known instances of price manipulation in the global energy sector
A huge market manipulation occurred in the United States by two traders and trading firms owned by Norwegian billionaire John Fredriksen. In 2008, traders James Dyer of Oklahoma’s Parnon Energy and Nick Wildgoose of Europe’s Arcadia Energy got sued for reportedly squashing oil markets and making $50 million. They used their respective posts within the U.S trading sector to manipulate the oil market, by driving the price of West Texas Intermediate crude oil to artificially increases, and then back down into the market. Due to this, the prices crashed and traders got dragged into huge unlawful profits from short-sale positions.
In 2001, Enron became synonymous with corruption and fraud due to his accounting scam, known as Enron Scandal, which resulted in great price manipulation. This fundamental scam was formulated on an old financing method known as “prepay”, where producers sell their product at a discount for cash now and deliver it later. With the help of intermediary banks such as JP Morgan and Citigroup, Enron borrowed dollars and provided commodities to the dealers. Also, he prepared “off-balance-sheet” financing disguised as commodity merchants of which Enron’s investors and creditors were not at all unaware. Enron Corporation was an American energy service and commodities company, established in Texas.
California electricity crisis
In 2001, the state of California witnessed a huge electricity crisis, in which the Californians had to go through a shortage of electricity supply which was a result of the market manipulation and curbed retail electricity prices. The state was in a large-scale blackout at that time, due to which the largest energy company of California, Pacific Gas, and Electricity Company, collapsed and went bankrupt.
California used to have an installed generating capacity of 45 GW. But at the time of the blackout, the demand was 28 GW. The gap between demand and supply was deliberately created by energy companies, to create an artificial shortage of electricity. The state energy market permitted energy companies to charge higher prices for electricity by playing a false act that electricity is being generated outside the state. Thus, the regulation of electricity market price came into the hands of traders, and therefore, they started selling power at premium prices, causing price manipulation in the energy sector.
The Atlantic Trading case
In the case of Atlantic Trading USA LLC vs BP P.L.C (2020), the plaintiff claimed that the defendant manipulated the spot price of Brent Crude Oil by putting forward the false data on oil transactions to a price reporting service in London, the consequences of which was the twisted price of Brent crude oil in the U.S. futures markets. Moreover, it was claimed that the sole purpose of doing such an act was to deliberately manipulate the prices and trade off those prices. The lower court held that if the manipulated schemes misrepresent prices on the U.S. products that originate overseas, then they are beyond the reach of the law. Subsequently, the Supreme Court refused to review the case any further.
Wholesale gas price manipulation by EGM
In 2016, a market competitor warned Ofgem about a doubtful activity on Great Britain’s wholesale gas market. The company manager found that a trader had engaged in spoofing for three months, who was working in the name and behalf of Engie Global Market (EGM). The term “spoofing” is a process in which the trader places bids and then offers for the contract without any intention of making any trade, thus he sends out misleading price signals. Ofgem claimed that EGM had failed to take appropriate measures against the prevention or detection of the breach, resulting in price manipulation. Thus, Ofgem put a fine on EGM of £2.1 million as their traders manipulated the wholesale gas prices to increase profits.
GreenHat Energy LLC and electricity betting
Recently, in 2021, the Federation Energy Regulatory Commission fined Green Hat Energy LLC and its owners for placing bets on the financial transmission rights market, also known as potential grid bottlenecks, by sending false price signals. The defectors were three veteran power traders of JP Morgan Chase and Co., who had to pay a sum of $242 million for alleged manipulation of the country’s largest electricity market.
Regulations across the globe dealing with price manipulation in the global energy sector
The legislation and jurisprudence, regarding price manipulation in the energy market, have seen significant developments in the United States, Canada, and Europe as these holders of mega energy sectors have witnessed huge instances regarding price manipulation.
Federal Energy Regulatory Commission Rules, U.S
The Federal Energy Regulatory Commission (FERC), established under the Department of Energy Organisation Act 1977, is an independent federal agency in the U.S. that manages the transmission of natural gas, electricity, and oil, between states. This Commission is responsible for faux pas in the energy sector, including the authority to punish the companies or traders for manipulating market prices.
The Energy Policy Act of 2005 enables FERC to regulate the transmission and wholesale sales of electricity as well as natural oil, in interstate commerce. Moreover, it monitors and investigates energy markets, in case of any kind of price manipulation. For example, in 2015, an administrative law judge held that the American division of the British multinational oil and gas company, BP plc, has deliberately arranged their deliveries of natural gas in such a way that the future price of natural gas gets manipulated. Thus, the company was ordered to repay its unfair profits of $207,000 along with $20 million as a penalty.
Market Surveillance Administrator or Panel, Canada
The Canadian competitive electricity markets exist only in Ontario and Alberta. In both provinces, the State governments have established agencies to guard against market manipulation. As per the case of Alberta, a separate agency called the Market Surveillance Administrator (MSA) has been established to conduct investigations. But the applications regarding settlements, penalties, or enforcement of decisions, can only be created by the Alberta Utilities Commission.
In Ontario, there are two separate agencies that conduct investigations. The first is a division of the Ontario IESO. The second is the Market Surveillance Panel (MSP), which is a panel of the Ontario Energy Board, responsible for the regulation of energy in Ontario. Although MSP has no authority to establish penalties, it simply makes recommendations through published reports. On the other hand, the IESO has the power to determine penalties, approve settlements as well as conduct investigations. Moreover, in Ontario, fines can be appealed to the Ontario Energy Board, but there is no review system of settlements.
Regulation on Wholesale Energy Market Integrity and Transparency Regulation, Europe
Europe has been gradual in terms of the development of jurisprudence on energy market manipulation. But in 2011, the European Commission adopted the Regulation on Wholesale Energy Market Integrity and Transparency, known as REMIT. This regulation introduced an EU-wide monitoring system that was able to detect and prevent market manipulation. Also, it requires disclosure of price-sensitive information regarding energy generation, storage, and transmission. The adoption of REMIT produced a shared compliance responsibility between the Agency for the Cooperation of Energy Regulators (ACER) and National Regulatory Authorities (NRAs). The Office of Gas and Electricity Markets (Ofgem) is the applicable NRA in the U.K. Until REMIT, some of the European countries had to rely upon the competition laws to deal with energy market manipulation.
Manipulation is a prospective serious problem in the energy market, across many countries. Throughout the research and review of legal cases involving manipulation, it has been suggested that there is a need to revise existing laws to provide more specific guidance on what constitutes market power manipulation. The foremost step in this process is to learn the possible consequences of price manipulation in the energy sector. The second step is to identify the kinds of conduct that specify price manipulation, and the final step to draft relevant and strict laws and regulations against price or market manipulation.
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