MEKH issues fine for market manipulation under REMIT

This week MEKH, the Hungarian energy regulator, issued a fine of HUF 500,000,000 (approximately €1.4 million) to a Croatian trading firm active in the Hungarian gas market for alleged abuse of a rolling monthly gas capacity auction in breach of Article 5 of REMIT. The decision itself was issued on 2 June 2023 and the alleged activity occurred in January 2022 and relates to the Austria-Hungary interconnection point.

The details of the case are briefly as follows:

• The auction itself is an “ascending clock auction” which involves multiple rounds of bidding at incrementally increasing prices until balanced demand is achieved with a range of rules around bidding “price steps”.
• Each market participant may bid in each bidding round for an amount equal to or less than the capacity offered in that auction. The total oversubscription volume is public information that all market participants can see. As such, a market participant bidding for a significant part of the capacity volume tendered can assess its market power and should therefore consider the signal that its bidding behaviour sends to the market.
• The firm in this case bid for nearly 100% of the available capacity advertised. By the 10th round of bidding, the total aggregate demand of the other market participants was less than the advertised total capacity for the auction – at this point, the firm in MEKH's view was able to fundamentally influence the outcome of the auction through its bids in subsequent bidding rounds (i.e. without the firm’s bids, there would likely have been an under-subscription in the auction leading to more volume being sold at a lower price). Their bids therefore had an impact on the auction. The Order states that the firm would have been aware of this as it could have determined this from its share of the publicly available oversubscription volumes.
• As the firm did not reduce its bid at all during this phase of the auction, the share of their bid volume increased steadily, sending an increasingly strong signal to the market that there was a market player or group of market players willing to pay a significant relative premium for capacity.
• The firm maintained its bids for virtually all the offered capacity for 36 auction bidding rounds but ultimately left the auction in the 37th without acquiring any capacity at all despite sending signals for 36 bidding rounds that there was demand. This resulted in the clearing price of the auction for other market participants being multiples higher than the reserve price (i.e. the minimum clearing price) for the auction.
• MEKH concluded that the firm’s conduct gave a misleading signal as to the demand for the capacity product, as a result of which other market participants were also likely to have reduced their own bidding volumes or exited the auction because they had received an indication that there was demand in the market willing to pay a higher premium.
• To establish if the price was misleading, MEKH examined the auctions held for the relevant interconnector where a significant relative auction premium was achieved, as well as where significant demand for capacity over several rounds was observed only to see a small proportion of the capacity tendered ultimately being sold. This analysis revealed that the high relative auction premium was very rare, as was the pattern of high excess demand at the start of the auction but with capacity ultimately not being sold out by the end of the auction. The MEKH Order contains detailed statistics in this regard.
• The Order discusses potential legitimate reasons/rationale for the behaviour, including the potential application of “accepted market practices” (AMPs) to explain the firm’s bidding behaviour but concluded that none had been recognised by any Hungarian institution.
• The firm is quoted in the order saying that the premium paid in addition to the regulated tariff at the given interconnector forced it to look for alternative market routes. However, the lack of a date stamp on the calculation document (which considered a Austria-Slovakia-Hungary route) provided to MEKH made it an unreliable source and the regulator’s questions as to why they did no exit at lower price levels or reduce its capacity requirements stood.
• This led to MEKH concluding that the firm was in breach of Article 5 of REMIT. ACER joined in by announcing the fine on their website (click here)

RegTrail Insights

Cases of market manipulation involving auctions are rare making this a very useful reference case, particularly with the level of detail provided by MEKH (albeit with some redactions) and the methodical, although long-winded, approach to decomposing the case detail. Undoubtedly more learnings will emerge from this case over time, particularly as regulators in European power and gas markets show increasing interest in auctions but perhaps have not yet found a way to effectively monitor these markets. This case might well provide a foundation on which other regulators build their understanding and capabilities to do so.