Manipulation of energy markets does occur and should be vigorously prosecuted, but investigators must not cross the line from manipulation into restricting speculation, according to several panelists who spoke at a meeting of the National Association of Regulatory Utility Commissioners (NARUC) in Washington, DC, last Tuesday.
"Speculators play a very necessary role in the market," said De' Ana Dow, managing director of government affairs for global commodities exchange CME Group. "They are our liquidity providers."
According to FERC Commissioner Joseph Kelliher, energy market manipulation can be broken down into three categories: manipulation of physical energy products to benefit positions held in financial energy products; manipulation of financial energy products to benefit positions held in physical energy products; and manipulation of one kind of financial energy product to benefit a position held in another financial energy product, thereby affecting the price of a physical energy product. "I believe that there have been attempts to engage in all three of these types of manipulative schemes," Kelliher said. "To me, that's not remarkable. You should expect that. That's what we're looking for. That's what we're trying to be vigilant about.
"At FERC [Federal Energy Regulatory Commission] we're trying to prevent manipulation. We're not trying to prevent speculation, and we're not trying to prevent volatility...If you accept that those patterns are possible and that there are attempts to engage in those kinds of schemes, then that means that they're going to attempt to manipulate across jurisdictional boundaries. That's one reason FERC and CFTC [Commodity Futures Trading Commission] are working very closely, collaborating in their efforts."
CFTC Acting Chairman Michael Dunn echoed Kelliher's comments, saying neither agency has the resources to take on all investigative and enforcement duties singlehandedly.
The agencies have butted heads over the issue of whether FERC has jurisdiction in cases where the manipulation of natural gas futures trading subsequently influences the price of physical gas transactions (see NGI, Nov. 10, 2008). The CFTC intervened in an appeal of a former gas trader for failed hedge fund Amaranth Advisors LLC, who challenged FERC's authority to bring an enforcement action against him for allegedly manipulating the settlement prices of certain gas futures contracts traded on the New York Mercantile Exchange. FERC contends that the manipulation of futures trading influenced FERC-jurisdictional physical gas prices in violation of the Natural Gas Act.
"I think that's an honorable disagreement; we just read the statute differently," Kelliher said. "But that disagreement has not affected or impeded our ability to collaborate."
Mark Cooper, Research Director and energy expert of the Consumer Federation of America, called for more stringent regulation to stop arbitrage, including increased margin and capital reserve requirements and the creation of criminal penalties for violating commodity laws. "Fining them does you no good," Cooper said. "They make too much money to care about a silly little fine. We have to put the bad guys in jail."
The CFTC Reauthorization Act of 2008 closed the "Enron loophole," which had allowed large electronic trading platforms to circumvent the full oversight of the CFTC for years. On Wednesday the NARUC Board of Directors voted to approve a resolution supporting CFTC's efforts to eliminate the loophole, new federal legislation addressing the flow of investment capital into financial markets in ways that produce commodity price movements that are harmful to consumers, and proposals to increase margin requirements for futures contracts on speculators who do not intend to take delivery on natural gas (see related story).
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