FERC is considering whether it should use its new authority under the newly-minted comprehensive energy law to try and improve price transparency in the electricity and gas markets, FERC Chairman Joseph Kelliher told reporters following prepared remarks at a Washington, DC, conference sponsored by the Energy Bar Association (EBA).
“We’re authorized, not required to act,” he noted, saying the Commission might take action “if we can use it effectively.” The threshold question facing FERC from Kelliher’s point of view is whether there is a need for greater price transparency in electricity sales, gas sales or transportation. “Then the second is do we need to use this new authority to get that information,” he said.
The FERC chairman also was asked whether there’s anything the Commission can do to address concerns in the short term about gas supply and prices. He noted that when FERC set market behavior rules two years ago, they applied to jurisdictional gas sales, as well as electricity sales. “So we’ve acted to prevent manipulation in gas sales…,” Kelliher said.
“We do have this new price transparency language in the new law and one of the questions is can we use this in electricity markets, another is gas markets, can we use this new authority to require greater transparency for gas sales?”
He said there also may be a need for action on power transmission. “For example, I don’t think there’s very good transparency on refusals of transmission service. So that’s an area of electric transmission where right now there isn’t that much transparency. We don’t necessarily need to use the new authority to achieve that, since if we can require a jurisdictional transmitting utility to file an open access tariff, we could put that requirement in the open access tariff,” he said.
Gas storage is another area in need of greater transparency. FERC “did have a proposal a year ago to require reporting of daily injections and withdrawals from storage and it ultimately didn’t get a very enthusiastic reaction in part because the storage owners that are jurisdictional to the Commission owned a relatively small share of storage capacity,” he said.
The new language in the energy law “gives us authority to require ‘information from market participants,’ a much broader class. So we’re looking back at that proposal to see if there are other proposals that might have some merit to provide more transparency for gas prices this winter.”
Kelliher recognizes “there are supply problems because of the hurricanes. We’ve lost a significant amount of supply. That will have some upward pressure on prices. But we want to make sure the upward pressure is not subject to manipulation.”
Meanwhile, Kelliher in his prepared remarks said FERC is taking a closer look at whether the Commission will need to alter the market behavior rules in the wake of a sweeping new national energy law signed by President Bush this summer that, among other things, beefs up the Commission’s enforcement powers and gives FERC significant penalty authority as a deterrent against market manipulation.
“Because the language that Congress included in the new law are expressly modeled on the Securities Act, we’ve been doing a little studying of our own on how securities law operates,” Kelliher said. “It’s not something we normally have to be very expert in.”
He said the new law “expressly cross-references” a section of the Securities and Exchange Act of 1934. “What we’re doing is trying to understand how that provision operates. Trying to understand the SEC precedent, the case law that defines how they have defined a deceptive or manipulative contrivance or device over the past 70 years.”
FERC is also “looking at that in relation to the market behavior rules that the Commission issued two years ago. Does the new language, does the new law, require us to change the market behavior rules? That’s one of the questions in front of the Commission.”
Kelliher emphasized that FERC currently does have rules against market manipulation — the market behavior rules issued in November 2003. “Those rules have been challenged” in court, he noted. “One reason we asked Congress to establish an express prohibition in the new law was to insulate us from that legal challenge. At least to provide clear legal authority for Commission rules to prevent market manipulation.”
His goal in the area of market manipulation is compliance. “In a perfect world, the Commission’s rules are clear. There’s universal recognition of what a regulated company has to do to be in compliance, and there’s universal compliance. That is the ideal state.” In a less perfect world, FERC “rules are clear. It’s well understood what’s necessary to comply with them, but there are some violations. Under that less perfect world, those violations are quickly identified and sanctioned.”
With the new penalty authority and the size of the monetary penalties the Commission can levy under the new energy law, “there is a responsibility on behalf of the Commission to be clear on what is necessary to achieve compliance. Compliance can’t be elusive, it can’t be mysterious. It should be clear.”
He said that “if we do our job and establish clear rules and those rules are violated, then I think it’s appropriate for us to exercise vigorously our penalty authority.”
The topic of compliance also came up at an earlier panel at the EBA conference examining the Energy Policy Act of 2005, which included Susan Tomasky, CFO at American Electric Power (AEP).
Tomasky said that market manipulation “has a huge amount of uncertainty and gray around. You can read the Federal Power Act and see pretty clearly a lot of things you should and shouldn’t do. Market manipulation is sort of the inverse of that. There are many things that are absolutely obvious and some times traders help you by naming it things like Death Star.”
Tomasky said that when it comes to market manipulation, energy lawyers “should absolutely tell people that FERC’s going to take this authority seriously, which I think they will, and that they need to do things systematically within their company” to address this matter. “That to me is the key. It’s not so much educating people on where the gray edges of [where] you can go. It’s creating an atmosphere in your company in which the right thing to do is, yes, to make the money, but also to do it within the bounds of the law,” the AEP official said.
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