House Energy and Commerce subcommittee lawmakers Wednesday chastised the Commodity Futures Trading Commission (CFTC) for challenging FERC’s authority to purse 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 platforms from the full oversight and regulation of the CFTC. This loophole has created so-called “dark markets.” They also urged lawmakers to investigate the CFTC’s use of “no-action” letters to exempt certain market players, and to increase funding for the agency.

In related action, the House Agriculture Committee 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 (ECM) that perform significant price discovery for commodities in interstate commerce.

Moreover, Sen. Dianne Feinstein (D-CA) is expected to offer an amendment to the farm bill now on the Senate floor that would extend the CFTC’s oversight to include ECMs, such as Atlanta-based IntercontinentalExchange (ICE), a largely unregulated global electronic energy trading platform and a major competitor of the New York Mercantile Exchange (Nymex).

ICE President Charles A. Vice 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.”

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. “I would hope that by the time we conclude this hearing [the] CFTC will have rethought its views on this issue.”

“We felt compelled…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 Daily GPI, July 27). 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 Daily GPI, Dec. 12, Nov. 5 ).

“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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