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48–895 PDF 2009

S. HRG. 111–17 

ENERGY MARKET TRANSPARENCY 

AND REGULATION 

HEARING 

BEFORE THE

SUBCOMMITTEE ON ENERGY 

OF THE

COMMITTEE ON 

ENERGY AND NATURAL RESOURCES 

UNITED STATES SENATE 

ONE HUNDRED ELEVENTH CONGRESS 

FIRST SESSION 

TO

RECEIVE TESTIMONY ON DRAFT LEGISLATION TO IMPROVE ENERGY MARKET

TRANSPARENCY AND REGULATION

MARCH 25, 2009 

( 

Printed for the use of the 

Committee on Energy and Natural Resources 
(II) 

COMMITTEE ON ENERGY AND NATURAL RESOURCES 

JEFF BINGAMAN, New Mexico, Chairman 

BYRON L. DORGAN, North Dakota 

RON WYDEN, Oregon 

TIM JOHNSON, South Dakota 

MARY L. LANDRIEU, Louisiana 

MARIA CANTWELL, Washington 

ROBERT MENENDEZ, New Jersey 

BLANCHE L. LINCOLN, Arkansas 

BERNARD SANDERS, Vermont 

EVAN BAYH, Indiana 

DEBBIE STABENOW, Michigan 

MARK UDALL, Colorado 

JEANNE SHAHEEN, New Hampshire 

LISA MURKOWSKI, Alaska 

RICHARD BURR, North Carolina 

JOHN BARRASSO, Wyoming 

SAM BROWNBACK, Kansas 

JAMES E. RISCH, Idaho 

JOHN MCCAIN, Arizona 

ROBERT F. BENNETT, Utah 

JIM BUNNING, Kentucky 

JEFF SESSIONS, Alabama 

BOB CORKER, Tennessee 

ROBERT M. SIMON, Staff Director 

SAM E. FOWLER, Chief Counsel 

MCKIE CAMPBELL, Republican Staff Director 

KAREN K. BILLUPS, Republican Chief Counsel 

SUBCOMMITTEE ON ENERGY

MARIA CANTWELL, Washington, Chairman 

BYRON L. DORGAN, North Dakota 

RON WYDEN, Oregon 

MARY L. LANDRIEU, Louisiana 

ROBERT MENENDEZ, New Jersey 

BERNARD SANDERS, Vermont 

EVAN BAYH, Indiana 

DEBBIE STABENOW, Michigan 

MARK UDALL, Colorado 

JEANNE SHAHEEN, New Hampshire 

JAMES E. RISCH, Idaho 

RICHARD BURR, North Carolina 

JOHN BARRASSO, Wyoming 

SAM BROWNBACK, Kansas 

JROBERT F. BENNETT, Utah 

JIM BUNNING, Kentucky 

JEFF SESSIONS, Alabama 

BOB CORKER, Tennesse 

JEFF BINGAMAN and LISA MURKOWSKI are Ex Officio Members of the Subcommittee 
(III) 

C O N T E N T S 

STATEMENTS 

Page 

Cantwell, Hon. Maria, U.S. Senator from Washington ........................................ 1 

Cochrane, Anna, Acting Director, Office of Enforcement, Federal Energy Regulatory Commission ............................................................................................. 8 

Gruenspecht, Howard, Acting Administrator, Energy Information Administration ........................................................................................................................ 3 

Johnson, Hon. Tim, U.S. Senator From South Dakota ........................................ 3 

McCullough, Robert F., Jr., Managing Partner, McCullough Research, Portland, OR ................................................................................................................ 14 

Ramm, Gerry, Senior Executive, Inland Oil Company, Ephrata, WA, on Behalf of the Petroleum Marketers Association of America ................................. 18 

Risch, Hon. James E., U.S. Senator From Idaho .................................................. 2 

APPENDIXES 

APPENDIX I 

Responses to additional questions .......................................................................... 33 

APPENDIX II 

Additional material submitted for the record ........................................................ 41 

(1) 

ENERGY MARKET TRANSPARENCY 

AND REGULATION 

WEDNESDAY, MARCH 25, 2009 

U.S. SENATE, SUBCOMMITTEE ON ENERGY, COMMITTEE ON ENERGY AND NATURAL RESOURCES, Washington, DC. 

The committee met, pursuant to notice, at 2:08 p.m. in room SD– 

366, Dirksen Senate Office Building, Hon. Senator Maria Cantwell 

presiding. 

OPENING STATEMENT OF HON. MARIA CANTWELL, U.S. 

SENATOR FROM WASHINGTON 

Senator CANTWELL. This hearing will come to order. I want to 

thank Senator Risch for being here today and my colleague Senator 

Johnson. I hope that this will be the first of many subcommittee 

hearings that we have working together in trying to make progress 

on our Nation’s energy challenges. 

We’re here today to examine two pieces of proposed legislation 

that will help prevent future energy price bubbles and market manipulation. We have worked with many stakeholders in developing 

these bills and have received a lot of positive feedback. 

For instance we’ve heard from the Industrial Energy Consumers 

of America whose membership are significant consumers of natural 

gas and from every major energy intensive manufacturing sector. 

We’ve also received positive feedback from other organizations that 

we’ll make part of the record. 

The first piece of legislation which was S. 672 adds real teeth for 

FERC’s anti-manipulation authority. It provides FERC with the 

tools to stop bad actors before they wreak havoc on energy consumers and the economy. One of the lessons we learned from the 

Western Energy Crisis in 2000 and 2001. 

The committee, then led by Chairman Domenici, gave the Federal Energy Regulatory Commission important anti-manipulation 

authority in the Energy Policy Act of 2005. To date FERC has used 

this new authority to conduct a 135 investigations resulting in 27 

settlements totaling over almost $65 million in civil penalties. One 

example of FERC’s work is the enforcement actions the Commission took for alleged market manipulation against AMARANTH. 

These actions yielded 291 million in civil penalties along with 

167 in penalties from energy trading partners. However I understand that in this case of AMARANTH the hedge fund liquidated 

its assets before FERC could complete its enforcement action leaving little left for FERC to collect on its penalties it originally 
2 

sought. That falls quite short of what an estimated nine billion of 

AMARANTH shenanigans really cost natural gas consumers. 

AMARANTH is a notable example of why we need to strengthen 

and clarify FERC’s enforcement powers to protect consumers and 

deter manipulation. S. 672 would empower FERC with cease and 

desist authority to stop manipulative schemes currently in 

progress. The Securities and Exchange Commission and the Commodities Futures Trading Commission already have this authority. 

It would allow FERC to act more like a cop stopping the robbery 

in progress instead of trying to piece together what happened at a 

crime scene after the fact. 

Second, the bill empowers FERC to freeze assets of any entity 

that is suspected of market manipulation and creating a bright line 

on deterrent so that bad actors know if they attempt to manipulate 

the market there will be a penalty. 

Finally in order to give more effectively recover unjust and unreasonable rates the law would allow a refund to occur from the 

time that FERC brings the case. Currently FERC can only recover 

damages to the time that they actually prove the case. 

We’re also going to consider important legislation that would increase transparency in data collection in oil markets. I know that 

some of you are here specifically to testify on that. Mr. McCullough 

as you have testified in the past before this committee. 

Mr. McCullough was one of the many experts that released independent reports that helped show a bright line in these oil markets. These reports demonstrated the tight correlation between 

physical and financial oil markets. Thanks to several of the hearings this committee has had in previous years, we’ve learned that 

we don’t have all the necessary data collection or the focus to understand what has really been going on in energy markets. 

To that end the committee has drafted legislation that would establish an office within the Energy Information Administration to 

collect and analyze information from both the physical and paper 

markets. It will improve their ability to predict future energy 

prices which will help businesses and consumers plan for the future. It will also empower regulators to more effectively police the 

markets. 

So I look forward to hearing the testimony of the witnesses 

today. Now I’d like to turn it over to the ranking member, Senator 

Risch for his opening statement. 

STATEMENT OF HON. JAMES E. RISCH, U.S. SENATOR 

FROM IDAHO 

Senator RISCH. Thank you very much, Madame Chairman. We 

all know that free markets and free people have delivered the most 

successful and fluent society that’s ever existed on the face of this 

Earth. We also know that free markets only work when they’re free 

from monopolies and from market manipulation. 

So in that context I think we need to examine all these things 

and make sure the balance stays in place that indeed we have free 

markets. But at the same time that we don’t have people that are 

involved in market manipulation. 

Thank you, Madame Chair. 

Senator CANTWELL. Thank you. 
3 

Senator Johnson. 

STATEMENT OF HON. TIM JOHNSON, U.S. SENATOR FROM 

SOUTH DAKOTA 

Senator JOHNSON. Thank you, Senator Cantwell for holding this 

important hearing to gather information in how to improve energy 

market transparency in regulation. 

Senator CANTWELL. Thank you, Senator Johnson. 

Senator Shaheen. 

Senator SHAHEEN. I don’t have a statement. 

Senator CANTWELL. We’ll turn to our witnesses. I want to welcome them. 

Dr. Howard Gruenspecht, is that right? Ok. Acting Administrator 

of the Energy Information Agency. 

Anna Cochrane, Acting Director of the Office of Enforcement for 

the Federal Energy Regulatory Commission. 

Robert McCullough, Managing Partner at McCullough Research. 

Finally, Gerry, no, sorry, Gerry Ramm, representing the Petroleum Marketers Association of America. 

Thank you all for being here and for your testimony today. So 

we’re going to start with you, Dr. Gruenspecht. I just will say for 

my colleagues I know there’s a possibility of a vote coming up 

sometime in the next hour. 

So we’ll just have to work through that. So we ask in advance 

the indulgence of those testifying. 

So, Dr. Gruenspecht. 

STATEMENT OF HOWARD GRUENSPECHT, ACTING 

ADMINISTRATOR, ENERGY INFORMATION ADMINISTRATION 

Mr. GRUENSPECHT. Madame Chairman and members of the committee, I appreciate the opportunity to appear before you today to 

discuss draft legislation entitled the Energy Market Transparency 

Act of 2009. The Energy Information Administration is the independent statistical and analytical agency within the Department of 

Energy. We do not promote, formulate or take positions on policy 

issues, and our views should not be construed as representing 

those of the Department of Energy or the Administration. 

Since the proposed legislation aims to improve our understanding of the effects of interactions between energy and financial 

markets, I’ll start by describing some of the efforts that we’re already undertaking in this area. Earlier this month, EIA held a 

workshop on the relationships between futures and financial market activity and the underlying physical market for crude oil. Participants included staff from Federal agencies and experts from the 

academic community. The presentations and the discussions highlighted several points including the need for better and more accessible data on trader activity in futures markets, the importance of 

examining alternative theories of trader behavior, and the need to 

continue examining the role of supply and demand fundamentals 

using better and more accurate data. EIA staff also presented its 

research into the use of implied volatilities from the options markets as a measure of uncertainty in short-term price forecasts. Following further review by the Committee on Energy Statistics of the 

American Statistical Association, we plan to report these calcula-
4 

tions in each edition of our monthly, short term outlook to provide 

additional context for our analysis. We plan to continue our dialog 

on this issue at a session on financial markets and short-term energy prices at the EIA annual energy conference in early April. 

Based on our current knowledge, EIA staff believes that improved insight into the relationships between trader behavior and 

fundamentals in forming prices will require building insight into 

the full process of price formation, from developing theory through 

the analysis of pertinent data. Such data might in some cases be 

purchased from commercial sources, but additional data collection, 

whether by EIA or other agencies, could also be warranted. A 

major investment of resources and time is likely to be required, 

and the difficulties are such that conclusive results are unlikely to 

be quickly obtained. 

Let me now turn to our specific comments on the March 18 draft 

of the Energy Market Transparency Act of 2009, focusing on three 

main issues: First, the feasibility of the specific data collection 

called for in the draft legislation; second, providing a broader perspective on other potentially relevant data sources; and finally, 

data confidentiality. 

Our initial assessment is that the data collections proposed in 

subsection (n) could be both difficult and expensive. This suggests 

a need to consider whether other, more readily obtainable, data 

might provide comparable or even better insights into energy markets. In part, the answer may depend on an even more basic question—the intended uses of the data which are not described in the 

legislation. 

A key issue with subsection (n) is the feasibility of the collection. 

EIA currently surveys crude and product stocks at petroleum terminals, for instance, but those stocks are held on a custody basis, 

and terminal operators may not know the identity of the owners. 

With the assistance of other agencies, EIA may be able to identify 

and survey at least a subset of owners, who may include entities 

other than the refineries, pipelines and terminal operators—who 

usually report to EIA. However, such an activity should be recognized as involving far more than simply adding questions about 

ownership to surveys that are currently completed by those having 

custody of inventories. We suggest that a limited threshold of respondents be used rather that owners of ‘‘all’’ oil and natural gas 

inventories. 

Turning to the role of other Federal agencies, the CFTC and the 

Internal Revenue Service, among others, may already have some of 

the desired information or have lists of entities that would constitute a portion of those that would need to be surveyed in order 

to collect it. For example, the IRS already collects some data by 

ownership, such as end-of-month product inventory at petroleum 

terminals, for tax purposes. Ownership matters there. 

The IRS has also established a Joint Operations Committee to 

enable State and Federal motor fuel tax compliance activities, and 

that committee has in turn established a national data center that 

provides a technical foundation for a common motor fuel data repository. 

Given our lack of involvement with holders of energy futures contracts or energy commodity swaps to date, we’re inclined to defer 
5 

to the CFTC regarding those types of entities. We agree therefore 

with the language in subsection (n) stating that the plan should be 

developed in consultation with other Federal agencies. However, for 

reasons discussed in my written testimony, the proposed timelines 

on page two of the legislation don’t seem realistic. 

Turning to confidentiality of proprietary information, the draft 

legislation applies Section 12(f) of the Federal Energy Administration Act of 1974. At times respondent-level data collected under 

this authority has been the subject of Freedom of Information Act 

requests including requests from private parties that anticipate opportunities for using the survey data for private gain. An alternative approach would be to make these data collections subject to 

the Confidential Information Protection and Statistical Efficiency 

Act. Ultimately the choice of which data collection authority to cite 

will depend on the intended uses of the data, how sensitive the reported information is to respondents, and the purposes for which 

the information may be shared with other agencies. These considerations are not specified in the draft legislation. 

Turning finally to resources, any new mandated data collections 

would be handled by existing staff that would need to be pulled 

from previously planned activities pending the availability of additional staff and resources. This could lead to delays in current 

high-priority projects such as integrating ethanol into our weekly 

data petroleum program, collecting custody-based petroleum data 

at the individual terminal level rather than across an entire Petroleum Administration for Defense District, and addressing other existing data quality issues. 

This concludes my statement, Madame Chairman. I’d be pleased 

to answer any questions you or the other Members may have. 

[The prepared statement of Mr. Gruenspecht follows:] 

PREPARED STATEMENT OF HOWARD GRUENSPECHT, ACTING ADMINISTRATOR, ENERGY

INFORMATION ADMINISTRATION

Madam Chairman and Members of the Committee, I appreciate the opportunity 

to appear before you today to discuss draft legislation entitled the ‘‘Energy Market 

Transparency Act of 2009,’’ received from Committee staff on March 18. 

The Energy Information Administration (EIA) is the independent statistical and 

analytical agency within the Department of Energy that produces objective, timely, 

and relevant data, projections, and analyses to assist policymakers, help markets 

function efficiently, and inform the public. We do not promote, formulate, or take 

positions on policy issues, and our views should not be construed as representing 

those of the Department of Energy or the Administration. 

Because concerns regarding volatility in oil prices and the factors that have contributed to it appear to be the motivation for the proposed legislation, I will start 

by briefly describing some recent and ongoing activities that EIA has undertaken 

to improve its understanding of the effects of interactions between energy and financial markets. I will then turn to specific comments on the draft legislation. 

Earlier this month, EIA held a workshop on the relationships between futures 

and financial market activity and the underlying physical market for crude oil. Participants included staff from the Commodity Futures Trading Commission (CFTC), 

the Federal Reserve Board, the Government Accountability Office, and the International Monetary Fund, as well as staff from EIA, other Department of Energy offices and experts from the academic community. Topics discussed included: Can information obtained from futures and financial over-the-counter markets enhance the 

understanding of the underlying physical markets? Can activity in futures and financial over-the-counter markets cause short-term price fluctuations in spot markets, even in the absence of change in underlying oil market fundamentals? What 

kind of models and data are most appropriate to fully understand the relationships 

between financial and physical markets? The presentations and resultant discussion 

highlighted several points, including the following: there is a need for better and 
6 

more accessible data on trader activity in the futures markets; it is important to 

examine alternative theories of trader behavior; and there is a need to continue examining the role of fundamentals using better and more accurate data. 

We know that members of this Committee, other EIA customers, and EIA analysts have considerable interest in quantifying the uncertainty surrounding shortterm price forecasts. At the workshop, members of EIA’s Short-Term Energy Outlook (STEO) team presented research into the use of implied volatilities from the 

New York Mercantile Exchange options markets as a measure of uncertainly in 

short-term price forecasts. Group discussion of this research coalesced around a particular method for calculating probability distributions for future oil prices using implied volatilities reflected in prevailing prices of options contracts. The American 

Statistical Association’s Committee on Energy Statistics is scheduled to provide a 

further review of this method at its April meeting. By mid-year, we intend to report 

these calculations in each edition of the STEO to provide additional context for our 

own analysis. 

EIA has also included a session on financial markets and short-term energy prices 

as a part of its annual energy conference, scheduled for April 7-8, 2009. We hope 

that the discussion among the panelists will further inform our research agenda and 

advance the ongoing dialogue in the broader community. 

Looking ahead based on our current understanding, EIA staff believe that effective analysis of the effects of trading on resulting prices will require not only better 

data, but a much stronger theoretical approach as well. Analysts within and outside 

EIA continue to grapple with understanding the gap between very short-term and 

longer-term price formation. A comprehensive theory of how trader behavior affects 

longer-term prices is simply not well developed and without a well-developed theory, 

analysts are reduced to data mining and testing unformed hypotheses. 

The limited availability of aggregate data that can be used to track trader strategy and behavior compounds the challenge faced by analysts In the most obvious 

example, the position information that the CFTC publishes is separated into categories of commercial and non-commercial traders; categories that do not map cleanly to hedgers and speculators. Without a way of identifying trades and positions 

taken for speculative purposes, direct analysis of the effects of speculation on price 

formation is not really possible. Since the EIA and CFTC staffs maintain a cooperative relationship, we know the CFTC has been struggling with this problem, and 

may have made some advances, but those CFTC data have not been made public. 

EIA staff believe that an improved understanding of the relationships between 

trader behavior and fundamentals in forming prices will require the gathering and 

deployment of strong analytic capabilities focused on building insight into the full 

process of price formation, from developing theory through the analysis of pertinent 

data. Such data, assuming they exist, might in some cases be purchased from commercial sources. In other cases, additional data collection, whether by EIA or other 

agencies, may also be warranted. A major investment of resources and time is likely 

to be required, and the difficulties are of sufficient magnitude that conclusive results are unlikely to be quickly obtained. 

COMMENTS ON THE DRAFT ENERGY MARKET TRANSPARENCY ACT OF 2009

As a Federal statistical agency, EIA strongly supports data transparency as a 

means of achieving its mission and agrees that additional data on physical and financial oil and natural gas markets would be helpful in increasing understanding 

of oil price discovery. EIA’s comments, which follow, focus on three main issues: 

first, the feasibility of the specific data collection called for in the draft legislation; 

second, providing a broader perspective on other potentially relevant data sources; 

and, finally, data confidentiality. 

Comments on Section 3 

General.—EIA’s initial assessment is that the data collection efforts proposed in 

subsections (n) and (o) could be both difficult and expensive. This does not, in itself, 

mean that they are inappropriate, but it does suggest the need to consider whether 

other, more readily obtainable, data might provide comparable or even better insights into energy markets. In part, the answer may depend on an even more basic 

question—the intended uses of the data, which are not described in the draft legislation. These questions are important to consider, and so are intertwined with EIA’s 

more specific comments that follow. 

Ownership of energy commodities.—A key issue with subsection (n) is the feasibility of the proposed data collection, i.e., how to determine who are the owners of 

‘‘all’’ inventories and therefore who should report to EIA. EIA currently surveys 

stocks at petroleum terminals, for instance, but those stocks are held on a custody 

basis, not an ownership one. Terminal operators may not know who the owners of 
7 

1The U.S. Fuel Distribution System is an extensive infrastructure that connects buyers and 

sellers of fuel within the financial market. The physical infrastructure encompasses a vast array 

of capital, including drilling rigs, pipelines, ports, tankers, barges, trucks, crude oil storage facilities, refineries, product terminals, and retail storage tanks and pumps which are used to refine, produce, and distribute fuel to the consumer. 

the stocks are. These operators would know who brought the product to the terminal and who leases the tanks, but the product could have been subsequently 

sold—something that can occur daily—and still remain in the same tanks. Ownership would also be difficult to identify in the cases of minority position owners and 

joint ventures. The universe of actual owners (i.e., intended survey respondents) is 

unknown and perhaps unknowable, particularly outside of the physical market participants EIA usually deals with such as refiners, pipelines, and terminal operators. 

With the assistance of other agencies, EIA might be able to identify and survey at 

least a subset of owners, but such an activity should be recognized as involving far 

more difficulty than simply adding questions about ownership to the surveys that 

are currently completed by those having custody of inventories. 

The universe of owners could include those entities covered by subsection (n)(2) 

as well, i.e., ‘‘any person holding or controlling energy futures contracts or energy 

commodity swaps. . . .’’. Some of the issues prompted by trying to identify the owners of petroleum inventories apply to natural gas inventories as well. We suggest 

that a limited threshold of respondents be used, rather than owners of ‘‘all’’ oil and 

natural gas inventories called for in proposed subsection (n)(1). The language in subsection (n)(1)(A) that calls for information collection ‘‘to the maximum extent practicable’’ is reflective of our concern but the inclusion of ‘‘all’’ is problematic. 

Other Federal agencies.—Federal agencies such as the CFTC and the Internal 

Revenue Service (IRS) may already have some of the desired information and/or 

have lists of entities that would constitute a portion of the entities that would need 

to be surveyed in order to collect ownership and transaction information. 

In terms of existing data sources, EIA is aware that the IRS already collects some 

data by ownership, such as end-of-month product inventory at petroleum terminals, 

for tax purposes. It is not clear, however, if the ownership definition IRS uses for 

tax collection would be useful for increased understanding of trading-price relationships. 

It should also be noted that the IRS has established a Joint Operations Committee (JOC), a partnership of dedicated Federal and state fuel tax administration 

resources, to enable state and Federal motor fuel tax compliance activities, foster 

interagency and multi-national cooperation, and to provide strategic analyses of domestic and foreign motor fuel distribution trends and patterns. The JOC works toward those ends through the innovative use of technology and other means to collect, analyze and share information, and conduct joint compliance initiatives. To 

support analysis related to its missions, the JOC has established a National Data 

Center consisting of a technical foundation for a common motor fuel data repository. 

More specifically, the JOC can incrementally identify, acquire and integrate State, 

Federal and other commercial third-party data sources that bear on the national 

fuel inventory. The compiled data can be used to track and trend fuel movement 

within the nation’s Fuel Distribution System1 for the purpose of developing improved baselines for measuring fuel supply, fuel distribution and fuel consumption. 

Since EIA has had no prior involvement with holders of energy futures contracts 

or energy commodity swaps, we are inclined to defer to the CFTC regarding those 

types of entities. We agree, therefore, that the language in subsections (n)(1) and 

(n)(2) that states that the plan should be developed ‘‘in consultation with other Federal agencies (as necessary)’’ is the appropriate approach to take. It is quite likely 

that an interagency task force would be needed to develop and implement the plan 

for the proposed collections, considering the scope of the proposal. 

Timelines.—The level of effort needed to develop and implement the plan envisioned in the draft legislation would be quite substantial, and is likely to require 

a great deal of EIA and interagency work It also could well involve the modification 

of existing surveys or the creation of new ones, which are time consuming processes 

in their own right and include both an initial 60-day public comment period as well 

as a lengthy review by the Office of Management and Budget that provides an additional opportunity for public comment. Thus, the deadlines on page 2 of the legislation do not appear to be realistic and would need to be extended. It is difficult to 

specify alternative time periods at this early stage of consideration; one alternative 

would be to say ‘‘as soon as practicable after the date of enactment. . . .’’ and take 

the same approach for the time period after the date on which notice is to be provided. 
8 

Protection of Proprietary Information.—The legislation applies section 12(f) of the 

Federal Energy Administration Act of 1974 to information collected under subsection (n). This statute authorizes EIA to share company-level data with all Federal agencies as well as with the Congress and the courts. At times, respondentlevel data collected under this authority has been the subject of Freedom of Information Act (FOIA) requests by private, non-governmental parties. This includes requests from private organizations that anticipate opportunities for utilizing EIA respondent-level data for private gains. An alternative approach would be to make 

these data collections subject to the Confidential Information Protection and Statistical Efficiency Act (CIPSEA) which requires additional safeguards for protecting 

the identity of reported information and for sharing individual respondent (i.e., company-specific) information. For data collected under CIPSEA, sharing company-level 

data is restricted to statistical use only and cannot be released for non-statistical, 

including regulatory or FOIA, purposes. Ultimately, the choice of which data collection authority to cite will depend on the level of protection that is required, the intended use of the data, how sensitive the reported information is to respondents in 

identifiable form, and the purposes for which the information may be shared with 

other agencies. These considerations are not specified in the draft legislation. 

We cannot speak to the detailed information protection policies and statutes in 

place in other Federal agencies, including CFTC and IRS, which generally are more 

stringent than EIA’s and do not require an affirmative obligation to share data with 

other Federal agencies. They would, of course, also have to be taken into account 

in the development and implementation of the proposed information collection plan, 

providing yet another reason for extending the deadlines mentioned previously. 

Funding.—Though no cost estimate could be provided until the details of the plan 

required under the draft legislation are finalized, the proposed section 3 activities 

would likely be both time-consuming and expensive. It should also be noted that, 

pending the availability of additional staff and resources, these activities would be 

handled by existing staff that would need to be pulled from their previously planned 

activities, which could lead to delays in current high-priority projects such as integrating ethanol into our weekly petroleum data program, collecting custody-based 

petroleum data at the individual terminal level rather than across an entire Petroleum Administration for Defense District, and addressing other existing data quality 

issues. 

Financial Markets Analysis Office.—Proposed subsection (o) creates a Financial 

Markets Analysis Office within EIA, the director of which reports directly to the Administrator. EIA would prefer to have the latitude to restructure EIA as necessary, 

rather than have a new office designated by statute. Expertise in energy markets 

is located across several EIA offices, the staff of which work together across office 

lines to produce forecasts and analyses. Cross-office teams are created as needed, 

including for work on financial markets. 

Comments on Section 4 

Section 4 of the draft legislation establishes an interagency Working Group on Energy Markets, the membership of which is composed of the Secretary of Energy (who 

serves as chairperson), the Secretary of the Treasury, the heads of four independent 

agencies (CFTC, Federal Energy Regulatory Commission, Federal Trade Commission, and the Securities and Exchange Commission), and the EIA Administrator. 

The Working Group is tasked with several purposes and functions, one of which is 

to make recommendations to the President and the Congress regarding laws and 

regulations that may be needed to ‘‘prevent excessive speculation in energy commodity markets. . . .’’ While we agree that EIA could make a valuable contribution 

in advancing many of the identified purposes and functions, EIA’s role as a policyneutral statistical agency may lead a future EIA Administrator to avoid taking an 

active role in making any recommendations on laws and regulations. 

This concludes my prepared testimony, Madam Chairman. I would be pleased to 

answer any questions you and the other Members may have. 

Senator CANTWELL. Thank you. 

Ms. Cochrane, thank you for being here. 

STATEMENT OF ANNA COCHRANE, ACTING DIRECTOR, OFFICE 

OF ENFORCEMENT, FEDERAL ENERGY REGULATORY COMMISSION 

Ms. COCHRANE. I’m sorry. Madame Chairman and members of 

the subcommittee, thank you for the opportunity to appear before 
9 

you today. I note that I appear before you as a staff witness and 

do not speak for individual members of the Commission. 

Transparency in our Nation’s electric and natural gas energy 

markets is critically important to the Commission in fulfilling its 

statutory responsibilities to ensure just and reasonable wholesale 

rates for electric and natural gas customers. The subcommittee’s 

review of this important topic is a timely one. The commission has 

undertaken a number of initiatives to increase transparency in the 

Nation’s energy markets, including some that predate the Energy 

Policy Act of 2005 and some based on the authority Congress 

granted to it in EPACT 2005. 

I have described these initiatives in more detail in my written 

testimony, but would like to highlight some of the most significant 

initiatives. To make electric transmission service more transparent 

the Commission issued regulations in 1996 requiring public utility 

transmission providers to implement an open access, same time information system or OASIS to share information about the electric 

transmission system with all users of the system at the same time. 

OASIS is an important tool to ensure that there is no undue discrimination in the provision of transmission services in interstate 

commerce and to help prevent the exercise of market power. 

In 2001, the Commission issued a final rule that requires all 

public utilities including power marketers to file an electric quarterly report summarizing data about their currently effective contracts and wholesale power sales made during each calendar quarter including transaction specific information. This publicly available data is particularly useful for monitoring markets for indications that market power may be being exercised and provides an 

insight into pricing trends throughout the electric industry. 

In 2003, the Commission issued a policy statement on electric 

and natural gas price indexes that explained the Commission’s expectations of natural gas and electricity price index developers and 

the companies that report transaction data to them. The Commission has recently undertaken two initiatives pursuant to the new 

transparency authority which Congress granted the Commission in 

EPACT 2005. These initiatives taken together will provide the 

Commission with a more complete picture of the wholesale natural 

gas market and the supply and demand fundamentals underlying 

that market. 

The Commission’s oversight staff in the Office of Enforcement 

conducts daily oversight and monitoring of energy markets as well 

as research and analysis facilitated by customized reports prepared 

from the information available to us. If we discover a market 

anomaly we analyze the situation further to determine if it can be 

explained by market fundamentals. If not, we refer the matter to 

our investigation staff. 

Staff also works closely with the RTO and ISO market monitoring units. The Commission recently enhanced the independence 

of the market monitors, extended their scope of reporting and required the RTOs and ISOs to provide the market monitors with 

adequate resources and full access to market information. Much of 

our oversight staff’s research and analysis is shared with the public 

through website postings, regional monthly calls with State regu-
10 

latory officials and presentations at open Commission meetings and 

other public conferences. 

Transparency in energy markets is important to ensure just and 

reasonable rates under the FPA and NGA and to protect customers. Much has been done by the Commission to increase transparency in wholesale electric and natural gas markets especially 

over the last few years. The Commission will continue to be vigilant in this area. 

The Commission’s new market manipulation authority granted 

by Congress in EPACT 2005 also helps us protect customers. A few 

additional tools could help the Commission better ensure that customers are protected. For example, congressional action to give the 

Commission cease and desist authorities for violations of the FPA 

and NGA. The ability to freeze assets of entities that violate the 

market manipulation rules would give the Commission the same 

enforcement tools that both the SEC and CFTC have long possessed. 

In addition authority to temporarily suspend market rules on file 

under the FPA when necessary to protect against potential abuse 

of market power could also be useful. If Congress determined that 

it was appropriate to provide the Commission with such authorities 

it is likely that they would be used only in rare circumstances, if 

at all. However their statutory existence would have a deterrent effect. 

Thank you again for giving me the opportunity to appear before 

you today. I’d be happy to answer any questions you might have. 

[The prepared statement of Ms. Cochrane follows:] 

PREPARED STATEMENT OF ANNA COCHRANE, ACTING DIRECTOR, OFFICE OF

ENFORCEMENT, FEDERAL ENERGY REGULATORY COMMISSION

Madam Chairman, and Members of the Subcommittee: 

My name is Anna Cochrane, and I am Acting Director of the Federal Energy Regulatory Commission’s (Commission) Office of Enforcement. Thank you for the opportunity to appear before you today to discuss energy market transparency and regulation. I appear before you today as a staff witness and do not speak for individual 

members of the Commission. Transparency in our nation’s electric and natural gas 

energy markets is critically important to the Commission in fulfilling its statutory 

responsibilities to ensure just and reasonable wholesale rates for electric and natural gas customers. The Subcommittee’s review of this important topic is a timely 

one. 

THE COMMISSION’S EFFORTS TO PROMOTE TRANSPARENCY

The Commission has undertaken a number of initiatives to increase transparency 

in the nation’s energy markets, including some that predate the Energy Policy Act 

of 2005 (EPAct 2005) by over a decade. It has used its Natural Gas Act (NGA) and 

Federal Power Act (FPA) authorities to collect information and require reporting of 

market information to improve transparency in wholesale natural gas and electric 

markets and in electric transmission and natural gas transportation. In addition, 

the Commission has used the specific Natural Gas Act transparency authority Congress granted to it in EPAct 2005 to improve transparency in natural gas markets. 

These efforts are discussed below. 

To make electric transmission service more transparent, the Commission issued 

regulations in 1996 requiring public utility transmission providers to implement an 

Open Access Same-time Information System, or OASIS, to share information about 

the electric transmission system with all users of the system at the same time. 

Through the OASIS, transmission customers can view information regarding the 

availability of transmission capacity and the usage of the transmission system by 

other wholesale power customers. The terms and conditions of service are clearly 

posted on the OASIS, including the prices for each type of service offered and reserved. If the transmission provider discounts its price for a particular customer, it 
11 

must announce that discount to all wholesale customers through an OASIS posting. 

The transmission provider also must post the reason for denying any request for 

service, along with information regarding curtailments and interruptions of service 

to those that have confirmed reservations. These OASIS requirements were patterned on similar requirements that had been earlier implemented for interstate 

natural gas transportation. OASIS requirements remain an important tool to ensure 

that there is no undue discrimination in the provision of transmission services in 

interstate commerce and to help prevent the exercise of market power. 

The Commission also has taken several important steps to increase the transparency of electricity and natural gas commodity prices. For example, in 2001, the 

Commission issued a final rule that requires all public utilities, including power 

marketers, to file an Electric Quarterly Report (EQR) summarizing data about their 

currently effective contracts and wholesale power sales made during each calendar 

quarter, including transaction specific information. EQR data is public and available 

for use on the Commission’s website. EQR data is particularly useful for monitoring 

markets for indications that market power may be being exercised and provides an 

insight into pricing trends throughout the electric industry. For example, the information reported in the EQR (1) assists in corroborating or refuting evidence of market power submitted by sellers seeking market-based rate authority, (2) assists addressing on the record protests involving regional market conditions, and (3) helps 

determine whether sellers are complying with Commission-imposed price mitigation 

measures. 

In addition, in 2003, the Commission issued a Policy Statement on Electric and 

Natural Gas Price Indices that explained the Commission’s expectations of natural 

gas and electricity price index developers and the companies that report transaction 

data to them. The Policy Statement, among other things, directed the Commission’s 

staff to continue to monitor price formation in wholesale markets, including the 

level of reporting to index developers and the amount of adherence to the Policy 

Statement standards by price index developers and by those who provide data to 

them. In adhering to this directive, Commission staff documented improvements in 

the number of companies reporting prices from back offices, adopting codes of conduct, and auditing their price reporting practices. These efforts resulted in significant progress in the amount and quality of both price reporting and the information 

provided to market participants by price indices. 

In 2005, the Commission issued Order No. 668 which, among other things, revised 

its Uniform System of Accounts (USofA) to accommodate the restructuring changes 

that are occurring in the electric industry and to provide uniformity and transparency in accounting for and reporting of transactions and events affecting public 

utilities, including Regional Transmission Organizations (RTO). These changes in 

accounting and financial reporting should improve cost recovery practices by providing details concerning the cost of RTO functions, and increased assurance that 

the costs are both legitimate and reasonable. In addition, in 2008, the Commission 

further enhanced the transparency of the business activities of natural gas companies and public utilities by requiring them to provide greater detail in their annual 

financial forms filed with the Commission. Public utility customers, state commissions, and the public now have more detailed information on wholesale sales to 

allow them to better assess the justness and reasonableness of interstate natural 

gas pipeline and electric utility rates. 

In EPAct 2005, Congress enhanced the Commission’s authority to facilitate price 

transparency in both the electric and natural gas markets. Such authority was given 

to the Commission ‘‘for the public interest, the integrity of . . . markets, fair competition,’’ as well as for the protection of consumers. New Section 23 of the NGA 

and new section 220 of the FPA enhance the Commission’s authority to ensure confidence in the nation’s electric and natural gas markets. The Commission’s marketoriented policies for the wholesale electric and natural gas industries require that 

interested persons have broad confidence that reported market prices accurately reflect the interplay of legitimate market forces. Without confidence in the fairness 

of price formation, the true value of transactions is very difficult to determine. Further, price transparency makes it easier for the Commission to ensure that jurisdictional prices are ‘‘just and reasonable.’’ 

Pursuant to its new transparency authority under NGA section 23, the Commission issued Order No. 704-A to require natural gas wholesale market participants, 

including a number of entities that may not otherwise be subject to the Commission’s traditional NGA jurisdiction to identify themselves and annually report summary information about their physical transactions that contribute to natural gas 

price indices. The reported information will make it possible for the Commission to 

assess the formation of index prices and the use of index pricing in natural gas mar-
12 

kets. The first annual reports will be filed on May 1 for transactions that occurred 

during the 2008 calendar year. 

Also pursuant to the NGA section 23 authority, the Commission recently revised 

its regulations to improve the transparency of wholesale natural gas markets in the 

United States, by requiring the dissemination of greater information about scheduled natural gas flows throughout the national pipeline network. The Commission 

has long required interstate natural gas pipelines to post on their internet web sites 

substantial information about their natural gas transportation business. On November 28, 2008, the Commission issued Order No. 720, in which it found that it is also 

necessary to obtain information from major non-interstate natural gas pipelines in 

order to obtain a complete picture of the wholesale natural gas market and the supply and demand fundamentals underlying that market. 

Specifically, Order No. 720 required major non-interstate pipelines to post on 

their publicly accessible websites daily operational information, such as scheduled 

volume information and design capacity for each receipt and delivery point with a 

design capacity greater than 15,000 MMBtu per day. Order No. 720 defined a major 

non-interstate pipeline as a pipeline that is not classified as a natural gas company 

under the Natural Gas Act and delivers on average more than 50 million MMBtu 

of gas annually over a three-year period. Order No. 720 also required interstate 

pipelines to post similar information regarding their no-notice transportation services. Order No. 720 is currently pending on rehearing. Major non-interstate pipeline 

companies are currently required to comply with the new rules 150 days after the 

issuance of an order on rehearing. 

While the Commission does not regulate financial commodity market trading, activities in financial commodity markets can affect the electric and natural gas physical markets that the Commission regulates. It is therefore important that the Commission coordinate closely with the Commodity Futures Trading Commission 

(CFTC), which is responsible for the day-to-day regulation of commodity futures. In 

an effort to ensure coordination of overlapping jurisdiction between these two agencies, Congress directed in EPAct 2005 that the two Commissions execute a Memorandum of Understanding (MOU) related to information sharing. Specifically, it directed that the MOU include provisions ensuring that information requests to markets within the respective jurisdiction of each agency are properly coordinated to 

minimize duplicative information requests, and provisions regarding the treatment 

of proprietary trading information. The agencies signed an MOU shortly after enactment of EPAct 2005. Pursuant to the provisions of this MOU, the staffs of the two 

agencies have worked closely together to help ensure that both have the information 

necessary to perform their statutory functions. These efforts have contributed to 

more effective enforcement and oversight by our Commission over the physical energy markets. 

The Commission’s oversight staff within the Office of Enforcement conducts daily 

oversight of energy markets through regularly scheduled morning meetings, as well 

as research and analysis conducted throughout the day and as part of long-term 

projects. This research is facilitated by customized reports prepared from the information available to the oversight staff as well as information and analysis developed 

by third-party information providers. The oversight staff’s long-term projects include 

developing tools to automate and enhance analysis of the information that will become available through the Commission’s transparency efforts, like Order No. 704- 

A and Order No. 720. 

In addition to maintaining an oversight staff, the Commission requires all RTOs 

and Independent System Operators (ISOs) to maintain a market monitoring function to analyze the state of the markets and refer to the Commission any suspected 

market violations. In October 2008, the Commission took action through Order No. 

719 to enhance the independence of the market monitors and extend the scope of 

reporting required of the market monitors. The Commission’s independence reforms 

included requiring the market monitors to report to the RTO or ISO board of directors rather than to management and requiring the RTOs and ISOs to provide the 

market monitors with adequate resources and full access to market information. 

The Commission’s reporting reforms required production of a quarterly report that 

broadened the scope of recipients of market data produced by the market monitors, 

and shortened the lag time for release of bid and offer data. 

In addition to the formal reporting required of the RTO and ISO market monitors, 

Commission oversight staff have almost daily contact with the market monitors to 

discuss issues identified during the oversight staff’s market monitor activities. In 

addition to routine contacts with the RTO and ISO market monitors, the Commission’s oversight staff have several structured interactions with the market monitors 

including semi-annual meetings with all of the market monitors and regularly 
13 

scheduled monthly meetings between the Commission staff and individual market 

monitors. 

Finally, it is important to note that the information collected by the Commission 

is analyzed and, when appropriate, is shared with the public. The staff does this 

by posting material on the oversight section of the FERC website and making presentations at open Commission meetings and other public conferences. The information posted on the oversight website includes a monthly ‘‘snapshot’’ report that provides information about market outcomes during the previous month. The Commission staff use the ‘‘snapshot’’ report as the basis for monthly conversations about energy markets with state regulatory officials. During these calls, state regulatory officials often share their insights into factors influencing their local energy markets. 

In addition, the oversight staff publishes an annual State of the Markets report that 

summarizes major events in natural gas and electricity markets during the previous 

year. The oversight staff present the findings from its State of the Market report, 

as well as its Winter and Summer Assessments, at open Commission meetings. 

POTENTIAL IMPROVEMENTS TO THE COMMISSION’S ABILITY TO PROTECT CUSTOMERS

In addition to the role of transparency in energy markets to help ensure just and 

reasonable rates for wholesale sales and transmission of electric energy and wholesale sales and transportation of natural gas, there are other tools the Commission 

uses to help monitor markets and protect customers. Among those are the market 

rules the Commission approves or establishes under its FPA section 205 and 206 

authority for organized electric markets administered by ISOs and RTOs and the 

implementation of the Commission’s new market manipulation authority granted by 

Congress in EPAct 2005. In this regard, there are certain additional legislative 

changes that could further facilitate the Commission’s ability to protect against 

market manipulation and more timely ensure that market rules contained in FERC 

tariffs do not cause unexpected harm to the marketplace. If Congress determined 

it appropriate to provide the Commission with such authorities, it is likely that they 

would be used only in rare circumstances, if at all. However, their statutory existence would have a deterrent effect. 

First, Congress could give the Commission ‘‘cease and desist’’ authority under 

both the FPA and NGA. The Commission could use this authority if it determines 

that a market participant’s behavior was ongoing and significantly harming the 

public interest. While the Commission currently has the ability to seek United 

States District Court injunctive relief, direct cease and desist authority would expand the Commission’s enforcement tool box to match those of the SEC and the 

CFTC. 

Second, Congress could consider giving the Commission authority that would 

allow it to prevent the dissipation of assets by a company under investigation for 

violating market manipulation rules under the FPA or NGA. If the Commission had 

the authority to freeze assets, it could prevent a company from frustrating the Commission’s ability to order disgorgement or restitution after determining that there 

was a violation of the anti-manipulation rule. The SEC and the CFTC have comparable authority. 

Third, Congress could consider giving the Commission authority, in emergency 

circumstances, to temporarily modify or suspend market rules on file at the Commission under the FPA if those market rules were unexpectedly allowing market 

power to be exercised or causing other serious problems in the organized markets. 

This could be followed by normal FPA procedures for long-term changes to the market rules. 

CONCLUSION

In summary, transparency in energy markets is important to ensure just and reasonable rates under the FPA and NGA and to protect customers. Much has been 

done by the Commission to increase transparency in wholesale electric and natural 

gas markets, especially over the last few years, and the Commission will continue 

to be vigilant in this area. In addition to transparency, there are other regulatory 

tools that could be used by the Commission to help ensure that customers are protected. For example, Congressional action to give the Commission cease and desist 

authority for violations of the FPA and NGA, and the ability to freeze assets of entities that violate the market manipulation rules, would give the Commission the 

same enforcement tools that both the SEC and the CFTC have long possessed. In 

addition, authority to temporarily suspend market rules on file under the FPA when 

necessary to protect against potential abuse of market power could be useful. 

Thank you again for giving me the opportunity to appear before you today. I 

would be happy to answer any questions you may have. 
14 

Senator CANTWELL. Thank you very much. 

Mr. McCullough, thank you for being here. 

STATEMENT OF ROBERT F. MCCULLOUGH, JR., MANAGING 

PARTNER, MCCULLOUGH RESEARCH, PORTLAND, OR 

Mr. MCCULLOUGH. Good afternoon. Thank you very much for the 

opportunity to be here today. 

In preparing for this I went back to page 485 of the Wealth of 

Nations. That’s the page that uses the term ‘‘invisible hands.’’ It’s 

been often quoted. It’s been seldom read. 

The passage was not simply praise of the market. It was warning 

against market participants who say that they are performing their 

trades for the public good. The point is without understanding the 

market, without the data to review the market, we don’t know 

whether they’re telling the truth or not. 

Two centuries ago Adam Smith was worried enough about it to 

write a page on this issue. I think we should actually make a few 

people read the full page, not just the one quote. I’m talking today 

about the oil peak that we had last year. At our office we’ve taken 

to calling that the ‘‘Pickens’ Peak.’’ I’ve put it up on a poster board 

today. 

We lived through the price of oil doubling and then falling back 

by a factor of four. That is a level of volatility we’d never seen in 

our history. At the time we had variety of explanations. We were 

told it was having to do with the Chinese and the Indians who apparently are easy to blame for things, exchange rates, surging demand. 

Luckily the Energy Information Administration provides a lot of 

data. It’s very useful data. It is extremely important in this process. 

Can I get the next poster board? 

We’ve been through this process trying to review. Now that we 

have the data what has occurred? 

The first thing that we discover is that there was no demand 

spike. In point of fact the EIA’s forecast of quantities was exceedingly good. It was, frankly, astonishingly good. 

We had a net increase in production, production over our requirements in the spring. Then we had a decrease in inventory, production less than requirements in the fall. That may surprise some 

people since it goes the wrong direction. 

Let’s turn to the next slide which shows the price forecast of the 

EIA. The problem with this slide is that that the EIA’s price forecast was just flat wrong. Now when I say that, it’s not to make fun 

of them, I had no possible explanation of the spike either. 

But what we had was a spot on forecast of quantities and an absolute inability to forecast prices. This is in spite of the fact that 

we’ve got a large staff of very bright people who had followed every 

barrel of oil as closely as they could. The difficulty we have is not 

that someone did a bad job. The difficulty is that we don’t have the 

right model. 

Economists will tell you that this could not happen in perfect 

competition. If we were talking about farmers in Iowa raising rye 

and wheat, it wouldn’t happen. However if we’re talking about an 

oligopoly, relatively few players, it makes perfect sense. 
15 

1T. Boone Pickens shares his views on energy, politics, the Olympics, OSU’s new president, 

The Daily Oklahoman, January 30, 2008. 2Pickens warns of $300 oil, Herald News Services, July 23, 2008. 

You intend to hold inventory when prices were increasing hoping 

to be able to sell it at a much higher price. It may not be criminal. 

It could in fact simply be even cagey. 

But the key is that we have almost no data to follow this 

through. In reviewing the legislation before you I was very pleased 

to find that you’ll be accumulating inventory data. Because with 

the increases in world inventory it would have been very interesting to find out who actually were the players that held that inventory. 

We found out mid-summer by the CFTC reclassifying one player 

that a single firm of brokers from Switzerland held a very high percentage of the foreign contracts on the NYMEX. That amazed all 

of us. Not one of us had considered that they had taken such a 

strong position. 

We’d be very interested to find out that they’d had a strong position in inventory as well. Quite frankly until we start tracking the 

numbers, we’re not going to know what’s happening. The worst 

part is because we don’t think oil will become more plentiful in the 

near future we are likely to see more of these spikes with high volatility and even more unfortunate those travel through the entire 

economy directly to natural gas which is a competing energy source 

and then on to electricity. 

We’re in the midst of the most major recession of our lifetimes. 

A large component of that was the destruction of the automobile 

industry. The impact on low income homeowners of heating prices 

that doubled last winter. If I had my way I would go much further 

than this bill. 

I would certainly praise FERC for the quarterly electric reports. 

That’s a very valuable tool. The best way to discourage bad actions 

is to make them public. The quarterly reports do that. I think 

they’ve had a tremendous impact on the industry. I’d like to see an 

extension all the way through the energy industry, through natural 

gases and certainly to oil. 

Thank you very much. 

[The prepared statement of Mr. McCullough follows:] 

PREPARED STATEMENT OF ROBERT F. MCCULLOUGH, JR., MANAGING PARTNER, 

MCCULLOUGH RESEARCH, PORTLAND, OR 

Thank you for the opportunity to testify today before the Energy Subcommittee. 

America’s most significant import, crude oil, has such strong connections with natural gas and electricity that it affects the entire economy. It is also the import we 

know the least about. U.S. regulators do not collect data on any spot transactions, 

and data is available on only a portion of forward transactions. Although we fear 

that the oil market may have become dominated by speculators, we do not know 

who they are, or their possible impacts. We do know that oil prices are frequently 

anomalous. For example, on March 15, 2009, OPEC decided to maintain output at 

levels agreed to before the onset of the current recession. This was good news for 

oil consumers. Unfortunately, however, oil prices have risen significantly in the ensuing ten days. 

On January 30, 2008, T. Boone Pickens predicted that oil prices would reach 

$100.00 a barrel during the first half of 2008.1 By July 23, he predicted that oil 

prices would reach $300.00 a barrel by the year 2018.2
16 

3 Interim Report on Crude Oil, Interagency Task Force on Commodity Markets, July 23, 2008. 

* Charts have been retained in subcommittee files. 

4 EIA STEO Table 3a, http://www.eia.doe.gov/emeu/steo/pub/contents.html 

5 Ibid. 

But oil prices in 2008 did not obey Mr. Pickens. On July 3, oil peaked at $146.00 

a barrel, only to fall precipitously to a yearly low of $31.00 a barrel on December 

22. 

At McCullough Research, we have taken to calling the anomalous prices in 2008 

the ‘‘Pickens’ Peak’’ in honor of Mr. Pickens’ forecasting initiatives. 

Because of the linkages among the nation’s fuel markets, retail gasoline, natural 

gas, and electricity followed similar trajectories during 2008. Pressure on household 

budgets accentuated the subprime financial crisis, and the change in automobile economics brought a steep decline in car sales. 

While oil is arguably the U.S. economy’s most important commodity, it is ironic 

that no agency of the U.S. government has been assigned the task of investigating 

and explaining the extraordinary price changes of last year. 

Current responsibilities are allocated among the Federal Energy Regulatory Commission (pipelines), the CFTC (some, but not all, forward contracts), and the EIA 

(forecasting.) On June 10, 2008, the CFTC announced the formation of an interagency task force, including the CFTC, the Federal Reserve, the Department of the 

Treasury, the SEC, the DOE, and the Department of Agriculture, to study commodity markets. The task force expeditiously published an interim report, but apparently stopped its activities soon thereafter.3

It is surprising that not one of the three lead federal agencies has expressed much 

in-terest in Pickens’ Peak. A review of materials issued by FERC, which regulates 

natural gas and electricity trades, but not oil trades, also reveals little interest in 

the dramatic run-up in the price of oil in the first half of 2008. 

Like the market surveillance of electricity and natural gas prices, reviews of pricing anomalies largely rely upon third parties, such as McCullough Research, that 

are retained to examine whether the markets are reflecting fundamental supply and 

demand conditions. 

THE EIA’S SHORT TERM ENERGY OUTLOOK (STEO) FORECASTS

The preeminent independent forecast of world oil markets is performed monthly 

at the Energy Information Administration. Curiously, this resource was largely ignored by apologists for the 2008 price spike, who relied instead on anecdotes concerning exchange rates, Chinese and Indian oil imports, and surging U.S. demand. 

Now that data from 2008 is in hand, it is useful to compare the EIA’s quantity forecasts with actual historical quantities. 

On January 8, 2008, the STEO forecasted supply shortfalls at the beginning and 

the end of 2008. 

The chart* shows the EIA’s forecasted additions (blue line) to world oil inventories 

in the spring and early summer of 2008, followed by drawdowns in the fall and winter of 2008. Actual data (red line) shows that while the EIA accurately predicted 

the basic pattern, it underestimated the inventory build-up during the price spike 

and the reduction in inventories during the autumn when oil prices were falling. 

It is worth noting that the EIA had correctly forecasted all of the fundamentals 

that supposedly drove up last year’s market prices, including: 

• Demand from China (which did not change materially during the run-up in 

prices)4

• Demand from the U.S. (which declined during the run-up in prices)5

Yet the EIA’s price forecast was very poor. 

Examining the numbers the way a statistician would approach this problem, the 

EIA’s forecast of quantities is statistically significant at 99%, i.e. very good. The 

EIA’s forecast of prices, however, is not statistically significant at any level. 

We may conclude therefore that the basic assumptions underlying the EIA’s forecast require careful examination. It appears likely that price responses to changes 

in supply and demand are more complex than those modeled in the EIA’s price forecast. 

THE ECONOMIC THEORY OF OLIGOPOLISTIC MARKETS

The heart of the problem is the assumption that the global crude oil market reflects a competitive market with a large number of buyers and sellers. Very little 

research has been performed concerning the degree of competition in the oil market. 
17 

Although we know that mergers have reduced the number of very large players, 

there is almost no real data about the degree of market concentration. 

Understanding the degree of competition is crucial, because economic theory gives 

very different predictions under different market structures: 

1. Perfect Competition 

In perfect competition the presence of many buyers and many sellers make 

it impossible for any one supplier (or a small group of suppliers) to set prices. 

To forecast prices in perfect competition, economists rely upon the years of experience that have established the use of supply and demand curves. 

1. Oligopoly 

Oligopoly is a market with relatively few sellers. Forecasting prices in an 

oligopoly is far more complex since a few large players can—and do—exert control over prices. 

Inventories are important in an oligopoly. A market with only a few large participants is likely to experience situations where market participants will accumulate 

inventory rather than sell their products at prices they see as less than their longterm prospects. 

An extreme case of oligopoly is a market with a few pivotal suppliers. A pivotal 

supplier can exert strong control over prices because its output is absolutely required to meet demand even after all alternative supplies have been purchased. 

In a dynamic economic model we would expect an oligopolist in a market with increasing prices to accumulate inventory to sell during later periods. If the market 

for oil experienced prices increasing 6% per month—as happened in the first six 

months of 2008—only a very altruistic competitor would not be tempted to increase 

its inventory in anticipation of higher prices later. If other competitors made similar 

decisions, their inventory changes would also alter the supply of oil available to the 

market and increase oil prices. 

If a pivotal supplier was present, its inventory decisions could directly set the 

price in the market. Decisions to withhold supply are frequently observed in the nation’s wholesale electricity markets. This was the case during the Western Market 

Crisis of 2000-2001 when major suppliers in California reported only 50% availability for their plants during periods of high demand. 

Given the data now available from the EIA, the assumption of oligopoly is a better 

candidate for a model of the world oil market than perfect competition. Inventories 

rose during the period of rising prices and then fell when prices were falling. 

Statistically, the relationship between prices and net world production has been 

positive since 2006. 

Increases to world inventories—production larger than current needs—has been 

correlated with higher prices. This is more consistent with oligopolistic behavior 

than perfect competition. Given the extreme levels reached during July 2008, it is 

very possible that the oil market had one or more pivotal suppliers. 

RECOMMENDATIONS

The inability of the federal government to fully investigate oil price behavior in 

2008 is fundamentally a data problem. Perhaps it is not a coincidence that oil is 

the most opaque of our nation’s energy supplies. 

The transparency legislation that you are discussing today is a step in the right 

direction, because it will expand the EIA’s ability to track oil inventories within the 

U.S. by owner. 

We know so little at this point that any information is useful. There are, however, 

limitations to having only a small amount of the information available. The oil inventories in the U.S. in 2008 averaged only 37% of total OECD inventories. They 

do not include data from either Russia or OPEC. 

As with the current problems with the CFTC’s oversight being limited to just a 

fraction of the total forward markets, inventory data for the U.S. will not identify 

inventory decisions from our major trading partners. I recommend that another useful step is to direct the EIA to identify data-sharing arrangements with our OECD 

partners, including Canada, our single largest oil supplier. 

Over the last decade, and especially after 9-11, Americans have been told that the 

concept of secrecy applies to many types of energy transactions. There has been little public debate about the heightened levels of secrecy in energy transactions, or 

studies of the impact of this secrecy on energy prices and on our national economy. 

The American economist, Paul Samuelson, always included transparency in markets as one of the conditions for perfect competition. If we are seeking more efficient 
18 

6Depending On 19th Century Regulatory Institutions to Handle 21st Century Markets, http:// 

www.mresearch.com/pdfs/355.pdf 

oil markets that are less vulnerable to manipulation, we may want to re-examine 

a concept of secrecy that may be taking us in the opposite direction. 

My testimony before the Senate Energy and Natural Resources Committee on 

September 18, 2008 stated that we have a double standard for reporting market 

data. While some energy sources are relatively transparent, other competing energy 

sources are largely opaque. FERC’s Web site openly publishes the electricity trades 

within the U.S. on a quarterly basis, and is a good model for reporting other energy 

sources.6 The creation of an Oil Quarterly Report modeled after FERC’s Electric 

Quarterly Report would give regulators, decision-makers, and the public a better 

sense of whether oil markets are dysfunctional. 

This completes my testimony today. 

Senator CANTWELL. Thank you, Mr. McCullough. 

Mr. Ramm, welcome to the committee. Thank you for being here. 

STATEMENT OF GERRY RAMM, SENIOR EXECUTIVE, INLAND 

OIL COMPANY, EPHRATA, WA, ON BEHALF OF THE PETROLEUM MARKETERS ASSOCIATION OF AMERICA 

Mr. RAMM. Chairman Cantwell, Ranking Member Risch and distinguished members, I want to thank you for this invitation. I appreciate the opportunity to provide some insight. Draft legislation 

entitled, Energy Market Transparency Act is a good start toward 

a lot of the things that we’ve been trying to do as an industry. 

I’m also pleased to speak to the detrimental effects that inadequately regulate the commodity markets and the abusive trading 

practices that have had a devastating effect on the independent 

fuel markers in the Nation. I want to thank the chairwoman and 

the committee for your efforts to bring greater transparency and 

accountability to the commodity markets. Without your dedication 

this issue would never get any attention that it needs. 

I serve as Vice Chairman of the Petroleum Marketers Association 

of America. PMAA is a national federation of 47 State and regional 

trade associations representing over 8,000 independent fuel marketers. These marketers account for approximately half of the gasoline sold in the United States and nearly all the distillate fuels consumed by motor vehicles and home heating oil users. 

Chairwoman, it was 4 years ago when PMAA members first sat 

in your office to discuss our concerns regarding this price volatility. 

The correlations that we were seeing in the under regulated energy 

commodity market and we appreciate your strong commitment to 

resolving this issue. Unlike the other panelists, I’m just a small 

businessman. I’m not an economist. I don’t work for the Federal 

Government, just a small business person in Eastern Washington. 

Large scale institutional investors speculating in the energy markets are a driving force behind energy prices today. The rising 

crude oil prices, which reached $150 a barrel for December delivery 

in July of last year only to fall dramatically to as low as $33 when 

that fuel was delivered on the spot price in December, was not 

completely a result of supply and demand fundamentals, but was 

unduly influenced by excessively leveraged speculators, index investors and hedge funds. Futures prices should operate on real 

data and not to be driven by surges in buying. 

Last week futures prices on motor fuel went up 20 cents a gallon. 

In Iraq prices also rose 20 cents a gallon. Did supply and demand 
19 

in Seattle, L.A., Houston or New York change? That price increase 

happened when supplies are at an all time high. Just this last 

week, distillate fuels went up another 10 cents. 

According to the hedge fund managers, Michael Masters, during 

the first 6 months of 2008 index speculators in hedge funds poured 

about 55 billion into commodity indexes which resulted in the buying of between 130 to 170 million barrels of West Texas intermediate crude oil in the futures market. However by late July and 

early August index speculators began to pull out money of the commodity indexes. Approximately $70 billion were withdrawn from 

these commodity indexes resulting in the selling of around 230 million barrels of crude oil by the end of the year. 

Oil should not have skyrocketed to previously mentioned records 

last year only to see prices dramatically collapse a few months 

later. Investors were looking not to actually buy oil futures, but to 

make a fast buck in a paper trade. This practice caused oil prices 

to rise faster and fall harder than could ever be explained by ordinary market forces. 

Consumers, small businesses and economy were forced into a 

roller coaster ride of greed and fear. The commodity markets need 

the ability to determine a fair and predictable price for energy. 

Commodity markets were not designed as investment classes. They 

were set up for price discovery and for physical hedgers to manage 

risk by entering into a futures contract in order to lock in a price 

for future delivery. 

Index funds managers who believe commodities are an asset 

class are speculators. They are so large and generally lack fundamental commodity market knowledge that they have dramatically 

distorted these markets we rely on. This abuse of this original intent must end now. 

Often times you hear the argument that for every buyer there is 

a seller to justify that there is a market for any price. Even though 

that is true, oftentimes the buyer and seller are both speculators, 

who set the commodity price determined by the enthusiasm of the 

buyer compared to the enthusiasm of the seller. Unfortunately for 

consumers they have to buy that commodity both gasoline and diesel fuel. 

When the prices have ratcheted up by speculators thus drivers 

and farmers and all consumers have to buy this fuel at today’s 

price and that has been driven up by speculators playing a futures 

game. PMAA member’s companies rely on these markets to provide 

the consumer with a quality product that a price reflective of market fundamentals. 

Traditional speculators serve an important role by providing liquidity in the commodity markets for this to be accomplished. However investment in hedge funds have wreaked havoc on the price 

discovery mechanism that commodity futures markets provide to 

bonafide physical hedgers. PMAA urges Congress to expedite commodity markets reform legislation through the legislative process. 

If Congress does not act and another excessively leverage speculative bubble occurs again, how do you think that’s going to affect our 

economy? 

Regarding the draft legislation, PMAA strongly supported language in the 2005 Energy Policy Act that required DOE to examine 
20 

the amount of useable storage that is available in the United 

States. We believe there has been a dramatic reduction of useable 

storage and that policymakers may not be aware of the extent of 

that reduction. Part of the reduction has been caused by overly aggressive underground storage tank requirements, specifically related to spill regulations that render much storage unusable. 

Therefore PMAA supports efforts to obtain data on storage availability. 

Regarding section three, enhanced information on ownership of 

critical energy supplies, data collection would have to occur on a 

frequent basis. Reporting requirements on the amount of commercially held oil should have a minimum threshold. Particularly in regard to heating oil contracts which should not be included in the 

reporting requirements that we believe. 

We support the intent of the committee’s legislation to bring 

transparency to help eliminate excessive speculation in the energy 

commodity markets. In addition beyond the committee’s jurisdiction in order to bring greater transparency to the energy commodity futures market legislation must impose aggregate position 

limits on non-commercial traders including over the counter markets. Distinguish between legitimate hedgers in the business of actually delivering the fuel to the consumer and those in the market 

purely for speculative purposes. 

We need to close the end in the swaps loopholes and increase 

staff and resources at the CFTC. PMAA and our customers need 

our public officials to take a stand against abusive trading practices that artificially inflate energy prices and severely damage our 

economy. 

We support free interchange on community futures markets in 

an open, well regulated and transparent exchange that are subject 

to the rules of accountability and law. Reliable futures markets are 

crucial to the entire petroleum industry and the American economy. Let’s make sure that these markets are competitively driven 

by supply and demand and not purely the speculative limits and 

the whims and greed of Wall Street. 

I want to thank you for this opportunity to testify. I’ll answer 

any questions I can. 

[The prepared statement of Mr. Ramm follows:] 

PREPARED STATEMENT OF GERRY RAMM, SENIOR EXECUTIVE, INLAND OIL COMPANY, 

EPHRATA, WA, ON BEHALF OF THE PETROLEUM MARKETERS ASSOCIATION OF AMERICA

Honorable Chairwoman Cantwell, Ranking Member Risch and distinguished 

members of the committee, thank you for the invitation to testify before you today. 

I appreciate the opportunity to provide some insight on draft legislation entitled the 

‘‘Energy Market Transparency Act of 2009.’’ I am also pleased to speak to the detrimental effects that inadequately regulated commodities markets and abusive trading practices have had on our nation’s independent fuel marketers and home heating fuel providers. 

I thank the Chairwoman and the committee for your efforts to bring greater 

transparency and accountability to commodity markets. Without your dedication, 

this issue would never have gained the attention it deserved. 

I serve as Vice Chairman of the Petroleum Marketers Association of America 

(PMAA). PMAA is a national federation of 47 state and several regional trade associations representing over 8,000 independent fuel marketers. These marketers account for approximately half of the gasoline and nearly all of the distillate fuel consumed by motor vehicles and home heating equipment in the United States. 
21 

Chairwoman, it was four years ago when PMAA members first sat in your office 

to discuss our concerns regarding price volatility and the correlations that we were 

seeing in the under-regulated energy commodity market, and we appreciate your 

strong commitment to resolving the issue. 

Large-scale, institutional investors speculating in the energy markets are a driving force behind energy prices. The rise in crude oil prices, which reached $150 a 

barrel for December delivery in July of last year, only to fall dramatically to as low 

as $33 in December, was not completely a result of supply and demand fundamentals. But was unduly influenced by excessively-leveraged speculators, index investors and hedge funds. 

Futures prices should operate on real data and not be driven by surges in buying. 

Last week futures prices on motor fuel went up 20 cents and rack prices also rose 

20 cents. Did supply and demand change in Seattle, L.A., Houston, and New York? 

And that price increase happened when supplies are at an all time high. 

According to hedge-fund manager Michael Masters, during the first six months of 

2008, index speculators and hedge funds poured around $55 billion into commodity 

indices which resulted in the buying of between 130 and 170 million barrels of West 

Texas Intermediate crude oil in the futures market; however, by late July and early 

August, index speculators began to pull money out of commodity indices. Approximately $70 billion dollars were withdrawn from these commodity indices resulting 

in the selling of around 230 million barrels of crude oil by the end of the year. 

According to a January 11, 2009 CBS News’ 60 Minutes investigation titled, ‘‘Did 

Speculation Fuel Oil Price Swings?,’’ oil should not have skyrocketed to previously 

mentioned record levels last year, only to see prices dramatically collapse a few 

months later. The piece highlighted how investors were looking not to actually buy 

oil futures, but to make a fast buck in a ‘‘paper trade.’’ This practice caused oil 

prices to rise faster and fall harder than could ever be explained by ordinary market 

forces alone. American consumers, small businesses and the broader economy were 

forced onto a roller coaster ride of greed and fear. However, the greatest victim of 

the 2008 energy crisis was consumer confidence in these markets’ ability to determine a fair and predictable price for energy. 

Commodity markets were not designed as an investment class—they were set up 

for physical hedgers to manage price risk by entering into a futures contract in 

order to lock in a price for future delivery. These index funds managers who believe 

commodities are an asset class, are really unwitting speculators. They are so large 

and lack fundamental commodity market knowledge, that they have dramatically 

distorted these markets we rely on. This abuse of this original intent must end now. 

Oftentimes you hear the argument that for every buyer there is a seller to justify 

that there is a market for any price. Even though that is true, oftentimes the buyer 

and seller are both speculators who set the commodity price determined by the enthusiasm of the buyer compared with the enthusiasm of the seller. Unfortunately 

for consumers, they have to buy the commodity (gasoline, distillates) when the price 

has been ratcheted up by speculators. Thus, drivers, farmers, and all consumers 

have to buy the fuel at today’s price that has been driven by speculators playing 

a futures game. 

PMAA member companies rely on these markets to provide the consumer with a 

quality product at a price reflective of market fundamentals. Traditional speculators 

serve an important and healthy role by providing needed liquidity in the commodities market for this to be accomplished. However, investment and hedge funds have 

wreaked havoc on the price discovery mechanism that commodity futures markets 

provide to bona-fide physical hedgers. 

Congress should act quickly to restore the transparency and oversight needed for 

secure and stable commodities markets and help restore the confidence in these 

markets that physical hedgers and consumer once had. If Congress does not act, and 

another excessively leveraged speculative bubble occurs again, how do you think it 

will affect the economy? 

Therefore, PMAA urges Congress to expedite commodity markets reform legislation through the legislative process. Please do not allow the bill to be stalled by the 

financial services regulatory overhaul debate. 

Specifically regarding the draft legislation, PMAA strongly supported language in 

the 2005 Energy Policy Act that required DOE to examine the amount of useable 

storage that is available in the U.S. We believe there has been a dramatic reduction 

in the amount of useable storage in the U.S., and that policy makers may not be 

aware of the extent of the reduction. Part of the reduction has been caused by overly 

aggressive under-ground storage tank requirements, specifically related to spill regulations that render much storage un-useable. Therefore, PMAA supports efforts to 

obtain data on storage availability. 
22 

Regarding Section 3, Enhanced Information on Ownership of Critical Energy Supplies, data collection would have to occur on a frequent basis and reporting requirements on the amount of commercially held oil should have a minimum threshold. 

We support the Committee’s legislation. In addition, beyond the Committee’s jurisdiction, in order to bring greater transparency to the energy commodities futures 

market, legislation must: 

• Impose aggregate position limits at the control entity level on non-commercial 

traders, and across all trading environments, including over-the-counter markets that do not have physical connection to the underlying commodity; 

• Distinguish between legitimate hedgers in the business of actually delivering 

the fuel to consumers, and those who are in the market for purely speculative 

purposes; 

• Close the ‘‘London Loophole’’ by requiring foreign exchanges with energy contracts for delivery in the U.S. and/or that allow U.S. access to their platforms 

to be subject to comparable U.S. rules and regulations; 

• Close the ‘‘Swaps Loophole’’ which allows so-called ‘‘index speculators’’ (who now 

amount to one-third of the market) an exemption on position limits which enable them to control unlimited amounts of energy commodities; 

• Increase staff and other resources at the CFTC. 

PMAA and our customers need our public officials to take a stand against abusive 

trading practices that artificially inflate energy prices and severely damage our 

economy. We strongly support the free exchange of commodity futures on open, well 

regulated and transparent exchanges that are subject to the rule of laws and accountability. Reliable futures markets are crucial to the entire petroleum industry 

and the American economy. Let’s make sure that these markets are competitively 

driven by supply and demand and not purely the speculative whims and greed of 

Wall Street. 

Thank you again for allowing me the opportunity to testify before you today. 

Senator CANTWELL. Thank you, Mr. Ramm. Thank you for again, 

for all the witnesses being here. I know some of you have been before the full committee before or other committees talking about 

this important issue. So we appreciate your expertise and knowledge on it. 

I think we’re going to do 5-minute rounds. Hopefully we can get 

through a few questions before the votes occur this afternoon. But 

Ms. Cochrane, I think I’ll start with you because in 2009 then 

Chairman Kelliher recommended to the committee several of these 

legislative proposals that we are considering as part of a larger energy package, the cease and desist authority, the dissipation in assets, the emergency authority. 

I’m sitting here with my colleague from Idaho thinking about 

what if we would have had these powers in place prior to the Western energy crisis. What do you think would have happened in that 

instance as opposed to what transpired there over a several year 

period of time, if we would have had these kinds of authorities? 

Ms. COCHRANE. I think specifically with regard to the authority 

that would allow us to, on an emergency basis, modify or revise 

market rules. That would have been a useful tool to have at the 

time. Specifically during the Western energy crisis when the Commission found significant market flaws such as the requirement for 

the three IOUs to buy 100 percent of their energy in spot markets. 

We had to first propose market rule changes. Then allow notice 

and comment before requiring the changes. 

So I think that rule in particular would have helped with the energy crisis. 

Senator CANTWELL. How long a period of time was that? 

Ms. COCHRANE. I don’t have an answer. 
23 

Senator CANTWELL. From the comment period and the rule, was 

that several months or? 

Ms. COCHRANE. It would have been several months, yeah. We 

would have had to go through a process, a notice and comment 

process before changing a rule. 

As far as the other language, during the Western energy crisis, 

we didn’t have the authorities that we have now under EPACT 

2005 to police against market manipulation. I think it was because 

of that crisis that the Congress gave us that authority in 2005. So 

the other two authorities of, in particular the freezing assets, we 

would only apply if market manipulation was found. So that 

wouldn’t have been availing at the time. 

Senator CANTWELL. FERC has brought several cases. I can’t remember the number right now. So what are you finding in these 

cases that FERC has been successful in bringing forward? 

Ms. COCHRANE. As far as in all our enforcement actions we have. 

I would note that we have an annual report on enforcement that 

we provide. We look at what we do each fiscal year. I note that during fiscal year 2008, we did open 20 investigations involving allegations of market manipulation. 

Many of those investigations and the numbers that you provided 

are still ongoing. So they’re non-public investigations that I can’t 

really talk about at this time. 

Senator CANTWELL. How many have been settled? 

Ms. COCHRANE. I do have these numbers. We have settlements 

with 27 companies for a total of 64.67 million. Many of those were 

involved tariff violations or other violations in addition to market 

manipulation. 

Senator CANTWELL. Ok. Mr. McCullough, on this point of information and how valuable in can be on the data collection, do you 

know of any government reporting right now that informs regulators, both about the, you know, the interconnection between the 

financial and physical market. I mean the reason why I ask that 

is because so much of the physical aspects of the oil market are 

also connected, you know, to the holders on the futures side. 

So do you know anybody that is connecting that information now 

as far as government reporting? 

Mr. MCCULLOUGH. No. The best we have at the moment are the 

EIA statistic report of the STO. They’re good. They’re very useful. 

But the fact is no one is following the spot oil market. There’s 

a fair amount of academic research including in the interesting 

paper recently brought out by the CFTC concerning the impacts of 

term structures. I think most of us believe that spot and forward 

are highly correlated. 

What that means is that we are only watching one door of the 

Department’s door. The shoplifters have figured out which door to 

leave by. It’s not a good situation at all. It’s not a practical solution 

to understanding why we had these sudden shifts in oil prices. 

There’s just too much we’re not following on. I believe, frankly, 

I was going to say day to day basis, on any basis. 

Senator CANTWELL. What, in the collection of this data will allow 

us to do what? What will it allow us to see? 
24 

Mr. MCCULLOUGH. We are still hypothesizing why we had to run 

up to 143. By the way we all have a different number for that high 

peak. But I think we’d all agree it was big. 

There are a variety of things that could have happened there. If 

I had a quarterly oil report what I would have been looking for is 

a fair amount of concentration in oil. I would have certainly been 

looking for major players who had changed their purchasing strategies in the spring of last year. 

If this was in fact a spot for a gamut and we’ve seen a fair number of those over the years that I would have expected to have seen 

the inventories increasing because traditional suppliers, major suppliers, were actually choosing to sell less during that high price period. Now let me stress that might not be criminal. It’s only criminal if there’s a conspiracy. Since we don’t have a clue what’s going 

on, we have not a clue to know whether it’s a conspiracy. 

But in terms of public policy, even if it isn’t criminal it would be 

critical for us to understand that behavior so that we could prepare 

for it and perhaps create measures to discourage it. 

Senator CANTWELL. Thank you. 

Senator Risch. 

Senator RISCH. Thank you, Madame Chairman. Mr. McCullough, 

excuse me for not knowing more about the details of this. This is 

a complex area. It’s hard for us to keep on the simple stuff, let 

alone the complex stuff. 

But let me ask you this. Why is this done in the oil market, but 

yet not in copper or wheat or something like that? I mean it seems 

to me that there’s so much trading and so much bigger in oil that 

it would be harder to do than in one of the smaller markets. Help 

me out. 

Mr. MCCULLOUGH. It is, Don. We’re all used to the Hunt Brothers attempt to corner the silver market 20 years ago. There’s nothing new to this. 

The United States has the CFTC and the Department of Agriculture have reviewed commodity markets for many years. We’ve 

seen efforts to corner commodity markets in many years. We have 

however seen a shift in oil. We used to have seven sisters and now 

depending on how you count it, we have four or five. So we’ve leveled concentration there. 

We’ve seen a dramatic shift in where the oil is produced. We 

used to be the major oil producer in the entire world for a long period in our history. Now we’re major importers. 

So we’ve seen enough changes that we begin to suspect that we 

might have a market shift. The one thing I comment on was last 

summer the CFTC had changed their statistics enough that we 

could puzzle through what one player was. We were amazed to find 

that that player had 20 percent of the net long positions in the 

NYMEX. 

This is a Swiss broker. They’re probably fine people and not proposing anything criminal. I’m just noting people most of us had 

never heard of before suddenly turned out to be major players in 

the entire U.S. oil market. 

That’s in sort of information that’s useful for us to have. 

Senator RISCH. Ms. Cochrane, help me out here. Tell me where 

the breaking point is? Where do you cross the line between being 
25 

a legitimate trader who is trying to make the biggest profit that 

they possibly can. I mean, that’s what traders do verses a market 

manipulator? 

Where does somebody cross the line? 

Ms. COCHRANE. The big difference is the legal definition of speculation, I mean of market manipulation. It’s really a fraud statute. 

So what we have to show is that the trader had an intent to manipulate the market if the trader is taken advantage of a market 

rule or a market loophole then we don’t have authority to go after 

them. But if they’re intentionally trying to manipulate the market 

then that’s where we can go after them. 

Senator RISCH. So this all comes down to a matter of intent. 

Ms. COCHRANE. Yes, it does. 

Senator RISCH. A trader who is trading and happens to manipulate the market just because their idea is going here, going there 

doesn’t commit an offense. It’s only a person who sets out to actually manipulate the market. Is that what you’re telling me? 

Ms. COCHRANE. We view it that if they knew or should have 

known that their actions could have had an impact on the physical 

markets that are under our jurisdiction then they acted recklessly 

and resulted in the manipulation that would also be market manipulation. We could also look at reckless—— 

Senator RISCH. I’m losing something in the definition because by 

its very nature every trade is going to have an effect, some way, 

on the market, is it not? 

Ms. COCHRANE. Our authority is only over manipulation of the 

physical markets under our jurisdiction. So a trade, you know, 

again if they have legitimate reasons. If they’re hedging or they’re 

just engaging in, you know, speculative behavior. 

Hedging, in and of itself, is not illegal and is not necessarily bad 

for the market. It can increase liquidity and increase transparency. 

But it’s a very fact intensive inquiry to determine whether it’s a 

fraud in fact, is taking place. 

Senator RISCH. Indeed really, every market needs market makers. Thank you very much. Thank you. 

Senator CANTWELL. Thank you, Senator. 

Senator Shaheen. 

Senator SHAHEEN. Thank you, Madame Chairman, thank you all 

for being here this afternoon. I especially appreciate hearing and 

seeing the graphs that show the market and the manipulation of 

the market. Because for many of us who, particularly in the Northeast in New Hampshire where we live through the high heating oil 

prices and saw the impact of those on families and on people trying 

to keep their cars operating. 

It’s reassuring to see that what some of said was happening at 

the time is actually, given the analysis, what we see did happen 

because, as you know, there’s been a lot of debate about that. To 

pick up a little bit on Senator Risch’s questions about, you know, 

how do you determine whether fraud was involved and, you know, 

where do you cross the line with manipulation. Shouldn’t the goal 

of our oversight of markets be to avoid or prevent the kind of manipulation that we saw over the last year, regardless of whether 

there was intent involved or not? 
26 

I mean, shouldn’t the goal be to avoid that kind of manipulation 

of the markets? I would direct that at whoever would like to answer. 

Mr. MCCULLOUGH. Regulating markets retroactively is the single 

most expensive and most inefficient way to do it. With all due respect to Ms. Cochrane, who I hope will protect me in many different ways. 

I don’t want to see her go into action. I want to see the market 

be just and reasonable on the way in. The best possible way to 

avoid manipulation is to bring that market in the light of day. 

Senator Risch, you asked is there a bright shining light on fraud? 

Often there is. Case in point, throughout the electric and gas markets we’ve had many cases where traders will create artificial 

trades. 

In fact ENRON had a book. They called it the fake trade book. 

That was used to fool market price indexes either put together by 

the Federal Government or put together by individual sources. 

That’s simple fraud. 

They lied to the press. They lied to the Federal Government to 

set prices at the wrong level, people thought and then to take a 

profit from it. Those people should go to jail. 

How do I find out if they’re lying? I find out if we have a quarterly electric report. I could actually see what the trades were. 

If they said one thing here and they did another thing there. It’s 

self evident. It’s also self enforcing. You’re not going to make that 

lie if you’re going to be discovered immediately. 

When we don’t have that transparency then we have people 

lying. You know, we used to say good neighbors and good fences. 

But I will tell you, bad fences make bad neighbors. So when we 

don’t have the data we’re encouraging people to undertake those 

manipulations. 

Senator SHAHEEN. Just to follow up a little bit on that. Given the 

fluidity of financial markets and the commodities markets that 

we’re talking about, how do we ensure that the data that’s collected 

is accurate and timely? 

Mr. MCCULLOUGH. There’s always a chance that people will be 

lying under oath on their submissions to the U.S. Government. I 

think that’s a possibility. But once we have that in place we know 

the person signing those reports is putting his freedom on the line. 

So I think to the degree we make those reports enforced by the 

full weight of the law we’re going to have an impact. At the moment in many of these markets we never know whether any of the 

data is correct. So we will never have a way of finding out if they’re 

lying or not. 

But in a few cases and the EQR is one of them. We do have a 

chance, later on, to figure out whether they were telling the truth 

or not. 

Senator SHAHEEN. I am almost out of time, but just very quickly 

because the recommendation by a couple of you has been to close 

the loopholes on London and on the swaps market. Is it your assessment that closing the ENRON loophole has been successful in 

addressing the abuses that we saw with that loophole? Again, I’m 

happy to have any of you respond or is there more we need to do 

there? 
27 

Mr. RAMM. As far as the ENRON loophole of course that does 

with electrical markets end. But it does plan to a little bit more 

of the fact that of the electronic trading that happened in the commodity markets at the time that the Commodity Modernization Act 

was enacted in 2000. What we’ve seen and maybe to speak to your 

first question was these markets were not designed to have all of 

the speculative money poured into them. 

They aren’t an equity market. So when you pour all of this 

money in, it’s hard for the market to respond in a way that’s fundamental in the ways that it happened before. If you look at the commodity trading that happens in the NYMEX even. You look at 

what gets traded on the floor verses what gets traded electronically. 

Electronically is happening fast and furious and with a lot of 

money. I think that in some of the questions about fraud and manipulation in general the markets weren’t designed for this excessive speculation in the marketplace. There was always a balance. 

The CFTC has an obligation to see that speculation doesn’t injure price discovery. I would offer that speculation has injured price 

discovery of what the markets were designed for. 

Senator SHAHEEN. Thank you. 

Senator CANTWELL. Senator Dorgan, thank you for joining us. 

Senator DORGAN. Thank you very much. I’m sorry I was late. But 

thank you to all of the witnesses. 

I think, Mr. McCullough when I walked in you said something 

that I think is prescient. You said we don’t have a clue. I thought, 

well that’s accurate. I don’t think any of us in this room have a 

clue as to what drove the price of oil up like a roman candle to 

$147 a barrel in day trading 1 day, then back down. 

We’ve had hearing after hearing on this. Energy Information Administration, I have pounded you like you were on a meat rack trying to get out of you what do you think happened because we’re 

spending $100 million on your agency for information. The answer 

with Mr. Caruso is a, we don’t know. We think it’s the fundamentals, kind of. 

But there was nothing in the fundamentals that could ever justify the run up in these prices and the run back down. What we 

know is that 37 percent of the oil future market traders in 2,000 

were speculators. In a few short years 80 percent were speculators. 

Mr. Ramm, I think you said it. That market was not designed 

for that kind of unbelievable speculation. I think that the Commodity Futures Trading Commission did, in my judgment, a 

shameful job of regulating. They actually provided their own blind 

folders, which is pretty bizarre for a regulatory agency. 

So I think the purpose of this hearing is to find out what do we 

do about all this to prevent it from happening again? We don’t have 

a clue. You’re right about that. 

That’s because so much of what has happened is on the dark 

money side of things. We can’t see it. We don’t know where it is. 

It’s so dark out there. We ought to bring it all into the light to 

be able to understand it. Who’s trading what? What are the consequences? 

We do know just little snippets. We know that at a time when 

investment banks still apparently had a little money, they were 
28 

buying oil storage capability to buy oil and take it off the market 

and store it and sell it later. So you know, we knew some of the 

players. But we knew just snippets of information. 

But there’s much more we don’t know then what we do know. 

Senator Cantwell has done a lot of work on this, as have I. I’ve 

chaired hearings on this subject. 

I hope we can find a way to effectively establish regulation transparency and then have regulators who care about their work so 

that we have a market that works. We need an oil futures market 

that works. You can’t get rid of the market. 

You must have a market. It’s a very important market. Normal 

hedging is an important part of what we’re doing. 

But when you run speculators up from 37 percent of the market 

to 80 percent of the market, that changes the oil futures market 

in a very significant way, and not for the better. That’s why we 

had, I think, this huge spike. 

Mr. McCullough, are you speaking for all of us in this room when 

you said we don’t have a clue? 

Mr. MCCULLOUGH. I found that at 58 I know a lot less than I 

did when I was 21, Senator. Can I show you one chart? 

Senator DORGAN. Yes. 

Mr. MCCULLOUGH. The next chart up here. Yes. This is an x/y 

chart. Along the horizontal axis we’ve put the net contribution to 

world inventories. Along the vertical axis we’ve put the price of 

WTI crude. 

Now we believe that when we’ve got more supply, the price 

should be going down. This is a statistical analysis over the last 

2 years. Over that period the world has turned on its head. 

By the way, this is significant at 99 percentile which in statistics 

taught me would say, oh wow, results. What we’ve ended up with 

for the last 2 years is the exact opposite of the relationship we 

would expect. Now if we were talking about dark energy and dark 

matter and a physicist came into here and said my new super accelerator is giving the exact wrong answer. You’d be saying I’m 

about to create new science. This would be a Nobel Prize moment. 

For us, either analysts or policymakers, this is a very exciting result. It says that our basic hypothesis about the market is wrong. 

We’re not talking about Ma and Pa Kettle rising over a week. 

We’re talking about a very, very different world from the one we 

saw before. 

Senator DORGAN. But we’re not talking about dark matter. We’re 

talking about dark money. 

Mr. MCCULLOUGH. We’re talking about—I’m sorry, Senator. 

Senator DORGAN. Go ahead. No, that’s fine. 

Mr. MCCULLOUGH. We’re talking about something that indicates 

that we desperately need to know about this because every prediction we’re making is going to be wrong until we get to the bottom of why having a surplus of production in world markets is getting correlated with rising prices. 

Senator DORGAN. Yes. Dr. Gruenspecht, my time is up, and I 

really owed you a question. But you’ve testified before. 

Mr. GRUENSPECHT. That’s all right, sir. 

[Laughter.] 

Senator DORGAN. I understand you’re pleased my time is up. 
29 

[Laughter.] 

Senator DORGAN. Yes, but thank you for being with us. We’re expecting some real help out of Energy Information Administration. 

I found that through the Energy and Water Subcommittee that I 

chair in Appropriations. We need some real help. 

What I got from Mr. Caruso, who is an awfully nice guy. But he 

was just sitting there saying, you know what? It’s the fundamentals. 

That is sheer nonsense. Nothing had changed in the fundamentals to justify what happened. The American people are the victims 

of what happened. 

Let me say this, Senator Cantwell. Thanks for holding the hearing and hanging on to this subject because we need to fix it. 

Senator CANTWELL. Thank you, Senator Dorgan. I know you 

have chaired many hearings on this subject as well. So we appreciate your leadership and your attention to this as well. 

I want to go back to the issue about once we actually find somebody at fault of market manipulation. How do we stop them from 

dumping all their assets? Because we can see from the AMARANTH case that once the penalties were assessed the ability to 

collect on them, which I would assume if people in the marketplace 

don’t think that there really is a strong deterrent. 

I mean there isn’t a strong issue there, they might continue 

these practices. So how do we actually stop them from dumping 

these assets? 

Ms. COCHRANE. Senator, currently we don’t have the authority to 

stop them from dumping their assets. 

Senator CANTWELL. How would this new authority help you in 

that? 

Ms. COCHRANE. Oh, yes. The new authority would allow us, at 

some point during the process the Commission would be able to 

issue an order directing them to freeze their assets and would help 

us preserve the status quo in order to ultimately disclose profits 

and perhaps settle a penalty. 

We would issue an order and direct them to, you know, basically 

cease and desist. 

Senator CANTWELL. So FERC would issue the order. At that 

point in time—— 

Ms. COCHRANE. Yes. 

Senator CANTWELL [continuing]. They would have to freeze their 

assets until any resolution of the situation. 

Ms. COCHRANE. Right. 

Senator CANTWELL. So unlike AMARANTH who by that point in 

time had already gone through a process of liquidating their assets, 

so to speak. 

Ms. COCHRANE. Right. 

Senator CANTWELL. In this case, AMARANTH would have been 

stopped at an earlier point by FERC on concerns of their activities 

in the natural gas market and would have been required then to 

set aside revenue in fact if they were found guilty of those actions. 

Is that correct? 

Ms. COCHRANE. Right. We would have been able to take action 

to prevent the dissipation or dispersion of the assets if the Commis-
30 

sion had the authority at that time and had chosen to do so would 

have been able to. 

Senator CANTWELL. Do other agencies have any authority to stop 

manipulators from avoiding penalties that you know of? 

Ms. COCHRANE. In my understanding is that the CFTC and the 

SEC also have this authority. 

Senator CANTWELL. So it’s authority that has been used and used 

successfully by those agencies? 

Ms. COCHRANE. My understanding is that these authorities are 

used very rarely. As far as the CFTC, my understanding is that 

they’ve used the cease and desist authority only about four times 

in the last 20 years. So it is used rarely. 

Senator CANTWELL. Who did you say? 

Ms. COCHRANE. The CFTC. 

Senator CANTWELL. I think maybe we could say with some conjecture they should have been using it a little more aggressively 

given what’s transpired. 

I want to go back to the data question again, Mr. McCullough because this information you’ve provided in your latest chart. Is this 

information that you collected, your organization, McCullough Research? 

Mr. MCCULLOUGH. This is taken from a short term electric outlets of the EIA. It’s available on about a 1-month flag. So we didn’t 

have it in front of us in September. 

Senator CANTWELL. So how would this information been collected 

in a more timely basis or shared? Are you saying this is EIA responsibility? 

Mr. MCCULLOUGH. It’s good data. It’s EIA data. We rely on it. 

It’s very important for forecasting, you know, the status of overall 

world production levels. 

What it doesn’t tell us is the case that Senator Dorgan just 

raised which is if people were trying to acquire storage facilities in 

order to store physical product in order to create a short term corner. If that was true that was the sort of thing then we would be 

able to turn over to the Department of Justice or the CFTC. But 

at the moment all I know is that on this very high level summary 

data, we have a situation where the net production levels appear 

to be completely opposite everything we’ve ever learned about economics in terms of their impact on price. 

If we found that there was a major player who seemed to be at 

the scene of each crime, so to speak. Then we would actually know 

that we would have to pursue that and get an explanation why. If 

we’d have had that data for ENRON, for example, we might have 

caught some of the times that they had spot forward gamuts back 

in 2000 and 2001. 

Senator CANTWELL. Is this information that CFTC is collecting 

because you know, there’s been a little dispute about, you know, 

roles and responsibilities here. Is this information being collected 

or analyzed by someone? 

Mr. MCCULLOUGH. No. You know, we have talked about AMARANTH. I’m very glad that FERC took a role in AMARANTH. But 

the fact is that AMARANTH took manipulations were in forward 

markets. 
31 

It would not have been accessible to FERC to have intervened at 

the appropriate moment because that was data that was sitting in 

CFTC files. The CFTC itself didn’t react until AMARANTH went 

under. So the manipulations at AMARANTH, they effectively tried 

to corner North American natural gas for certain months, would 

not have been accessible to the regulators to move on in a timely 

fashion. 

So we really need to get that data out there as well as giving 

people the power to react to it. 

Senator CANTWELL. So the data collection in this case would 

have been EIA’s responsibility but shared with agencies like FERC 

is what you’re saying. 

Mr. MCCULLOUGH. For AMARANTH it would have been CFTC. 

Then I would hope it would be shared with FERC because frankly 

the only way we found out about this is when we found out that 

Mr. Hunter had tried to corner the market and failed. His entire 

hedge fund went under. 

Senator CANTWELL. I meant on this actual. 

Mr. MCCULLOUGH. Oh, on this one. 

Senator CANTWELL. Yes, on the WTI market. 

Mr. MCCULLOUGH. Unfortunately FERC doesn’t have oil authority. It’s oil’s responsibility at the top of the pipeline as I understand 

it. I don’t want to get in trouble with different Federal agencies, 

but I would love them to have oil authority. 

Frankly they’ve got some of the skills they’ve built up in the 

agency for electric and gas. These are, when all is said and done, 

in Siamese twin commodities. Natural gas prices and oil prices are 

very highly correlated. 

Electricity prices and natural gas prices are very highly correlated. I think I’ve just proposed something rather beyond my 

ability to affect unfortunately. 

Senator CANTWELL. Yes. Thank you. There is a vote on. So I 

want to see if my colleagues have further questions. 

Senator RISCH. You know there is a vote. We’re going to need to 

run in a minute. But can somebody answer this question briefly? 

What is the oil market like compared to other commodities in 

number of traders, number of dollars and what have you? Who can 

take a run at that real quick? I mean how does it compare to wheat 

or corn or whatever the biggest? 

Mr. GRUENSPECHT. I think it’s very big for a commodity market, 

and small relative to something like the currency markets. But relative to other commodities, I think there’s a significant amount of 

trading. 

Senator RISCH. Ok. Mr. McCullough? Thirty seconds. How’d this 

happen that the market turned upside down, exactly the opposite 

prices for supply and demand? 

Mr. MCCULLOUGH. My hypothesis is real straight forward. We 

had a market with a lot of players, many buyers, many sellers 

that’s evolved over time. We now have a fewer number of buyers 

and sellers and they are larger entities. 

This looks like oligopoly strategies being played out in the market as opposed to the perfect competition of our college courses. 

Senator RISCH. Very good. Thank you. 
32 

Senator CANTWELL. Thank you. Thank you. I want to thank all 

the witnesses for their testimony today and to share with my colleagues that if they any follow up questions we can submit them 

to the witnesses and if they could respond to us. 

These legislative proposals are things we’re going to be considering as part of the mark up on energy legislation. So we appreciate your response to that. This meeting is adjourned. 

[Whereupon, at 3:15 p.m. the hearing was adjourned.] 
(33) 

APPENDIXES 

APPENDIX I 

Responses to Additional Questions 

RESPONSES OF ANNA COCHRANE TO QUESTIONS FROM SENATOR BINGAMAN

Question 1. Please describe the benefits that the Commission has seen from the 

Open Access Same-time Information System (OASIS), with emphasis on the number 

of alleged violations that OASIS has detected that the Commission has then gone 

on to pursue. 

How many of the violations that the Commission pursues are the result of FERC 

discovery, and how many are the result of self-reports? 

Answer. The Commission generally requires public utilities subject to its jurisdiction to maintain Open Access Same-time Information Systems (OASIS). OASIS systems are electronic databases that provide information regarding available transmission capacity and prices as well as an ability to request transmission service. 

This data is regularly updated and provided simultaneously to all users of the utility’s OASIS system. The purpose of OASIS systems is to ensure that existing and 

potential transmission customers have non-discriminatory access to relevant transmission data from the transmission provider. 

The primary benefit of OASIS postings is market transparency. Market participants should have simultaneous access to data relevant to making transmission 

purchasing decisions. Our OASIS regulations also prohibit transmission providers 

from providing transmission data on a preferential basis, including to an affiliate 

or business partner. OASIS therefore plays a key role in our mission to ensure that 

our regulated transmission markets are fair and transparent. Therefore, OASIS is 

not designed so much to detect violations as it is to prevent them, by making the 

transactions so transparent that would-be violators are deterred. Though OASIS 

data sometimes evidences violations of Commission requirements, the Commission’s 

enforcement activities relating to OASIS more often have to do with ensuring that 

market participants timely and materially comply with the OASIS system requirements. 

Violations of our regulations related to OASIS systems are varied. For example, 

through our normal auditing functions within the Office of Enforcement, we have 

uncovered instances in which a transmission provider has failed to provide all of the 

information required on OASIS. In fiscal year 2008, we found 13 such instances of 

noncompliance with our regulations through our auditing process. The data was 

promptly corrected or supplied on the OASIS by the transmission provider in response to the auditors’ report. 

Other types of potential violations are related to FERC’s policies prohibiting 

undue discrimination among transmission customers by the transmission provider, 

touching upon OASIS postings. For example, FERC imposed a $10 million civil penalty under a consent agreement with PacifiCorp related to several self-reported violations of the company’s Open Access Transmission Tariff and OASIS postings. In 

re PacifiCorp, 118 FERC ¶ 61,026 (2007). Similarly, our investigations of SCANA 

Corporation and Otter Tail Power Company revealed that the companies had been 

erroneously utilizing network transmission service to make off-system power sales. 

In re SCANA Corporation, 118 FERC ¶ 61,028 (2007) (consenting to imposition of 

civil penalty without admitting or denying violation); Otter Tail Power Company, 

123 FERC 1161,213 (2008) (consenting to imposition of civil penalty without admitting or denying violation). Commission audit staff uncovered non-compliance at 

MidAmerican Energy Company involving preferential transmission service to the 

company’s wholesale merchant function. MidAmerican Energy Company, 112 FERC 
34 

¶ 61,346 (2005). The Commission penalized Arizona Public Service Company $4 million for OASIS posting violations and for making off-system power sales without 

purchasing transmission service. Arizona Public Service Company, 109 FERC ¶ 

61,271 (2004). 

Question 2. Are the Electric Quarterly Reports (EQRs) audited for accuracy? 

Answer. Yes. Commission staff reviews over 1,200 Electric Quarterly Reports 

(EQR) filings each quarter for accuracy and completeness. Commission staff determines whether sellers have timely complied with the requirements set forth by the 

Commission through the use of software tools designed to identify inconsistencies 

in the data. Once identified, staff contacts EQR filers to determine whether the information filed is correct and, if not, assists filers in revising their EQRs to come 

into compliance with Commission requirements. During FY2008, Commission staff 

contacted over 300 filers regarding issues with their EQRs. 

In addition, Commission staff has completed 18 audits of EQR data during 

FY2004-09. The Commission will consider conducting audits of EQR data in future 

audit planning cycles. 

Question 3. In your written testimony, you stated that EQRs are helpful in determining ‘‘whether sellers are complying with Commission-imposed price mitigation 

measures.’’ Could you describe how the Commission decides when to impose price 

mitigation? 

Answer. In organized markets, each regional transmission organization (RTO) and 

independent system operator (ISO) has established market rules which govern when 

and how price mitigation is imposed. These market rules are stated in the RTO’s 

or ISO’s tariff, which is filed with the Commission and subject to public comment 

before the market rules go into effect. Proposals on when to impose price mitigation 

may come to the Commission from the RTO or ISO, from any market participants 

(e.g., through complaints filed with the Commission), from other interested participants in a proceeding (e.g., state regulatory commissions), or from the Commission 

itself. In many cases, these market rules are the subject of stakeholder deliberations 

before they are submitted to the Commission for approval. The decision on when 

to approve price mitigation rules is a case-by-case determination that is made after 

reviewing the record in a particular case. The Commission may accept the rules in 

whole or in part, reject them, or establish further proceedings. 

Different RTOs/ISOs apply mitigation in their organized energy markets using 

one of two methods. Under the first, bid caps are applied when a structural market 

power screen is failed, such as when there are few or no competing bids for service, 

and the seller’s bid must be accepted due to a transmission constraint. Under the 

second, bid caps are applied when a seller’s bid exceeds an estimate of its marginal 

costs by an established threshold and as a result, the market price is increased by 

another established threshold. The thresholds vary among RTOs and ISOs. 

Also, in either traditional or RTO/ISO markets, public utilities that make wholesale sales of electric energy, capacity or ancillary services under market-based rates 

authority granted by the Commission are subject to Commission-imposed mitigation 

on a seller-specific basis in instances where a market power problem has been identified. Such mitigation includes, but is not limited to, various forms of price mitigation which can be tailored to address the specific market circumstances of the applicant. Section 35.38 of the Commission’s regulations also provides for default price 

mitigation in instances where the seller fails to provide alternative mitigation that 

is sufficient to address the identified market power problem. 

Question 4. Please describe how cease-and-desist authority, such as proposed in 

S. 672, could have altered any cases that have been pursued, or are currently being 

pursued, by the Commission. 

Answer. The cease-and-desist authority proposed in S. 672 would permit the Commission to order any entity that may be committing a violation or may have committed a violation to cease and desist from the violation. Such authority would be 

utilized by the Commission to temporarily prohibit practices that it preliminarily 

determines are likely to result in significant harm to consumers or significant harm 

to the public interest, until such time as the Commission has concluded its investigation of the matter. 

Once an investigation commences, subjects almost always promptly and voluntarily stop the activities that gave rise to the investigation so as to limit their potential exposure to penalties should FERC determine that violations have occurred. For 

this reason, we have not yet encountered many situations where cease and desist 

authority would have been utilized. However, as our investigations, particularly investigations into market manipulation, continue, the Commission could face a situation where a subject continues the activity after we commence an investigation, especially if such a violation is particularly profitable. The ability to quickly and flexibly respond to such an event is the primary benefit of the cease and desist authority 
35 

provided in S. 672. In addition, the Commission’s current ability to file in district 

court for an injunction is limited to ongoing violations or suspected future violations, 

yet our investigations necessarily focus on conduct that occurred in the past and 

there may be circumstances where the nature and extent of past violations give rise 

to a concern that violations may recur. This authority makes clear that the Commission can order a subject to cease specific conduct based on its past behavior. 

I also want to distinguish between cease and desist authority and the related authority under S. 672 to order an entity subject to investigation for possible manipulation to preserve its assets. This latter authority would be utilized when the subject 

is in the process of dissolving its business or monies are being distributed to owners 

or creditors. In these instances, the Commission could act to ensure that monies will 

be available should there be an ultimate order requiring disgorgement and/or penalties. The Amaranth matter is an example of a situation where the prohibition of 

dissipation of assets authority could have been used to good effect. 

RESPONSES OF ANNA COCHRANE TO QUESTIONS FROM SENATOR MURKOWSKI

Question 1. Could you clarify the status of the Amarenth case, since statements 

in the hearingeemed to indicate that Amarenth has already been found liable? 

Answer. The Amaranth proceeding is currently in litigation before an administrative law judge at the Commission. On July 26, 2007, the Commission issued an 

order that directed the Amaranth respondents to show cause why they should not 

be found to have violated the Anti-Manipulation Rule promulgated by the Commission under section 315 of the Energy Policy Act of 2005, and why they should not 

be assessed civil penalties and disgorge unjust profits associated with their actions. 

Responses were submitted along with briefs on the merits by the respondents and 

trial staff within the Commission’s Office of Enforcement. 

On review of those responses and briefs, the Commission on July 17, 2008, issued 

an order ruling on certain preliminary legal issues raised by the parties and setting 

for hearing issues involving disputes of material fact. Specifically, the Commission 

directed an administrative law judge to determine, based on the allegations contained in the Show Cause Order and in the brief submitted by the Office of Enforcement, whether any of the respondents violated the Anti-Manipulation rule and 

whether they unjustly profited from their activities, and if so the level of unjust 

profits. The Commission reserved for itself the issues of whether civil penalties 

should be imposed for the respondents’ alleged violations and the method by which 

the respondents should disgorge any unjust profits. The Commission stated that it 

would make those determinations based on the record developed at the hearing. 

The judge presiding over the hearing has established a procedural schedule requiring the conclusion of discovery and the submission of written testimony by July 

23, 2009. The hearing is scheduled to begin on August 4, 2009, followed by an initial 

decision by the judge on or before December 1, 2009. 

Question 2. Can you provide a breakdown of how many cases FERC is pursuing 

that deal directly with market manipulation, in terms of both number and percentage? 

Answer. Currently, the Division of Investigations has open 23 investigations 

(some involving multiple subject companies) in which market manipulation is a potential violation. These 23 investigations constitute approximately 45% of all investigations currently open. 

Question 3. What other enforcement proceedings is FERC currently undertaking? 

Answer. FERC engages in a number of enforcement activities beyond matters involving opened investigations regarding market manipulation. For example, the 

Commission is handling four manipulation proceedings in which orders to show 

cause have been issued. These proceedings, involving Amaranth (Docket No. IN07- 

26), Energy Transfer Partners (Docket No. IN06-3), National Fuel Marketing Company (Docket No. IN09-10), and Seminole Energy Services, Inc. (Docket No. IN09- 

9) are in various procedural stages at the Commission. 

Additionally, the Office of Enforcement’s Division of Investigations currently has 

28 investigations (some with multiple subject companies) pending which do not involve market manipulation. These cases run the gamut of the Commission’s regulatory authority, including pipeline capacity release activities, the allocation of network transmission service, potential undue discrimination, possible standards of 

conduct violations, and pipeline and electric utility tariff violations. Notably, investigations of potential violations of new Electric Reliability Standards authorized by 

EPAct 2005 are an emerging and increasingly significant proportion of the Commission’s investigative activity. 

The Office of Enforcement also receives self-reports of potential violations from 

the regulated community. Such reports are reviewed by staff attorneys to determine 
36 

whether an investigation is warranted. In fiscal year 2008, the Commission received 

and reviewed 68 self-reports and 36 were subsequently opened as investigations. 

Further, the Division of Audits within the Office of Enforcement conducts both financial and non-financial audits of the entities subject to the Commission’s regulations. For fiscal year 2008, this division conducted 60 audits resulting in 156 recommendations for corrective action. Our auditors address a wide range of enforcement issues, including open access transmission tariff compliance, interconnection 

rules, standards of conduct, and Commission filing requirements. 

Additionally, the Office of Enforcement operates a publicly-accessible Enforcement 

Hotline. The Enforcement Hotline is staffed during all business hours by attorneys 

within the Division of Investigations. Where warranted, the Office utilizes information obtained through the Hotline as a basis to begin an investigation. 

Question 4. Considering the separate notion of modifying Section 5 of the NGA, 

have you assessed the degree to which retroactive refunds, and the resulting insecurity of pipeline revenues, would have on the ability of pipelines to access the capital 

markets? 

Answer. We have not done a quantitative assessment. However, the current proposals to modify section 5 of the NGA are similar to section 206 of the FPA. Among 

other limitations, these provisions set a refund effective date no earlier than the 

date a complaint is filed or the Commission issues a notice of its intent to initiate 

such a proceeding. There is no evidence that refund liability under Section 206 of 

the FPA has significantly impaired access by the electric utility industry to the capital markets. 

Question 5. Is the proposal for retroactive refunds limited to cost of service or does 

it also apply to rate design and cost allocation? If the latter, how can you justify 

making it retroactive? 

Answer. The proposal to revise NGA section 5 to permit the Commission to establish a retroactive refund effective date would apply to all refunds, including refunds 

that result from a finding that the pipeline’s existing rate design or allocation of 

costs among its customers is unjust and unreasonable. Currently, when the Commission finds under NGA section 5 that a pipeline’s rate design or existing allocation of costs among its shippers is unjust and unreasonable, the Commission allows 

the pipeline to implement any offsetting rate increases at the same time as it implements the rate decreases. This ensures that the Commission’s action under NGA 

section 5 does not cause the pipeline to under recover its cost of service. Similarly, 

if NGA section 5 is amended to be consistent with section 206 of the FPA, the Commission could nonetheless continue this practice of ensuring that changes in rate design or cost allocation do not cause a shortfall for the pipeline. It should also be 

noted that refunds are discretionary under this provision and that, if they are ordered, they are limited to 15 months. 

Question 6. Isn’t it true that markets determine the ultimate price for natural gas 

(i.e. it is not a compendium of segmented costs along the way). Thus, retroactive 

refunds would have little or no impact on the delivered price of gas. Rather, it’s just 

a quest between market participants, including producers, to capture the netback. 

Answer. It is true that the price of natural gas is market-determined. Some customers purchase their gas in locations close to the market where it will be consumed, such as Chicago. However, other customers purchase their gas at market 

hubs or producing areas, and pay to transport that gas to the market where it will 

be resold or consumed. 

For any specific transaction, the party which acts as shipper on the interstate natural gas pipeline could be a local distribution company, a producer, a marketer, another interstate pipeline, or an end-user. Retroactive refunds would go initially to 

whichever of the numerous parties in a chain of commercial transactions was the 

actual shipper, if that shipper was paying the maximum tariff rate. But a number 

of shippers enter into negotiated rate transportation contracts under which retroactive refunds may be reduced or relinquished, in exchange for a mutually-agreeable 

rate; whether refunds apply is a matter of the specific contract terms. 

Many local distribution companies (LDCs), regulated by state public service commissions, continue to hold sufficient long-term capacity to ensure adequate deliveries to their markets, and the state public service commissions most likely would 

require those LDCs to flow through any retroactive refunds they receive to their 

customers, including residential consumers. In the case of a producer which held 

long-term firm pipeline capacity for the transportation of its gas to market, the producer would receive the retroactive refund; this refund would defer some of the producer’s transportation costs, and may result in an increase in its effective revenues 

from the transaction. 

Regardless of whether the shipper is a producer, marketer, pipeline, LDC, or enduser, the shipper’s transportation payments support the transmission infrastructure 
37 

needed to allow a healthy competitive natural gas market to function, and it is these 

shippers and their customers who receive the benefit of any retroactive refunds 

pipelines are ordered to make. 

Question 7. Isn’t adequate pipeline capacity key to keeping delivered costs low? 

For example, during the New England cold snap of 2004 it was a lack of pipeline 

capacity—not a lack of natural gas—which resulted in prices spiking over $50 per 

mmbtu. If retroactive refunds impair the ability of pipes to access capital markets 

and continue robust construction aren’t we running the risk of repeating that example? 

Answer. Adequate pipeline capacity is certainly a key element in keeping delivered natural gas costs low. Since the New England cold snap of 2004, over 3,600 

MMcf per day of pipeline delivery capacity and 800 MMcf of liquefied natural gas 

deliverability has been placed in service in the Northeast with Commission approval. An additional 2,000 MMcf per day of pipeline capacity to the region is currently under construction. The additional new capacity—along with generally milder 

weather—is one reason why price spikes during the winter of 2008-09 were less frequent and less severe than those in the recent past. 

The Commission diligently reviews the proposed rates associated with new construction to assure that rates are just and reasonable. The Commission would only 

order rate refunds in cases where those rates are determined, after considerable review, not to be just and reasonable. Additionally, in those cases the Commission is 

limited in its ability regarding the refunds ordered. 

Question 8. Most of the merchant generators who operate gas fired generation facilities do not hold firm transportation capacity on the natural gas on the pipelines 

that serve them. During the cold snap of 2004 this very nearly resulted in an inadequacy of electric power generation. Have you evaluated the degree to which the 

failure to hold firm capacity jeopardizes electric reliability on a larger scale? 

Answer. A number of factors contributed to conditions in the New England electricity market during the 2004 cold snap. Commission staff began an assessment 

even while the cold snap continued and identified many areas that contributed to 

market events. ISO-NE and state agencies, at the urging of the Commission, took 

several steps to reduce the risk of winter disruptions. Those steps included: 

• Altering bidding schedules during cold snaps so generators know their power 

commitment before gas trading and pipeline scheduling deadlines. • Improving operations to allow for increased power imports. • Restricting economic outages during cold snaps. • Including fuel and pipeline data in the unit commitment and forecasting process. • Working with states to clarify emissions rules and make them more flexible. 

Reserving firm capacity directly from a pipeline on a year round basis can be costly and may not always benefit the public. The Commission has created conditions 

where those that value capacity the most from day to day can acquire it at a market 

price through a transparent posting system. This market price tells generators the 

value of capacity during times of constraint; it tells the power system operators that 

other resources may be more economic; and it tells pipeline companies when sufficient demand exists to justify new construction. During the winter of 2008-09, independent power providers purchased 20% of the pipeline capacity released in the 

Northeast. 

Question 9. When is the last time the Commission updated its policy on incremental pricing of gas transmission capacity, as compared to rolled in pricing? Don’t 

we now have a system with wildly variant prices for the same essential service? 

How do you justify that result? 

Answer. The last generic policy review of the Commission’s incremental and 

rolled-in pricing policies was completed in 2000. Certification of New Interstate Natural Gas Pipeline Facilities, 88 FERC ¶ 61,227 (1999), order on clarification, 90 

FERC ¶ 61,128 (20000), order on clarification, 92 FERC ¶ 61,094 (2000) (collectively 

we refer to these orders as the ‘‘Certificate Policy Statement’’). Under this policy, 

pipelines and shippers have significant flexibility to negotiate rates which provide 

a fair balance between the pipeline and individual shippers dealing with both price 

and risks, such as the risk of future cost overruns, while ensuring that other shippers who do not benefit from newly constructed capacity do not bear the costs. As 

a result, shippers who enter into long-term contracts for pipeline transportation 

service may pay different rates, depending on when they entered into their contract, 

and other factors (such as how much must be invested in new facilities to provide 

the requested service). 

In addition, shippers also have the opportunity to seek released capacity from 

other shippers or interruptible capacity from the pipeline itself. This allows competi-
38 

tion to take place between the pipeline and releasing shippers. This competition creates short-term market prices which reflect the relative surplus or scarcity of capacity on individual pipelines and gives all interested shippers opportunities to acquire 

short-term spot market gas supplies and the pipeline capacity necessary to deliver 

their gas to market. On a nation-wide basis these opportunities allow shippers to 

seek the most cost-effective supplies of natural gas delivered to their markets. 

Question 10. In testimony you stated that if FERC detects market manipulation, 

it has no meanso order a stop to such manipulation until the administrative proceeding results in a finding of liability. Isn’t it true that FERC does have that ability through the federal court system? 

If so, is this ability truly inadequate to deal with manipulation or is it simply a 

bit less convenient for FERC to obtain judicial injunctive relief? 

Answer. To be clear, under Section 20 of the Federal Power Act (FPA) and Section 

314 of the Natural Gas Act (NGA), the Commission has the authority to seek an 

injunction from the federal district courts to stop actions that constitute or will constitute a violation of our regulations, the acts, or our orders. Such an injunction will 

be issued by the courts ‘‘upon a proper showing.’’ Proceedings under FPA Section 

20 and NGA Section 314 are subject to the same scheduling, procedural requirements, legal standards, and burden of proof as those faced by private litigants seeking injunctions from the federal courts. And, as noted above, the authority is limited 

to situations where the Commission has a basis to find that ongoing or future conduct violates or will violate the law. 

The proposals contained in S. 672 would permit the Commission itself to issue an 

order to companies subject to investigation to temporarily cease and desist from potential violations based on past, ongoing, or suspected future conduct. Notice and 

hearing would be required prior to the issuance of such an order, except in the circumstance where such procedures are impracticable or contrary to the public interest. Upon issuance of such a temporary cease and desist order, the subject of the 

order could request reconsiderationy the Commission or proceed immediately to the 

Circuit Courts of Appeals to obtain review of the order. Moreover, the related asset 

freeze authority remedy may not clearly be available even in a district court injunction proceeding under Rule 64 of the Federal Rules of Civil Procedure, absent an 

express federal statutory authority. The procedure provided for in S. 672 allows for 

much quicker action to stop prohibited conduct or the dissipation of assets than 

going to federal district court while also allowing for immediate access to appellate 

court review. 

Further, the existing authority to seek injunction from the courts would not reach 

the situation posed by Amaranth. Section 20 of the FPA only allows the Commission 

to seek an injunction of acts or practices that ‘‘constitute or will constitute a violation’’ of the FPA or the Commission’s regulations or orders. Amaranth’s conduct was 

completed by the time the investigation commenced and its distribution of assets 

was not, itself, an action that is a violation of the Act or the Commission’s regulations or orders. 

The proposals would bring FERC’s authority and practices more in line with the 

authority and practices in place at CFTC and SEC. It would also expand our ability 

to stop potential violations. Under existing authority, the Commission would need 

to demonstrate the subject is engaged or is about to engage in violations to obtain 

an injunction. However, under S. 672, the Commission may, as a precautionary 

measure, issue an order to prohibit any actions the subject would take that would 

harm the public interest without proving the likelihood that the violation would be 

repeated. Perhaps most importantly, the proposals would allow the Commission to 

act rapidly and flexibly to deal with potential violations, including market manipulation, by ensuring that the public interest is protected while investigations are 

pending. The proposals strike an appropriate balance between the need to quickly 

respond to potential violations and important due process rights. 

RESPONSE OF HOWARD GRUENSPECHT TO QUESTION FROM SENATOR MURKOWSKI

Question 1. Do you think that there are certain duties and functions that are fundamentally inconsistent with EIA’s mission and capacity that would be better left 

to the CFTC? 

Answer. Yes, EIA’s mission is to provide policy-neutral data, forecasts, and analyses to promote sound policy making, efficient markets, and public understanding 

regarding energy and its interaction with the economy and the environment. The 

CFTC’s mission is to protect market users and the public from fraud, manipulation, 

and abusive practices related to the sale of commodity and financial futures and options, and to foster open, competitive, and financially-sound futures and option mar-
39 

kets. For both EIA and the CFTC, knowledge and understanding of the market are 

very important. EIA’s work focuses on extracting information from the data available through its surveys and third-party providers. CFTC’s market oversight is directed to supporting its policy-related activities, including development and enforcement of regulations. The institution of processes for sharing data, expertise and insights on a more timely basis—some of which has already begun—will help both 

agencies. However, given the policy neutrality of EIA’s mission, it should not directly engage in the policy-related functions of the CFTC that include regulation 

and enforcement. 

(41) 

APPENDIX II 

Additional Material Submitted for the Record 

NATURAL GAS SUPPLY ASSOCIATION, 

March 27, 2009. 

Hon. MARIA CANTWELL, 

Chair, Subcommittee on Energy, Committee on Energy and Natural Resources, U.S. 

Senate, Washington, DC. 

DEAR CHAIR CANTWELL: The Natural Gas Supply Association (‘‘NGSA’’) requests 

inclusion of these comments in the record for the Subcommittee on Energy’s hearing 

on draft legislation to improve energy market transparency and regulation held on 

March 25, 2009. In particular, NGSA recently became aware of the proposed 

Amendment to the Natural Gas Act (‘‘NGA’’) giving the Federal Energy Regulatory 

Commission (‘‘FERC’’) cease-and-desist authority, and would like to submit brief initial comments on the proposed language. 

NGSA represents integrated and independent companies that produce and market 

domestic natural gas. Established in 1965, NGSA encourages the use of natural gas 

within a balanced national energy policy and promotes the benefits of competitive 

markets to ensure reliable and efficient transportation and delivery of natural gas 

and to increase the supply of natural gas to U.S. consumers. NGSA strongly opposes 

market manipulation and believes that FERC should have sufficient enforcement 

tools to deter and stop such conduct. As NGSA stated as part of an industry coalition in a white paper submitted to FERC in Docket No. AD07-13, we believe that 

the vitality of the markets regulated by FERC depends on the agency’s vigorous, 

firm and fair use of its enforcement authority. 

However, it is also important that FERC’s enforcement tools provide the proper 

checks and balances, giving all parties due process rights. FERC’s authorities have 

already been significantly broadened in recent years, and NGSA believes the tools 

already at the commission’s disposal are sufficient. To date, there has been only one 

reported instance in which a company distributed its assets, ‘‘frustrating the agency’s ability to collect civil penalties.’’ (January 21, 2009 letter from Chairman 

Kelliher to Senator Bingaman). If it is determined that FERC requires additional 

enforcement authority beyond the existing court injunction powers provided for in 

both Section 717s(a) of the NGA and the Energy Policy Act of 2005, NGSA believes 

certain modifications are needed to clarify and enhance the proposed language in 

order to ensure that any additional enforcement authority is also coupled with a balanced approach to due process. NGSA’s suggestions with regard to Senate Bill 672 

titled ‘‘Natural Gas and Electricity Review and Enforcement Act’’ include the following: 

1. GIVEN THE NATURE OF ANY TEMPORARY CEASE-AND-DESIST AUTHORITY, IT SHOULD

ALSO INCLUDE OTHER ENFORCEMENT LIMITS

NGSA believes the language in Section 2(e)(1) of the proposed amendment should 

be further tailored to limit the types of pre-emptive enforcement actions that FERC 

will have authority to employ. NGSA is concerned that the current language is overly broad and may give FERC the authority to unnecessarily hinder, or even stop, 

companies from operating their businesses (e.g. revocation of blanket certificate authority). NGSA suggests modifying the proposed language in Section 2(e)(1) so that 

the remedy within any cease-and-desist order is narrowly tailored to address the alleged violation. As stated below regarding emergency orders, the amount of assets 

that can be frozen should be commensurate with the level of penalty that ultimately 

may be assessed. Failure to incorporate this limit could unreasonably result in a 

company no longer being able to operate its business, potentially impairing the supply of natural gas to the market. 
42 

2. REQUIRE DE NOVO COURT REVIEW

To ensure the fairness of due process, the judicial review of a FERC cease-anddesist order should provide all parties, including FERC, with equal deference. Specifically, the proposed language should be modified to grant explicitly de novo jurisdiction to the reviewing district courts, thus allowing the court to make an independent determination of all of the facts and all of the issues surrounding the agency’s actions. As courts have previously recognized in cases involving other agencies, 

such de novo review is appropriate in analogous circumstances where the agency 

has the ability to serve as the prosecutor, judge and jury in the proceeding. (See 

NRC v. Radiation Tech, Inc., 519 F. Supp. 1266, 1286 (D. N.J. 1981); FCC v. Summa 

Corp., 447 F. Supp. 923, 925 (D. Nev. 1978). In situations where an emergency 

cease-and-desist order is issued without a prior hearing, it is critical that on judicial 

review, the district court is able to independently review the facts and circumstances in order to determine whether the order was appropriate. 

3. EMPLOY THE CFTC MODEL FOR ANY IMMEDIATE EMERGENCY ACTIONS

The proposed language for the cease-and-desist authority appears to be modeled 

after Section 21(c) of the Securities Exchange Act of 1934 (‘‘SEA’’). Instead, NGSA 

believes that the U.S. Commodity Futures Trading Commission’s (‘‘CFTC’’) model 

provides the most effective due process procedures for addressing undesirable behavior. In particular, for emergency situations, NGSA supports adopting language 

modeled after Section 6c of the Commodities Exchange Act (‘‘CEA’’), which states 

that, 

Whenever it shall appear to the Commission that any registered entity 

or other person has engaged, is engaging, or is about to engage in any act 

or practice constituting a violation of any provision of this chapter or any 

rule, regulation, or order thereunder, or is restraining trading in any commodity for future delivery, the Commission may bring an action in the 

proper district court of the United States or the proper United States court 

of any territory or other place subject to the jurisdiction of the United 

States, to enjoin such act or practice, or to enforce compliance with this 

chapter, or any rule, regulation or order thereunder, and said courts shall 

have jurisdiction to entertain such actions. (emphasis added) 

One of the primary functions of the CFTC is to enforce laws which ensure that 

market participants do not engage in actions that manipulate the marketplace. Conversely, the SEC is primarily responsible for supervising fiduciary responsibility between market participants, which ensures that all market participants are treated 

fairly and without discrimination. Given that the enforcement activities of the 

FERC and the CFTC are similar, it follows that to the extent FERC’s enforcement 

powers should be broadened, the laws governing the CFTC enforcement activities 

could serve as an appropriate model rather than the laws which govern the responsibilities of the SEC. 

Moreover, FERC has the authority under Section 717s(a) of the NGA to seek an 

injunction through the district courts. Modifying the proposed language to mirror 

the CFTC approach in those instances where FERC has not yet held a hearing reinforces Section 717s(a) and will help safeguard against any tendency by the agency 

to serve as prosecutor, judge and jury prior to full fact-finding. This will guarantee 

parties an independent adjudication of findings that protect the public interest. 

NGSA further favors the CFTC model in those situations in which a prior hearing 

is not practical because certain cease-and-desist provisions in the current language 

fail to provide parties with sufficient due process protection, give the Commission 

unlimited discretion, or provide a low threshold for action. The proposed legislation, 

unlike the CFTC model, would allow the agency to issue a cease-and-desist order 

without notice and hearing. Specifically, the areas of concern with the proposed approach are as follows: 

• No Limits on the Power to Freeze Assets. In Section 2(f), the proposed language 

gives FERC the ability to prevent the dissipation or conversion of assets. If 

FERC is granted this ability, the assets subject to being frozen should not be 

unlimited. Instead, the amount of assets that can be frozen should be commensurate with the level of penalty that ultimately may be assessed. The failure 

to limit this amount could unreasonably result in an unjustified inequity or a 

company that is no longer able to operate its business. 

• The Standard Is Too Low for Issuing an Emergency Order without Hearing. In 

Section 2(f)(2), the proposed language gives FERC authority to bypass a hearing 

prior to issuing a cease-and-desist order in instances where FERC determines 
43 

that a prior hearing would be ‘‘impracticable or contrary to the public interest.’’ 

In contrast, courts have a higher standard for issuing a restraining order to preserve the status quo. For example, in district court a restraining order will only 

be granted, without a prior hearing, in situations where the moving party can 

plead and prove: (1) reasonable probability of success on the merits; (2) irreparable injury; and (3) a balance of equities in favor of the moving party. A similarly high standard should apply when considering whether use of cease-anddesist authority by FERC is appropriate. • No Deadline is Specified for FERC Action Once an Emergency Cease-and-Desist 

Order Issues. Section 2(g)(2)(B) states that an applicant can request a hearing 

within 10 days of an emergency order and FERC shall hold a hearing and 

render a decision ‘‘at the earliest practicable time.’’ Given that a cease-and-desist order can have significant consequences for a company, FERC action on a 

hearing and decision in an instance where a cease-and-desist order has already 

been issued should be expedited and not left unspecified. A hearing should take 

place within 10 days of the order and a decision should be issued within 30 days 

of the order. 

To the extent any further FERC enforcement authority is warranted, NGSA 

strongly endorses the CFTC model for cease-and-desist authority, and asks that the 

Committee consider modifying Section 2(f) to require a court injunction in instances 

where an immediate cease-and-desist order must be issued. 

Thank you for the opportunity to provide these comments. In closing, we appreciate the Committee’s efforts to consider whether FERC has sufficient enforcement 

authority in order to prevent market manipulation, and believe the tools already at 

the commission’s disposal are sufficient. To date, there has been only one reported 

instance in which a company reportedly distributed its assets in order to avoid 

pending penalties. In the event Congress decides to move forward with this legislation, NGSA hopes you will give our suggestions serious consideration so that balanced due process benefits are provided to all potentially affected parties. 

Sincerely, 

R. SKIP HORVATH. 

AMERICAN PUBLIC GAS ASSOCIATION, 

March 25, 2009. 

Hon. MARIA CANTWELL, 

U.S. Senate, 511 Senate Dirksen Building Washington, DC. 

DEAR SENATOR CANTWELL: On behalf of the American Public Gas Association 

(APGA), I want express our strong support for S. 672—The Natural Gas and Electricity Review and Enforcement Act which you recently introduced. I commend you 

for your efforts on behalf of natural gas consumers. 

APGA is the national association for publicly-owned natural gas distribution systems. Of the some 1,200 local distribution systems in the United States, approximately 1,000 are public gas systems located in 36 states; over 700 of these systems 

are APGA members. Publicly-owned gas systems are not-for-profit, retail distribution entities owned by, and accountable to, the citizens they serve. They include municipal gas distribution systems, public utility districts, county districts, and other 

public agencies that have natural gas distribution facilities. 

Your legislation will bring parity to the manner in which electric customers 

versus gas customers are treated when it comes to the ability of the Federal Energy 

Regulatory Commission (FERC) to review and timely set just and reasonable rates. 

Correcting this inequity in Section 5 of the Natural Gas Act to allow the FERC to 

set a refund-effective date commensurate with the date on which a consumer complaint is filed and will allow FERC to treat regulated pipelines just as it currently 

treats regulated electricity transmission providers. This is a critical consumer protection tool that the current and past FERC Chairmen and sitting Commissioners 

have themselves recognized that FERC is lacking. 

Your legislation will also provide the FERC with cease and desist authority. Currently, if FERC wants an entity to refrain from certain offensive activities, such as 

market manipulation, it must go to court to obtain an order, which can be a timeconsuming exercise. By contrast, Congress has provided other federal agencies, such 

as the Commodity Futures Trading Commission and the Securities Exchange Commission, with cease and desist authority, which gives the agency the authority to 

order a bad actor to cease its offensive behavior immediately. This authority would 

significantly enhance the FERC’s ability to protect consumers by providing it with 

the ability to stop market manipulation and other market abuses in a timely fashion. 
44 

I thank you for your efforts on behalf of natural gas consumers and look forward 

to working with you and others towards passage of these critical consumer protection provisions. 

Sincerely, 

BERT KALISCH, 

President and CEO. 

AMERICAN PUBLIC GAS ASSOCIATION, 

March 25, 2009. 

Hon. JEFF BINGAMAN, 

Chairman, Committee on Energy and Natural Resources, U.S. Senate, Washington, 

DC. 

DEAR CHAIRMAN BINGAMAN: On behalf of the American Public Gas Association 

(APGA), I request your support to eliminate the wide disparity that currently exists 

in the manner that electric customers are treated versus natural gas customers. 

Under the Federal Power Act (FPA), the Federal Energy Regulatory Commission 

(FERC) has the ability to review and timely set just and reasonable rates because 

the complaint section of the FPA provides for refunds. There is no corresponding 

protection for consumers under the Natural Gas Act (NGA). 

Yesterday, Senator Cantwell introduced legislation, S. 672, that would correct this 

inequity (by putting gas customers on the same footing as electric power customers), 

and I urge your support of this legislation that provides FERC with this critical consumer protection tool—a tool that the FERC Chairman and all sitting Commissioners have outspokenly supported. 

APGA is the national, non-profit association of publicly-owned natural gas distribution systems. Nationwide there are approximately 1,000 public gas systems in 

36 states. Public gas systems range in size from Philadelphia Gas Works, the largest and longest-operating public gas utility in the U.S., to Wagon Mound Municipal 

Gas Department in New Mexico that serves approximately 80 customers. 

Under the FPA, if a complaint is filed and FERC rules that the rate the customers have paid was unjust and unreasonable, FERC has the authority to order 

refunds from and after the date the complaint case was filed. By contrast, FERC 

does not have the same authority under the NGA to provide for the reimbursement 

to a gas customer that is determined to have been paying an unjust and unreasonable rate after a complaint has been filed. Under NGA Section 5, FERC can only 

rule that a rate reduction take effect prospectively after FERC’s order is issued, 

which more often than not occurs years after a complaint is filed. Given the time 

and expense of a complaint proceeding and the pipeline’s obvious and strong incentive to delay the proceeding (since no refunds can be ordered under NGA Section 

5), the absence of a refund-effective date provision in NGA Section 5 completely undermines its effectiveness, as the FERC Commissioners themselves have expressly 

recognized. 

Last week the Natural Gas Supply Association (NGSA) released a study (copy attached) that analyzed the cost recovery of 32 major pipelines based on financial data 

that they are required to file annually with the FERC. The study shows, among 

other things, that ‘‘over a 5-year period [from 2003-2007], pipelines earned roughly 

$3.7 billion more than they would have collected on an average 12% allowed return 

on equity. While pipelines have clearly performed effectively for their shareholders, 

it is just as clear that returns are at a point where FERC oversight is necessary.’’ 

The study also shows that seven of the 32 pipelines earned on average equity returns in excess of 20%. In fact in the case of one pipeline, Natural Gas Pipeline 

Company of America, its 5-year average return on equity was 34.4% (ranging from 

a low of 29% to a high of 40%). 

One of the arguments raised in the past by the pipeline lobby against providing 

FERC with this consumer protection tool is that it would have a negative impact 

upon a pipeline’s ability to attract new capital, and this in turn would have an adverse impact on infrastructure investment. This argument is a red-herring with no 

basis in fact. The FERC in establishing just and reasonable rates provides for the 

recovery of all costs, including debt costs and a fair return on equity. And a fair 

return on equity must, as the Supreme Court long ago mandated, permit the regulated utility to go to the marketplace to raise capital at reasonable rates. In addition, many infrastructure projects are undertaken by pipelines, as identified in the 

NGSA study, that are not in the egregious overcollection category. 

Ironically, the pipelines never argue that they are not over-recovering their 

costs—only that if caught they should not have to refund the overcharges. The 

FERC Commissioners, all of whom support infrastructure improvement and the 
45 

amendment of NGA Section 5 to provide for the establishment of a refund-effective 

date, understand that this is not an ‘‘either-or’’ proposition. 

As the Committee considers developing an energy package, I hope you will support much-needed legislation that provides natural gas consumers with the same 

level of protection from overcharges that currently exists for electric consumers. The 

current economic climate, not to mention the NGA’s requirement that rates be just 

and reasonable, demands nothing less. 

Sincerely, 

BERT KALISCH, 

President & CEO. 

Æ