The broad energy bill’s proposals putting FERC in the business of collecting prices on natural gas and electricity trades are a bad idea because they would interfere with energy markets and the price discovery process, and would keep FERC from carrying out its more important market-monitoring duties, said Commissioner Sharon Brown-Hruska of the Commodity Futures Trading Commission (CFTC) Thursday.
While applauding the efforts of top Republican lawmakers to “satisfy those who supported the market transparency provisions” in the bill, she said “I believe there never was a more ambiguous solution to a problem that did not need a solution than in this case.” The transparency provisions are an example of “how compromise can result in some really scary legislation,” Brown-Hruska told energy lawyers, executives and regulators at the Energy Bar Association’s mid-year meeting in Washington, DC.
With regard to the bill’s provisions on gas-price reporting,”mandatory disclosure is not only required to FERC who then may make [prices] public, but it is also required that entities report their transaction prices to price publishers,” she said. This new authority, however, “is then made illusory for the FERC as they are then forbidden from competing with a price publisher and prohibited from regulating price publishers or imposing any requirements on the publishers of such information.” On the electric side, the bill calls for the Commission to issue rules establishing an electronic system that would provide information on prices and availability for the public and regulators.
“The problem with the transparency proposals is that they will interfere with the markets for information, which the legislation seems not to realize exist,” Brown-Hruska said. “Information inherent in transaction prices and trade is the product of investment and expertise that is part of the price discovery process. The rewards to developing that information not only help counterparties ensure that they get a fair deal but also contribute to the overall efficiency of the market.”
A mandate that the “information be surrendered to a government agency for dissemination to the public…runs perilously close to a taking or expropriation of that information from those who engage in price discovery,” she noted. Moreover, the energy bill proposals “could endanger energy price efficiency while costing the U.S. taxpayers dearly.”
This begs the question “why have a government regulator perform a service that can be performed in the private sector in a more efficient and reliable manner?” Brown-Hruska said.
“The best reason not to put government in the business of price reporting is that there already is a market for information and it is competitive,” she noted. “As a result of the stain on their indices created by false reporting by traders, these firms have invested substantially in improving their procedures to ensure that the information they cull is accurate and that they no longer get duped by traders making false or inaccurate reports.”
The published price indexes have market incentives to make sure the prices and volumes reported to them are accurate and not fabricated, according to Brown-Hruska. “It is called reputational capital, and in the information business, if you don’t have it, you’re out of business.”
Another reason not to make FERC a price collector is the toll it would take on the agency, she said. It “would inevitably take away resources from other areas of regulatory responsibility for which the agency is responsible, including the vital functions of surveillance and enforcement.” Instead of performing the “rote activities of compiling and publishing price information, a regulatory agency would prefer to spend time analyzing the information to ensure that market problems and illegal activity are adequately evaluated and investigated,” Brown-Hruska noted.
The reporting of false prices for gas trades was “pervasive,” but she said the CFTC, FERC and the energy industry have taken significant steps to clean it up. Since last December, the CFTC has entered into eight settlements with violators, collecting a total of $130 million in civil penalties. In October, the CFTC also filed a complaint in a federal district court in Ohio against American Electric Power for allegedly manipulating gas prices.
“The FERC and the CFTC, working together and separately, have pushed hard to solve the problems of false price reporting,” Brown-Hruska said. Moreover, the energy industry, including groups like the Committee of Chief Risk Officers, “has made great strides toward developing standards for price reporting, but also for restructuring the function of price reporting, moving it from the traders to the back office, and incorporating internal controls to ensure prices reported are legitimate trade prices.”
She further noted companies whose traders supplied bogus information to price indexes also “have been cooperative with both FERC and the CFTC investigations, seeking not only to quell any concerns that misreporting was condoned at the corporate level, but also to illustrate to shareholders and the public that it will not be tolerated in the future.”
Congressional proposals that would give additional authority in the price reporting arena to the CFTC or the FERC “rest on the premise that somehow we are powerless to stop the false price reporting. Or, that the industry is indifferent. Nothing could be further from the case,” Brown-Hruska said.
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