Overly prescriptive regulatory or legislative action that is meant to remedy manipulative behavior in the energy sector could in the end “chill or kill” the market, warned Commissioner Sharon Brown-Hruska of the Commodity Future Trading Commission (CFTC) last Thursday.

“It is my view that prescriptive regulation cannot address the problems being experienced by the energy sector, but may exacerbate a liquidity shortage in the energy complex by unnecessarily imposing costs on industry participants, and creating regulatory and legal uncertainty,” she said during a conference in Washington, DC.

“In our effort to squelch manipulative behavior, we may end up unwittingly nurturing it by encouraging non-competitive, illiquid markets,” Brown-Hruska told a crowed of legal and economic experts.

Energy markets “are suffering a crisis of confidence driven by a lack of liquidity and the realization that credit risk may have been higher than [expected],” she noted. “Prescriptive approaches to these problems generally include mandates for increased transparency and disclosure. Increased market transparency is often held out as a quick-fix solution to market problems.”

While greater transparency and integrity are a must in accounting and financial statements of companies, the “extent to which the details of individually negotiated or private transactions should be made public is less clear-cut,” Brown-Hruska noted. “It is also not clear how release of this information [such as prices and volume] would deter manipulation, but it certainly might deter participation in the markets.”

She believes any legislative and regulatory remedies for manipulation must provide a “direct hit on [the] actual problems and misdeeds” seen in the energy markets.

“We [CFTC] have been criticized for not moving quickly enough, but I think the greater risk is in acting without good information and understanding of the markets, in a ‘knee-jerk’ response that does not solve problems,” she said. “To do so would create significant costs, not only for the industry, but also for government and the taxpayers.”

The CFTC’s goal is to “restore integrity to the energy markets and bring legitimate, honest dealing back,” Brown-Hruska said. “At the same time, I believe we must not become overzealous in our effort to rid the markets of manipulative behavior to the point that we severely stifle legitimate activity merely to achieve political purposes.”

She noted the CFTC is currently investigating 32 energy companies (including employees of the companies) to determine whether they engaged in wash trading, manipulation and the reporting of false prices for natural gas or electricity, all in violation of the Commodity Exchange Act. Since last December, the agency has entered into six settlement with a number of “very prominent” energy companies and power merchant firms, collecting a total of $96 million in civil penalties for attempting to manipulate energy prices that are reported to published indexes, she said.

“I believe our cases in this area demonstrate not only that we have significant authority to bring cases of manipulation in the energy sector, but also that we are prepared to exercise that authority.”

Energy companies “are anxious to put this chapter behind them, and get on with business,” said Brown-Hruska, adding that the CFTC was working hard to wrap up its energy market investigations by the end of this year.

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