* EU power, gas, coal all see forms off loss-leading trading
* EU plans to impose clearer rules
* New regulation slow in being implemented
By Henning Gloystein and Oleg Vukmanovic
LONDON, Nov 6 Dealers on Europe's energy market
commonly trade coal, gas or power at a loss to push up profits
on futures prices, industry sources say, a practice that
regulators want to stop.
Uneconomic or loss-leading trades are explicitly banned in
the United States where British bank Barclays has been accused
of using them to rig California's electricity prices.
In Europe, the law is not so clear. Regulators have
introduced new rules aimed at preventing market manipulation but
lawyers say there is room for interpretation and nobody has yet
been investigated. Officials want to strengthen the rules.
"Loss-leading trading happens across all energy markets I
know of, and while it's not as frequent as it used to be when
regulation was really lax, it's still a fairly frequent
practice, especially in less liquid trading," a trader with
experience at major banks and utilities said.
Dealers take a loss by paying over the odds for spot power,
coal or gas when market information suggests the price should be
lower. The rise in spot prices lifts forward contracts, in which
the trader takes a larger position, increasing profits.
The practice is particularly lucrative when trading is light
and it is easier to move prices.
A source at a trading analytics firm used by UK gas and
electricity traders said there may have been manipulative
practices in the UK gas market across several weeks in August, a
time of low gas trading volumes.
He identified occasions when a trader put extreme bids into
the market early in the morning to influence sentiment.
"I reckon someone's trying to manipulate it, which is easy
enough in light volume markets," said the analyst who asked not
to be identified.
EU officials want to make sure the practice is banned.
"The allegations that Barclays has manipulated U.S. energy
markets further highlight concerns of manipulation of essential
commodity prices," said Arlene McCarthy, a British Labour member
of the European Parliament.
"We need to have more research and information on whether
there is a trend or pattern of manipulation of commodities and
price indices in order to establish rules to prevent distortion
and ensure the integrity of markets."
Laws introduced last year aimed at preventing the use of
insider information and other forms of market manipulation did
not go far enough and they are now proposing to toughen them up.
Unlike in the United States, the existing rules do not
specify that such trading is illegal and this means they are
open to interpretation.
"Although the practice (of loss-leading trading) is not
specifically mentioned, it could be seen as equivalent to
specified market manipulative cases of 'pump and dump or 'market
cornering'," Matthias Lang, a partner with law company Bird &
The EU says its proposals will tighten the broader rules.
"Under EU rules, manipulation of EU power markets is
expressly forbidden," Stefaan de Rynck, a European Commission
"The Commission has presented proposals to strengthen the
existing Market Abuse Directive (MAD). Under the proposed
regulation, cross-market manipulation between spot and financial
markets would be explicitly forbidden (and) the proposals are
under negotiation in the European Parliament and the Council."
HARD TO PIN DOWN
Even when the new proposals are adopted traders say that
loss-leading would be hard to pin down.
"If you want to prove this, you have to know all a company's
bids on the exchange and brokered market and know exactly all
asset operations," said the former bank and utility trader.
"This will be very hard, especially as most spot trades are
exchange-based while most forward trading is OTC-brokered."
Brokers in off-exchange markets, known as over-the-counter
(OTC) deals, do not publish their customer trade details.
Additionally, the EU watchdog Acer cannot act on its own
behalf under the REMIT rules but can only urge national
regulators to interfere and put penalties in place.
Asked whether it monitors loss-leading trading, British
regulator Ofgem said "we monitor the market at all times using
our existing powers. In preparing for full implementation of
this legislation, we will consider evidence of market abuse that
is brought to our attention."
At present, Ofgem is not investigating loss-leading trading
at any of Britain's utilities, information on its website shows.
Some utilities say they are not engaging in loss-leading
trading tactics f or fear of being investigated by the
regulators, especially if the rules are tightened.
German utility E.ON - which operates in all major
European power, gas and coal markets - said that it already
views loss-leading trading as illegal, and that it would soon
trigger regulatory intervention.
"In our view such trading behaviour is already against
EU-regulations of REMIT and MAD, and regulatory procedures in
Europe already cover such related trading operations or will do
so in the near future," E.ON spokesman Georg Oppermann said.
E.ON's closest German rival, RWE, which also
operates in all major energy markets, said its traders do not
use loss-leading trading tactics.