House Energy and Commerce subcommittee lawmakers last Wednesday admonished the Commodity Futures Trading Commission (CFTC) for challenging FERC's authority to pursue manipulative activities in the natural gas futures market.
In testimony before the Subcommittee on Oversight and Investigations, energy experts, municipal gas utilities and a heating fuel supplier renewed the call for Congress to close the controversial "Enron loophole" that exempts most over-the-counter (OTC) energy trades and trading on electronic energy platforms from the full oversight and regulation of the CFTC. This loophole has created so-called "dark markets."
In related action, the Senate last Thursday approved a bipartisan measure that would increase federal oversight authority of trading on currently unregulated electronic energy platforms, such as Atlanta-based IntercontinentalExchange (ICE). The proposal is part of the reauthorization of the Commodity Futures Modernization Act, which was folded into the $286 billion farm bill (HR 2419).
The measure, offered by Sens. Dianne Feinstein (D-CA), Carl Levin (D-MI) and Olympia Snow (R-ME), would close the "Enron loophole" to the Commodity Exchange Act (see related story). It would bring ICE and others under the same regulation as the New York Mercantile Exchange.
ICE President Charles A. Vice last week said his company supported legislative and regulatory changes that would enhance oversight of the market. "ICE is in complete agreement and has been working with Congress for several months...We agree there's room for improvement. Let's do something thoughtful."
On the House side, the Agriculture Committee last Wednesday passed by voice vote CFTC reauthorization legislation, which included several CFTC 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. It also would increase the CFTC's penalty authority.
As for the jurisdictional dispute, "I am...disappointed to see the CFTC has challenged FERC's authority to investigate [and] pursue the energy market manipulators, despite the Congress's explicit grant of authority to FERC in the Energy Policy Act of 2005 [EPAct]," said Rep. John Dingell (D-MI), chairman of the House Energy and Commerce Committee.
"We felt...that we have exclusive jurisdiction over those contracts" in the natural gas futures markets, countered CFTC Acting Chairman Walter Lukken during the hearing on energy speculation.
"There's no way that you can have exclusive jurisdiction [in the futures market] with this statutory authority on the books" in EPAct, said Rep. Joe Barton (R-TX), who noted that he specifically inserted the language in EPAct extending the Federal Energy Regulatory Commission's authority to deal with potential manipulation by ICE traders.
"This wasn't something [that was] serendipitous," Barton said. FERC Chairman Joseph Kelliher and "his compadres at the FERC are doing exactly...what we hoped they would do. I don't see how your agency or the courts can rule" otherwise.
The issue involving the extent of FERC's jurisdiction in the gas futures market is expected to be decided by an appellate court. "I can't imagine the appellate court reading this [EPAct] language and saying that FERC can't do what they have been attempting to do," Barton noted.
"At this time, I do not believe that FERC needs any additional legal authority to protect consumers from market manipulation," Kelliher said. But, he added, "We think it's important [for Congress] to clarify the extended FERC authority in this area," particularly as it applies to the futures market.
The issue of whether FERC's authority extends to the futures market arose when the agency brought an enforcement action against failed hedge fund Amaranth Advisors LLC last July for manipulation of the gas market (see NGI, July 30). 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.
The CFTC agreed that it has sole jurisdiction in the futures market. FERC, however, "stands by our position that Amaranth's activities fall within our jurisdiction in so far as they [affected] physical sales of natural gas," Kelliher told the subcommittee. The courts so far have denied all attempts by Amaranth and its former traders to enjoin FERC from proceeding with its enforcement action against them (see NGI, Nov. 5) (see related story).
"I consider this to have been a significant change in the CFTC's position," Kelliher said. "There's a great deal at stake in this legal dispute" over FERC's jurisdictional boundaries. "If the attack on our jurisdiction is successful, our ability to guard the consumers from exploitation would be significantly reduced," he noted.
"I regret that this disagreement between FERC and the CFTC has arisen in recent months," but Kelliher stressed that the two agencies still are cooperating in their investigations of manipulation in the energy markets.
"We support having multiple cops on the beat" in the energy market, said Laura Campbell, assistant manager of energy resources for Memphis Light, Gas and Water. She encouraged the two agencies to work together. Campbell further said she believes that FERC should be able to pursue suspected manipulation in the futures market, if it affects prices in the physical gas market.
While FERC has made "considerable progress" in its enforcement efforts in the past year, Dingell said the CFTC was a different story. "There are indications the CFTC may have been more enthusiastic in granting exemptions from regulations than it has been in rooting out possible energy market manipulation."
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