Senator Ron Wyden, D-Ore., chairman of the Committee on Energy and Natural Resources, and Senator Dianne Feinstein, D-Calif., chairman of the Appropriations Subcommittee on Energy and Water Development, said Sept. 6 they are discouraged by comments from the Federal Energy Regulatory Commission on power market reforms.
FERC Chairman Jon Wellinghoff on Aug. 29 responded in a letter to the senators to an April 29 letter from them that urged the Commodity Futures Trading Commission (CFTC) and FERC to work together to provide rigorous oversight of U.S. energy markets.
Wyden said: “In the wake of the Enron scandal, Congress took steps in 2005 to strengthen the Federal Energy Regulatory Commission’s authority to police the energy markets. While FERC has already taken major enforcement actions against traders and companies that manipulated energy prices, it appears that their federal counterparts at the CFTC have been working to undermine FERC’s efforts. Chairman Wellinghoff has asked Congress to step in and I will be consulting with our colleagues on Capitol Hill about doing exactly that.”
Feinstein said: “In April we called on the CFTC and FERC to execute memorandums of understanding to ‘ensure complete integration of data and other information used to monitor and investigate natural gas and electricity market trading.’ The response letter we received from FERC indicates the MOU has not been executed and as a result FERC is not able to obtain ‘data that we believe is critical to our surveillance program to detect and deter energy market manipulation.’”
Feinstein added: “In the Dodd-Frank Act, Congress directed CFTC and FERC to cooperate in order to protect American consumers from manipulation, so it is unconscionable the CFTC would be unwilling to share this essential information with FERC. I feel very strongly about this. During the Western energy crisis, Californians learned that energy markets that lack real-time market oversight and effective regulation allow traders to rob Americans, disrupt economic activity and darken cities. The crisis cost consumers an estimated $45 billion in higher electricity rates, lost business due to blackouts, and a slowdown in economic growth. And the repercussions continue to be felt, as federal courts and FERC are still resolving multibillion dollar cases between the buyers and sellers active in the market during the crisis.”
Using authority to prevent fraud and manipulation in energy markets that the senators sponsored in 2005, FERC recently reached a $410m consent agreement with JP Morgan regarding electricity market manipulation in California and the Midwest between 2010 and 2012. In July, FERC ordered Barclays and four of its traders to pay $453m for allegedly gaming western state power markets between 2006 and 2008.
Dodd-Frank directed FERC and the CFTC to develop two memorandums of understanding (MOUs) concerning information sharing and jurisdiction, respectively.
With respect to information sharing, FERC and the CFTC continue to operate under a 2005 MOU that allows FERC to request information from the CFTC. “While that MOU provides a useful foundation, I believe that we should expand and broaden our information sharing,” Wellinghoff wrote. “Unfortunately, in developing the new information sharing MOU required by Dodd-Frank, the two agencies disagree over whether the CFTC should provide FERC with certain data that we believe is critical to our surveillance program to detect and deter energy market manipulation. This data includes the Large Trader Report, which would allow FERC staff to identify market participants with an incentive in the financial markets to manipulate the physical markets by trading at physical hubs and nodes. This ability, in turn, would improve the efficiency and precision of FERC staff’s surveillance screens.
With respect to the MOU on jurisdiction, a complication has been a disagreement over whether FERC has the authority to protect consumers from price impacts in the physical energy markets resulting from manipulation in the financial markets. FERC believes that in the Energy Policy Act of 2005, Congress authorized FERC to protect against manipulation that affects the wholesale natural gas and electric markets. In Hunter v. FERC, however, the U.S. Court of Appeals for the D.C. Circuit recently ruled that the CFTC has exclusive jurisdiction over futures, depriving FERC of authority to bring an action based on manipulation in the futures market even though the activity affected prices in the physical natural gas and electricity markets, Wellinghoff added.
“Although we believe the Hunter decision is narrow in scope, it has been interpreted broadly by some market participants to support arguments that FERC does not have the authority to bring manipulation cases for conduct that is squarely within FERC’s jurisdictional markets,” Wellinghoff added. “Accordingly, I support a legislative fix to eliminate uncertainty on this matter and ensure that FERC has the full authority needed to police manipulation of wholesale physical natural gas and electric markets. Such legislation would also assist both agencies in clearing the remaining hurdles to executing the jurisdictional MOU.”