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[Senate Hearing 111-17]
[From the U.S. Government Publishing Office]

                                                         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

                  U.S. GOVERNMENT PRINTING OFFICE
48-895                    WASHINGTON : 2009
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               COMMITTEE ON ENERGY AND NATURAL RESOURCES

                  JEFF BINGAMAN, New Mexico, Chairman

BYRON L. DORGAN, North Dakota        LISA MURKOWSKI, Alaska
RON WYDEN, Oregon                    RICHARD BURR, North Carolina
TIM JOHNSON, South Dakota            JOHN BARRASSO, Wyoming
MARY L. LANDRIEU, Louisiana          SAM BROWNBACK, Kansas
MARIA CANTWELL, Washington           JAMES E. RISCH, Idaho
ROBERT MENENDEZ, New Jersey          JOHN McCAIN, Arizona
BLANCHE L. LINCOLN, Arkansas         ROBERT F. BENNETT, Utah
BERNARD SANDERS, Vermont             JIM BUNNING, Kentucky
EVAN BAYH, Indiana                   JEFF SESSIONS, Alabama
DEBBIE STABENOW, Michigan            BOB CORKER, Tennessee
MARK UDALL, Colorado
JEANNE SHAHEEN, New Hampshire

                    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        JAMES E. RISCH, Idaho
RON WYDEN, Oregon                    RICHARD BURR, North Carolina
MARY L. LANDRIEU, Louisiana          JOHN BARRASSO, Wyoming
ROBERT MENENDEZ, New Jersey          SAM BROWNBACK, Kansas
BERNARD SANDERS, Vermont             JROBERT F. BENNETT, Utah
EVAN BAYH, Indiana                   JIM BUNNING, Kentucky
DEBBIE STABENOW, Michigan            JEFF SESSIONS, Alabama
MARK UDALL, Colorado                 BOB CORKER, Tennesse
JEANNE SHAHEEN, New Hampshire

    Jeff Bingaman  and Lisa Murkowski are Ex Officio Members of the 
                              Subcommittee

                            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

                      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 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.
    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 calculations 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 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 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 short-term 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 
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 System\1\ 
for the purpose of developing improved baselines for measuring fuel 
supply, fuel distribution and fuel consumption.
---------------------------------------------------------------------------
    \1\ The 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.
---------------------------------------------------------------------------
    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.
    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, respondent-level 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 policy-neutral 
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 
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 regulatory 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 
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 market-oriented 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 markets. 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 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.

    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.
    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\
---------------------------------------------------------------------------
    \1\ T. Boone Pickens shares his views on energy, politics, the 
Olympics, OSU's new president, The Daily Oklahoman, January 30, 2008.
    \2\ Pickens warns of $300 oil, Herald News Services, July 23, 2008.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \3\ Interim Report on Crude Oil, Interagency Task Force on 
Commodity Markets, July 23, 2008.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    * Charts have been retained in subcommittee files.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \4\ EIA STEO Table 3a, http://www.eia.doe.gov/emeu/steo/pub/
contents.html
---------------------------------------------------------------------------
   Demand from the U.S. (which declined during the run-up in 
        prices)\5\
---------------------------------------------------------------------------
    \5\ Ibid.

    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. 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 long-term 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 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.
---------------------------------------------------------------------------
    \6\ Depending On 19th Century Regulatory Institutions to Handle 
21st Century Markets, http://www.mresearch.com/pdfs/355.pdf
---------------------------------------------------------------------------
    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 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 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.
    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.
    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.
    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?
    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 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?
    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?
    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 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.
    [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 
Commission 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.
    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.
    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.]
                               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  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 
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 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 end-user, the shipper's transportation payments 
support the transmission infrastructure 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 competition 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 markets. 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.
                              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.
                    2. require de novo court review
    To ensure the fairness of due process, the judicial review of a 
FERC cease-and-desist 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 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-and-desist 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 time-consuming 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.
    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 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.

                                    

      
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