Five questions answered on the wholesale gas price fixing allegations

Regulators are investigating claims wholesale gas prices have been manipulated by major gas companies. We answer five questions on the gas pricing fiasco.

What exactly are the allegations being made? 

Major energy companies are being accused of manipulating the wholesale price of gas in the same way banks have manipulated libor. 

Energy companies buy gas at wholesale price then sell it onto to homes and businesses. On the 26 September gas companies are alleged to have made unrealistic bids at a time when data was being collected to set the wholesale price, they area alleged to have done this in order to suit their own situation rather than making a realistic bid.

Who discovered this alleged price-fixing? 

The whistle was blown by Seth Freedman, who worked at ICIS Heren, a financial information company that publishes energy price reports.

The Guardian report that Freeman flagged up a set of suspiciously low trades he believed were designed to depress ICIS Heron’s ‘day ahead’ price on the 28th September. One trader told Freeman in regards to the range of prices quoted on the 28th September:

There's a feeling among some people that somebody's taking the piss a bit on the day-ahead index.

ICIS Heren also told the BBC it had:

Detected some unusual trading activity on the British wholesale gas market on 28 September 2012, which it reported to energy regulator Ofgem in October.

Does wholesale price manipulation affect consumer prices?

Not directly as the price is being manipulated to be lowered. Wholesale gas price makes up an average of 45 per cent of consumers bills so lowering it shouldn’t affect bills. However, it is still a damaging discovery as Freeman has explained: 

There's certainly a link. They [the power companies] are telling you: Look, in order to make our profits and cover our costs and so on, we have to give a price to retail customers which reflects the cost to us.

But if you can't trust the market at a wholesale level, it becomes a crisis of confidence. People at retail level are just thinking, "I don't trust these companies" - and it needs to be scrutinised.

What has been the response of energy providers?

The big six energy providers have all released statements denying the claims. However, some of these ‘big six’ are currently being investigated by the Financial Services Authority and Ofgem. 

What has government said?

Energy Secretary Ed Davey will make a statement in the House of Commons today, but he has already said he is extremely concerned about the allegations. 

The Treasury Secretary, Greg Clark, spoke of the seriousness of the allegations to the BBC, saying:

Any scintilla of doubt that the participants cannot be trusted has a tremendously important effect.

I think it's very straightforward. When someone breaks the law, they should be punished, and when it's as serious as this, they should be punished very severely. And it's as true for stealing through financial manipulation as it is, frankly, for breaking and entering.

Photograph: Getty Images

Heidi Vella is a features writer for

Show Hide image

Q&A: What are tax credits and how do they work?

All you need to know about the government's plan to cut tax credits.

What are tax credits?

Tax credits are payments made regularly by the state into bank accounts to support families with children, or those who are in low-paid jobs. There are two types of tax credit: the working tax credit and the child tax credit.

What are they for?

To redistribute income to those less able to get by, or to provide for their children, on what they earn.

Are they similar to tax relief?

No. They don’t have much to do with tax. They’re more of a welfare thing. You don’t need to be a taxpayer to receive tax credits. It’s just that, unlike other benefits, they are based on the tax year and paid via the tax office.

Who is eligible?

Anyone aged over 16 (for child tax credits) and over 25 (for working tax credits) who normally lives in the UK can apply for them, depending on their income, the hours they work, whether they have a disability, and whether they pay for childcare.

What are their circumstances?

The more you earn, the less you are likely to receive. Single claimants must work at least 16 hours a week. Let’s take a full-time worker: if you work at least 30 hours a week, you are generally eligible for working tax credits if you earn less than £13,253 a year (if you’re single and don’t have children), or less than £18,023 (jointly as part of a couple without children but working at least 30 hours a week).

And for families?

A family with children and an income below about £32,200 can claim child tax credit. It used to be that the more children you have, the more you are eligible to receive – but George Osborne in his most recent Budget has limited child tax credit to two children.

How much money do you receive?

Again, this depends on your circumstances. The basic payment for a single claimant, or a joint claim by a couple, of working tax credits is £1,940 for the tax year. You can then receive extra, depending on your circumstances. For example, single parents can receive up to an additional £2,010, on top of the basic £1,940 payment; people who work more than 30 hours a week can receive up to an extra £810; and disabled workers up to £2,970. The average award of tax credit is £6,340 per year. Child tax credit claimants get £545 per year as a flat payment, plus £2,780 per child.

How many people claim tax credits?

About 4.5m people – the vast majority of these people (around 4m) have children.

How much does it cost the taxpayer?

The estimation is that they will cost the government £30bn in April 2015/16. That’s around 14 per cent of the £220bn welfare budget, which the Tories have pledged to cut by £12bn.

Who introduced this system?

New Labour. Gordon Brown, when he was Chancellor, developed tax credits in his first term. The system as we know it was established in April 2003.

Why did they do this?

To lift working people out of poverty, and to remove the disincentives to work believed to have been inculcated by welfare. The tax credit system made it more attractive for people depending on benefits to work, and gave those in low-paid jobs a helping hand.

Did it work?

Yes. Tax credits’ biggest achievement was lifting a record number of children out of poverty since the war. The proportion of children living below the poverty line fell from 35 per cent in 1998/9 to 19 per cent in 2012/13.

So what’s the problem?

Well, it’s a bit of a weird system in that it lets companies pay wages that are too low to live on without the state supplementing them. Many also criticise tax credits for allowing the minimum wage – also brought in by New Labour – to stagnate (ie. not keep up with the rate of inflation). David Cameron has called the system of taxing low earners and then handing them some money back via tax credits a “ridiculous merry-go-round”.

Then it’s a good thing to scrap them?

It would be fine if all those low earners and families struggling to get by would be given support in place of tax credits – a living wage, for example.

And that’s why the Tories are introducing a living wage...

That’s what they call it. But it’s not. The Chancellor announced in his most recent Budget a new minimum wage of £7.20 an hour for over-25s, rising to £9 by 2020. He called this the “national living wage” – it’s not, because the current living wage (which is calculated by the Living Wage Foundation, and currently non-compulsory) is already £9.15 in London and £7.85 in the rest of the country.

Will people be better off?

No. Quite the reverse. The IFS has said this slightly higher national minimum wage will not compensate working families who will be subjected to tax credit cuts; it is arithmetically impossible. The IFS director, Paul Johnson, commented: “Unequivocally, tax credit recipients in work will be made worse off by the measures in the Budget on average.” It has been calculated that 3.2m low-paid workers will have their pay packets cut by an average of £1,350 a year.

Could the government change its policy to avoid this?

The Prime Minister and his frontbenchers have been pretty stubborn about pushing on with the plan. In spite of criticism from all angles – the IFS, campaigners, Labour, The Sun – Cameron has ruled out a review of the policy in the Autumn Statement, which is on 25 November. But there is an alternative. The chair of parliament’s Work & Pensions Select Committee and Labour MP Frank Field has proposed what he calls a “cost neutral” tweak to the tax credit cuts.

How would this alternative work?

Currently, if your income is less than £6,420, you will receive the maximum amount of tax credits. That threshold is called the gross income threshold. Field wants to introduce a second gross income threshold of £13,100 (what you earn if you work 35 hours a week on minimum wage). Those earning a salary between those two thresholds would have their tax credits reduced at a slower rate on whatever they earn above £6,420 up to £13,100. The percentage of what you earn above the basic threshold that is deducted from your tax credits is called the taper rate, and it is currently at 41 per cent. In contrast to this plan, the Tories want to halve the income threshold to £3,850 a year and increase the taper rate to 48 per cent once you hit that threshold, which basically means you lose more tax credits, faster, the more you earn.

When will the tax credit cuts come in?

They will be imposed from April next year, barring a u-turn.

Anoosh Chakelian is deputy web editor at the New Statesman.