FERC is “quite close to being done” with its investigation of price manipulation in the natural gas industry, according to the director of the Commission’s Office of Market Oversight & Investigations (OMOI). William Hederman told a Houston audience last week that “barring major changes,” the investigation is “wrapping up.”

Hederman was part of a panel discussion on the second day of Platts Power Marketing Conference, sharing the podium with Michael Gorham, former director of the Division of Market Oversight for the Commodity Futures Exchange Commission (CFTC), and Doron F. Ezickson, an energy compliance lawyer with McDermott Will & Emery.

Hederman said he was limited in what he could discuss, and noted that the “Commission has the ultimate decision,” but he believed that the price manipulation investigation that began more than two years ago is nearly finished. Hederman said that since OMOI’s inception three years ago, the Federal Energy Regulatory Commission has gained valuable knowledge. Pat Wood, chairman of the Federal Energy Regulatory Commission, called Hederman “FERC’s cop” when OMOI was set up, but Hederman said he’s now called “FERC’s teacher.”

“Knowledge is critical,” Hederman said of the lessons learned. Regulators now have a better understanding of the market, the businesses involved and the regulations. Participants now have a better understanding of behavior, standards and conduct, he said. “The major publishers of price indexes really reformed their processes better to help consumers make informed decisions,” Hederman said, and the result has been more “responsiveness” in the market.

The OMOI chief said industry cooperation has been helpful on all fronts. He said collaboration has been the key in OMOI’s investigations, as well as FERC’s joint efforts with the CFTC, various states’ public utility commissions and regional players.

“Change is difficult,” he noted. “Moving forward makes it difficult. We were an organ transplant [from FERC] and we have had to prove ourselves and explain why we are useful.” So far, “much has been accomplished.”

OMOI took the lead on settlement negotiations with California and various energy entities to resolve energy “wash” trading allegations and price manipulation. To date, Hederman said more than $800 million “has been returned to customers.” OMOI also has led the way with a series of technical conferences on various issues, including standards of conduct. So far, OMOI has conducted about 80 audits and plans to begin site visits to check compliance next year.

Still, “we intend to do a lot more,” said Hederman. Included in OMOI’s action plan are more rapid responses to “observed anomalies and “more intense scrutiny of less transparent markets.” Also, OMOI plans “pro-active oversight,” which includes increased audits, both random and targeted visits, along with increased market intelligence gathering, which includes taking tips from employees and using more sophisticated detection methods that indicates something is not within the threshold of “normal.”

OMOI also wants to empower key players, which will include helping energy companies’ boards of directors, compliance and risk officers and engineers learn how to properly report and help manage problems that may occur.

“It may seem ironic,” said Hederman, “but frankly, we’ve found that the board of directors may wish to do a good job, but they do not have an understanding of how to do it.” Also, OMOI staff found that during its investigation of California’s physical withholding scandal, engineers did “only what they were needed or told to do,” he said. “They need to take more responsibility.”

OMOI also is working to educate regulators, and “there has been a lot more openness” about the various roles within the markets. OMOI plans “continuous improvement,” through its market surveillance reports, which are conducted jointly with the CFTC, as well as its “seasonal look ahead” reports. “Market integrity is everyone’s business,” Hederman added.

Gorham, former director of market oversight at the CFTC, told the audience that he believes the “long, national nightmare is over” into investigations of price manipulation and false trading within the energy merchant industry. Gorham, who paraphrased a statement by President Gerald Ford during the Watergate era, said the energy trading scandals, which rippled through the industry for more than two years, will “soon become a point of history.”

Gorham was appointed the first director of CFTC’s Division of Market Oversight in June 2002, a division set up in part to regulate market surveillance during the investigation of energy wash trading and price manipulation. He recently left the commission to return to the Illinois Institute of Technology’s Center for Financial Markets as director.

“There’s no doubt that you guys got picked on in the last couple of years,” Gorham told energy executives, but he added that most of the problems uncovered during the lengthy investigations have abated. In the past two years, CFTC’s enforcement division investigated more than 40 energy companies for false reporting, wash trades and market manipulation, and also investigated several individuals involved. To date, CFTC has filed 22 actions and collected more than $215 million in monetary penalties for its investigations.

With humor and seriousness, Gorham said, “everybody’s probably learned from the past,” and “I don’t expect to see a whole lot of energy cases in the future.”

However, the enforcement division at CFTC still must work to ensure market integrity, Gorham said. “The world of electronic trading is now easier to police, but there also are new ways to cheat the market.” Even with heightened scrutiny, Gorham admitted that people who report problems to the CFTC make a huge difference in combating problems. “Tips are actually often an important source of information. Some things that we just couldn’t see that others see make a big difference.”

Asked about CFTC’s possible investigation of future gas market volatility, and whether investigations could be expected if there are price spikes, Gorham said the CFTC will continue to play a “very limited role on the physical markets.” What warrants an investigation by the enforcement division, he said, is in clear cases where there appear to be “problems” with artificial pricing in the futures market. He added, “The CFTC doesn’t care about volatility [in the markets], only if there is artificial price manipulation. Volatility is part of the process.”

In keeping with its outreach efforts, FERC, CFTC and other energy regulators, along with energy executives, will be speaking at a conference at The University of Notre Dame on Oct. 28-29 called “Ethics and Changing Energy Markets: Issues for Engineers, Managers and Regulators.” More information on the conference may be found at https://energyethics2004.nd.edu/cp.html.

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