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European Watchdog Eyes 45 Potential Cases of Energy Market Abuse
Officials say some countries haven’t put in place the authority to punish wrongdoers
Nov. 23, 2015 8:31 a.m. ET
http://www.wsj.com/articles/european-watchdog-eyes-45-potential-cases-of-energy-market-abuse-1448285498
By ALISTAIR MACDONALD

A European regulator is examining 45 potential cases of abuse in one of the world’s largest energy markets, but faces a big hurdle in pursuing them: Many countries aren’t prosecuting the alleged wrongdoing.

The Agency for the Cooperation of Energy Regulators says it has proof that in 2014 there was market abuse in three cases in the buying and selling of natural gas and electricity in Europe, but said national authorities in countries where the breaches took place didn’t have the legal powers to pursue them.

ACER was established in 2011 as a pan-European agency to supervise energy markets—part of the European Union’s push to open them up to cross-border competition.

But ACER officials say they struggle with a lack of funding and that some countries haven’t put in place the authority to punish wrongdoers. This October, ACER began to collect and monitor its own market data, rather than rely on national regulators. But the watchdog says that its staffing level is inadequate for the mandate Brussels has given it.

“ACER expected that there would be proper enforcement,” said Alberto Pototschnig, the Director of ACER. “In each case, there was just a warning letter.”
Mr. Pototschnig declined to name the countries, companies or individuals involved.

An official said the European Commission, the EU’s executive arm, sent letters in August asking 11 member states to tell them if they had given their national regulators the legal powers to prosecute abuses, an official said.

Since then, all but Estonia, Slovenia and Croatia have said they have supplied their regulators with the necessary powers. Energy ministries in those countries didn’t respond to a request for comment. The commission is checking to see if the eight countries that say they are fully in line with legislation actually are, the official said.

ACER, which is based in Slovenia, believes there are still problems.

“We are afraid that there have been delays and there are still gaps in national implementation,” said Mr. Pototschnig.

The difficulties of chasing abuse come as regulators in the U.S. and U.K. focus on commodity markets. Britain’s financial regulator, the Financial Conduct Authority, said that commodity firms have learned little from high-profile market-abuse cases and are failing to monitor the risks of such abuse, while authorities in the U.S. are pursuing a number of alleged abuses in commodities markets.

The EU has set integrating its fractured energy markets as a priority this year. The ability to detect market abuse is a prerequisite.

“Different countries have inherently different regulators in place,” said Shaun Ledgerwood, an expert in manipulation in commodities markets at The Brattle Group, a consulting firm. “Some have the resources, for others that simply isn’t the case.”

Mr. Ledgerwood said that manipulation can push electricity and gas prices higher for consumers, or push them lower, which affects producers.

Accusations of wrongdoing aren’t new to these markets. Experts say that the lack of exchanges and the small windows of time during which energy is priced can make them ripe for abuse. But unlike other markets, few cases have been successfully prosecuted in Europe.

That is, in part, because of the markets’ fragmented nature.

As these markets become more linked, Europe wants to police them on a more regional basis. To prosecute abuses, governments have to enact laws, and the EU gave them a deadline of 2013 to do so.

Last year, 33 new cases of alleged market abuse were reported by market participants, local regulators and others to ACER, up from 12 in the previous year.

Of these, 18 involved potential market manipulation, 12 breaking rules on the publishing of inside information and nine were alleged insider-trading cases. For six of these, there were two alleged infractions. The regulator, though, is looking at 45 potential breaches, counting ongoing cases from 2014 and new ones this year.

The watchdog wants the European Commission to either give it some enforcement powers, or to look closer at the ability of countries to prosecute cases.

ACER believes the U.S. has more experience of prosecuting abuses in these markets after the collapse of Enron Corp., the energy giant that went bankrupt in 2001 amid a massive accounting fraud.

Last month, ACER began collecting data from energy exchanges and brokers and will be sifting through one million transactions a day.

But it says it has a “level of resources clearly inadequate to its mandate,” according to its annual report, released in September.

The watchdog has 15 people monitoring markets, compared with 95 who handle surveillance and monitoring at the U.S. Federal Energy Regulatory Commission.

The EU official said that the bloc’s 2016 budget should give the agency an extra eight to 10 members of staff.

In its report, ACER sketched some of the alleged abuses that it has seen. These included the use of so-called spoofing, where traders put in orders to buy or sell contracts without intending to execute those orders. That gives a misleading sense that the price might go up or down, which is then taken advantage of. In the case seen by ACER, identical orders were introduced and withdrawn several times during the day in related energy products. In another instance, somebody traded on information that the maintenance of a power station had been postponed before that news was announced to the market.

Gabriele Steinhauser contributed to this article.

Write to Alistair MacDonald at [e-mail]