Paula Dittrick, Senior staff writer, Oil & Gas Journal
Some congressional members advocate reforming energy market regulations through pending legislation to reauthorize the US Commodity Futures Trading Commission, and at least one CFTC commissioner urges caution.
The CFTC’s authorization, which happens every five years, expired Sept. 30, 2005. The 2000 reauthorization marked the biggest amendments to the commodity futures tradition regulations-the Commodity Exchange Act (CEA)-since the CFTC was created in 1974.
Photo courtesy of NYMEX
CTFC Commissioner Sharon Brown-Hruska said efforts to impose additional regulations on energy futures and over-the-counter markets are “veiled in a call for greater transparency.” Advocates of such a move are “misguided,” she said.
Brown-Hruska
Her comments came during a keynote topic at the 4th Annual Energy Trading and Marketing Conference, sponsored by the University of Houston Global Energy Management Institute, on Jan. 26.
Noting she spoke of her opinions rather than on behalf of the CFTC, Brown-Hruska said proposed CFTC regulatory changes “will likely do little to reign in prices and could actually lead to more volatility in the markets.”
She said suggestions for heighten market surveillance and more price reporting from various types of gas markets raise “jurisdictional and resource issues that create moral hazards for market users and the CFTC.”
The CFTC regulates US commodities markets and monitors the futures markets, including a review of any dramatic price swings. She noted that the proposed changes would apply only to natural gas, mandating market reviews under specific circumstances.
Regulators and the trading industry already have improved the performance of the energy markets, Brown-Hruska said, acknowledging earlier problems about price reporting and questions about market transparency.
“We know exactly what is being traded at exactly what price, and how many contracts change hands,” Brown-Hruska said. “The level of transparency in the form of real-time dissemination of market information exceeds that required by regulation since exchanges have a strong economic interest in publishing the information to encourage business to come to the exchange.
Following the Enron Corp. collapse and subsequent investigation into energy trading practices, the CFTC filed 32 enforcement cases involving individual traders and energy companies. Some $300 million in civil penalties were imposed.
Legislation
The US House of Representatives passed its CFTC reauthorization bill, H.R. 4473, on Dec. 14, 2005. The full Senate has yet to approve its reauthorization bill, S. 1566.
The House bill charges the CFTC with detecting and preventing manipulation of natural gas markets. Provisions outline increased record-keeping requirements for large traders on the exchanges, and increased civil and criminal penalties for violations.
Rep. John Barrow, D-Ga., and Rep. Sam Graves, R-Mo., sponsored the reform measures in the bill. Barrow said the changes are intended to benefit consumers by deterring price gouging.
“Erratic spikes in the price of natural gas have been burning holes in bottom lines and budgets,” of both residential and industrial consumers, Barrow said in a news release.
Some key provisions that Barrow advocates:
• In the event of a “significant and highly unusual change” in natural gas futures prices, the CFTC must review the factors that caused the price movement to determine if manipulation or attempted manipulation occurred.
• The CFTC will set rules to require traders to maintain records of their contracts, agreements, and transactions for 5 years. These records can be requested at any time, or the CFTC can require regular reporting. This provides paper trails to follow in case of an investigation into possible manipulation.
• Increase the civil and criminal monetary fine upon conviction of manipulation or attempted manipulation to a maximum of $1 million from $500,000. Criminal incarceration would increase to a maximum of 10 years from 5 years.
Brown-Hruska
The House bill contains a section called Title II-Natural Gas Price Transparency. It calls for enhanced surveillance and reporting requirements, Brown-Hruska said.
“What this bill would do would be to formalize and expand the commission’s mandate to conduct surveillance of not just the futures and options markets, but all contracts for natural gas,” Brown-Hruska said.
Although the CFTC already conducts market surveillance, Brown-Hruska noted that the proposed reporting requirement “deals only with the natural gas markets and places a greater burden on market users than currently exists and goes beyond what applies to any other commodity.”
US consumers watched energy prices rise throughout most of 2005, resulting in high retail gasoline prices and triggering record natural gas prices on the New York Mercantile Exchange.
Subsequently, some consumers and lawmakers blame hedge funds and speculative traders. But Brown-Hruska said high oil and gas prices stem from supply-demand fundamentals rather than from the efforts of speculative traders or hedge funds.
“We haven’t uncovered any systematic problems with regard to manipulation or with speculative traders to exercise market power,” Brown-Hruska said. “We don’t have any formal investigation of speculative funds.”
Traders
J. Robert Collins Jr., president and CEO of MotherRock LP, a New York trading company, believes the free market is functioning properly.
“I run a hedge fund, and I’m never long all the time,” Collins said. “I don’t know any hedge fund that is always long. About half the hedge funds are going to be long and about half are going to be short.”
Collins was president of the New York Mercantile Exchange from 2001-04. He returned to energy trading by founding MotherRock. Before NYMEX, Collins was a senior vice-president at El Paso Merchant Energy in Houston.
Regarding energy investors in general rather than just hedge funds, Collins said he sees a trend toward people looking for more long-term investment vehicles.
“We’re in a cycle in the market,” Collins said. “I’m betting that we’re going to see massive long-term capital flows into the commodity sector.”
George D. Baker of Williams & Jenson PLLC, a lobbying firm, urged energy traders attending the UH conference to help educate Congress about the markets.
Lawmakers face “political frustration” because manufacturers and chemical companies want Congress to help curb rising energy prices, Baker said. Critics of high energy prices suggest the CFTC needs more anti-fraud and anti-manipulation rules.
“Politics born of the California energy crisis have not gone away,” Baker said. “Nor did the Energy Policy Act of 2005 satisfy the politics of spikes in natural gas and gasoline markets.”
The California electricity crisis of 2000 involved shortages and rolling blackouts by power plants. It prompted an investigation into whether energy traders manipulated California’s electric markets.
Brown-Hruska believes that traders are acting with integrity, and that market fundamentals are responsible for current energy price levels.
“Regulators and the industry can work together without resorting to heavy-handed prescriptive regulations,” Brown-Hruska said. “I don’t think that mandates for greater transparency will bring down the market price.”OGFJ
The author
Paula Dittrick [[email protected]] is senior staff writer for Oil & Gas Journal.
