in the new Congress. In February, the ranking member of the Senate Energy and Natural Resources Committee, Sen. Jeff Bingaman ( D-NM), wrote separate letters to FERC and the CFTC asking about their market oversight activity and claiming the need for more transparency in trading markets and access to ICE records.
CFTC has been very active during the past five years in penalizing companies for market manipulation. Between 2002 and 2005, nearly all of the $300 million in civil monetary penalties levied on energy companies was for reporting false information to trade publications in attempted manipulation of over-the-counter markets. The CFTC collected a $4.25 million fine from Dominion Resources in September 2006 for similar allegations and continues to investigate criminal activities involving energy trading and reporting practices. Recently, high profile investigations targeted BP for alleged manipulation of propane markets and Amaranth’s potential manipulation of natural gas markets.
Et tu, NERC?
The North American Electric Reliability Corporation is subject to audit by FERC and governmental authorities in Canada. Yet even NERC has developed a Compliance Enforcement Program (CEP) to ensure compliance with its reliability standards—yet another form of regulatory oversight.
Under CEP, NERC oversees each region’s compliance review and enforcement process under two activities: compliance reviews and compliance enforcement that includes penalties and sanctions based on performance. Until EPAct, industry compliance with NERC was
mandatory but not enforceable, limiting NERC’s activities to reviews. However, the EPAct contains provisions that will make compliance with NERC standards both mandatory and enforceable. NERC is currently working to implement the reliability provisions of that law.
The fault lies not in the stars
Despite the rising tide of regulation, energy market participants can protect themselves. FERC, the CFTC and NERC all encourage comprehensive compliance programs, self-reporting, and ongoing communication with regulatory agencies, and have provided clear indications that such activities will generate good will and offset penalties assessed for violations.
What does this mean for energy commodity traders, including hedge funds that normally operate outside the scope of financial regulations? First, being immune to certain regulatory requirements of the Securities and Exchange Commission does not provide protection from other regulators who are tasked with protecting U.S. energy markets. Second, recent legislation and regulations expand regulatory scope and control over otherwise unregulated players in energy markets. Third, some of the largest energy market participants already have regulatory compliance programs in place, including investment banks that are adapting their existing compliance platforms for securities and banking services to energy. Whereas in-house compliance programs may have been optional for traders in the past, failing to have one now is becoming a competitive disadvantage. To quote the bard one last time, “The ides of March are come. Ay, Caesar; but not gone.”
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