The integrity of natural gas price reporting and price indices is “extremely important,” said the chairman of the Commodity Futures Trading Commission (CFTC), last week, but it is up to Congress to determine if any new rules are required to govern price reporting practices. However, Chairman James Newsome added he has “yet to see anything” that changes his belief that the commission and other regulatory agencies already possess the tools to address any misconduct that may occur.

The commission’s investigation into energy market manipulation could be wrapped up by mid-2004, but Newsome added that it will depend on how well the companies involved cooperate. The CFTC launched an investigation last year into allegations that energy merchants had attempted to manipulate natural gas prices during the western energy crisis of 2000-2001.

Last December, CFTC ordered Dynegy Marketing and Trade and affiliate West Coast Power LLC to pay a $5 million fine to resolve charges that they colluded to manipulate natural gas prices for more than two years by submitting bogus trading information to energy newsletters that publish gas price indices (see NGI, Dec. 23, 2002). West Coast Power was a 50/50 joint venture between Dynegy and NRG Energy Inc., and Dynegy acted as the agent for West Coast Power in supplying energy to California. In March, El Paso Corp.’s trading unit, El Paso Merchant Energy LP, agreed to pay $20 million as part of a settlement with the CFTC on charges that it furnished false information about natural gas trades in an attempt to skew index prices to its benefit (see NGI, March 31).

Newsome did not comment on how many companies have been subpoenaed regarding their energy trading activities. However, the confirmed list includes Entergy-Koch Trading LP, EnCana, Reliant Resources Inc., IDACORP, El Paso Corp., CMS Energy, Duke Energy, El Paso Electric Co., Portland General Electric, Avista Corp., Xcel Energy, Morgan Stanley Capital Group Inc. and The McGraw-Hill Companies Inc.

“In my opinion,” said Newsome, “the proper deterrent to such misconduct is a vigorous use of our enforcement authority, rather than the imposition of additional, prescriptive or burdensome regulations that could adversely affect legitimate activity.”

Newsome explained CFTC’s role to executives privately during a breakfast meeting in Houston on how the commission is working to rebuild confidence in energy trading. The breakfast was sponsored by the Global Energy Management Institute at the University of Houston. Challenging proponents who want to stiffen the regulations over energy markets, Newsome said the commission planned to continue its “aggressive efforts…so that those who operated outside the law are identified and sanctioned, and just as importantly, so that companies that followed the rules are identified as well.”

However, Newsome noted that “unclear laws, regulations or enforcement policies can result in inefficiencies, missed opportunities and the misallocation of resources by market participants, who must factor such uncertainty into their business decisions.

“A regulatory structure that replicates the exchange-traded model is not appropriate for principal-to-principal trading between institutional counterparties, and we should approach any changes to the legal certainty in place for these specialized marketplaces with extreme caution.”

Legislative proposals advanced to date “could result in significant, negative unintended consequences for the risk management markets.” The CFTC, the Securities and Exchange Commission, the Federal Energy Regulatory Commission and the Department of Justice together can take care of “wrongdoers in the energy markets” and “new legislation at this time would not be justified or advisable.”

Sen. Dianne Feinstein (D-CA), whose proposal to revamp the over-the-counter (OTC) energy derivatives trading was tabled in June, has vowed to reintroduce the legislation again (see NGI, June 16). The bill would bring regulation of OTC energy derivatives under the CFTC umbrella.

The “deep, liquid markets coped well” following Enron Corp.’s bankruptcy, said Newsome. “Prices did not spike and liquidity did not dry up.” The “system of financial controls in place was successful. There were no disruptions to the system of clearance and settlement, and each trader met its obligations.”

Positive developments have occurred in the energy sector in the past few months, he said, and the CFTC has been working with FERC on possible solutions to credit risk problems. Newsome also applauded the efforts of other industry participants to adopt new codes of ethics and best practices.

“I believe that these market initiatives, coupled with the appropriate use of the commission’s enforcement authority, are critical to restoring confidence in the marketplace.” The CFTC remains “fully committed” to resolving the ongoing investigations into illegal market activity “as expeditiously as possible, so that wrongdoers are appropriately punished and those that were not involved are exonerated.”

CFTC remains opposed to “safe harbor” statements to protect energy companies from reporting incorrect prices in error, Newsome added. “The reality is that honest mistakes are not a violation of the Commodities Exchange Act and the commission has not and will not bring enforcement actions against honest mistakes.” Newsome is planning to meet with FERC Chairman Pat Wood this week to discuss price reporting issues.

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