Recent reports of turf battles between FERC and the Commodity Futures Trading Commission (CFTC) "have been overplayed," and the two regulatory entities have, in fact, worked in close cooperation, members of each commission said at the National Energy Marketers Association (NEMA) annual membership meeting in Washington, DC, last Tuesday.
"There are certain areas where we have exclusive jurisdiction and there are certain areas where jurisdiction is shared," said Federal Energy Regulatory Commission (FERC) Commissioner Marc Spitzer. "From time to time we may have experienced a bumpy road over how these sister agencies exercise jurisdiction, but people need to understand that we are working together to ensure the validity of wholesale markets."
Last year CFTC challenged FERC's authority to pursue manipulative activities in the natural gas futures market after FERC brought an enforcement action against failed hedge fund Amaranth Advisors LLC for manipulation of the gas market (see NGI, Oct. 22, 2007; Oct. 1, 2007; July 30, 2007). Amaranth argued that the CFTC, not FERC, had exclusive jurisdiction over its activities in the futures arena, while FERC's jurisdiction was limited to the physical gas market. A series of court decisions blocked attempts by Amaranth and its former traders to enjoin FERC from proceeding with its enforcement action against them (see NGI, Dec. 17, 2007a).
The two agencies had negotiated a memorandum of understanding (MOU) to spell out their respective authorities over energy markets, but CFTC Commissioner Bart Chilton said in November that "MOUs are only as good as those who [are] supposed to use them [and] the CFTC-FERC MOU didn't work so well" (see NGI, Nov. 5).
"I think this has been overplayed," CFTC Commissioner Michael Dunn said at the NEMA meeting. "Our staffs have been working very, very closely, even long before the recent controversy...It's incumbent upon us as regulators to join forces."
Dunn said a few high-profile cases -- the California energy crisis in 2000-2001; regulatory charges being brought against Enron and Amaranth; and BP's agreement last fall to pay $303 million to settle charges that it manipulated and attempted to manipulate the propane market in early 2003 and 2004 -- "led the public to question the integrity of the derivatives market and to ask who's in charge. Well, when it comes to energy derivatives, the answer sometimes is no one, and that...is by design."
The CFTC "aggressively pursues market manipulation," but had its hands tied by language included in the Commodity Futures Modernization Act of 2000, Dunn said. That legislation created exempt market conditions and, in doing so, "Congress prevented the CFTC from regulating energy contracts that are essentially off-exchange energy futures contracts fulfilling a price discovery function, such as several of those created by Enron in the early 2000s and ICE [IntercontinentalExchange] today," he said. "In foreclosing the option of further regulation, Congress created today's situation where a large number of energy futures and options markets are largely beyond the CFTC's jurisdiction. This ultimately makes it quite difficult, but not impossible, to meet the Commodities Exchange Act's objective of detecting price discovery, preventing manipulation and ensuring the futures and options markets remain effective tools for hedgers."
The Enron, BP and Amaranth cases "are just the ones we caught," Dunn said. "I'm afraid we don't know if they're just the tip of the iceberg or the totality of it. Based on our actual experience with these off-exchange energy markets, why should we expect the public to have confidence in the market? At best, all we can do is file a case after the damage is done. The public expects that some cop is going to be on the beat preventing these things from happening. Markets need regulatory oversight to help ensure that the prices [that traders] are paying are fair. The commission has done what it can within the confines of the CFTC act, but we are at the limits of our authority."
Spitzer said the industry and the public must have confidence that "the rule of law" is enforced in energy markets.
"I'll be blunt," Spitzer said. "In 2000-2001, with the California energy crisis, there was a huge loss of confidence...over the soundness of our energy markets, and the fact that we had some bad actors undermined the faith and confidence of the people.
"Our energy markets need regulatory certainty, we need economic certainty; the courts and the FERC have to enforce the rule of law to assure the public that they're getting a fair deal."
Dunn said he supports legislation approved by the Senate last year that would close the controversial "Enron Loophole" that exempts most over-the-counter energy trades and trading on electronic platforms from the full oversight and regulation of the CFTC and includes several recommendations to give the agency heightened oversight authority over certain lightly regulated contracts in exempt commercial markets that perform significant price discovery for commodities in interstate commerce (see NGI, Dec. 17, 2007b).
"In my estimation, this legislation will undoubtedly allow us to provide more transparency to those markets and to provide our surveillance staff with the necessary tools and information needed to protect the markets from manipulation," Dunn said.
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