A US Senate Energy and Natural Resources subcommittee hearing on Mar. 25 showed the steps one congressional energy commodity reform advocate would like the federal government to take.
“We are here today to examine two pieces of proposed legislation that will help prevent future energy price bubbles and market manipulation,” said Sen. Maria Cantwell (D-Wash.), who chairs the Energy Subcommittee.
The first, S. 672, which she introduced on Mar. 24, would give the Federal Energy Regulatory Commission authority to issue cease-and-desist orders against manipulative schemes in progress. The US Securities and Exchange Commission and Commodity Futures Trading Commission already have this authority, she noted.
She said the bill also would enable FERC to freeze the assets of any entity suspected of market manipulation. It would give the commission authority to temporarily change or suspend power rates for up to 30 days during an energy emergency caused by market manipulation. And it would have any potential natural gas refund accrue from the time FERC brought a case instead of when it actually proves it, an approach currently used in electricity markets, according to Cantwell.
“It will allow FERC to act more like a cop catching a robbery in progress instead of trying to piece together what happened at a crime scene after the fact,” she said.
EPACT authority
The 2005 Energy Policy Act (EPACT) gave the utility regulatory commission its initial authority to investigate and prosecute energy market manipulation, and FERC has used this authority to conduct 135 investigations resulting in 27 settlements totaling $65 million in civil penalties, Cantwell said.
She said FERC’s enforcement actions against Amaranth Advisors LLC for allegedly manipulating markets under this authority resulted in $291 million in civil penalties. “However, I understand that in the case of Amaranth, this hedge fund liquidated its assets before FERC could complete its enforcement action, leaving little left for FERC to collect: only the $291 million in penalties it originally sought. That falls quite short of the estimated $9 billion Amaranth’s shenanigans cost natural gas consumers,” she said.
FERC would welcome this additional authority, according to one of the hearing’s witnesses, Anna Cochrane, acting director of the commission’s enforcement office. “Congressional action to give the commission cease-and-desist authority for violations of the [Federal Power Act] and [Natural Gas Act] and the ability to freeze assets of entities that violate the market manipulation rules would give the commission the same enforcement tools that both the SEC and CFTC have long possessed. In addition, authority to temporarily suspend market rules on file under the FPA when necessary to protect against potential abuse of market power could be useful,” she said in her written statement.
Cantwell said that while S. 672 would give FERC necessary new tools for fighting energy market manipulation, other steps need to be taken. “We need to make the line of what is and what isn’t acceptable market behavior brighter. This will ensure markets function more efficiently and effectively,” she said.
She pointed out that when the subcommittee held a related hearing on energy markets in September, the price of gasoline was around $3.85/gal. “Now, just 6 months later, the price has dropped almost exactly in half to a national average of $1.96/gal. In these challenging economic times, every American is thankful that energy prices are closer to historical levels. But they still wonder: What happened?” Cantwell said.
Close correlation
She said another of the witnesses at the hearing, Robert F. McCullough Jr., managing partner at McCullough Research in Portland, Ore., detected a close correlation between financial and physical oil markets last year, in contrast to the US Energy Information Administration, which based its conclusions on factors influencing supply and demand.
“Thanks to his work, and several hearings this committee has held in previous years, we have learned that we don’t have the necessary data collection or focus to understand what really drives oil market prices. All we really know now is that supply-and-demand is only part of the equation,” she said.
Cantwell said the second legislation the hearing would examine would establish an office within EIA to collect and analyze information from physical and paper oil markets. This would improve EIA’s ability to predict future energy prices and help regulators police markets more effectively, she said.
In his written testimony, McCullough said no federal agency has been directed to investigate and explain last year’s extraordinary crude oil price changes despite oil’s arguably being the US economy’s most important commodity.
“The inability of the federal government to fully investigate oil price behavior in 2008 is fundamentally a data problem. Perhaps it is not a coincidence that oil is the most opaque of our nation’s energy supplies. The transparency legislation that you are discussing today is a step in the right direction because it will expand EIA’s ability to track oil inventories within the US by owner,” he said.
Difficult and expensive
Howard K. Gruenspecht, EIA’s acting administrator, testified that efforts are under way to develop data about short-term price impacts beyond supply and demand. He also warned that adopting procedures outlined in the market transparency bill could prove to be both difficult and expensive.
He said that earlier in March EIA held a workshop on the relationship between futures and financial market activity and the underlying physical market for crude oil with staff members from the CFTC, Federal Reserve Board, Government Accountability Office, and International Monetary Fund. Presentations and discussions highlighted several points, including the need for better and more accessible data on trader activity, the need to examine alternative theories of trader behavior, and the need to continue examining the role of fundamentals with better and more accurate data.
“Looking ahead based on our current understanding, EIA staff believe that effective analysis of the effects of trading on resulting prices will require not only better data, but a much stronger theoretical approach as well. Analysts within and outside EIA continue to grapple with understanding the gap between very short-term and longer-term price formation. A comprehensive theory of how trader behavior affects longer-term prices is simply not well developed. Without a well-developed theory, analysts are reduced to data mining and testing unformed hypotheses,” Gruenspecht said.
Limited availability of aggregate data which can be used to track trader strategy and behavior compounds the challenge, he continued. “In the most obvious example, the position information that the CFTC publishes is separated into categories of commercial and noncommercial traders, categories that do not map cleanly to hedgers and speculators. Without a way of identifying trades and positions taken for speculative purposes, direct analysis of the effects of speculation on price formation is not really possible,” he said.
