CFTC, FERC working on price manipulation, price reporting questions

Paula Dittrick
Senior Staff Writer

HOUSTON, July 9 -- US Commodity Futures Trading Commission (CFTC) Chairman James E. Newsome met with energy commodity trading representatives and their attorneys Wednesday at the University of Houston to discuss federal regulators' examination of possible price manipulation by energy traders. Regulators also are examining the way that utilities and energy companies use price indices compiled by publications.

The UH Global Energy Management Institute sponsored the breakfast meeting, which was attended by about 40 people and was closed to the media. Newsome later met with reporters during a news conference.

"I think that Congress will make the determination of how price reporting will move forward," Newsome said. "It's important for Congress to address it." He said it was unclear whether Congress might provide price reporting standards or whether Congress would designate a federal agency to address these concerns.

Price reporting addressed
Currently traders have no regulations regarding the way in which they report—or refuse to report—transactions to publications that compile and publish energy commodity prices. Traders also are not required to disclose deals or name the participants involved in any transaction.

Questions about fraudulent reporting and possible price manipulation among energy traders arose during 2000-01, when California witnessed electric power price surges and also experienced power blackouts across the state.

Enron Corp.'s collapse in early November 2001 shocked the energy markets, resulting in an initial period of natural gas and electric power market disruption and then a period in 2002 of balance-sheet scrutiny by many energy companies as the ratings agencies assessed just how leveraged the industry had become (OGJ, Dec. 2, 2002, p. 20).

Earlier this month in Washington, DC, a group of natural gas and electric power trading companies asked federal regulations for limited liability protection regarding honest mistakes in reporting deals to publications putting out the price indices.

"Honest mistakes are not a violation of the Commodities Exchange Act," Newsome said, adding, "Certainty in the marketplace, (accurate price reporting) is very, very critical."

CFTC, FERC collaboration
The CFTC and the US Federal Regulatory Energy Commission are working closely together to address solutions to credit risk problems, Newsome said. He praised efforts being made within the energy industry to adopt new codes of ethics and best practices.

Newsome urged all energy market participants, and especially trading system operators, to continue working to restore confidence in the use of risk-management mechanisms.

"I would also like to acknowledge recent efforts made by FERC and the industry to find solutions to the current problems associated with price reporting. I believe that these market initiatives, coupled with the appropriate use of the commission's enforcement authority, are critical to restoring confidence in the marketplace," Newsome said.

The CFTC has opened numerous investigations regarding possible misconduct in the over-the-counter energy markets, and has filed several enforcement actions. During the news conference, Newsome said he could not discuss the specifics of any of these investigations.

"I am fully committed to resolving our other investigations as expeditiously as possible, so that wrongdoers are appropriately punished, and those that were not involved are exonerated," he said.

Market participants who cooperate with the CFTC are likely to see their cases resolved by yearend, Newsome said, adding that uncooperative participants could see their cases drag on into next spring.

Contact Paula Dittrick at [email protected].