EN    EN EN 
 
EN    EN  COMMISSION OF THE E UROPEAN COMMUNITIES 
Brussels, 8.12.2010 
SEC(2010) 1510 final 
  
COMMISSION STAFF WORKING DOCUMENT 
IMPACT ASSESSMENT  
 
 
Accompanying document to the 
Proposal for a 
 
REGULATION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL 
  
on energy market integrity and transparency 
   
{COM(2010) 726 final} 
{SEC(2010) 1511 final} 
 
EN 2   EN Table of content  
 
  
1 Introduction................................................................................................................. .3  
2 Procedural Issues And Consulta tion Of Interested Parties .......................................... 4 
3 Problem Definition....................................................................................................... 5 4 Objectives................................................................................................................... 20 
5 Policy options and enforcement design choices......................................................... 23 6 Analysis of impacts.................................................................................................... 29 7 Other Issues................................................................................................................ 4 2 
8 Conclusions – the preferred options........................................................................... 45 9 Monitoring and evaluation ......................................................................................... 47 10 List of Annexes .......................................................................................................... 49 
 
 
 
 
 
  
 
DISCLAIMER: this does not prejudge Commission decision, and is only binding services involved in the 
preparation of the document. 
 
EN 3   EN 1 INTRODUCTION  
European energy policy aims to give Europe's  citizens access to competitive, secure and 
sustainable energy supplies. The cr eation of a true internal market in energy is crucial to each 
of these elements. Integrated markets bring competitive pressure to a sector which has historically been characterise d by national markets often domina ted by incumbents. Integrated 
markets allow consumers to benefit from a pan- European choice of diverse energy resources. 
In addition, harmonised cross-border market ope ration together with strong and efficiently 
operated networks will give the depth needed  to allow the integration of new renewable 
energy sources at least cost.  
Experience in the liberalisation and integration of energy market s, and electricity markets in 
particular, has demonstrated the importance of liquid European wholesale markets. The 
development of power exchanges (or other organi sed markets) and broker  facilitated markets 
in standardised over-the-counter (OTC) contracts has created liquidity for market participants. 
This is a positive and beneficial outcome of over a decade of successive European energy liberalization packages. Although liqu idity in traded gas markets stil l lags behind electricity, it 
is catching up steadily.  
Beyond generators and suppliers, wholesale energy markets now a ttract a wide ra nge of actors 
including utilities, large energy users, pure trad ers, financial institut ions and other trade 
facilitators. These players have an important ro le in the price formation process and creating 
liquidity. Important derivative markets have arisen around ma rkets in the underlying energy 
products. This means that energy wholesale markets have become increasingly hybrid 
physical and financial ones.  
Prices established at the level of wholesale mark ets not only affect mark et participants, they 
also serve as the benchmark for retail prices  for household consumers and industrial users. 
Equally importantly, by showing where energy prices are high and where they are low these 
markets send important signals for future invest ments in energy infrastructure. For this reason 
it is crucial that citizens, business and national authorities can have confidence in the integrity 
of such markets. This integrity  can be put in question in case market participants engage in 
abusive practices and market misconduct. In  energy markets, their hybrid physical and 
financial nature give rise to important regulato ry challenges when it comes to ensuring market 
integrity.   
Figure 1: Trading function located in  the overall electricity value chain 
 
     
Übertragung Verteilung Vertrieb
regulierter Bereich
transmission distribution supply
monopoly activity
Erzeugung
competitive activity
generation HandeltradingHandeltrading
competitive activity
 
EN 4   EN 2 PROCEDURAL ISSUES AND CONSULTATION OF INTERESTED PARTIES  
The 3rd Energy Market Liberalisation Package esta blishes a new institutional framework for 
the gas and electricity sectors, ensuring non- discriminatory access to networks, enhancing 
regulators' powers and independence and esta blishing new European bodies to create 
harmonised network and market operation standa rds like the Agency for Cooperation of the 
Regulators (ACER) and the European Networ k of Transmission Sy stem Operators for 
Electricity and Gas (ENTSOs) 
However, it does not define spec ific conduct rules for wholesale energy trading. As a first step 
in addressing concerns regardi ng market integrity. It does defi ne transaction record keeping 
obligations and a generic regulat ory duty to monitor the level of competition on retail and 
wholesale levels. After the publication of th e Commission's Third P ackage proposals the 
Directorate General for Energy and Transport and the Directorate General for Internal Market and Services issued a joint mandate to th e Committee of European  Securities Regulators 
(CESR) and the European Regulators' Group for Electricity and Gas (ERGEG), seeking 
advice on issues concerning record keeping and tran sparency of transactions in electricity and 
gas supply contracts and derivatives.   
Since then, and in particular  since the final report from  CESR/ERGEG in January 2009
1 and 
the adoption of the Third P ackage in July 2009, DG TREN has worked closely with 
stakeholders with the aim of developing a propos al for an efficient, effective and coherent 
oversight regime specifically designed for en ergy markets to ensure market integrity and 
transparency. DG TREN organised a workshop in  May 2009 to collect stakeholders' views 
and discuss the way forward. It was agreed that the Commission will develop its initiative and 
organise dedicated workshops to  take interested market part icipants' input on board. Seeking 
the industry's support and generating attention for the subject, the Commissioner for energy 
Mr. Piebalgs, invited senior management of key energy trading companies, brokerages, 
energy exchanges together w ith regulators in September 2009 for a Roundtable debate.  
Building on the orientation of the CESR-ERGEG  work and encouraged by the consensus in 
the Roundtable debate, DG TREN organised a second workshop in October 2009 with wide 
industry participation and presente d the basic building blocks of its planned sector specific  
market integrity regime, followed by comments and input from stakeholders and regulators. 
Following this, the Commission issu ed a draft discussion paper2 which was presented and 
discussed in the December 2009 Florence Forum (for electricity) and in January 2010 in the Madrid Forum (for gas). Finally, the Stakehol ders were asked to submit their proposals and 
views on the presented policy options by February 2010. 
In order to ensure that all interested parties ar e able to contribute to this important debate a 
full public consultation was organised from the 31 May 2010 to 23 July 2010. The 
consultation was addressed to energy companie s, companies in the financial sector and 
companies covered by the Emissions Trading Sc heme as well as consumer organisations, 
representatives of small and medium enterpri ses, representatives of  regional bodies and 
organisations affected by the developmen t of the internal market in energy. 
                                                
 
1  CESR and ERGEG advice to the European Commission in the context of the Third Energy Package, 
Three separate documents (Ref: CESR/08-527, CESR/08-998, CESR/08-739). 
2http://ec.europa.eu/energy/gas_electricity/doc/forum_florence_electricity/meeting_17_5_commission_non_pape
r_on_market_integrity_and_transparency.pdf 
 
EN 5   EN All information on the consultation process, th e documents and presentations used in the 
stakeholder meetings have been made available on the website of DG ENER. 
 http://ec.europa.eu/energy/gas_electric ity/consultations/2010_07_23_energy_markets_en.htm  
All stakeholder comments have been assessed in detail and the summary of responses is 
attached in Annex. The Commi ssion’s requirements for stake holder consultati on have been 
fully met. 
DG ENER set up an inter-service group3 that met on 18 June 2010 and on 26 July 2010. The 
services cooperated particularly closely in th e preparation of the draft consultation document. 
The draft Impact Assessment was submitted to  the Impact Assessment Board (IAB) on 
2 August 2010. The IAB meeting took place on 8 September 2010. The IAB adopted its opinion on the draft on 10 September 2010. The pr esent Impact Assessment takes full account 
of the Impact Assessment Board's opinion as follows: 
• The Assessment includes clarifications with re gards to the scope of th e initiative, i.e. how 
the market misconduct rules will be formulated in Chapter 5 
• More analysis was added to underpin the st rong price linkages betw een traded energy 
markets in form of additional correlation anal yses and figures on historical trade volumes 
in addition to further evidence on the occurre nce of market abuses  and their Community 
dimension in Chapter 4 
• Chapter 4 also includes additional description on current market oversight responsibilities 
in different Member States 
• In the same chapter further descriptions were  added to put in cont ext the relevance of 
increased energy costs for households, in genera l and for groups subject to potential social 
exclusion, in particular. The section on admi nistrative impacts of  Option 1a includes 
further assumptions on the content and volume of data to be reported. In addition the 
administrative costs for all options are pres ented in summary tables allowing for better 
overview 
• Finally, the annex with the summary of the public consultation was extended 
3 P
ROBLEM DEFINITION  
Liquid traded wholesale markets send crucial signals for where future investments in energy 
infrastructure are needed and are key to the tr ansformation of the European energy landscape. 
Deep wholesale markets give confidence to busin esses entering into long term contracts that 
they will be able to respond flexibly to cha nges in the markets – vital as tomorrow's low 
carbon economy will require long term contracts to underwrite high capital costs in nuclear 
generation and new renewable infrastructure. Pr ices established on wholesale markets serve 
as the benchmark for retail prices for hous ehold consumers and industrial users.  
                                                 
3  Participants were invited from DG COMP, DG ECFIN, DG ENTR, DG MARKT, DG CLIMA, 
DG ENV, DG EMPL, Legal Servi ce and the Secretariat General. 
 
EN 6   EN Because they are crucial to the well being of Europe's citizens, and to the competitiveness of 
Europe's businesses, as well as to the succes s of the EUs energy policy, it is of central 
importance that citizens, businesses and national authorities can have confidence in the integrity of energy markets. Unless effectively addressed, the potential for unfair trading practice undermines public trust, deter inve stment (particularly outside companies home 
bases), increases volatility of energy prices and may lead to hi gher energy prices in general. 
This in turn may also reduce competitivenes s of other sectors and industries e.g. energy 
intensive industries. As made cl ear in their advice to the Co mmission, financial regulators and 
energy regulators cannot effectively address co ncerns regarding market abuse because of a 
combination of informational failures and incomplete regulation.  
The underlying drivers of this failure lie in the particular nature of gas and electricity as 
commodities which are discussed below.  
Nature of gas and electricity as commodities 
Electricity cannot be stored on an  industrial scale. It must be produced in the moment it is 
consumed. This means that market prices are hi ghly sensitive to the availability of generation 
– and the expected availability of generation. To  a lesser extent, the same concerns apply to 
gas markets. As a result targeted use of gene ration and production can ea sily distort spot and 
derivatives prices. 
Gas is an important fuel, wide ly used in power generation, often delivering the marginal 
electricity needed to meet dema nd. Any changes of gas prices will  influence electricity prices 
(and vice versa). Manipulated gas (o r electricity) prices will distor t electricity (or gas) prices. 
The supply of electricity and gas is tied to  a smoothly operating network. Bottlenecks or 
limitations in the transport infrastructure will  have a great impact on prices. Artificially 
creating congestion at interconnect ors, or making it appear that congestion exists, or is likely 
to exist, will lead to price distortions between Member States or price areas.  
Energy markets are increasingly cross border 
EU energy markets increasingly cross national boundaries in terms of where trading takes 
place and where production and consumption takes place. This is a positive development and reflects the dynamic benefits broug ht by the internal market. As a result price setting is not 
tied to a particular market as prices are set based on supply and demand in several countries. 
If prices go up in the one c ountry market participants woul d buy electricity in another and 
export it to a higher-priced area bringing differences in supply and demand into a regional 
balance. This is supported by the high correla tion between prices of neighbouring countries, 
many of them relatively well interconnected and apply fairly similar market arrangements (market time frames, gate closures, etc.). As far as day-ahead prices concern, the Dutch-German price correlation increased from 0.57 (2004) and 0.67 (2005) to 0.85 and 0.91 in 2008 
and 2009, respectively. French-German pri ce correlation was high with 0.91 (2004), 0.85 
(2005) and have remained stable at levels  of 0.88 and 0.83 in 2008 and 2009, respectively; 
between Germany and Austrian even higher price correlations can be observed.
4 Figure 2 
shows how closely day-ahead power prices  follow each other in Central-Europe. 
Figure 2: Day-ahead power price developments in The Netherlands, Germany, Belgium and Austria 
                                                 
4  The Electricity Wholesale Sector – Market Inte gration and Competition; ESMT Competition Analyses, 
Berlin; page 7. 
 
EN 7   EN 010203040506070
16.01.2010
21.01.2010
26.01.2010
31.01.2010
05.02.2010
10.02.2010
15.02.201020.02.201025.02.201002.03.201007.03.2010
12.03.2010
17.03.2010
22.03.2010
27.03.2010
01.04.201006.04.201012.04.201017.04.2010
22.04.2010
27.04.2010
02.05.2010
07.05.2010
12.05.2010
17.05.2010
22.05.2010
27.05.201001.06.201006.06.201011.06.201016.06.2010
21.06.2010
26.06.2010
01.07.2010
06.07.2010
11.07.201016.07.201021.07.201026.07.2010€/MWh
EXAA - AT
APX - NL
EEX - DE
Belpex - BE
 
Source: EEX, APX, Belpex, EXAA 
Price correlations betwenn forward prices are even higher and they ar e also strong between 
interrelated commodities, especial ly electricity and gas. The PWC Study finds that "…in both 
spot and futures trading […] th e relation between gas and electri city is quite strong, with the 
correlation being particularly high for fu tures contracts (e.g. EEX 0.978, Nordpool 0.923)."5 
DG ENERGY's own calculations, based on the data  available to EMOS, the Energy Market 
Observation System confirm the above findings.  As Figure 3 shows, correlation between 
different geographical gas markets is even higher  than between different electricity markets. 
This is because gas is storable (os opposed to electricity) thus events like short term system 
disturbances or unavaila bilities of generation capacities in certiain areas which create short 
term regional price differences are not prevalen t. Correlation is also relatively high between 
gas futures markets in the US and Europe. Th is is, in our understanding, generally due to 
Atlantic LNG arbitarage possibililies. 
The introduction of market coupli ng between power exchanges across EU6, which is 
envisaged to be in place by 2015, will reinforce this development. Likwise the move to hub 
based trading in gas and entry/exit gas transmission tariffs, will have a similar effect.  
What this means is that energy bids and offers in one country affect pr ices in each of its 
neighbours. These bids and offers are not eas ily visible to those charged with market 
oversight. Even where information can be ex changed between countries, the process is 
cumbersome and does not lend itself to early and efficient identification of suspicous trading patterns.  
                                                
 
5  Impact Assessment for an Initiative on Transparen cy and Integrity of traded European wholesale 
markets for electricity and gas, Final Report, July 9 2010, Price Waterhouse Coopers. 
6 Presentation to Florence Forum  "Target Model for Interregional Congestion Management", 10 
December 2009, http://ec.europa.eu/ energy/gas_electricity/forum_e lectricity_florence_en.htm. 
 
EN 8   EN  
Figure 3: Covariance analysis: 1 January 2007 – 30 June 2010  
 Electricity Gas 
Day-ahead 
Correlation APX_NL  BPX_BE EPEX_DE EPEX_FR2 
APX_NL  1.000000    
BPX_BE  0.952043 1.000000   
EPEX_DE  0.864549 0.838692 1.000000  
EPEX_FR2  0.842050 0.913859 0.874453 1.000000
 Correlation GPOOL_DA  NBP_DA TTF_DA ZEE_DA 
GPOOL_DA 1.000000    
NBP_DA  0.979555 1.000000   
TTF_DA  0.994495 0.9869171.000000  
ZEE_DA  0.986344 0.9925950.9930721.000000
 
Front 
month Correlation NL_FM01 BE_FM01 DE_FM01 FR_FM01
NL_FM01  1.000000    
BE_FM01  0.978225 1.000000   
DE_FM01  0.988709 0.984077 1.000000  
F R_F M01  0.923299 0.968931 0.946145 1.000000
 Correlation GPOOL_MA1 NBP_MA1 TTF_MA1  ZEE_MA1 HH_MA1  
GPOOL_MA1 1.000000     
NBP_MA1  0.992454 1.000000    
TTF_MA1  0.997934 0.996156 1.000000   
ZEE_MA1  0.994547 0.997849 0.997646 1.000000  
HH_MA1  0.803670 0.809047 0.805109 0.816194 1.000000
 
   
 Cross Commodity 
Day-ahead 
Correlation APX_NL EPEX_DE TTF_DA GPOOL_DA
APX_NL 1.000000    
EPEX_DE 0.934750 1.000000   
TTF_DA 0.823945 0.767754 1.000000  
GPOOL_DA 0.820875 0.767319 0.994495 1.000000 
 
Front 
month Correlation NL_FM01 DE_FM01 TTF_MA1 GPOOL_MA1
NL_FM01 1.000000    
DE_F M01 0.991772 1.000000   
TTF_MA1 0.944266 0.924443 1.000000  
GPOOL_MA1 0.940587 0.921709 0.997934 1.000000 
 
  
  
Source: Platts, EMOS 
Electricity exchanges: EPEX spot DE, EPEX spot FR, APX, Belpex ; Gas hubs / exchanges : NBP, TTF, Zeebrugge, Gaspool, Henry Hub  
Note: The time series for EPEX Spot FR exclude values for two specific days as outliers (15/11/2007 and 19/10/2009)
 
EN 9   EN In one of the most well know instances of the breakdown of an Energy ma rket, the experience 
in California in 2001, Twomey, Green, Neuhof a nd Newberry have commented that "market 
surveilance concentrated on the local market and failed to monitor developments in the interconnected Pacific Northwest. An awareness of the interdependence of related markets is 
therefore important for timely and effective market survilance and may well suggest 
improvements elswhere"
7 While EU markets have not replicat ed the experience of California, 
the level of interdependence between different markets or regions in Europe is evident  
This creates possibilities for cross-border market  abuses without having the need to conclude 
a single transaction between two countries. Here  a simplified demonstration of such an abuse 
using Germany and France (as example) which could be possible between any two countries 
with highly integrated and inte rdependent wholesale markets. 
 
Box: Example of abuse 
Because of a high level of price interdependence,  a shortage of generation capacity in France 
will increase German electricity prices. Depending on the duration of this outage, prices of 
short and longer dated (deriva tive) contracts will be affect ed. This applies whether the 
shortage is a result of fundamental conditions wh en the increase in German prices is efficient 
or market abuse when it is not. Take a market participant who creates an artificial shortage of 
generation in France but also holds significan t "long" derivative posi tions on the German 
market 
• In France he can credibly argue that this resulted in losses for him.  
• In Germany he can credibly argue that he ha d taken a legitimate proprietary position – he 
did not act in any way on the German ma rket to cause the increase in prices. 
Only by combining knowledge of the market pa rticipant's actions on both the French and 
German markets, can the market abuse be detected. 
In reality, the transactions will be more comp licated – the long position on the German market 
will be contracted using both on and off-exchange derivatives, some of which will be 
transacted outside Germany. Part of the transa ction may be using "spread" contracts on the 
German French price differential. There may also  be ways to hide the cause of the artificial 
shortage in France.   
 
The Comission has indeed investigated instan ces of possible genertion capacy witholding 
based on its experience gained through the Sector Inquiry8. In its preliminary assessment of 
E.ON's market practices in 2008, it raised the co ncern that the German power generator would 
have abused its position on the wholesale market   by the short term withdrawal of available 
                                                 
7 Twomey, Green, Neuhof and Newberry A review of the Monitoring of Market Power: the Possible Role 
of TSOs in Monitoring for Market Power in Cong ested Transmission Systems.  Centre for Energy and 
Environmental Policy Research 2005 . 
8  Inquiry into the functioning of gas and electricity ma rkets of 2005, pursuant to Article 17 of Regulation 
1/2003 EC - http://ec.europa.eu/competiti on/sectors/energy/inqui ry/index.html#final. 
 
EN 10   EN generation capacity9. The case was settled with E.ON's commitment to divest its entire 
transmission network and 4,800 MW of its generation capacity to competitiors.10 
The Commission decision closing the case also found that the re ffered abusive practice has an 
important cross-border implication by stating th at "…the Commission considered that the 
practices in question could have  an effects on trade between Me mber States given that the 
consequences of this alleged behaviour do not only effect customers who need electricity as 
an imput for their industrial activity on the German markets but also customers in other 
European markets as higher prices on the German  market diminish the scope for exports to 
other markets"11 The existing interconnections between Member States' energy markets and 
the possibility to channel energy to higher pric ed markets through cross-border infrastructure 
makes it evident that market abuses occuring on a specific market will not be confined to on 
Member State but will inevitably impact all interconnected markets in Europe. 
For market misconducts to occur there has to be a certain traded volume there allowing for 
positions to be built up and dispositions to be made with ease. Traded volumes both in electricity and gas have developed well in th e last years with traded volumes reaching a 
multiple of physically transpor ted molecules and electrons. 
Figure 4  shows the development of 
the hubs except for the NBP, comparing the trad ed volumes to the physical volumes that are 
transported by the TSOs over these hubs 
Figure 4: Development of traded gas volumes in the EU (excluding NBP) 
 
Source: IEA, Natural Gas Market Review 2009 
                                                 
9  See: Commission Decision of 28.11.2008 relating to cases COMP/39.388 – German Electricity 
Wholesale Market and COMP/39.389 – Ge rman Electricity Balancing Market. 
10  Commission MEMO/08/132 of 28.2.2008. 
11  Page 15 of the referred Commission decision. 
 
EN 11   EN Energy markets are increasingly cross platform 
Successive European energy liberalization packag es have led to the development of power 
exchanges (or other organised markets) and br oker facilitated market s in over-the-counter 
(OTC) contracts which allow market  participants to trade with each other. From the point of 
view of market participants th ese options serve the same functio n and are used for equivalent 
purposes. Access to a range of trading venues pr esents advantages for market participants. 
While the share of trade conducted via organised power exchanges has increased, OTC still dominates in most EU markets, and there is little prospect of this changing.  
Companies trade based on agreements to phys ically deliver electricity and gas (either 
bilaterally or using power exchanges), and us ing derivatives products based on prices on a 
power exchange or a pool. For market part icipants these two types of trading are 
economically equivalent – a Contract for Differ ence based on a reference price on a market or 
energy pool fulfills the same func tion as a contract for the sale  or purchase of energy. Both 
organised market places and OTC platforms are used to trade in products based on physical 
delivery and in derivative products. As Figure 5 below shows the majority of trade in the 
main EU markets is brokered on the OTC market s where 74% of  total traded volumes is 
traded in derivatives. Because the underlying c ontracts are equivalent in economic terms, 
market abuses in one marketplace is  likely to  immediately impact prices on all other trading 
platforms or the price level of bilateral transactions. 
Figure 5: Volumes of electricity traded in  the EU's main markets in 2009 (in TWh)  12 
Total traded
forward spotfutures / forwards 
derivativesspot volumes
Germany 4,109.9 38.2 257.0 135.0 4,540.0
Nordic 1,100.0 0.0 1,195.9 285.5 2,581.4
UK 1,020.8 39.9 0.0 12.6 1,073.4
France 500.7 11.7 28.0 52.6 593.0
The Netherlands 205.8 2.3 34.0 29.1 271.2
Spain 168.1 1.5 0.0 201.0 370.6
Czech Rep 82.6 1.1 24.3 3.0 111.0
Italy 72.0 0.0 0.0 213.0 285.0
B e l g i u m 7 1 . 10 . 4 8 . 41 0 . 1 9 0 . 0
Hungary 38.7 0.4 3.5 0.0 42.6
Poland 31.3 0.0 0.0 2.8 34.1
Romania 6.9 0.0 11.5 6.3 24.7
Total traded volumes 7,407.8 95.6 1,562.6 951.0 10,017.0
Total in  % 74.0% 1.0% 15.6% 9.5% 100.0%Brokered OTC Exchange
 
Source: Argus Media Limited, GME, EEX, APX, PXE, Polpx, Opcom 
The difficulty in accessing data related to market behaviour on neighbouring markets is 
exaccaberated by trading of gas an electricity, particularly brokered OTC markets, at venues 
or through intermediaries located outside the country where the electricity or gas is to be delivered. Much of this trade is currently carried out through br okers based in London
13. This 
paralell trading using different trading channels  or platforms located in different Member 
States means for example that electricity for de livery in Germany can be traded in form of 
                                                 
12  According to market participants an additional 10% of standard transactions are conducted purely 
bilaterally without engaging any intermediaries. 
13  LEBA – Reply to EU Commission: Public Consultation by DG Energy on measures to ensure 
transparency and integrity of wh olesale markets in electricity and gas, 31 My 2010, Annex 1. 
 
EN 12   EN derivatives through brokers located in the UK,  but also as futures via EEX, a regulated 
marketplace in Germany. The same or similar co ntracts can also be traded bilaterally between 
market participants registered anywhere in or outside the EU wit hout using any organised 
market place or relying on a broker's service. As  Figure 5 shows, less than 6% (257 TWh) of 
all observable derivative (forward and futures)  transactions for delivery in Germany take 
place through a marketplace located in Germ any (EEX) while 94% (4,109.9 TWh) of the 
volumes are traded using intermediaries located outside the country. 
Regulatory data capturing is furt her complicated by the fact th at trading participants who 
trade a particular energy market are usually es tablished in different Member States. Figure 6 
shows, as an example, the geographical distri bution of participants trading German power 
derivatives on EEX. We can assume that the part icipants trading Germ an OTC spot and/or 
derivatives, which make up the large majority of overall German contracts, are similarly 
distributed. 
Figure 6: Geographical distribution of participants trading German power derivatives on EEX according 
to their country of establishment 
DE
29%UK
19%CH
9%IT
8%AT
6%FR
6% NL
5%SP
3%
DK
3%
NO
2%
CZ
2%
SK
2%
PL
1% US
1%SL
1%BE
1%PT
1%
LU
1%
KY
1% Other
7%
 
Source: EEX 
Market conduct rules appl ying to energy markets. 
The Market Abuse Directive14 (MAD) only partly covers energy markets as it is designed for 
the financial markets. It applies to financia l instruments admitted to trading on a regulated 
                                                 
14  Directive 2003/6/EC of the European Parliament and of the Council of 28 January 2003 on insider 
dealing and market manipulation (market abuse) and Commission Directive 2004/72/EC of 29 April 
2004 implementing Directive 2003/6/EC of the European Parliament and of the Council as regards accepted market practices, the definitio n of inside information in relatio n to directives on commodities, 
the drawing up of list of insiders, the notification of managers' transactions and the notification of 
suspicious transactions. 
 
EN 13   EN market, whether these are traded on such a mark et or on multilateral trading facilities (MTFs) 
or OTC. Physical energy market products (e .g. spot market products) are not covered and 
energy derivatives markets products are covere d only if they are admitted to trading on a 
regulated market. Figure 5 shows that the segment (Exchange – Futures/ forward /derivatives) 
covered by MAD made up some 16% of the total volumes traded in 2009.  
Since the regulated segment only accounts for a minority of overall trades in energy, the 
scope of MAD does not properly address market integrity issues in the electricity and gas 
markets. In addition, the relevant definition of  inside information is not specific and is 
therefore difficult to apply fo r electricity and gas markets15.  
The Markets in Financial Instruments Directive16 (MiFID), regulating investment services, 
fair and orderly trading and appropriate tran sparency on regulated markets, applies to 
commodity derivatives. However, there are only relatively high le vel transparency obligations 
with regard to exchanges listing commodity deri vatives as part of th eir basic organizational 
requirements to ensure fair and orderly trading. Also the definition of fina ncial instruments in 
the Directive does not c over the spot market and physically  settled OTC transactions which 
are non-standardized. Its basic objective of ensuring “financial stability and investor 
protection” seems less relevant for energy since energy derivative s are typically not 
investment products but are primarily used as  hedging instruments for mitigating price risks 
of energy market particip ants (e.g. some utilities).17  
Some other rules may exist on the level of Memb er States but they ar e only limited in scope, 
often relating only to a single trading platfo rm and covering a single Member State. This 
finding was also confirmed by a dedicated study on which the present initiative builds. It 
found that " In Czech Republic, the Czech Natio nal Bank is competent to oversee the Czech 
financial market. The Czech National Bank overs ees Energy Derivatives together with the 
ministry of finance and the ministry of industr y and trade. The ministry of industry and trade 
(and not the NRA [ National Energy Regulatory Authority ]) is competent for supervising 
Commodities. 
In Belgium, the NSA [ National Securities Authority ] is competent for supervising Energy 
Derivatives […], whereas the NRA is compet ent for supervising wholesale exchanges of 
Commodities along with the energy ministry, havi ng certain powers in re spect of the Belgian 
PX, Belpex. In the field of EA [ EU Emissions Allowance ] in Belgium, beside the NRA and 
the NSA, regional authoritie s (three) might be competen t for oversight of EA.  
[….] in Germany, PXs [ Power Exchanges ] /Regulated Markets are overseen by the exchange 
supervisory authorities of the Länder (“Börsenaufsichtsbehörden” ). The German PX (EEX) is 
overseen by the exchange supervisory authority of Saxony. 
                                                 
15  CESR and ERGEG advice to the European Commissi on in the context of the Third Energy Package, 
Ref: CESR/08-739.  
16  Directive 2004/39/EC of the European Parliament and of the Council of 21 April 2004 on markets in 
financial instruments amending Council Directives 85/611/EEC and 93/6/EEC and Directive 
2000/12/EC of the European Parliament and of the Council and repealing Council Directive 93/22/EEC (OJ L 145, 30.4.2004, p. 1–44). 
17  See e.g. advice by the European Securities Mark ets Expert Group on commodity derivatives business, 
p.59ff http://ec.europa.eu/internal_market/secu rities/docs/esme/commodity_derivatives_en.pdf. 
 
EN 14   EN Complex competency divisions might creat e legal uncertainties  and a lack of 
effective/efficient collaboration between comp etent authorities, as well as gaps and 
contradiction in oversight. The German NSA indi cates that a clear division of competencies 
between all involved au thorities is required to enhance oversight."18 
Internal energy market legislation (in particul ar 3rd liberalisation package with Directives 
2009/72 and 2009/73) defines obligations for Member States to provide for competitive and non-discriminatory market arrange ments, but does not se t out standard s to ensure the integrity 
of such markets. Supply undertak ings are required to keep reco rds of their transactions, but 
the Directives do not define specific conduct rules for wholesale markets and their participants.  
Summary of the problem  
Based on the above analysis th e rules governing energy markets are insufficient to ensure 
their stable and orderly functioni ng. The rules only capture a frac tion of relevant transactions 
and do not provide for consistent or easily applicable definitions of acceptable practice. The 
lack of rules and the divergence of rules re garding reporting of data do not allow for the 
totality of markets to be monitored and spec ific misconducts, such as cross-border, cross-
commodity and cross-market misconducts to be effectively detected. Th is view is supported 
by sectoral regulators in their advice to the Commission, and by the respondents to the 
Commission's consultation. As the European Federation of Energy Traders (EFET) states
19: 
"… based on the above-mentioned regulatory gaps and shortcomings - a sub-optimal oversight of energy wholesale markets exists, wh ich hinders further market development. The 
current regulatory situation does,  in particular, not take into account the factual situation that 
energy wholesale markets are increasingly charac terized by a wide range  of actors (including 
utilities, pure traders, financial institutions and other wholesale tradin g market participants 
and platforms), cross-border trade, important  derivatives markets around markets in the 
underlying energy products and increasing liquid ity in energy wholesal e trading activities. 
Various different national regimes and authoriti es do not fit to such an EU-wide wholesale 
trading market."  
Other responses to the public consultation showed widespread agreement with this analysis by 
Member States, regulators, power ex changes and market participants.  
The Amaranth case description  
In the following we develop a case study which we  use further below in chapter 'Analysis of 
Impacts' to demonstrate the impact of ma rket misconduct. For this purpose we use the 
Amaranth  case which involved the manipulation of seve ral natural gas markets in the U.S. in 
2006 (for the essence of the case see the Box below). The Amaranth  case was a particularly 
sever case of manipulation, however, it is also important to bear in mind, as ERGEG note in 
their response to the public consultation th at "in many cases market misconduct would not 
result in huge impacts on market prices (e.g. pr ice spikes) but rather in smaller deviations 
                                                
 
18  Report on the Competencies and Powers of National Regulation Authorities and National Securities 
Authorities by Philippe & Partners & R. Feltkamp, annexed to this document. 
19  Response of EFET to Public Consultation by the Directorate General for Energy on measures to ensure 
transparency and integrity of whol esale markets in electricity and ga s. Some Member States responses 
also highlighted actions taken at the Member States level. 
 
EN 15   EN from a 'fair and orderly' price. However the imp act of this behaviour on  the well functioning 
and trust in the markets shoul d not be underestimated".  
 
EN 16   EN  
Box: The Amaranth case 
A hedge fund, Amaranth Advisors LLC, manipulat ed the U.S. natural gas market in 2006 on 
several instances. Amaranth accumulated massi ve natural gas holdings in the form of 
derivative contracts on NYMEX, an organised marketplace for trading commodities in the 
US,  spanning five years, from 2006-2010. Am aranth’s 2006 accumulation of such large 
positions and trading of such large volumes of natural gas  had a direct effect on U.S. natural 
gas prices and increased price volatility on th e whole natural gas market. The larger than 
usual differences between winter and summer fu tures prices that prevailed during the spring 
and summer of 2006 were largely th e result of Amaranth’s large- scale trades rather than the 
normal market interaction of buye rs and sellers. Purchasers of  natural gas during the summer 
of 2006 for delivery in the following winter mont hs paid inflated pri ces due to Amaranth’s 
trading practices. 
Amaranth accumulated natural gas futures pos itions on NYMEX with the view to sell these 
contracts in a very short period of  time right before the futures contract in question expire and 
go in delivery. In fact, it sold large amounts of contracts on February  24, March 29, and April 
26, 2006, the days on which the respective futures for March, April and May expire.  The 
transactions were designed to produce artificially low “settlement prices”. Considered in 
isolation, this trading would be economical ly irrational because by driving down the 
settlement price, Amaranth made less on the sale s of these contracts.  However, Amaranth had 
previously taken positions several times larger  in various financial derivatives on ICE, an 
organised marketplace in the US, and in th e over-the-counter trade the value of which 
increased as a direct result of the decrease in the settlement price of the NYMEX natural gas 
futures contract.  Thus, for every dollar lost on its sales of the NYMEX natural gas futures 
positions, it would gain several dollars on its derivative financial positions. According to a 
report20 of the Federal Energy Regulatory Commissi on of the US, Amaran th profited by a 
total of at least  $59,000,000 and perhaps as much as $168,000,000 on these three settlement 
days as a direct result of the manipulation. 
 
Lesson learnt from the Amaranth case 
Amaranth's abusive conduct not only caused direct and indirect economic damages to 
consumers and market participants but also highlighted an important regulatory issue. 
Amaranth's distorting trading strategy conc erned two distinct marketplaces, NYMEX and 
ICE, and also involved OT C derivative transactions21. Having regard to th e inconsistencies in 
the oversight of Europe's traded energy ma rkets, it is doubtful that a Amaranth-style 
misconduct would have been efficiently detected if it had happened in Europe. 
                                                 
20  120 FERC ¶ 61,085, UNITED STATES OF  AMERICA FEDERAL ENERGY REGULATORY 
COMMISSION, Order to show cause and notice for proposed penalties; Docket No. IN07-26-000, 
issued July 26, 2007. 
21   OTC derivatives include next to different "options" so called “basis swap”. Basis swaps are derivative 
instrument whose value is based on the difference between the settlement price of the NYMEX gas 
futures contract for a given contract month and nautral gas transactions for delivery in different 
locations. 
 
EN 17   EN The involved marketplaces in the U.S. were lo cated in different States and part of the 
transactions concerned derivatives  relating to natural gas delive ries in different geographical 
locations within the U.S.. In the EU, without rules specified on EU le vel, they would be 
subject to different supervisor y and market monitoring regimes22. Market supervisors, whose 
jurisdiction is defined by the locat ion of the marketplace, would only be able to see fragments 
of a trading strategy  making the detection of complex cross-platform and cross-border 
misconducts difficult23. The detection of the market misconduct is made even more difficult if 
it involves OTC transactions, as it was the ca se with Amaranth, whic h are not coherently 
monitored throughout Europe. 
These regulatory shortcomings suggest that  economically equivalent transactions and 
transactions that relate  to deliveries in severa l interrelated markets should be monitored in one 
to allow for a complete view of the market , irrespective how and where the trades are 
conducted. This does not detract from the obliga tions on those who operate organised market 
places, and those who supervise organised market places.  
 
Likely evolution of the problem 
In their advice to the Commission, CESR and ERGEG state that "Due to the lack of a full and 
in-depth market monitoring exercise, as well as the unavailability of the required information for regulators, the extent to which such [abusive]  practices take place ca nnot be evaluated by 
CESR/ERGEG. As long as the necessary informa tion is not available to regulators, abusive 
behaviour will remain difficult to detect . However, so long as regulators do not have the data 
they require to evaluate the po ssibility for market abuse to ta ke place and to take appropriate 
action to prevent it, it is likely that the condi tions that currently exist, which could allow 
market abuse to go undetecte d and/or unprosecuted, will re main unchanged. As a result, 
CESR and ERGEG remain concerned about the pot ential for such abuses to take place."  
At present there are nascent attempts at the national level to implement oversight of energy 
markets.24 Given the organisation of energy markets, it  will be difficult fo r individual member 
states to ensure they have acce ss to the necessary range  of data to ensure that market abuse is 
detected and deterred. Moreover, without ac tion at the EU level these initiaves could 
proliferate and risk exposing ma rket participants to conflictin g and uncoordinated regimes.  
The graph below sets out a problem tree showin g how the particularieties of energy markets 
and cross-border and cross platform trading with energy and energy derivatives could 
undermine the EU Energy Policy if energy markest are not properly regulate d at the EU level. 
                                                 
22  In the U.S. the case took place in Louisiana an d the impact on prices took place in New York.  
23  An exchange of transactional data between compet ent regulators is not likely to fully alleviate these 
shortcomings. 
24 The French energy regulator (CRE) has broad powers to oversee wholesale markets (including spot and 
OTC derivative transactions) and began to request tr ansactional data relating to French markets from 
market participant across Europe. The German Monopolkommission has demanded the establishment of an independent market monitor in Germany being able to access on and off-ex change transactions.for 
delivery in Germany. In March 2009 Ofgem, the UK energy regulator issued a paper on preventing 
market abuse. 
 
EN 18   EN Figure 7: Problem tree 
 
  EU Energy Policy o f 
Secure Sustainable
and Competitive
supplies of energy is 
undermined  
Reluctance to make 
investments due to 
lack of confidence in 
market   Misdirecte d
investment and 
production due to 
poor price signals  Inefficient market 
interventions   
Lack of confidence i n
market outcomes on 
part of consumers, 
investors and 
Member States  
Unclear regulatory
framework for energy
markets / markets
vulnerable to
manipulation  
Cross border nature 
of energy markets – 
i.e. market outcomes 
are interdependent  
across MS   Hybrid nature o f 
energy markets – 
physical an d 
derivative trading  Trading locatio n 
separated from where 
energy is delivere d 
and consumed   
 
EN 19   EN Right of the EU to take action 
Action aimed to ensure market integrity clea rly and directly contri butes to ensuring the 
functioning of the energy market, in line with Article 19425. It also has a positive indirect 
impact on ensuing security of supply, promoting energy efficiency and th e interconnection of 
energy networks by facilitating cr oss-border trade and encouragi ng the most efficient use of 
the resources.  
Action to ensure market integrity does not affect a Member State's right to determine the 
conditions for exploiting its ener gy resources, its choice betw een different energy sources and 
the general structure of its energy supply.  
Given the cross-border nature of the problem, it is  clear that EU action has a key role to play 
in ensuring the integrity of European energy mark ets. Some level of EU  wide coordination is 
clearly required to ensure that the benefits of the internal market in energy are not lost as a 
result of market behaviour which undermines the confidence of citizens and business in the 
price formation process, when the behaviour occu rs in a different Memb er State to where its 
effects are felt.  
Market monitoring is not a monopoly funciton; European level monitoring does not prevent 
Member States reviewing market data. Member  State authorities no t only have a direct 
interest in the outcomes on their markets, they  also bring an important understanding of the 
evolution of market outcomes in their juri sdiction. Therefore resp ecting the subsidarity 
principle will be key to ensuring the e ffectiveness of EU action in this area. 
 
                                                 
25 Article 194 of the Treaty on the Functio ning of the European Union states:  
1. In the context of the establishment and functioning of the internal market and with regard for the 
need to preserve and improve the environment, Un ion policy on energy shall aim, in a spirit of 
solidarity between Member States, to:  (a) ensure the functioning of the energy market;  
(b) ensure security of energy supply in the Union;  
(c) promote energy efficiency and energy saving and the development of new and renewable forms of energy; and  
(d) promote the interconnection of energy networks.  
2. Without prejudice to the application of other provis ions of the Treaties, the European Parliament and 
the Council, acting in accord ance with the ordinary legislative pro cedure, shall establish the measures 
necessary to achieve the objectives in paragraph 1. Such measures shall be adopted after consultation of 
the Economic and Social Committee a nd the Committee of the Regions.  
Such measures shall not affect a Member State's right to determine the conditions for exploiting its 
energy resources, its choice between different energy  sources and the general structure of its energy 
supply, without prejudice to Article 192(2)(c). 
 
EN 20   EN 4 OBJECTIVES  
 
General objectives 
The Green Paper "A European Strategy for Su stainable, Competitive and Secure Energy"26 
defines the EU's overarching energy policy objectives of safe, sustainable and competitive energy markets. Robust and reliable wholesale ma rkets play a central ro le in delivering these 
objectives. 
The purpose of the present initiative is to cr eate a framework which ensures that Europe's 
traded energy markets function properly, i.e. their outcomes are not distorted by abusive 
market behaviour, but truly reflect market fund amentals. This shall generate an increased 
level of trust of all stakeholders, which in tu rn will lead to higher participation, more depth 
and liquidity and lower transactional costs. 
Delivering deep, liquid and integrated energy market s fits into Europe's 2020 strategy to reach 
a smart, sustainable and inclusive growth in Europe. This goal requires among others "well-
connected markets where competition an d consumer access stimulate growth and 
innovation"
27. The strategy document also estimates that "further progress with the integration 
of the European energy market can  add an extra 0.6% to 0.8% GDP"28  
Creating a proper framework for the integrity a nd transparency of Europe's traded energy 
markets will foster the desired market inte gration and underpin overarching European policy 
objectives. 
 
Specific objectives 
Trust in the functioning of traded energy market s can only be created if there is a framework 
which appropriately governs th e conduct of market participants. This framework needs to 
define rules that are complete, consistent, adap ted to the specifics of energy markets and be 
designed to effectively detect and deter market misconduct. This is fully in line with the 
advice of  energy and financia l regulators which recommends "… that the Commission should 
consider developing and evaluating proposals for a basic, tailor-made market abuse 
framework in the energy sector legislation for all electricity a nd gas products not covered by 
MAD"29 
 A.  Consistent and complete rules 
The rules need to effectively capture energy sp ecific market misconducts, such as: trading on 
insider information, withholding of energy pr oduction facilities fr om the market and 
                                                
 
26  COM(2006) 105 of 8 March 2006: "A European Strategy for Sustainable, Competitive and Secure 
Energy". 
27  COM(2010) 2020 of 3 March 2010: "Europe 2020 – A strategy for smart, sustainable and inclusive 
growth", page 19. 
28  COM(2010) 2020 of 3 March 2010: "Europe 2020 – A strategy for smart, sustainable and inclusive 
growth", page 13. 
29  CESR and ERGEG advice to the European Commissi on in the context of the Third Energy Package, 
Response to Question F.20 – Market Abuse, Ref: CESR/08-739; E08-FIS-07-04, page 26. 
 
EN 21   EN distortion of prices. Rules need to be consistent  throughout Europe so as to ensure that traders 
are able to apply the same compliance standard s and are not faced with diverging rules and 
requirements when trading in different Member States. 
The rules have to be also complete and cove r all relevant transact ions, including spot and 
derivatives and on- and off-exchange transac tions. In general, economically equivalent 
transactions should be subject to th e same set of market conduct rules. 
 B. Adaptable and compatible rules Sector specific rules need to be compatible with  applicable financial re gulation to which some 
of the energy market participants are also s ubject. At the same time fi nancial regulation needs 
to be adaptable to the needs of energy markets. In addition tailor made rules need to be created to fully capture energy specific mark et misconducts. The overa ll rulebook applicable 
to energy trading should be designed with a view that no overlaps ar e created but also no 
regulatory gaps are left. 
 More concretely: the concepts of insider trad ing and market manipula tion have already been 
well established in MAD. The Dir ective is currently unde r review and it is considered that its 
scope could be enlarged to cover important ener gy derivatives markets. The present initiative 
will therefore, on the one hand, introduce these concepts for energy market segments which 
remain outside the current and envisaged scope  of the MAD and, on the other, establish a 
framework within which an energy specific meaning of insider information or market 
manipulation can be practically established. For the latter it is envisaged that the detailed 
'rulebook' will be specified in a separate implementing legislation based on technical 
guidelines prepared by ACER. Once developed, th e proposed detaile d rules will be subject to 
a separate impact assessment. 
 
C. Measures for effective detection and deterrence In order for market misconduct to  be detected, wholesale energy markets need to be regularly 
monitored
30. To this end, an effectively functioni ng market monitor would need to have 
timely access to complete and verified sets of transactional data. The monitored data should 
have an appropriate commodity and geographic coverage so as to enable the detection of 
cross-commodity, cross-platform a nd cross-border market abuses. 
Once market misconduct is detected, compliance with  the rules needs to be enforced. For this 
purpose, competent enforcement authorities need to be defined who can effectively 
investigate and prove instances of market abuses  on energy markets. They  would need to have 
effective sanctioning powers to deter mark et participants from future misconduct. 
 
                                                 
30 The need for monitoring was explicitly raised as a consultation question. Almost all respondents agreed 
that monitoring was an important element in ensuring market integrity. The exception was Statoil which considered that "if guidance and legislation is suffic iently clear most participants will seek to operate 
within the rules as applied… Ex ante monitoring w ill take up a lot of resources… It may therefore be 
better to correct abusive behaviour than continually monitor markets".   
 
EN 22   EN Figure 8: Deduction of Objectives  from the identified Problems 
 
sssssss  sss        EU Energy Policy of 
Secure Sustainable 
and Competitive 
supplies of energy is 
supported 
Increased security for 
long term investmentsBetter short term asset 
optimisation Increased regulatory 
confidence in market 
based price setting 
mechanisms 
Deep and liquid 
markets supporting 
efficient price discovery and 
creating sustained 
trust
Complete,  consistent, 
adaptable and 
compatible rules 
effectively detecting 
and deterring abuses
 EU Energy Policy of 
Secure Sustainable 
and Competitive 
supplies of energy is 
undermined 
Reluctance to make 
investments due to 
lack of confidence in 
market Misdirected 
investments and 
production due to 
poor price signals Inefficient market 
interventions 
Lack of confidence in 
market outcomes on 
part of consumers, 
investors and Member 
States 
Unclear regulatory 
framework for energy 
markets / markets 
vulnerable to 
manipulation 
Cross border nature o f 
energy markets – i.e. 
market outcomes are 
interdependent across 
MS  Hybrid nature of 
energy markets – 
physical and 
derivative trading Trading location 
separated from where 
energy is delivered 
and consumed  Problem tree Hierarchy of objectives 
Regulatory objective Output Overarching policy objective 
Desired market outcome 
 
EN 23   EN 5 POLICY OPTIONS AND ENFORCEMENT DESIGN CHOICES  
This chapter gives an overview of the policy options considered when drafting the regime. 
Apart from the Baseline scenario which is maintaining the status quo, the remaining options 
assume sector-specific rules established at EU -level. All those op tions, except option  4 
envisage enforcement of rules at the level of the Member States.  
Option 0: Business as usual  
This option constitutes the business as usual scenario (BAU); under this option no sector-
specific initiative is taken, financ ial and/or energy regulatory au thorities supervise only some 
parts of the traded market. There are no market  conduct rules agreed at EU-level which could 
be coherently implemented in Member States . The supervisory frameworks are different 
between each Member State, and, although national energy regulator y authorities will 
increasingly cooperate within ACER, there is  no established process of data access and 
exchange for market monitoring purposes. Th erefore, market misconducts taking place in 
several markets and involving different but inte rrelated products/commodities are difficult if 
not possible to detect. 
A scenario without EU action does not mean th at no actions will be taken on Member State 
level. In the absence of a comprehensive EU-level market integrity and supervisory 
framework national legislators ha ve already started filling th is gap and introduced national 
measures including transactional data co llection, regulatory m onitoring and reporting 
schemes: The French energy regulator (CRE) ha s, for example, the power to monitor all 
physical and derivative electr icity and gas transactions (i ncluding OTC derivatives) for 
delivery in France. For this purpose it collects transactional data from all traders and/or 
intermediaries in the EU. As another exam ple, the German Monopolkommission called in its 
special report of 200931 for the establishment of an inde pendent market m onitor in Germany 
which should be able to access and screen on and off-exchange transactions for delivery in 
Germany. These schemes, though clearly increase  the scope of regulatory supervision, will 
inevitably remain incomplete. By monitoring transactions relating to a single Member State, the cross-commodity and cross-border aspect s of traded energy markets remain uncovered 
and certain market manipul ations will go undetected. 
Option 1a – Rules defined at EU level,  Member States monitor and enforce
 
This option foresees market misconduct rules to  be defined on EU-level. As pointed out in 
'Specific Objectives' these rules should be tail ored to the needs of traded energy markets and 
capture all electricity and gas products not c overed by MAD.  Markets are monitored on the 
Member State level based on decentralised tr ansaction reporting to competent regulatory 
authorities. National Regulators w ould assume monitoring responsib ility for transactions that 
are delivered in (or related to) the Member State in which they have jurisdiction32. 
Transactions are reported to each Regulator separa tely by traders or via brokers or other third 
parties. Traders and/or brokers would report a ll their wholesale energy transactions to the 
                                                 
31  Strom und Gas 2009: Energiemärkte im Spannungsfeld von Politik und Wettbewerb; Sondergutachten 
der Monopolkommission gemäß § 62 Abs. 1 EnWG. 
32  If a trader established in Country A engages in a tr ansaction with another trad er established in Country 
B concerning electricity for delivery in Country C, the Regulator of Country C would assume 
monitoring responsibility. 
 
EN 24   EN Regulator where they are established ir respective where the delivery takes place33. Reported 
transaction details and data formats are defined on EU-level. Transactiona l data are stored in 
different ways, in separate systems of the 27 national regulatory authorities. As we have 
discussed under 'Problem Definiti on' the country of establishment of the counterparts will in 
many cases differ from the country where the tr aded contract is delivered. Therefore the 
Regulators will operate a decentralised data exch ange mechanism which will enable them to 
monitor all transactions which are delivered in  their jurisdiction and enforce the tailor-made 
market conduct rules. In case the transactions  concern a number of Member States (e.g. 
contracts for location price di fferences), appropriate rules and coordination mechanisms 
would have to be put in place. Such rules an d mechanisms would also define enforcement 
responsibilities and obligations  to cooperate. Such cooperati on can be supported by an EU 
body (e.g. ACER). Main features are the following: 
• market misconduct rules, reporting obliga tions and formats, monitoring and 
enforcement responsibilities defined on EU level; 
• Market monitoring is decentralised and at  MS level. Each  MS Regulator will 
be in charge of the monitoring and enforcement; 
• Transactions are reported to each Re gulator separately by traders and/or 
brokers or a third party operators); 
• Each Regulator has its own systems in place to record the reported 
transactions; 
• Regulators operate a decentralised  data exchange mechanism  
• For misconducts concerning more than one  MS appropriate rules would need 
to be put in place, governing coordina tion and enforcement between national 
Regulators, making use of the s upport of an EU body (e.g. ACER)  
Figure 9 shows how the traders (Tr) in Member St ates (MS) and the regulatory authorities (R) 
interact with each other: 
Figure 9: Schematic picture of data fl ows and interactions under Option 1a 
 
                                                 
33  If a trader established in Country A engaged in transactions which are deliv ered in (or relating to) 
Country B, C and D it would have to report these tran sactions to the Regulator having jurisdiction in 
Country A. Tra 
MS 1 Trb   
MS 2 Trc 
MS 3 Trd 
MS 4 Tre 
MS 27 R1 R3 R4 R27 R2 EU Agency/Body 
 
EN 25   EN Option 1b – Rules defined at EU level, Member  States report, monitor and enforce, EU 
Agency process data and monitors cro ss-border and cross-commodity misconduct    
In this option, just like under Option 1a, mark et misconduct rules, reporting obligations, data 
formats and monitoring and enforcement obligati ons are defined on EU-level. However, when 
comparing with Option 1, there are two differences. 
Firstly, while competent authorities of the Memb er States continue m onitoring transactions 
for which they assume responsibility, there is an additional layer of m onitoring introduced on 
EU level. This monitoring function would concen trate on the detection of market abuses of 
cross-border and cross-commodity nature. 
Secondly, instead of operating a decentralised da ta exchange mechanism, Regulators directly 
send the transactional data they receive from ma rket participants to the EU Agency. The EU 
Agency collects all the data and sorts them by pl ace of delivery. The sorted data sets are then 
sent back to the respective competent Regulat or in the 27 Member States. A copy of all 
received data remains with the EU Agency enab ling it to monitor the referred market abuses. 
If the EU Agency suspects misconduct through it s regular monitoring it es tablishes whether 1) 
the misconduct concerns transactions  delivered in (or related to) a single Member State or, 2)  
several  Member States (e.g. in case of a location spread).  
In the first case the Agency informs the con cerned Regulator which has the obligation to 
enforce the market conduct rules.  In the second case appropriat e rules for the cooperation of 
the concerned Regulators have to be put in place,  including the possibility for the EU Agency 
to take action, if the concerned Regulators deci de to do so. The Regula tor may also detect 
misconduct within its boundaries on its own.   
In summary, this option implies the following: 
• market misconduct rules, reporting obliga tions and formats, monitoring and 
enforcement responsibilities defined on EU level; 
• Responsibility for market monitoring is shared between EU and MS level. MS 
Regulators will be in charge of enforcement; 
• Transactions are reported to each Re gulator separately by traders and/or 
brokers or a third party operators; 
• Each Regulator has its own systems in place to record the reported 
transactions; 
• Regulators send all transaction data to  EU Agency. As a service, the EU 
Agency sorts the transactions according to the place of delivery and sends the 
dedicated batches back to the respective regulators 
• For misconducts concerning more than one  MS appropriate rules need to be 
put in place, governing coordinati on and enforcement between national 
Regulators, making use of the s upport of an EU body (e.g. ACER)  
 
 
 
EN 26   EN Figure 10: Schematic picture of data fl ows and interactions under Option 1b 
 
 
Option 2 – Rules defined at EU level, shared monitoring in a unique EU Agency and Member 
States, enforcement by Member States  
In this option market misconduc t rules are defined on EU-l evel. Details of European 
wholesale transactions are reported to the EU Agency by traders or via brokers or other third 
parties. No direct reporting to Regulators is foreseen, but national auth orities have access to 
the data held by the EU body. In the same pr ocess as described under Option 1b, the EU 
Agency sorts the transactions according to their place of delivery and sends the dedicated data 
sets back to the respective regulators. This en ables them to monitor transactions falling in 
their jurisdiction wit hout having to collect data by themselves. 
Again, just like under Option 1b, monitoring res ponsibility is shared between MS and EU 
level, with the EU Agency concentrating on th e detection of market abuses of cross-border 
and cross-commodity nature. Regularity, format a nd details of data to be reported are defined 
on EU level. Reported data are st ored in a central database.  
In case the EU Agency identifies an alle ged misconduct through its regular monitoring the 
same procedure applies as under Option 1b.  
In summary, this option implies the following: 
• market misconduct rules, reporting obliga tions and formats, monitoring and 
enforcement responsibilities defined on EU level; 
• Responsibility for market monitoring is shared between EU and MS level. MS 
Regulators are in charge of enforcement; 
• Transactions are reported centrally to the EU Agency by traders and/or brokers 
or third party operators. No reporting on MS level foreseen 
• EU Agency sorts the directly reported transactions according to the place of 
delivery and sends the dedicated data se ts back to the respective regulators Tra 
MS 1 Trb 
MS 2 Trc 
MS 3 Trd 
MS 4 Tre 
MS 27 R1 R3 R4 R27 R2 EU Agency/Body 
 
EN 27   EN • For misconducts concerning more than one  MS, appropriate rules need to be 
put in place, governing coordination and enforcement between national 
Regulators, making use of the support of an EU body (e.g. ACER) 
Figure 11 shows the interactions: 
Figure 11: Schematic picture of data fl ows and interactions under Option 2 
 
 
Option 3 – Rules defined at EU level, shar ed monitoring by ACER and Member States,  
enforcement by Member States  
This option is equivalent to Option 2, however, all functions and compet ences of the EU level 
body are assumed by the European Agency for the Cooperation of Energy Regulators (ACER) 
which was recently established by the 3rd Internal  Energy Market Package and will be located 
in Ljubljana, Slovenia34. While market oversight is not  among its competences its powers 
could be expanded to cover the monitoring of trad ed energy markets with the view to detect 
and deter energy specific  market misconducts..  
Option 4 – Rules defined at EU level, monito ring and enforcement by ACER or unique EU 
Agency in cross-border cases  
This option is equivalent to Options 2 and 3, however, in all cross-border cases of detected 
misconduct, ACER or the EU Agency would assume exclusive responsibility for the 
enforcement of rules. This option is however discarded for further analysis because the Commission has no reason to believe that in case a misconduct is detected, Member States 
would not be able to enforce ru les as efficiently as the Agen cy or ACER. It is therefore 
maintained that in case of a detected misconduc t national authorities shall take enforcement 
action in accordance with the subsidiarity principle.  
                                                
 
34  The basis for its establishment is Regulation 713/2 009 of the European Parliament and the Council of 
13. July 2009. Ta in 
MS 1 Tb in 
MS 2 Tc in 
MS 3 Td in 
MS 4 Te in 
MS 27 R1 R3 R4 R27 R2 
EU Agency/Body 
 
EN 28   EN Option 5 – Self-regulation of the markets.  
This option assumes that there will be no actio n undertaken by public authorities at the EU 
level or by Member States, neither regarding defi nition of rules nor regarding monitoring. It is 
assumed that the industry itself will agree upon some market integrity rules. In case 
misconduct would become known, national Courts or public authorities on level of general 
market oversight could get involved in enforcem ent of such rules. It cannot be excluded that 
in some ways the industry would agree to es tablish market misconduct rules. Monitoring and 
enforcement of such rules would be expected however, a priori  ineffective as the incentive to 
transfer data by market particip ants and have them monitored by other market participants or 
private companies without the level of indepe ndency of public authorities will be limited. 
Weak monitoring is likely to result in an ineffective market integrity regime35. For these 
reasons this option is discarded.  
Option 6 – Extension of MAD and MiFID (No tailor made approach)  
Extension of financial market legislation to cover all relevant ener gy markets would bring 
these markets within the financial regulatory framework. This framewor k, in particular MAD, 
is designed to establish a genuine single mare kt for financial servi ces. Notwithstanding, the 
close links between energy markets and some fina ncial markets, the requirements of financial 
market supervision differ in important ways  from energy market oversight. Explicitly 
extending MAD to cover all energy markets w ould undermine the focus and effectiveness of 
MAD. This was recognised by CESR/ERGEG in  their advice to the Commission where they 
state "A mere extension of the scope of market abuse regulations…in MAD to physical 
products is not reccomended… [it] would bear the risk of leading to an inappropiate 
application of MAD in other areas"36. This means, including physical energy markets and 
defining prohibitions of energy specific mi sconducts (e.g witholding  of energy production 
assets) within MAD is not desirable and woul d only fragment its ove rarching character and 
applicability. This could have a detrimental effect on the internal market in financial services, 
and wider EU policies relati ng to financial stability. 
It the light of the strong advice from finacial and energy regulators, and the distinct scope of 
MAD, this option was not considered in detail. This, however, does not mean that the scope of 
the MAD could not be enlarged to cover a wide  range of energy deriva tives and marketplaces 
where such derivatives are traded. In fact, th e Commission services ar e reviewing the MAD, 
with proposals due in December 2010. Options  under consideration include extending the 
scope of the Directive to financial instru ments traded only on MTFs and to market 
manipulation through OTC derivatives which can im pact the prices of instruments traded on 
regulated markets or MTFs. The revision of the definition of inside information for 
commodity derivatives is also under considera tion. The MAD review shall ensure that the 
derivative side of energy mark ets is properly covered. Howeve r, these reviews and proposals 
will be made in the light of the goals in relation to financial markets.  
 The tailor made market integrity measures will ha ve to ensure that they  interact well with 
applicable financial regulation with rules which do not overlap but also do not leave any gaps. 
                                                 
35  For further reference on the inefficiency of self-regulation see: 'The Self-regulation of Commodity 
Exchanges: The case of Market Manipulation', S.C. Pirrong, University of Michigan, in Journal of Law 
and Economics, vol. XXXVIII (April 1995). 
36 CESR ERGEG advice to the European Commission – response to Question F.20 – Market Abuse. 
 
EN 29   EN 6 ANALYSIS OF IMPACTS  
The aim of this chapter is to assess positive and negative economic, social and environmental 
impacts of each of the defined options set out above. The outcome of this analysis will be 
further used when it comes to th e choice of the preferred option.  
Option 0: Business as Usual (BAU) 
As already explained, under this option no EU-lev el sector-specific initiative is taken. Traded 
markets remain without comprehensive and cohe rently implemented rules with a risk that 
national initiatives prol iferate and risk exposing market participants to conflicting and 
uncoordinated regimes. As a result of fragment ed rules and uncoordinate d oversight structures 
the likelihood of occurance of market miscon ducts remains hight and the probability of 
detection stays low. 
Economic impacts 
Market manipulations distort pr ices and dilute the essentia l price discovery and hedging 
function that traded energy markets supposed to provide. These functions depend on prices 
resulting from orderly trading truly reflecting supply and dema nd fundamentals, i.e. prices 
should not be perverted by abusive tradi ng schemes which disconnect them from 
fundamentals. 
Such distortions have both short and long te rm economic consequences. Looking at futures 
markets in isolation, the consequences fo r investors in the short run are of only 
redistributional nature. This is because trading in futures is a zero sum game, i.e. price changes result in gains of an i nvestor on its derivatives positions  which equal to losses on the 
same derivatives of other investors. However, long term, price distortions lead to suboptimal 
production and consumption decisions resultin g in either underemployment of production 
assets or waste of valuable energy resources. 
Markets exposed to manipulation reduce market participants' trust in market outcomes and 
makes them reducing their trading activity. This leads to lower levels of liquidity and less 
deeper markets resulting in in creased transaction costs. This is because financial 
intermediaries, essential to the efficient func tioning of wholesale markets, when faced with 
less liquidity on markets are likely to increase the risk premium they charge for holding open 
positions. This means that, ceteris paribus , producers will receive le ss for the electricity or 
gas they produce and consumers including companies will pay more for their energy consumption. Low levels of liquidity can itse lf cause market participants leaving the 
marketplace. This, in turn, increases the risk of a downward liquidity spiral and carries the 
danger of a market disruption. 
The direct impacts identified for the BAU scen ario are developed by applying the Amaranth 
case. It is reconstructed and transformed to fit the size of European gas markets and price 
levels
37.  
                                                 
37  This analysis uses figures and calculations made by PriceWaterhouseCoopers (PWC Study) in support 
of the present Impact Assessment in combination with assumptions made by the Commission's services. 
The PWC Study is annexed to the Impact Assessment. 
 
EN 30   EN If a trader were to trade UK Natural Gas c ontracts on the Intercontinental Exchange (ICE-
Europe), Europe's most liquid natural gas exchange, in the same way as Amaranth did, the 
traded volume at the ICE-Europe would go up at 34.419 contracts to a total number of 
contracts of 42.594. The price would be increased by 41.20%,  from 0.3659 EUR/therm (1.25 
EUR ct/kWh) on 09 April 2010 to 0,5166 EUR/ther m (1.76 EUR ct/kWh). This gives an 
increase of 0.51 EUR ct/kWh or 5.1 EUR/MWh of th e market price. If a trader had traded the 
same volume on ICE-Europe in London as Amar anth did on NYMEX in New York, the total 
volume on ICE-Europe would have increased by 321%. 
The increase in the wholesale gas market price would subsequently lead  to an increase of 
customer prices, both industria l and household, as those prices  are directly or indirectly 
derived from wholesale price quota tions. If artificially high prices would last for at least a 
month before returning to th eir normal levels, the total impact on UK gas users would be 
some 404 EURm/year38. This, however, would somewhat overestimate the impact, since 
prices for consumers and small businesses follow rolling average price tr ends, while prices of 
industrial and large business users are fixe d for at least a year. Under the simplified 
assumptions that a) fixed pri ced contracts are continuously re newed during the year, b) fixed 
price deals make up 50% of all supply contr acts and c) household and small business rates 
remain unchanged, the price impact would be some 202 EURm/year.   
However, the UK gas market cannot be seen in isolation. On the one hand, North-west 
European gas prices closely fo llow UK prices and, on the other, electricity prices are highly 
correlated with gas prices, gas be ing often the marginal fuel us ed in electric ity generation. 
This means that the impacts of manipulation on a single market place are directly felt across 
markets and commodities. It is assumed that an Amaranth-style market manipulation would 
inflate gas and electricity bills of European businesses and industrial users by some 1 EURbn. 
This amount would further increase by a price impact on households' and small businesses' 
bills. While the increase is certain, the magnit ude is difficult to qua ntify, since suppliers 
procure for this group of customers gra dually, often over a number of years. 
On top of the direct impact on energy users the occurrence of a similar market manipulation 
(and the likelihood of this) would also  lead to indirect impacts. An  increase of risk premia that 
wholesale market intermediaries charge to other market parties effect particip ants through two 
paths: 
Firstly, as a result of the market manipulation prices would change abruptly leading to higher 
volatility. On a volatile market intermediaries  feel less comfortable with holding buying and 
selling offers close to each other, since they  could easily lose out on their open positions if 
prices were to change suddenly. As a result they would add a premium leading to higher bid-
offer spreads39. 
Secondly, because of the possibility of a mani pulation (and the lack of effective market 
oversight regime) market partic ipants would price in the lik elihood of a renewed occurrence 
in their trading decisions. In addition, the weakened trust in  the proper functioning of the 
marketplace could cause liquidity to drop, leading to higher risk premia charged40.  
                                                 
38  This assumes a flat monthly gas consumption of 79.17 TWh in the UK. 
39  The bid-offer spread is a difference between the best selling and buying offer on the market. 
40  See: 'The Cost of Transacting', The Quarterly Journal of Economics, Vol 82, No 1 (Feb., 1968), page 
41. 
 
EN 31   EN To be able to quantify the imme diate effect of increased risk premia we use bid-offer spreads 
as a proxy. Assuming:  
a) an increased price volatility for the duration of one month following a market 
manipulation,  
b) an increased bid-offer spread by 20 EUR ct/MWh,  
c) that every gas contract passes through an intermediary at least once before it is 
delivered41,  
d) that fixed priced contracts are c ontinuously renewed during the year,  
e) that fixed price deals make up 50%  of all supply contracts and  
f) that household and small business rates remain unchanged,  
this would add an additional 8 EURm/year to customers' energy bills in a market similarly 
sized to the UK. For Noth-Western Europe, an area around the most actively traded gas 
markets in Europe, the figure would be some 25 EURm/year42. We expect that possible price 
distortions on traded electricity markets would have similar impacts but would be felt wider, 
since traded electricity markets are more developed than gas markets. Under similar 
assumptions, a widening bid-offer spread by 20 EU R ct/MWh (a realistic figure for the most 
liquid German benchmark contract43) would result in a price imp act on large electricity users 
of 25 EURm/year.44 This is a conservative assumpti on, since the bid-offer spreads on less 
liquid markets like France, could go up to as much as 1 EUR/MWh. 
The above calculations assume that after a period of high volatility caused by the 
manipulations markets would return to normality. However, as we refer to it above, in the aftermath of market manipulation(s) the market place it is likely to lose attractiveness and 
liquidity, resulting in intermediaries charging higher risk premia. The negative impact of it would be felt permanently with transaction cost s increasing for all market participants. While 
we are certain about the effect, it is more difficu lt to quantify it, since no empirical values are 
available to us. 
Instead, Figure 12 below shows how sensitive Eur opean electricity consumers' bills are to 
1 EUR ct/MWh increase in bid-offer spreads ov er a number of years, giving an impression 
about the impact's order of magnitude
45. 
 
                                                 
41  This is a conservative assumption. 
42  Assuming yearly gas consumption of 1,500 TWh for industrial and large business users in UK, France, 
Belgium, The Netherlands, Denmark, Germany. 
43  According to information received from traders, the most liquid German calendar contracts trades under 
normal circumstances at a bid-offer spread of 5 EUR ct/MWh while the less liquid French equivalent at 
25 EUR ct/MWh. In a stressed market the German sp read could go up to 25 ct/MWh and the French 
spread to as high as 1 €/MWh. 
44  Assuming yearly electricity consumption of 1,500 TWh for industrial and large EU business users. 
45  A similar approach was also used by the UK government in: 'Regulatory Impact Assessment', The 
Financial Services and Markets Act 2000 (Market Abuse) Regulations 2005, and the Investment 
Recommendation (Media) Regulations 2005, HM Treasury, Feb. 2005. We calculate with a volume of 
9.000 TWh of traded electricity derivatives (forwards and futures) in Europe. 
 
EN 32   EN  
Figure 12: Increase in cost of tradin g electricity as a function of increas ed spreads and the duration of the 
persistence of higher risk premia (in EUR million) 
123456789 1 0
1 90 180 270 360 450 540 630 720 810 900
2 180 360 540 720 900 1,080 1,260 1,440 1,620 1,800
3 270 540 810 1,080 1,350 1,620 1,890 2,160 2,430 2,700
4 360 720 1,080 1,440 1,800 2,160 2,520 2,880 3,240 3,600
5 450 900 1,350 1,800 2,250 2,700 3,150 3,600 4,050 4,500Increase in bid-
offer spread in 
EUR ct/MWhNumber of years with incrased bid-offer spreads
 
Figure 13 summarises the above presented figu res and gives an overview of the monetary 
impact of market abuses under different scenarios. 
Figure 13: Summary of monetary  impacts of market abuses 
Amaranth's profit earned on the three 
settlement days of 24 February, 29 
March, 26 April 2006USD 59,000,000 - USD 168,000,000
Direct impact of an Amaranth-style 
market abuse on European business and 
industrial energy users~ EUR 1,000,000,000
Indirect impact of an Amaranth-style 
market abuse on North-W est European 
business and industrial gas users through 
increased risk premia~ EUR 25,000,000
Indirect impact of an Amaranth-style 
market abuse on European business and 
industrial electricity users through 
increased risk premia~ EUR 25,000,000
Impact of an additional 1 EUR ct/MWh 
risk premium on electricity trading 
participants' transaction costs in Europe 
due to reduced confidence over a periode 
of 2 yearsEUR 180,000,000
 
 
It is also relevant to note, th at the baseline scenario does no t mean that nothing will happen in 
the legal landscape. As we alr eady mentioned, we can legitimately assume that in the absence 
of an EU level initiative for a consistent and coherent supervisory regime, potentially 
incompatible national measures will mushroom. 
Although national measures have the potential to increase regulatory supervision and with 
that the likelihood of detection of market abus es, their reach will inevitably remain limited. At 
the same time they are likely to cause increase d administrative burden to both, regulators and 
market participants. As regulators step up th eir monitoring activates they will increasingly 
rely on and ask for timely available market da ta. This means that in an extreme scenario 
trading participants and/or operators of trad ing venues will be faced with 27 national data 
reporting request, all differen tly designed covering different  data items. Especially 
internationally active market participants, ofte n operating via a single tr ading vehicle, may be 
 
EN 33   EN exposed to a plethora of di verging regulatory reporting sc hemes causing high compliance 
costs.  
Social impacts 
The undesired social impacts follow from th e likely scenarios we developed when we 
accessed the economic impacts. High occurrences of market manipulation distort market outcomes leading directly and indirectly to hi gher costs for customers. Higher prices reduce 
consumers' disposable income and reduce busine sses' competitiveness leading to lower levels 
of employment. Markets vulnerable to manipulation are likely  to see less trading and liquidity 
suggesting fewer jobs also at ba nks and trading entities.    
Increase in energy prices may cause the deepen ing of "energy poverty" and social exclusion 
of most vulnerable groups. This is because housing costs (of which energy costs make up a 
significant part
46) account for a considerable part of households' disposable income. Any 
increase of energy prices hit poor people disp roportionately since th eir housing expenditure, 
relative to their disp osable income, is higher than  in the average population. The 
Commission's Joint Report on Soci al Protection and Social Inclusion 2010 finds that "On 
average in the EU the share of housing costs in total disposable income, net of housing 
allowances, is 19 % […]. The issue of affordability is particularly problematic for the at-risk-of-poverty population: in the EU as a whole, the impact of hous ing costs is more than twice as 
important for the poor as for th e non-poor population (33 % vs 17 %) and this ratio is over 2.5 
in FI, AT, FR, CY, SI, LU and SE, where poor people spend three times more on housing, 
relatively to their income , than non-poor people."
47 
Despite these impacts no impact on job equality or job ri ghts are expected. 
Environmental impacts 
We believe that the BAU scenario has no direct environmental impacts, i.e. the pure lack of 
market misconduct rules or the absence of regulatory supervision will not impact the 
environment. However, leaving markets vulnerab le to abuses could ha ve indirect impacts. 
Persisting price distortions on tr aded energy markets may change the absolute level of fuel 
prices and/or the relative pri ce of one fuel to another. 
For example, if a gas producer were to withhol d the production of gas, this would drive up the 
price of gas relative to coal. This, in tur n, would make power produc ers to switch to more 
polluting coal as the fuel of their choice, resulting in higher emissions. If the price 
manipulations were to last over a longer period of time they could also distort market 
participants' investment decisions potentiall y resulting in more polluting power generation 
facilities. 
Market manipulations could, of course, work in the way around, leading to more gas burnt 
than coal. The size of the indirect environmen tal impact of the BAU scenario is therefore 
difficult to assess. It will not only depend on the nature of the potential abuse but also on the 
duration of the price distortion. 
                                                 
46  We estimate that on average energy costs make up some 40% of households' total housing cost in the 
EU. 
47  Joint Report on Social Protection and Social Inclusion 2010, European Commission, Directorate 
General for Employment, Social Affairs and Equal Opportunities, Units E2 and E4. 
 
EN 34   EN Option 1a:  Rules defined at EU level,  Member States monitor and enforce  
This option envisages a scenario without di rect EU intervention in monitoring and 
enforcement. The EU, however, will lay-out spec ific legislation on elec tricity and gas market 
misconduct rules (market manipulation, insider tr ading, etc.), leaving to Member States’ 
competent Regulators to monitor market s and enforce market conduct rules.  
Economic Impacts 
A coherent and complete set of market co nduct rules defined at EU-level and their 
harmonised application by Member States would have the potential to reduce the occurrence 
of market abuses and result in increased trust in market outcomes when compared with the 
BAU scenario. As such cases will less likely to occur, the impact on price fluctuations and 
therefore the risk of negative impact on households and co mpanies and their competitiveness 
is reduced. This is because the rules would be  comprehensively covering energy markets and 
national Regulators would have a common ru lebook based on which they could better use 
their enforcement powers. 
The introduction of a new EU market misc onduct framework and having MSs monitor and 
enforce the rules trough national Regulators w ill generate positive impacts on both regulatory 
transparency and integrity of the markets against the BAU scenario.  
There are, however, several forms of misconduc t behaviours that might remain undetected by 
national Regulators, particularly when occurrin g outside each single Regul ator's jurisdiction. 
These possibilities are mainly regarding:  
o Cross-commodity, cross-border and cross-plat form abuses may remain undetected if 
Regulators will only monitor energy transa ctions in their own jurisdiction; 
o Effectiveness in monitoring for all 27 Regulat ors. It is likely to assume that not all 
national regulators will perform identically  due to different monitoring approaches. 
This might generate systemic issues gi ven the interdependencies of each national 
market and each commodity. 
o The timely preparation of complete and verified  sets of transactiona l data sorted by the 
place of delivery might be problematic through a decentralised iterative data 
exchange mechanism 
Administrative impacts 
Because all 27 MS Regulators woul d need to get regular access to transactional data, the cost 
of reporting will potentially be higher than in the BAU scenario. Each market participant would have to install a data reporting interface to its home Re gulators and prep are data for 
reporting. We estimate the order of magnitude of data volumes to be submitted to the Regulators at some 10,000 data lines per day. This  includes details of a ll relevant wholesale 
transactions that go through broker's trad ing platforms and energy exchanges. The 
information contained in a data line will at  least include: name of  counterparties, product 
name or code, beneficiary of the transaction, volume, prices, place of  delivery, time stamp. 
Data reporting assumes IT investment for both market participants and Regulators. As for 
traders, the PWC Study estimates different soft ware implementation costs according to the 
size of the trading operation. Th ey estimate installation cost of EUR 600,000 for large traders 
 
EN 35   EN and EUR 110,000 for small traders. Assuming a si mplified world with a depreciation period 
of ten years and no interest rate, this would a dd up for the whole trading community to a total 
cost of 21.3 EURm/year. If exch anges and brokers were to re port on traders behalf the 
comparable figure would be 5.4 EURm/year. Howeve r, we have to note th at the two reporting 
channels would not result in ex actly the same data reported, si nce not all energy transactions 
are channelled through brokers and exchanges. Additional IT costs for 27 Regulators related 
to data handling would amount to 1.35 EURm/year . In addition Regulators would need to 
install and operate a data excha nge mechanism which is able to sort the transactions which the 
27 Regulators receive individually according to the place of delivery and dispatch the sorted 
data batches to the competent Regulators in a decentralised way. The cost of the installation 
and operation of such a system could not be assessed by us.  
The PWC Study has not assessed the need for additional human resources needed to operate 
the reporting scheme and the monitoring exercise . It is difficult to come up with well founded 
estimates. We estimate that the monitoring of  reported transactions would require the 
equivalent of an additional 50 employees for all national regulators. This estimate takes into account that some regulators alr eady carry out some market mon itoring activities. The work 
and resources between the national authorities will not be evenly distributed, since some 
Member States boast very actively traded energy markets while trading is still in its infancy in 
others, requiring different levels  supervisory attention. We assu me that market participant's 
data reporting would requi re little extra manpower since re porting will be highly automatic. 
We calculate with an equivalent of an additio nal 50 employees for the industry. This results in 
a total extra manpower of 100 employ ees. Calculating with a cost of 100,000 
Euro/employee/year, the additional manpower re lated cost of operating the reporting and 
monitoring scheme would amount to 10 EURm /year. The following Figure summarises the 
costs of the reporting scheme: 
Figure 14: Annualised costs of the initiative under option 1a 
 
 EURm/year 
Software implementation and IT installation cost for 
the trading community (annua lised assuming a ten year 
depreciation period) 
Alternatively, if reporting was to be handled by brokers and power 
exchanges (annualised assuming a ten year depreciation period) 21.3 
 
(5.4) 
Software implementation and IT installation cost for 
27 Regulators (annualised assuming a ten year 
depreciation period) 1.35 
Data exchange mechanism between Regulators n.a. 
Cost of monitoring and data handling for 27 
Regulators (human resources) 5.0 
Cost of data manipulation and reporting for the trading 
community 5.0 
 
 
EN 36   EN  
The above cost estimates both for IT and human resources are conservative. This is because 
the reporting exercise is likely to benefit from  already existing reporting schemes governed by 
financial regulation. MiFID companies have alre ady been reporting details  of certain energy 
derivatives transactions to fina ncial regulators. This obligation is expected to be enhanced 
soon to cover most of the relevant OTC deri vatives transactions. On ce this in place, 
investments directly attributable to this initia tive will only incur to participants who do not 
fall under financial regulation and/or tr ade energy products only bilaterally. 
Social Impacts 
Direct social impacts are not significant. The cr eation of few jobs with Regulators and market 
participants related data repor ting and market monitoring is not  significant. More important 
are the indirect impacts. Under this option th e negative effects emerging in the BAU scenario 
on job losses related to decreased competitiven ess of EU industries (e.g. energy intensive 
industries) resulting from increas ed or more volatile energy prices  are less likely to occur.   
On contrary, markets which better reflect supply /demand fundamentals are likely to generate 
other indirect positive impacts on the electricity and gas consumer s. A generally more stable 
market means lower probability of market shoc ks and price spikes. Similarly, a more trusted 
market will indirectly benefit consumers.  
No impacts on job rights, job equality or  job legislation are expected.      
Environmental Impacts 
We consider that Option 1a has no direct environmental impacts, i.e. the mere existence of 
market misconduct rules or increased regulatory supervision will not impact the environment. 
However these measures are likely to reduce th e vulnerability of markets to abuses and the 
potential negative indirect environmental imp acts, as described under the BAU scenario, are 
less likely to occur. 
Conclusion 
This option represents a clear improvement ove r the BAU scenario. The introduction of new 
market misconduct rules and expanding the Regu lators' competences to  monitor markets and 
enforce the rules will carry significant benefits for the electricity and gas markets and their participants. Overall market stability will impr ove and abusive operations are more likely to 
be identified and prevented in time.   
 
Economic impacts 
 
Market stability + 
Impact on prices of households and firms + 
Administrative costs - 
Social impacts  
Jobs in the industries  + 
Environmental impacts + 
 
 
EN 37   EN The option will nonetheless leave an important  issues unresolved. Since Regulators only 
monitor transactions relating to their own jurisdiction they would not be able to fully capture 
market misconducts of cross-border  and cross-commodity nature.  
Option 1b – Rules defined at EU level, Member  States report, monitor and enforce, EU 
Agency process data and monitors cro ss-border and cross-commodity misconduct   
This option involves the EU body stronger in th e process of data collection and monitoring 
exercise as in Option 1a and in troduces a shared responsibility of  market monitoring with the 
Member States. The EU Agency monitors tran sactions with potential  relevance of cross-
border and cross-commodity misconducts and calls  appropriate Regulators for action in case 
the misconduct takes place in their jurisdiction. The national Regulators are also receiving all 
data on wholesale transactions from market part icipants established in  their jurisdiction. The 
Regulators forward collected data to the EU Agen cy whereas format and details of data to be 
reported are defined in an  EU-level regulation.  
Economic impacts  
Similar as in option 1a a coherent and comple te set of market conduct rules defined at EU-
level would have the potential to reduce the occurrence of market abuses and result in 
increased trust in market outcomes. Price fluc tuations and the risk of negative impact on 
households and companies and th eir competitiveness are reduced. 
The collection of complete sets of transactional data will allow for the EU Agency and also 
Regulators of the Member States to gain a clea r view of traded energy  markets. This will 
enable it understand and detect  market abuses of cross-border, cross-platform and cross-
commodity nature and engage in preventing misconducts from happening. 
We consider that the creation of an EU Agency implementing regular monitoring across 
traded European energy market s will not just impr ove the detection of market misconducts 
but also deter market participants from atte mpted market abuses. T hus its operation will 
improve market stability (e.g. lim ited price fluctuations and redu ced risk premium for market 
participants), and lead to increased regulatory transparency and availa bility of information 
(e.g. centrally verified and compiled set of data). 
Administrative impacts 
The administrative impacts under this option will  be similar when compared with Option 1a 
with two distinctions: 
First, due to the introduction of an EU leve l market monitoring addi tional costs will incur 
such as ICT installation and ope ration costs and cost related to  additional human resources in 
the EU Agency. Under the above assumpti ons, the PWC Study estimates software 
implementation costs at 0.5 EURm/year. For th e personnel needed to run a dedicated new 
monitoring Agency we estimate twenty five em ployees with a total cost of 2.5 EURm/year. 
This will be on top of the 50 new employees we  mention in option 1a, since the EU Agency 
would share the monitoring responsibility with national regulators who would continue using 
resources for monitoring transact ions falling in th eir jurisdiction. 
Our view is that the introduction of an EU le vel data handling will not only enable an EU 
level market monitoring but it has the potential to increase the efficiency of the work of 
 
EN 38   EN national market monitors. Matching, verifying and sorting of data in one go can be safer and 
speedier than the operation a data exchange me chanism on a decentralised manner. Under this 
option regulators would only have to receive th e data and dispatch it to the EU Agency 
without additional handling. In exchange they would get access to a complete set of transactions they need to fulfil their monito ring duty. As a result no cost of installing and 
operating of a decentralised data exchange mechanism will have to incur. The following Figure summarises the costs of the reporting scheme: 
Figure 15: Annualised costs of the initiative under option 1b 
 
 EURm/year 
Software implementation and IT installation cost for 
the trading community (annua lised assuming a ten year 
depreciation period) 
Alternatively, if reporting was to be handled by brokers and power 
exchanges (annualised assuming a ten year depreciation period) 21.3 
 
(5.4) 
Software implementation and IT installation cost for 
27 Regulators (annualised assuming a ten year depreciation period) 1.35 
Cost of monitoring and data handling for 27 
Regulators (human resources) 5.0 
Cost of data manipulation and reporting for the trading 
community 5.0 
Software implementation and IT installation cost for 
the EU Agency (annualised assuming a ten year 
depreciation period) 0.5 
Cost of monitoring and data handling for the EU 
Agency (human resources) 2.5 
 
Social Impacts 
We expect similar kind, though more positive i ndirect social impacts when compared with 
Option 1a. This is because the probability of  market misconducts would further decrease 
yielding benefits for energy users. 
No impacts on job rights, job equality  or job legislation are expected 
Environmental Impacts 
As in option 1a, prices  better reflecting fundame ntals of gas and electr icity may make these 
energy sources more attractive as the more pollu ting coal.  As already explained in Option 1a, 
increased market monitoring and more stri ngent enforcement are likely to reduce the 
vulnerability of markets to a buses. When compared with the BAU scenario and Option 1a, the 
 
EN 39   EN measures in Option 1b have th e potential to further reducing the possible negative indirect 
environmental impacts (as described under the BAU scenario). 
Conclusion 
This option proves to be a sign ificant improvement compared to the baseline scenario. Much 
improved regulatory transparency and integrity ar e the results of the introduction of a new EU 
level body dedicated to active monitoring of traded electri city and gas markets.. The 
probability of detection and prevention of misconducts will significantly improve when 
compared with the BAU scenario or Option 1a, because the regular screening and analyses of 
the totality of relevant wholesale transactions  will enable to EU Agen cy to better capture 
energy specific market misconducts.  
 
Economic impacts  
Market stability ++ 
Impact on prices of households and firms ++ 
Administrative costs - 
Social impacts  
Jobs in the industries  + 
Environmental impacts + 
 
 
Option 2 – Rules defined at EU level, shared monitoring in a unique EU Agency and Member 
States, enforcement by Member States  
Economic impacts  
Similar as in option 2 a coherent and complete set of market conduct rules defined at EU-level 
would have the potential to re duce the occurrence of market abuses and result in increased 
trust in market outcomes. Price fluctuations a nd the risk of negative impact on households and 
companies and their competitiveness are reduced. 
Under this option we expect similar economic  impacts as in Option 1b, provided the data 
sharing is effective.  
Administrative impacts 
In comparison to Option 1b, the overall re porting costs should be lower since national 
regulators do not have to install extra commun ication interfaces to re porting participants. 
Instead, transaction data would be captured once, directly by th e EU Agency. This would also 
simplify and speed up overall data handling by reducing the number of data supply routes 
from 3 (Trader Æ Regulator Æ EU Agency Æ Regulator) to 2 (Trader Æ EU Agency Æ 
Regulator).  This is also likely to reduce th e occurrence of data transmission and handling 
errors. In this option all other cost items we included under Option 1b, including the cost for 
the equivalent for 50 employees with national  regulators remain valid. This is because 
national regulators will share monitoring responsibility with the EU Agency. The following 
Figure summarises the costs of the reporting scheme: 
 
EN 40   EN Figure 16: Annualised costs of the initiative under option 2 
 
 EURm/year 
Software implementation and IT installation cost for 
the trading community (annua lised assuming a ten year 
depreciation period) 
Alternatively, if reporting was to be handled by brokers and power 
exchanges (annualised assuming a ten year depreciation period) 21.3 
 
(5.4) 
Software implementation and IT installation cost for 
27 Regulators (annualised assuming a ten year 
depreciation period) 1.35 
Cost of monitoring and data handling for 27 
Regulators (human resources) 5.0 
Cost of data manipulation and reporting for the trading 
community 5.0 
Software implementation and IT installation cost for 
the EU Agency (annualised assuming a ten year 
depreciation period) 0.5 
Cost of monitoring and data handling for the EU 
Agency (human resources) 2.5 
 
Social Impacts 
Under this option we expect similar social impacts as in Option 1b.  
No impacts on job rights, job equality  or job legislation are expected 
Environmental Impacts 
Under this option we expect similar social impacts as in Option 1b.  
Conclusion 
Similar conclusions as for Option 1b, with ad ditional gains due to improved operational 
efficiency 
 
Economic impacts  
Market stability ++ 
Impact on prices of households and firms ++ 
Administrative costs - 
Social impacts  
Jobs in the industries  + 
Environmental impacts + 
 
EN 41   EN Option 3 – Rules defined at EU level, shar ed monitoring by ACER and Member States,  
enforcement by Member States  
This option is equivalent to Option 2, however, all functions and compet ences of the EU level 
body would be assumed by ACER.  
Economic Impacts  
A market monitor located at AC ER will be able to detect and prevent market misconducts 
with higher effectiveness than a newly created EU Agency. This is because ACER will have 
built its own energy expertise and had access to specialist knowledge of national energy 
regulators sitting in its Board. Su ch an expert knowledge is in dispensable for the EU monitor 
to understand complex market outcomes. A higher detection ratio will al so likely to better 
deter future misconducts which will have a bene ficial impact on market stability and the 
credibility of market outcomes. A newly establ ished body would have more difficulty to build 
up the required expert knowledge  and had presumably less convenient acces s to national 
energy regulators.   
Administrative impacts 
We assume that the market monitor at ACER w ould not only be more ef fective but could also 
be run at lower cost that a dedicated new Ag ency. This is because the market monitor had 
access to ACER's existing fac ilities (ICT, office space, manpower, etc.) and share overhead 
costs with ACER's existing operation48. For this reason we mark the administrative costs with 
an (*) in the table presented under 'Conclusion'. We estimate that the market monitor located 
at ACER could be run with fifteen employ ees at a cost of 1.5 EURm/year which is 
1 EURm/year less than the cost of monitoring in a newly established dedicated EU Agency. 
In this option all other cost items we used under Option 2, including the cost for the equivalent for 50 employees with national regulators remain valid. This is because national regulators will share monitoring responsibilit y with the EU Agency. The following Figure 
summarises the costs of the reporting scheme: 
 
Figure 17: Annualised costs of the initiative under option 3 
 
 EURm/year 
Software implementation and IT installation cost for 
the trading community (annua lised assuming a ten year 
depreciation period) 
Alternatively, if reporting was to be handled by brokers and power 
exchanges (annualised assuming a ten year depreciation period) 21.3 
 
(5.4) 
Software implementation and IT installation cost for 
27 Regulators (annualised assuming a ten year 
depreciation period) 1.35 
                                                 
48 For this reason we mark the administrative costs with an (*) in the tables of impacts for this option. 
 
EN 42   EN Cost of monitoring and data handling for 27 
Regulators (human resources) 5.0 
Cost of data manipulation and reporting for the trading 
community 5.0 
Software implementation and IT installation cost for 
ACER (annualised assuming a ten year depreciation period) 0.5 
Cost of monitoring and data handling for ACER 
(human resources) 1.5 
 
Social Impacts 
Same as Option 2 
Environmental Impacts 
Same as Option 2 
Conclusion 
Option 3 would be favourable to Option 2, since It can be expected that ACER would work 
more efficiently in terms of the overall cost of its monitoring exercise and more effectively 
regarding the expertise it  has available, than a newly created EU Agency. 
 
Economic impacts  
Market stability  +++ 
Impact on prices of households and firms ++ 
Administrative costs -* 
Social impacts   
Jobs in the industries  + 
Environmental impacts  + 
 
7 OTHER ISSUES  
Elaboration of sector specific rules 
Effective oversight requires that issues such as insider dealing and other forms of market 
misconduct cover all aspects of tr aded wholesale markets in elect ricity and gas. These should 
be consistent across Europe to prevent situati ons from arising where the same market conduct 
would be deemed as in line with rules on the one market but would be  found as infringing the 
rules in another. Because important venues fo r energy trading are already covered by MAD, 
definitions relating to market misconduct spec ifically covering the physical energy markets 
will need to interact very well with MAD.  
 
EN 43   EN However, it is essential that a tailor made regi me take account of the specific characteristics 
of energy markets, in particular, their high le vel of susceptibility to significant changes in 
price as a result of economic or physical with holding of capacity. Similarly, the impact of 
network congestion on prices in several national market s brings about particular issues, which 
do not arise in global financial securities ma rkets or indeed in other global commodity 
markets.  
Respondents to the public c onsultation were specifically requested their views on the 
appropriateness of basing market abuse definitions  applicable developed as part of an energy 
specific regime on the MAD definitions and ac counting for energy markets specifics through 
guidance. The majority of respondents warned against attempting what was often termed a 
one to one take over from MAD. Nonetheless th ere was also widespread acceptance that the 
principles under MAD should form the basis for a definition of Ma rket Abuse. In this context 
the response of E.On is particularly illuminating – it specifically raised  the issue not of the 
definitions in MAD, but of subsequent implementing legislation adopted under the 
Comitology procedure. The European Federa tion of Energy Traders proposed a multi layer 
model, in which the ACER (though potentially  another body) would consult with market 
participants to draw up guide lines. These could then be made binding through implementing 
legislation adopted by the Commission. This s uggestion was reflected in the majority of 
industry responses. 
This represents a sensible approach for each of the options requiring EU le vel rules. It fits in 
with the approach taken in financial sector regulation under the Lamfalussy arrangements, and 
would therefore also aid interaction betwee n financial regulation and sector specific 
regulation. It also allows the need for flexibility to be combined with market participants calls 
for legal certainty, which were clearly expresse d in the consultation responses. Where an EU 
agency is responsible for monitoring, and the elaboration of more detailed guidelines, the 
most appropriate form for the ba sic act would be a Regulation.  
Commodity scope 
Electricity and gas markets are interlinked with other commodity markets,  in particular with 
markets for primary energy products and for em ission allowances (EUAs) within the EU 
Emissions Trading System (EU ETS). 
Coal is an important primary fuel used in pow er generation, while oil and oil product prices 
influence electricity prices thr ough their role as refe rence in long-term gas supply contracts. 
The understanding of these markets and the trad ing behaviour of thei r participants are 
therefore essential for any market monitor to  be able to explain changes in wholesale 
electricity and gas prices. However, these market s are globally traded with major participants 
established in third countries. An isolate d, EU-level market monitoring would remain 
incomplete and misconduct rules partly unenfor ceable. This means that designing a regime 
which encompasses oversight of such markets w ould require a strategy for global regulatory 
cooperation to provide real benef its to Europe. To ensure the in tegrity of traded  oil and coal 
markets, globally agreed monitoring and enfo rcement schemes would be needed which is 
beyond the scope of the present initiative. This  approach had overwhelming support in the 
public consultation.  
This is, however, different in case of the em ission allowances. Emission trading under the EU 
ETS is by definition European in scope. With  its introduction, carbon became central to 
European electricity markets. The power generati on sector is the single largest emitting sector 
 
EN 44   EN in the EU, representing around 40% of the em issions under EU ETS. The supply of emission 
allowances impacts generators' fuel choice and, with  that, the demand for different fuels; just 
like relative price developments of fuels influe nce plant dispatch and, as a result, determine 
the demand for carbon. The two markets are ther efore mutually interdependent. They also 
share, to a large extent, the same trading part icipants and trading venues. Although the aim is 
to see the EU ETS linked up with compatible emission trading systems in other parts of the world, notably in the USA, the EU ETS is cu rrently limited to the European Economic Area. 
Consequently, price formation on the energy market  is driven by the acti ons of EU ETS actors 
based in Europe. 
Recognising these inte rlinkages and the growing importa nce of traded carbon markets the 
Commission has decided to initiate an in depth review into how be st to ensure the integrity of 
these markets. The results of the review are due in 2011. 
Interactions with third countries 
It has long been recognised that the poten tial for trading to migrate can undermine the 
effectiveness of the oversight of markets. In pr inciple, there is nothing to prevent the use of 
brokers, or even organised market s, located outside the EU for the trading of energy or energy 
related products for delivery inside the EU. Such transactions could be relevant for 
understanding attempts at market manipulation within the EU, just  as transactions brokered in 
one EU country relating to energy delivery in another.  
In order to prevent third countries  being used to make transacti ons which parties wish to hide 
from the authorities within the EU, the obligat ion to report transactions in products covered 
by the scope of the present initiative (i.e. electr icity and gas markets related to delivery within 
the EU) should in the first instance lie with the parties to that transaction. Under normal 
circumstances, this obligation should be fille d by the broker or exchange which acted as 
intermediary. However, in cases where third countries were used to carry out the transactions 
this would not relieve an EU based pa rty from its reporting obligations.   
Impact on SME's  
During the public consultation some  respondents raised concerns  on the impact on Small and 
Medium Enterprises. For example the Ener gy Commodity Traders Group pointed out that 
monitoring must not put burden on small comp anies who do not have a strong ability to 
influence market. These concerns relate to th e possible difficulties for SMEs to meet data 
reporting requirements. Although we do not expected  a major number of SMEs being affected 
by this regulation the legisl ative proposal will take account of this by proposing de-minimis  
measures and/or measures, like le ss frequent reporting.     
 
EN 45   EN 8 CONCLUSIONS – THE PREFERRED OPTIONS  
Analysis of policy options focused on the following areas: 
• Market Stability; 
• Impact on prices 
• Administrative costs  
• Job Creation; 
• Environmental Costs. 
The table presented below summarises the im pacts of each policy options, allowing for a 
quick comparison with the BAU scenario.  
 
 Market 
Stability Impact on 
prices Administrative 
costs Job 
Creation Environmental 
Costs 
BAU Amaranth 
case 
scenarios 
possible Price 
volatility, 
prices of 
energy may 
increase Costs incurred 
by possible 27 
regimes in the 
EU Job losses 
due to 
higher 
energy 
prices No direct 
effects 
identifiable  
Option 1a + + - + + 
Option 1b ++ ++ - + + 
Option 2 ++ ++ - + + 
Option 3 +++ ++ -* + + 
 
In general, options 1-3 examined  proved to be better  as the BAU scenario as they can, to 
varying degrees, detect better and deter market  misconduct and reduce rela ted costs to society. 
At the same time all of these options involve hi gher administrative costs. Policy options 1b, 2 
and 3 have the significant advant age over option 1a that  they better enable the detection of 
cross-border and cross-commodity abuses. Policy  options 2 and 3 perfor med better in terms of 
economic/market impacts because they combine the advantages of an enhanced regulatory 
regime with lower administrative costs in co mparison to options 1a and 1b. Option 3 has the 
advantage over option 2 that the energy market  expertise and the special focus allows for 
ACER to detect market misconducts more effi ciently then a newly created, dedicated EU 
Agency. In addition, by the time the present ini tiative takes effect, ACER will have already 
been established and could accommodate the market monitor more easily than a newly 
created EU Agency with less administrative costs because no additional overhead costs will be necessary. 
 
EN 46   EN In Figure 13 we presented differe nt metrics to demonstrate the monetary impact of a market 
misconduct. It is, however, very difficult to co mpare the administrative costs incurred as the 
result of the present initiative with the concre te monetary benefits it would bring to society. 
While we have argued that the introduction of  energy specific market conduct rules and 
stringent regulatory monitoring increases the likelihood of det ection of market abuses and 
raises deterrence the quantification of the beneficial impacts is problematic. 
Instead, to give an impression about possible be nefits, we refer to Figure 12 which shows cost 
savings of trading participants as a function of decreasing bid-offer spreads, as a proxy for 
reduced risk premia and increased  trust in market outcomes. If  average bid-offer spreads on 
traded electricity markets were to  decrease by a mere 1 EUR ct/MWh49, which is a 
conservative estimate, total saving for al l trading participan ts would amount to 
90 EURm/year. This figure would increase by furt her spread savings on traded gas markets. 
This compares with the total cost of the in tegrity regime (option 3) of 34.65 EURm/year. To 
put this figure in another perspective: the "inve stment" in the market integrity regime pays off 
if the measures only manage to deter an Am aranth-style misconduct once in every 30 years.50  
As identified above the envi saged regulatory regime needs to support general EU energy 
policy objectives of competitive, secure and su stainable energy supplies. The proposed market 
conduct rules and measures need to be:  
 
A. complete and consistent  
B. adaptable and compatible rules  
C. effectively detecting and deterring abuses  
 In reference to these objectives in terms of ef ficiency of introducing each of the options and 
the overall balance of impacts, the opti ons have been assessed regarding:  
 
• Effectiveness in reaching the objectives 
• Efficiency of introducing them  
• Coherence in limiting negative impacts in comparison to BAU.   
  
   
                                                
 
49  See footnote 43. 
50  Estimating that an Amaranth-style manipulation would inflate customers' energy bills by some 
1 EUR bn/year. 
 
EN 47   EN  Effectiveness Efficiency Coherence Rank 
BAU None of the 
objectives can be 
reached Costs of up to 27 
separate regimes 
are likely  No positive 
impacts 5 
Option 1a Objectives A and 
B can be reached 
but C not Costs of 27 
agencies  Slightly positive 
impacts on market 
stability and prices 4 
Option 1b 
Objectives A, B 
and C can be 
reached Costs of 27 
agencies and the 
EU Agency Positive impacts 
on market stability 
and prices but 
inefficiencies in 
the process 3 
Option 2 Objectives A, B 
and C can be 
reached  Costs of a special 
EU Agency  Positive impacts 
on market stability 
and prices  2 
Option 3 Objectives A, B 
and C can be 
reached but C will 
be reached more 
effectively Costs of additional 
tasks within ACER Positive impacts 
on market and 
prices and smaller 
costs of 
administration 1 
 
The above table shows that option 2 and 3 matc h best the identified ob jectives. Option 3 is 
likely to detects and deter energy specific market  abuses most effectively because of ACER's 
overall energy expertise and its special focus. As  ACER already exists the administrative cost 
of running the market monitor atta ched to this agency will also be lower when compared to 
option 2 where a new Agency would need to be set up. Market monitoring in Option 1a is less effective than in Option 1b, 2 and Option 3, because national market  monitors lack the 
comprehensive view of energy markets which they  would need to effectively and efficiently 
detect and deter energy specifi c market abuses involving cro ss-border, cross-commodity and 
cross-platform transactions  
Concluding from the above, option 3 is the pref erred framework in which  market misconduct 
rules are defined on EU-level,  the wholesale mark et monitor is located at ACER and the rules 
are enforced by the Member States.     
9 M
ONITORING AND EVALUATION  
Ongoing evaluation and monitoring of the impl ementation of a tailor made regime for 
ensuring the integrity of energy markets will need to cover a number of areas including the appropriateness of market abuse rules covering  energy markets, interaction with financial 
market regulation, the impact on MS level market oversight and how coordination of 
enforcement works in practice,  the effectiveness of EU level monitoring, and the actual 
impact of transaction reporting on market particip ants. Each of these issues should be covered 
 
EN 48   EN in a dedicated review report from ACER to th e Commission two years after the application of 
the measures. 
Appropriateness of market abuse rules  
The aim is to use implementing le gislation or guidelines to speci fy in detail how market abuse 
rules should be applied in practice. It will be important that this process is subject to full 
public consultation. The need for a more or less detailed specification of how general market 
abuse rules should be applied to energy markets will have to be kept under regular review. 
However, this does not mean that these concer ns should not form part of a more general 
review of the effectiveness of th e initiative. In particular this should be reviewed in parallel 
with the interaction with fi nancial market regulation.  
Interaction with financi al market regulation 
Only after a number of years of  application will it be possible to draw conclusions about how 
the implementation of a tailor made regime for energy markets interacts with financial market 
regulation. In the meantime other commodity markets may have developed more detailed 
sectoral oversight which will also need to in teract with financial regulation and from which 
lessons may be learned. Just as the CESR/ERGEG report was crucial to the development of this initiative, it will be important that fina ncial and energy regulator s together review how it 
works in practice. Without prejudice to th e need for ongoing cooperation, a proper joint 
review should take place after five years of the implementati on of the new market integrity 
regime.  
Impact on MS level market oversight  and Coordination of enforcement  
The public consultation showed strong support fo r an EU level initia tive to ensure the 
integrity of energy markets, this was combined with a desire to improve the effectiveness of national level monitoring and the relationship be tween national regulators  and their markets. 
Achieving this will be crucial to the effective implementation of an EU wide market integrity 
regime, as national regulators brin g much expertise as well as a deep understanding of their 
national markets.  
Our expectation is that this initiative will fac ilitate national level oversight, by providing more 
consistent and easy access to market data. It will also facilitate cooperation with other national 
regulators. Therefore ACER should report to the Commission after two years on the impact 
on MS level oversight of energy markets. Th is should be done following consultation with 
national level regulators. A fo llow up review should be undert aken in conjunction with the 
review on the interaction with financial market regulation.  
Effectiveness of EU level Monitoring 
The effectiveness of EU level monitoring should be reviewed on the approximately same 
timescale as interaction with financial market regulation and the impact on MS level market 
oversight. However, to be credible, such a re view should be external  to ACER. Therefore 
following the ACER report on the Impact on MS level market oversight and Coordination of 
enforcement, the Commission should prepare a report assessing the Effectiveness of EU level monitoring.  
 
 
EN 49   EN Impact of transaction repor ting on market participants 
One of the concerns which this initiative addresse s is the risk of a prol iferation of reporting 
obligations. Effective monitoring at an EU and MS level should be delivered by clear rules on 
transaction reporting which allow them to unde rstand what is happening on the markets. 
However, easing the access to da ta by oversight authorities should not create an undue burden 
on market participants, if double reporting obligations are inadve rtently created. In part this 
should be covered by a requirement to consult when defining in detail the information which 
needs to be reported and the modalities for actually reporting. Therefore the assessment of the impact of transaction reporting on  market participants should be reviewed in interaction with 
financial market regulation and the imp act on MS level market oversight.  
Conclusions on monitoring and evaluation  
We envisage a monitoring and review  schedule along the following lines: 
After two years a report from ACER to the Commission on  
• Impact of new regime on MS level oversight 
• Experience on the cooperation between national level authorities including in 
enforcement 
• Impact of new arrangements on market part icipants, particularly with respect to 
transactions reporting. 
Building on the ACER report, the Commission to review to effectiveness of EU level 
monitoring. 
After five years, a joint review by ACER and fi nancial regulators of the interaction between 
the tailor made integrity regime for energy and wider financial regul ation at an EU and 
national level.  
Based on the joint review by ACER and financ ial regulators, the Commission should then 
review the overall effectiveness of the tailor made market integrity regime. 
10 L
IST OF ANNEXES  
I. Summary of responses to public consultation 
 
EN 50   EN Annex I 
 
SUMMARY OF RESPONSES TO THE PUBLIC CONSULTATION ON   
REGULATION  ON  ENERGY  MARKET  INTEGRITY  AND  TRANSPARENCY   
 
 The Public Consultation on th e questionnaire attached below started on 23 of May 2010 and 
ended on the 23 of July 2010. Responses were rece ived from a wide range of organisations 
including, Government ministri es, Regulators, industry associ ations, individual banks and 
energy and financial trading compan ies (in total 51 responses).  
 
Need for tailor made regime for energy markets 
Almost all respondents agreed that there is th e need for a tailored made transparency and 
harmonised market integrity regime for energy markets set at the EU-level. This includes 
governments of France, Germany and the UK,  ERGEG and the main associations of 
industries (European Fede ration of Energy Traders (EFET), EURELECTRIC). 
EURELECTRIC pointed out that the increasing complexity of interactions between energy 
markets makes the current regulatory framewor k insufficient and a simple extension of 
existing framework applicable for financial mark ets is not appropriate. As the EFET states: 
"… based on the above-mentioned regulatory gaps and shortcomings - a sub-optimal oversight of energy wholesale markets exists, which hinders further market development. The current regulatory situation does,  in particular, take into acc ount the factual situation that 
energy wholesale markets are increasingly charac terized by a wide range  of actors (including 
utilities, pure traders, financial institutions and other wholesale tradin g market participants 
and platforms), cross-border trade, important  derivatives markets around markets in the 
underlying energy products and in creasing liquidity in energy wholesale trad ing activities. 
Various different national regimes and authorit ies do not fit to such an EU-wide wholesale 
trading market." 
Majority of the answers stressed that a tail or made regime should be separate from the 
Marked Abuse Directive (MAD) and Markets in Financial Instruments (MiFID) Directive but 
shall be consistent with these Directives and not contradict or overlap with them. This was 
recognised by CESR/ERGEG in their advice to the Commission where they state "A mere 
extension of the scope of ma rket abuse regulations…in MAD to physical products is not 
reccomended… [it] would bear the risk of leadin g to an inappropiate application of MAD in 
other areas". This reflected al so the overall consensus about inappropriateness of fragmented, 
national schemes to fulfil the task of market oversight and the need to have a one-stop-shop 
place of reporting and avoid excessive admi nistrative burdens on market participants. 
Similarly, almost all respondents agreed that th ere was a need for detailed definitions of 
market misconduct taking into account the specif icity of energy markets as well as differences 
 
EN 51   EN between gas and electricity markets. It was howev er stresses e.g. in response of Europex, that 
the MAD definitions are a good basis to devel op those specific energy market definitions.  
As regard the scope of possibl e misconduct it is important to bear in mind, as ERGEG note in 
their response to the public consultation th at "in many cases market misconduct would not 
result in huge impacts on market prices (e.g. pr ice spikes) but rather in smaller deviations 
from a 'fair and orderly' price. However the im pact of this behaviour on the well functioning 
and trust in the markets shoul d not be underestimated".  
Several respondents underlined that the new regime shall take into account the recent 
developments of regulatory regimes on the na tional level (governments of Germany, France 
and Saxonia).   
Only a minority of respondents (notably ENI, Exxon Mobile, St atoil) felt that the current 
framework is sufficient or that the update of rules sh all take place within  existing rules of 
MAD or MiFID.  
 
Oversight architecture 
There are two broad approaches how the oversig ht architecture shall l ook like. One, supported 
by the French, German and the UK governments pr oposes to define the applicable rules and 
provide for coordination of nationa l regulators at the EU level. EnBW state that this could be 
combined with a European body re sponsible for the centralised collection of data and first 
analysis. According to this approach the national  regulators play the main  role in monitoring 
of the markets. The approach model supported by government of Sach sen and many industrial 
organisations and companies (EFET, EURELEC TRIC, Bundesarbeitska mmer of Austria, 
Oesterreichs Energie, Nordenergi, E.ON, Gas Natural Fenosa, Verbund,) foresees market 
monitoring on the EU level. Often the respon dents supporting such solution agreed that 
ACER would be best placed to provide for such monitoring. Nordenergi underlined the 
importance between monitoring and enforcement. In their view enforcem ent will have to be 
dealt with by national regulatory bodies, even in  the case of EU le vel rules for energy 
markets.  
Energy Commodity Traders Group pointed out th at monitoring must not put burden on small 
companies who do not have a strong ability to influence market. The data shall be collected 
from trading venues.  
Independent of the views regarding market monitoring there was broad agreement that 
enforcement of the rules established on EU le vel shall take place on national level.   
 
Scope of commodities covered  
The respondents broadly supported the view that  only gas and electricity markets shall be 
covered by the new regime. Coal and oil which have different scale and prices for these 
commodities are formed on the world markets sha ll be outside of the scope. E.ON pointed out 
that in the future coverage of oil and gas ma rket could be useful but it is not needed now. 
Some respondent e.g. BDEW, argued that the en ergy specific integrity framework should be 
electricity, gas and CO2.  
 
EN 52   EN However several respondents considered th at ACER would be th e appropriate body to 
oversee and monitor CO2 markets, including the London Energy Brokers Association, Gas 
Natural Fenosa and Verbund. France and ERGEG argued that the most efficient option would 
be to entrust financial regulators to supervis e the CO2 markets and leave monitoring of this 
market to the national regulators. In justification of this statement, reference has been made to 
the findings of the Prada Comm ission Report (April 2010).    
There was broad agreement, supported by EFET, EURELECTRIC and many other 
organisations, that the body overseeing the ener gy markets shall have a ccess to all data on 
CO2 trading.