How to avoid market manipulation – lessons learnt in Norway

1. How to avoid market manipulation – lessons learnt in Norway 10th Baltic Electricity Market Mini-Forum June 4, 2010 Anne Dønnem, NVE

2. Overview • Nord Pool Spot • History and organisation • The role of the power exchange • Regulation of Nord Pool Spot • The Market place license • Renewal of the Market place licence from 2010 • Market surveillance • Cooperation • Supervisory Authorities • Nordic cooperation – NordREG

3. Nord Pool Spot history 1996 Common NorwegianSwedish power exchange / market Nord Pool 1998 Finland joined the Nordic power exchange 1999 West- Denmark joined 2000 East-Denmark joined 2002 Establishment of physical spot exchange in separate legal entity: Nord Pool SpotAS 2010 Estlink established as price area 1971 First spot market in Norway, for all producers 1993 Norwegian spot market in separate legal entity, open to all actors

4. Nord Pool Spot AS(physical exchange) • Nord Pool Spot AS is owned jointly by the Nordic TSOs • Statnett SF (30%) • Svenska Kraftnät (30%) • Fingrid Oyj (20%) • Energinet.dk (20%)

5. NorwegianMinistry of Petroleum and Energy The NASDAQ OMX Group, Inc. 100% 30% Nord Pool Consulting AS 100% 30% Norwegian Water Resources and Energy Directorate NASDAQ OMX Commodities 20% 100% 20% Nord Pool Clearing ASA 100% 100% 20% EuropeanMarketCouplingCompany 100% 50% Nord Pool Finland Oy Nord Pool Gas AS NORD POOL CONSULTING AS

6. Nord Pool Spot is the market place for physical power trade producers distributors industrial companies energy companies trading representatives large consumers TSOs 72 % of market volume now traded on Elspot (2009) Source: Nord Pool Spot Annual Review 2008

7. Regulation of the electricity market • Physical trading • Nord Pool Spot AS: >70 % • NVE issues the Market Place Licence with renewal every 3 years • Bilaterally: < 30 % • Energy Act, NVE issues ”Omsetningskonsesjon” Licence to all participants • Financial trading (derivatives) • Nord Pool ASA • The Financial Supervisory Authority of Norway • Nord Pool Clearing • The Financial Supervisory Authority of Sweden

8. The role of the power exchangeNord Pool Spot – main functions • Nord Pool Spot AS runs the Nordic market place for physical power, offering both day-ahead (Elspot) and intra-day (Elbas) markets to its participants. • In the preparatory works to the Norwegian Energy Act, the Ministry stated that the marketplace should have two main functions: • Administration of the market place for physical power by facilitating daily bidding and price determination • Clearing of all contracts entered on the marketplace, i.e. enter as the central counter party in all trades, guaranteeing settlement for trade and anonymity for participants.

9. The role of the power exchangeNord Pool Spot • Provides merit order operation through commercial decisions taken by both generators and customers • Provides a neutral, transparent reference price for both the wholesale and retail markets • Provides a reference price for power derivatives traded at the Nordic power exchange for financial contracts in Nord Pool ASA and bilaterally • Provides a reference price signalling the optimal development of generation and transmission capacity of the system • Serves as a grid congestion management tool • Nord Pool Spot AS is a non-mandatory power exchange • All market participants are free to negotiate OTC contracts

10. Overview • Nord Pool Spot • History and organisation • The role of the power exchange • Regulation of Nord Pool Spot • The Market place license • Renewal of the Market place licence from 2010 • Market surveillance • Cooperation • Supervisory Authorities • Nordic cooperation – NordREG

11. Regulation of NPS • Market place license given to NPS to organise and operate a market place for physical power trade • day a head spot market Objective Contribute to efficient price formation and appropriate flow of power Scope Organising and operating a market place for physical trade

12. Regulation of NPS • The Market place license covers the whole Nordic Elspot market and all participants trading at the market place (renewal every 3 years) • The regulation is based on basic efficiency principles - not detailed regulatory involvement • NPS is also holding a licence for organising cross border trade in the Nordic Market. This license is issued by the Ministry, but NVE monitors compliance with the licence

14. Managingresponsibility Clearinghouselicense Exchangelicense Cross-border trading license Marketplace license TradingRules Regulatory structure Market ConductRules + Ethical Guidelines Clearing Rules TradingRules

15. The Market place license – Conditions (1) • NPS shall • act in a neutral and non-discriminatory manner, e.g. ensuring all parties neutral and efficient access to information that is of importance to determining prices • create regulations that encourage efficient trade • have an advisory board with broad representation from the participants in the market. • establish appropriate arrangements for market surveillance to monitor the behaviour of parties in the organised market place (market surveillance)

16. The Market place license – Conditions (2) NPS’ information duties towards NVE: • report to NVE of any activity that can lead to distortion of competition • inform NVE of changes to its organisation, ownership situation, activities, amendments in contracts with market parties or associated regulations or other changes that have or may have an influence on price formation. • Material changes that have or may have an influence on price formation must be approved by NVE • The assessments of the advisory board and any comments from market parties must be presented to NVE

17. The Market place license – Conditions (3) • The concessionaire’s revenue from the organisation and operation of the market place shall cover the costs and provide a reasonable profit through efficient management • The concessionaire shall have adequate liable capital in relation to the activities being operated • NVE can require NPS to organize activities not subject to regulation in a separate company

18. Overview • Nord Pool Spot • History and organisation • The role of the power exchange • Regulation of Nord Pool Spot • The Market place license • Renewal of the Market place licence from 2010 • Market surveillance • Cooperation • Supervisory Authorities • Nordic cooperation – NordREG

19. NPS’ Market Surveillance (1) • Shall ensure that the parties behave in accordance with • the objectives of the Energy Act and regulations issued pursuant to the act • NPS’ rulebook • Regulations regarding Insider trading and Market manipulation • The Financial Supervisory Authority of Norway also requires the establishment of an internal market surveillance by Nord Pool ASA • NPS’ Market Surveillance cooperates with Nord Pool ASA’s Market Surveillance in a joint function. • Tasks: • Monitor trading activity • Investigate possible breaches • Report to supervisory authorities

20. NPS’ Market Surveillance (2) • Regulations given in the Norwegian Competition Act regarding misuse of dominant position also applies. • NVE and the Norwegian Competition Authority is monitoring the Norwegian generators bidding at NPS • the actual market price is compared to an expected price calculated by a model that simulates an efficient utilisation of reservoir-water • Differences that can not be explained as price-taker behaviour should be investigated by looking at the different participants bidding on the market place

21. Market surveillance reporting Kredittilsynet (Financial Supervisory Autorithy) NVE (Energy Regulator) Formal reporting Various authorities Competition Authorities Competition Authorities Competition Authorities Nord Pool ASA Nord Pool Spot AS Competition Authority Information flow Market surveillance

22. Overview • Nord Pool Spot • History and organisation • The role of the power exchange • Regulation of Nord Pool Spot • The Market place license • Renewal of the Market place licence from 2010 • Market surveillance • Cooperation • Supervisory Authorities • Nordic cooperation – NordREG

23. Cooperation between three authorities

24. Cooperation with other Supervisory Authorities • NVE, The Competition Authority and The Financial supervisory Authority have entered into a supervisory cooperation. • All three authorities govern different regulations, however they share the goal of “an efficient power market” • Within this cooperation the authorities wish to: • Address common issues regarding development of regulations • Exchange information and experiences • Cooperate on common projects • Coordinate the supervision of particular incidents or activities • In addition, bilateral cooperation arrangements handling cases

25. Close Nordic co-operation about Nord Pool Spot • In the Nordic countries NVE cooperates with the national Energy Market Authorities • EMV (Finland) • EI (Sweden) • DERA (Denmark) • Through the supervisory cooperation, other relevant Nordic authorities are involved Annual 12 parties meeting (4 countries with each 3 authorities)

26. NordREG (cooperation of Nordic energy market regulators) • Regular meetings to discuss issues related to Nord Pool Spot AS • Any new (national) rule that has effect on price setting on Nord Pool Spot AS shall be approved by NVE as the responsible authority • Guidelines for information exchange and consultation in connection with NVE’s exercise of authority over Nord Pool Spot • The guidelines came into force 1 Feb 2002

27. The Nordic perspective and cooperation • Guidelines for information exchange and consultation in connection with NVE’s exercise of authority over Nord Pool Spot AS: • NVE will notify or consult the regulators in Denmark, Finland and Sweden at an early date and in the most appropriate manner • The regulators in Denmark, Finland and Sweden may propose and bring up issues related to the regulation of Nord Pool Spot AS • In order to maintain an efficient exercise of authority, in matters of consultation the NVE can establish a reasonable delay for a response • Individual regulators will cover their own expenses related to the collaboration in accordance with these guidelines. • In consultation with the other regulators, the NVE can make changes to these guidelines.

28. Thank you for your attention! Anne Dønnem Norwegian Water and Energy Directorate Tel: + 47 2295 9806 www.nve.no

29. ...where market surveillanceis an official requirement Regulation of market surveillance in the Exchange Act: Ensure to provide: Integrity and independence of the employees Resources to conduct effective surveillance Duty to: Monitor trading activity Investigate possible breaches Report to supervisory authorities

30. Regulated markets... Physical market: Energy Act (Norway) Licence as market place and to organise cross border transmission Rulebook for Nord Pool Spot AS Financial market: Exchange Act (Norway) Securities Trading Act (Norway) Licences as commodity derivatives exchange and clearing house Rulebooks for Nord Pool ASA and Nord Pool Clearing ASA

31. NordREG Guidelines co-operation • In order to produce an efficient regulation of the power market and in order to establish mutual information exchange, the NVE wishes to contribute to close collaboration between the Nordic regulators within the electricity sector. • These guidelines deal with issues that are related to the NVE’s exercise of authority over Nord Pool Spot AS and that can be considered to be of importance or interest for the power market in the Nordic countries. • To the best of its ability and as far as it is possible, the NVE will notify or consult the regulators in Denmark, Finland and Sweden at an early date and in the most appropriate manner. • Depending on the type of issue and the time available for exercising authority, the NVE will determine fairly whether there should be consultation in the matter or whether notification should be provided. • The regulators in Denmark, Finland and Sweden may propose and bring up issues related to the regulation of Nord Pool Spot AS to be considered jointly by the Nordic regulators within the co- operation established through these guidelines. • In order to maintain an efficient exercise of authority, in matters of consultation the NVE can establish a reasonable delay for a response. • Individual regulators will cover their own expenses related to the collaboration in accordance with these guidelines. • In consultation with the other regulators, the NVE can make changes to these guidelines. • These guidelines are in force as of 2002.01.02. • These guidelines can be declared null and void. BACK-UP

32. How to avoid market manipulation? • Price sensitivity • The key to avoid abuse of market power • Efficient market design • Allow prices to reflect the underlying properties of the physical power system • Market surveillance

33. Price sensitivity • Price sensitivity is necessary to avoid market manipulation • Inelastic consumers allow suppliers to manipulate prices • End users must be exposed to high prices to trigger price responsiveness

34. Efficient market design – More price areas to mitigate market manipulation! • More bidding areas allow prices to reflect network constraints and geographical scarcities • Reduce possibilities of manipulation • Market players causing congestions should pay a price reflecting the true cost of congestion

35. Market surveillance • Co-operation with Norwegian competition authorities • The competition authorities use a model to identify possible incidents of market manipulation • Regular meetings with NVE to discuss findings • Are there natural explanations to the incidents? • The competition authorities are responsible for further investigations and actions if necessary.