Demand for watchdog with widespread powers follows claims of market manipulation by traders and speculators

Some of Britain's biggest energy users are calling on the government to introduce tough regulations to ensure the over-the-counter wholesale gas market cannot rigged by traders and speculators.

Eddie Proffitt, chairman of the gas group at the Major Energy Users Council, whose members include Tesco and large county councils, wants a watchdog, and all trading to be directed through power exchanges. He said he called the trades "under the counter" because "everything is totally hidden".

Another group representing large industrial users said members were concerned about the lack of "liquidity and transparency" in Britain's wholesale power markets.

The catalyst for these concerns was the revelation in the Guardian last month that the Financial Services Authority and the energy watchdog, Ofgem, were investigating allegations of market manipulation.

Erratic trading on 28 September brought complaints to the regulators from a whistleblower, Seth Freedman, and his employer, the ICIS Heren price reporting agency. Citigroup, the US investment bank, has admitted it was behind two of the low-priced trades that raised concern, although it says it was selling gas for energy clients and not on its own behalf.

The unreliability of prices quoted in the market was underlined by three major price reporting agencies giving different values for the same period of trading.

Matt Osborne, an executive at energy consultant and trader Inenco, which buys £1bn worth of energy a year for customers, said it was time to stop over-the-counter trading (OTC) with its high "risk premium".

And Jeremy Nicholson, director of the Energy Intensive Users Group, which represents the steel and chemical industries, said some of his members questioned the lack of "liquidity and transparency" in Britain's wholesale power markets.

There was also unease in the industry that Ofgem does not have the power to properly stamp out abuse, although it has promised to adopt tough new powers next year under the European commission's Regulation on Energy Market Integrity and Transparency (Remit).

Ed Davey, the energy and climate change secretary, has promised to severely punish anyone found guilt of market manipulation at a time when the "big six" energy companies are under fire over alleged profiteering in the retail supply sector. They deny the allegations.

Proffitt, a former executive at Pilkington glass company, said there was deep unease about the way the wholesale gas market had operated for many years using unregulated OTC trades.

"[Big energy users] have just accepted that this is the way the power sector works. I call it 'under the counter' trades because everything is totally hidden and it is anyone's guess whether rigging takes place. I would welcome everything being moved to an openly traded system on exchanges where individual transactions can be monitored and the operators [of the exchanges] would be obliged to report anything strange."

Proffitt said he did not think the FSA had the time or Ofgem the staffing power to undertake a sufficient review of the wholesale power markets, and advocated setting up a specialist watchdog with widespread powers, as in the US.

America's federal energy regulatory commission said it wanted to levy a $470m (£290m) fine on Barclays bank and banned the energy trading arm of JP Morgan Chase for six months over alleged trading irregularities.

Osborne, risk manager and trading strategist at Inenco, said it was "inevitable" that OTC trading in the wholesale gas market would eventually be brought to an end in favour of using energy exchanges such as ICE, N2X or APX.

"As a buyer of gas you need to have confidence in the prices you are paying and if you look at the wide bid offer spreads they are an embodiment of a [large] risk premium. Most other markets are exchange traded, why should energy be any different? Most people want to see more transparency and liquidity. I think it [the Guardian revelations] has been a catalyst for this kind of regulation," he said.

Nicholson said some of his members wanted to see power transactions go through a single exchange to improve volumes and price reliability, but others were happy to continue with the existing system. "There is not a single view from the consumer."

And not everyone believes that using exchanges will bring benefits to the energy users. Roderick Bruce, an analyst at IHS in London who has tracked energy markets for seven years, told Bloomberg recently: "Any other alternative, like forcing all trades on to an exchange or through a registry, would result in far higher costs for the industry and consumers."