Institutional Investor's Alpha Magazine - February 2008 - (Page 36)

Energy Trading the collapse of Enron Corp. later that year. Natural gas is probably the only major futures market in which the FERC can claim a spillover from its central mission — energy regulation. Though the Nymex has an electricity futures contract, it is not a very robust market and doesn’t benchmark prices in the same way the natural-gas contract does. Kelliher contends that Amaranth’s spectacular foray into natural-gas futures did spill over, to the detriment of consumers. For the FERC chairman and other witnesses summoned to the energy subcommittee hearing — including a heating oil vendor from Vermont and a representative of municipal gas distribution companies — the impact of Amaranth’s trading was clear: Consumers ended up paying far more for energy than supply and demand would have dictated. (The ﬁgure most frequently bandied about was $9 billion for this premium as a result of “excessive speculation” by Amaranth.) The FERC proceeding against Amaranth — an administrative action that Amaranth is challenging in the U.S. — JOSEPH KELLIHER Court of Appeals for the District of CoCHAIRMAN, FERC lumbia Circuit — is seeking a $291 million ﬁne. To Kelliher, the facts are clear: Amaranth manipulated natural-gas prices in a way that caused harm to consumers, just the sort of infraction the FERC is supposed to prevent — or, at least, punish after the fact. The argument has a political element, but it does not break down along party lines. In Washington, in fact, it seems like nothing brings partisan rivals together better than a good turf war. While Barton, a Republican, was responsible for getting the Energy Policy Act passed, current energy committee chairman John Dingell, a Michigan Democrat, has been more than willing to take up the cudgel in defense of the FERC. At the December hearing that featured Lukken in the hot seat, Dingell not only expressed disappointment at the CFTC’s resistance but also raised doubts about its vigilance. “I understand that the FERC has made considerable progress over the past two years in improving its marketsurveillance capabilities and exercising its enforcement authorities,” Dingell said. “On the other hand, there are indications that the CFTC may have been more enthusiastic in granting exemptions from regulation than it has been in rooting out possible energy market manipulation.” The exemptions Dingell seemed to be talking about are allowed under the Commodity Futures Modernization Act of 2000, which puts trading in exempt commercial markets beyond the purview of the CFTC’s surveillance. This loosening of regulation is generally cited as one of the main reasons behind the success of futures trading in recent years: the pace of innovation, the explosive volume of trading and the evolution of futures into an asset class for a wider range of investors. When Lukken had testified in October before the House agriculture subcommittee that oversees the CFTC, he had praised exempt commercial markets as “incubators for new concepts.” In response to the Amaranth experience, however, he also said in October that changes to the Commodity Exchange Act were necessary for the commission to detect and prevent manipulation in such markets. Lukken emphasized that the additional oversight should affect only those contracts that mirror the benchmark debt capital market contracts, stressing that “changes should not result in stiﬂing the innovation and other beneﬁts” of exempt commercial markets. The CFTC complaint against Amaranth Advisors, ﬁ led in U.S. District Court in Manhattan last July, alleges that the hedge fund undertook a “manipulative scheme” to drive down the price of the Nymex naturalgas contract during the last half hour of trading before the contracts expired — the “closing range” — by selling contracts it had amassed for just that purpose. The intent of the manipulation, the complaint states, was to beneﬁt short positions in “look-alike swaps” Amaranth had purchased on the IntercontinentalExchange, the Atlanta-based operator of exchanges and trading platforms, which — as an exempt commercial market — is outside the CFTC’s surveillance. The exchange’s contracts mirror the Nymex contracts and use the Nymex settlement price to settle. Part of what the lawmakers were inveighing against in December was that the CFTC had been completely in the dark about what Amaranth, which denies any wrongdoing, had been up to simply because the agency was not allowed to monitor trading at the IntercontinentalExchange. Lukken’s most cogent answer — and his biggest concession, perhaps — is contained in his recommendations for amending the Commodity Exchange Act so that his agency has greater authority over certain exempt commercial markets. Technicalities aside, the ﬁght promises to remain heated, in part because it seems to have such a personal element to it — for the lawmakers, for Kelliher, for Lukken and for their colleagues on the two commissions, as evinced in a recent speech by Bart Chilton, a CFTC commissioner. “The problem arose when FERC decided to take their new act for a little jurisdictional test-drive in the Amaranth case,” Chilton said during an appearance last year at an industry conference on natural gas. “But they took their act on the road too soon, I think, and it has resulted in a rendition of dueling government banjos. And that is very disappointing. It is the type of government that I have worked in for over 20 years and try to avoid.” Former MFA president Gaine says he is conﬁdent the CFTC will maintain its exclusive jurisdiction, but, of course, it remains an issue for the courts to decide. And though the ﬁght promises to be a long one, Lukken — the runner-turned-marathoner — says he is more than ready to go the distance. “It’s the single biggest grant of regulatory power since the New Deal.” 36 • INSTITUTIONAL INVESTOR’S ALPHA • FEBRUARY 2008

Table of Contents Feed for the Digital Edition of Institutional Investor's Alpha Magazine - February 2008

Institutional Investor's Alpha Magazine - February 2008 Contents Letter from the Editor Longs & Shorts Pension Corner: Alternative Perspective The Good Guys: A Simple Plan Cover Story: Energy and Commodities: Fueling Opportunity Regulation: Energy Trading: The Brawl on the Hill Interview: Master of Values Regulation: Hedge Fund Registration: Way Out West Research Center: Top Hedge Fund Analysts Alpha Bytes: Rocket Man Unhedged: Commentary: Structured for Success

Institutional Investor's Alpha Magazine - February 2008

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