Federal energy regulatory commission 

Washington, D.C. 20426 

Re: FOIA No. FY07-48 

Tina Seeley 

Bloomberg News 

1399 New York Avenue, NW 

Eleventh Floor 

Washington, DC 20005 

Dear Ms. Seeley: 

The Commission is in receipt of your correspondence dated March 20, 2007, 

requesting documents pursuant to the Freedom of Information Act (FOIA), 5 U.S.C. § 

552 (2006), and the Federal Energy Regulatory Commission’s (Commission or FERC) 

FOIA regulations, specifically 18 C.F.R. § 388.108 (2006). You specifically requested 

“copies of correspondence this year from Joseph Kelliher to Senator Jeff Bingaman 

responding to questions about whether the commission is adequately overseeing natural 

gas markets.” 

 A search of the Commission’s nonpublic records has identified one document that 

may be responsive to your request. The document, correspondence dated February 21, 

2007, from Chairman Kelliher to Senator Bingaman, is enclosed. 

Under 18 C.F.R. ' 388.110(a)(1) (2006) of the Commission's regulations, any 

appeal from this determination must be filed within 45 days of the date of this letter. This 

appeal must be in writing, addressed to John S. Moot, General Counsel, Federal Energy 

Regulatory Commission, 888 First Street, NE, Washington, DC 20426, and clearly 

marked "Freedom of Information Act Appeal." I would appreciate it if you would also 

send a copy to Ellen K. Schall, Associate General Counsel, General and Administrative 

Law, at the same address. 

 Sincerely, 

 Andrew J. Black 

 Director 

 Office of External Affairs 

Enclosure 
FEDERAL ENERGY REGULATORY COMMISSION 

WASHINGTON. DC 20426 

OFFICE OF THE CHAIRMAN 

February 2 1,2007 

The Honorable Jeff Bingaman 

Chairman 

Committee on Energy and Natural Resources 

United States Senate 

Washington, D.C. 205 10 

Dear Mr. Chairman: 

I am writing in response to your February 6,2007 letter relating to the Federal 

Energy Regulatory Commission's efforts to implement its expanded enforcement 

authority under the Energy Policy Act of 2005 (EPAct 2005). I agree with you that the 

evolution of complex and inter-related markets for financial and physical energy 

commodities has elevated the importance of the Commission's role, and I am pleased to 

share with you information on many initiatives and actions that the Commission has 

taken under EPAct 2005, which was enacted in large part because of your efforts. I am 

also pleased to have the opportunity to respond to your specific questions, to the extent I 

can do so publicly, as the Chairman, individual Commissioners, and Commission staff 

are bound by certain legal constraints to ensure the confidentiality of the existence and 

the nature of ongoing investigations. Any infraction of those rules, of course, would be a 

violation of law and a very serious matter. 

In general, your letter seeks information about how the Commission has 

discharged the regulatory, oversight, and enforcement authorities that were greatly 

expanded by EPAct 2005. EPAct 2005 amended Part I1 of the Federal Power Act (FPA), 

the Natural Gas Act (NGA), and the Natural Gas Policy Act of 1978 (NGPA), and gave 

the Commission the authority to assess civil penalties of up to $1 million per day per 

violation for violations of rules, regulations, and orders issued under these laws.' 

Energy Policy Act of 2005, Pub. L. No. 109-58, $8 1284(e), 314 (b) (1) (B), and 

3 14(b) (2), 1 19 Stat. 594 at 950 and 691 (2005), respectively. Under FPA Part 11, the 

Commission can assess a penalty "of not more than $1,000,000 for each day that such 

violation continues." FPA section 3 16A (b). under the NGA, the Commission can 

assess a penalty "of not more than $1,000,000 per day per violation for as long as the 

violation continues." NGA section 22(a). Under the NGPA, the Commission can assess 

a penalty "of not more than $1,000,000" and "each day of violation shall constitute a 

separate violation." NGPA section 504(b) (6) (A) and (C). There was no change to the 
I have long thought the Commission needed stronger enforcement authority. The 

basic enforcement tool available to a regulatory body is the ability to impose civil 

penalties. We largely lacked that necessary tool before EPAct 2005. I began to argue in 

favor of expanding the Commission's enforcement authority nearly ten years ago, when I 

was majority counsel to the House Energy and Commerce Committee. When I was an 

advisor to former Secretary of Energy Spencer Abraham, I argued in favor of granting the 

Commission increased civil penalty authority. As the Commission Chairman, I argued in 

favor of retaining the penalty provisions during consideration of EPAct 2005. It was a 

matter of great personal satisfaction to exercise this authority last month, when the 

Commission imposed civil penalties for the first time under our new penalty authority. 

EPAct 2005 also authorized the Commission to issue regulations prohibiting 

manipulation in wholesale electric and natural gas markets.' I want to take the 

opportunity to commend you for your leadership in granting the Commission this antimanipulation authority. I have long believed that the lack of an express prohibition of 

market manipulation was a tragic flaw in federal electricity and natural gas law. I urged 

Congress to establish such a prohibition, grant us discretion to define market 

manipulation, and also grant us civil penalty authority comparable to other economic 

regulatory b~dies.~ You agreed, and thanks in large part to your efforts Congress gave us 

the tools we needed. I have no doubt that without your leadership the anti-manipulation 

provisions of EPAct 2005 would not have become law. 

EPAct 2005 permanently changed the Commission. It represented the largest 

grant of regulatory power to the agency since the New Deal. It also turned us into an 

enforcement agency for the first time. We are dedicated to being a premier enforcement 

agency. I believe the Commission has a good record implementing our new EPAct 2005 

responsibilities, particularly our enforcement authorities. 

I promised that if Congress gave the Commission the tools we needed, we would 

use them - and we have. Upon enactment of EPAct 2005, the Commission acted 

promptly to implement its new enforcement authority. We have launched a number of 

new investigations, and expanded the scope of our investigations. Let me review the 

major actions we have taken to implement our new enforcement authority since 

implementation of EPAct 2005. 

Commission's existing FPA Part I civil penalty authority, under which the Commission 

can assess civil penalties of up to $1 1,000 "for each day that such violation or failure or 

rehsal continues." FPA section 3 l(c), as adjusted for inflation by 18 C.F.R. 5 385.1602 

(2006). 

EPAC~ $5 315, 1283 (cod@edas 15 U.S.C. 5 717c-1, 16 U.S.C. 5 824v). 

Joseph T. Kelliher, Market ManQxdation, Market Power, and the Authority of 

the Federal Energy Regulatory Commission, 26 Energy L. J. 1,30 (2005). 
In October 2005, the Commission issued the Policy Statement on Enforcement, 

describing the factors the Commission will consider when assessing civil 

penalties or developing remedies for violations of the statutes, orders, rules, and 

regulations the Commission administers. This Policy Statement was modeled on 

the practices of other enforcement agencies, such as the U.S. Department of 

Justice, the Securities and Exchange Commission (SEC), and the Commodity 

Futures Trading Commission (CFTC). In the Policy Statement, we laid out a goal 

of firm but fair enforcement of the statutes committed to us by Congress. Our 

goal is compliance, and in the Policy Statement we proposed to use our penalty 

authority to encourage compliance. Our experience to date shows the Policy 

Statement has been successful in encouraging compliance. One measure of that 

success is the number of self reports we have received since issuance of the Policy 

Statement, which exceeds 40. Our subsequent enforcement actions have been 

guided by and consistent with the Policy Statement. 

In October 2005, the Commission issued a notice of proposed rulemaking to 

implement the anti-manipulation authority granted by Congress in EPAct 2005 ." 

Consistent with the direction of Congress in EPAct 2005, this proposed rule was 

modeled closely on SEC anti-manipulation rules. 

In October 2005, the Commission also entered into the Memorandum of 

Understanding between the Federal Energy Regulatory Commission and the 

Commodity Futures Trading Commission Regarding Information Sharing and 

Treatment of Proprietary Trading and Other Information (MOU), which 

established the framework for ongoing coordination and sharing of information 

between the Commission and the CFTC with respect to markets of mutual 

interest, including natural gas related financial markets. I note that EPAct 2005 

directed the two agencies to enter into an MOU within 180 days of enactment. 

The agencies accelerated the MOU and concluded it much sooner, in 65 days. 

We did so because we recognized the importance of close coordination between 

the two agencies in the wake of hurricanes Katrina and Rita, given resulting high 

prices and volatility. 

In November 2005, the Commission issued an Interpretive Order Regarding NoAction Letter Process clarifjling that section 388.104(a) of its regulations may be 

used to obtain informal staff advice regarding certain matters, including the new 

Enforcement of Statutes, Orders, Rules, and Regulations, 11 3 FERC 7 61,068 

(2005). ' Notice of Proposed Rulemaking, Prohibition of Energy Market Manipulation, 70 

Fed. Reg. 61,930 (October 27,2005), FERC Stats. & Regs. 7 32,591 (2005). 
proscriptions on energy market manipulation under EPAct 2005. ti 

In January 2006, the Commission adopted Order No. 670, the Commission's new 

anti-manipulation rule, which prohibits energy market mani ulation by any entity P in connection with a Commission-jurisdictional transaction. Recognizing the 

importance of preventing manipulation of natural gas markets during a period of 

high prices, the Commission invoked the emergency provisions of the 

Administrative Procedure Act and made the anti-manipulation rule effective 

immediately. 

In December 2006, the Commission issued the Statement of Administrative Policy 

Regarding the Process for Assessing Civil Penalties, setting forth the specific 

procedures required under the FPA, NGA, and NGPA when assessing a civil 

penalty. While the Commission continues to encourage settlement, we cannot 

assume that all investigations that find wrongdoing will result in settlement. We 

must be prepared to litigate. The Statement of Administrative Policy details how 

we would assess civil penalties if we resort to administrative litigation. 

With the groundwork for enforcement laid, the Commission exercised for the first 

time its new civil penalty authority in January 2007, assessing a total of $22.5 

million in civil penalties on five companies for various violations of their tariffs 

or other regulatory obligations. 

Against this backdrop of broad-reaching developments, I will address your more 

specific questions. Before doing so, however, I would like to describe the legal 

restrictions with respect to disclosing non-public information, laws which govern the 

Commission, and apply equally to the Chairman, individual Commissioners, and the 

Commission staff. Indeed, the same or comparable laws and rules apply to other federal 

enforcement agencies, including the CFTC, the U.S. Department of Justice, and the SEC. 

The Commission's processes relevant to your questions are governed in most 

respects by the investigations provisions of 18 C.F.R. Part 1 b. Accordingly, the 

Commission may conduct an investigation relating to any matter subject to its 

jurisdiction.' Investigations may be "formal" or "preliminary," and "public" or "non- 

~nter~retive Order Regarding No-Action Letter Process, 1 13 FERC 1 6 1,174 

(2005), modzj?ed, 1 17 FERC 7 61,069 (2006). ' Prohibition of Energy Market Manipulation, Order No. 670,71 Fed. Reg. 4244 

(January 26,2006), FERC Stats. & Regs. 7 3 1,202, order denying reh 'g, 1 14 FERC 

7 6 1,300 (2006). ' Statement of Administrative Policy Regarding the Process for Assessing Civil 

Penalties, 1 17 FERC 7 6 1,3 17 (2006). 

18 C.F.R. 5 lb.3 (2006). 
public."10 The Commission may, by order, in its discretion initiate an investigation." 

The initiation may be based on its own information or in response to a request from a 

member of the public or the staff.." The Commission's staff is also authorized to initiate 

"preliminary" (non-formal) investigations at its discretion." All information and 

documents obtained during an investigation and the investigative proceeding are treated 

as non-public. This means that neither staff nor the Chairman nor an individual 

Commissioner may reveal the existence of the investigation or related information except 

to the extent the Commission directs or authorizes the public disclo~ure.'~ Only the 

Commission can order a "formal" investigation, which results in subpoena authority 

being vested in investigating officers1' as opposed to preliminary investigations where no 

process issues.16 1n practice, almost all investigations are initiated by staff and are both 

preliminary and non-public. Finally, in general, whether in the context of an 

investigation or otherwise, the nature and time of any proposed action by the Commission 

are confidential and may not be divulged to anyone outside the om mission.^' 

The non-public treatment of these matters is critical to the accomplishment of the 

Commission's mission, especially the enforcement role that has become one of the 

Commission's priorities, as Congress intended under EPAct 2005. Many of the 

investigations undertaken by the Commission deal with issues and markets that are vital 

to the nation's economy and could be disrupted by a disclosure that the Commission is 

investigating players or phenomena in those markets. Where wrongdoing has clearly 

occurred, such disruption might be an unavoidable consequence of necessary public 

action by the Commission. But, by their very nature, investigations begin based on 

incomplete information. Frequently, indeed in most instances, the Commission staff 

through discovery determines that what was at first glance suspicious or anomalous is in 

fact legitimate and legal. An announcement of the investigation of such matters might 

lead to unnecessary and adverse consequences in the markets, such as driving participants 

out of otherwise legitimate, competitive, and economically beneficial markets or 

transactions. In addition, companies are more willing to provide information and 

cooperate with an investigation when they have a reasonable expectation that the 

information they provide (which is usually proprietary trade data) and the existence of the 

investigation will not be made public. There are limits to such expectations (because 

ultimately some information will come out as part of the process if there has been 

wrongdoing), but before culpability can be determined, an investigation is typically 

lo 18 C.F.R. 5 lb.4 (2006). 

'l 18 C.F.R. tj lb.5 (2006). 

l2 18 C.F.R. $8 lb.8 and 1 b.6 (2006). 

l3 18 C.F.R. 8 1 b.6 (2006). 

l4 18 C.F.R. 8 lb.9 (2006). 

l5 18 C.F.R. tj lb.5 (2006). 

l6 18 C.F.R. 8 lb.6 (2006). *' 18 C.F.R. 8 3c.2 (b) (2006). 
required and some level of company cooperation is important to the efficient utilization 

of Commission resources in the prosecution of those investigations. At the end of an 

investigation, the Commission generally pursues a settlement with companies that have 

violated Commission rules, orders, or tariffs. We do so in order to expand the reach of 

our enforcement resources, and enable staff to conduct a greater number of 

investigations. Public disclosure of the existence of an investigation would certainly 

impede settlements, and may make settlement impossible. 

The Commission frequently relies on information from third party witnesses who 

do not wish it to become known publicly that they were the source. Finally, intra-agency 

communications pertaining to investigations almost always involve at least three 

privileges that are vital to the Commission's ability to perform its work: the attorneyclient communication privilege, the work product doctrine (because litigation is always a 

potential outcome), and the deliberative process privilege. Failure to keep non-public 

these communications poses the danger of waiving or violating those privileges. 

The importance of these principles is embraced by a number of statutory and 

regulatory protections such as: (a) exemptions to the Government in the Sunshine Act, 

(permitting the Commission to hold "Closed Meetings" when discussing sensitive law 

enforcement and litigation related matters)"; (b) exemptions to the Freedom of 

Information Act, (exempting from disclosure records pertaining to confidential trade data, 

privileged material, and records pertaining to law enforcement activities)19; (c) the 

Commission's investigations regulations, (discussed above)20; and (d) the Commission's 

regulations pertaining to the confidentiality of its decision making process, (described 

above12'. These principles and restrictions are fundamental to our work. The Chairman 

and every Commissioner and Commission staff member involved in these activities are 

repeatedly made aware of their importance by way of annual ethics training required of 

all Commission employees. Violations of these requirements are also ethical violations. 

As I stated earlier, an unauthorized disclosure of the existence of a nonpublic 

investigation would be a violation of the law and a very serious matter. It would damage 

the integrity of the investigative process. An unauthorized disclosure would allow the 

subjects of an investigation to attack the integrity of the investigation. In some 

circumstances, an improper disclosure could make it difficult or impossible for the 

Commission to ultimately prosecute parties who are found to have engaged in market 

manipulation or otherwise violated Commission rules, tariffs, or orders. Companies who 

might have been required to pay substantial civil penalties may escape payment 

altogether. 

-- 

l8 5 U.S.C. 8 552 (2000). 

l9 5 U.S.C. $8 552(b) (4), (9, and (7) (2000). 

'O 18 C.F.R. Part lb (2006). 

" 18 C.F.R 8 3c.2 (2006). 
The responses below are set against the backdrop of these legal restrictions. 

Question 1 

The Energy Policy Act of 2005 broadened the scope of the Commission's 

authority to review transactions in financial markets related to natural gas. This is 

particularly important, given that indices derived from the trading of NYMEX gas hres 

contracts are included in many supply agreements entered into between producers and 

local distribution companies (LDCs), the costs of which are ultimately passed along to 

end-use consumers. Please describe the Commission's efforts to monitor trading of 

NYMEX gas futures contracts, especially as it relates to end-of-month natural gas 

trading, the last half-hour of which forms the basis of the index used in many 

producer1LDC supply contracts. 

Response 

EPAct 2005 did not broaden the Commission's jurisdiction over the financial sales 

of natural gas that take place on designated contract markets such as the New York 

Mercantile Exchange (NYMEX). Those markets remain under the exclusive jurisdiction 

of the CFTC." The MOU entered into between the Commission and CFTC recognizes 

CFTC jurisdiction: 

[Tlhe CFTC has exclusive jurisdiction with respect to accounts, agreements 

and transactions involving contracts of sale of a commodity for future 

delivery, including, but not limited to, natural gas, electricity, or any other 

energy product, traded or executed on or subject to the rules of a designated 

contract market, registered derivatives transaction execution facility, or any 

other board of trade, exchange, or market as described in section 2(a)(l)(A) 

of the CEA, 7 U.S.C. 8 2(a)(l)(A). 

However, EPAct 2005 did grant the Commission authority to prohibit market 

manipulation "in connection with" the purchase or sale of natural gas subject to the 

jurisdiction of the omm mission.'^ We interpret the anti-manipulation language of EPAct 

2005 as allowing the Commission to sanction market manipulation in financial 

'* 7 U.S.C. 8 2(a) (1) (A) (2000). It appears to be clear Congressional intent to 

maintain the respective jurisdictions of the Commission and the CFTC. The 

jurisdictional balance was clear before enactment of EPAct 2005, there is no grant of 

authority to the Commission over financial sales of natural gas in the new laws, and some 

provisions of EPAct 2005 reflect a conscious decision by Congress to preserve the 

respective jurisdictions. EPAct 2005 5 3 16. 

23 EPAct 2005 8 3 15. 
transactions of natural gas that affect jurisdictional sales, or physical sales. In brief, the 

CFTC has exclusive jurisdiction over futures, the Commission has exclusive jurisdiction 

over interstate natural gas transportation and certain natural gas sales, and where matters 

relate to both markets, both agencies have jurisdiction. Therefore, as a general matter, 

Commission staff does not monitor trading of NYMEX Natural Gas Futures Contracts 

(NYMEX Futures) looking across all trading activities for any potential misbehavior or 

structural flaws. We monitor trading for trading activities that may affect jurisdictional 

sales, or physical sales. 

Certain physical markets for natural gas that fall under the Commission's 

jurisdiction make use of prices that are derived, in part, from final settlement prices of 

NYMEX Futures. In particular, transactions that make use of NYMEX Futures 

settlement prices include "physical basis" transactions. In physical basis transactions, the 

price for the next month's delivery is set directly by taking the NYMEX Futures 

settlement price and adding or subtracting a fixed amount to take account of a variety of 

other considerations, mainly the value of gas at the location of the delivery as compared 

to delivery at the Henry Hub in Louisiana. 

Physical basis transactions conform to the standards of "fixed price" deals that are 

used in the construction of monthly indices by publishers such as Platts and Natural Gas 

Intelligence, and by the IntercontinentalExchange (ICE). The proportion of physical 

basis transactions used in these indices varies by location, with Eastern and Gulf Coast 

indices predominantly made up of physical basis transactions, the Midcontinent indices 

containing a mix of physical basis and fixed price transactions, and those in the West not 

using physical basis at all. 

As a result, indices in these Eastern and Gulf Coast areas are closely, even 

mathematically, related to the NYMEX Futures final settlement prices. The index prices 

are related to, but not the same as, the NYMEX Futures settlement prices because the 

fixed amounts added or subtracted from the settlement price change the final price level 

of the physical basis contract. And, not all prices reported to the indices are physical 

basis - in some cases, index prices are also based on fixed-price bilateral transactions that 

do not rely on NYMEX Futures prices. However, in general, changes in the next-month 

NYMEX Futures price as it enters its settlement period are very influential in these 

monthly indices. 

As a consequence, Commission staff has reviewed trading into the last half hour 

final settlement period for NYMEX Futures since Fall of 2004. In particular, since early 

2006, Commission staff follows, in real time, trading in the NYMEX Futures contract 

and trading in the ICE swap designed to settle against the NYMEX Futures settlement 
price.24 Subsequent to final settlement, Commission staff collects and documents the 

"tick trading" in these periods, and reports to the Chairman and the Commissioners when 

changes into and during this final period appear significant. 

Question 2 

Pursuant to provisions of EPACT, FERC and the Commodity Futures Trading 

Commission (CFTC) in October 2005 jointly entered into a Memorandum of 

Understanding regarding information sharing, which has presumably enhanced the 

capabilities of FERC's market monitoring unit. In general, when a potential anomaly in 

financial natural gas markets is detected by FERC's monitoring unit: 

a. What is the process by which the full complement of Commissioners is 

notified? 

b. What is the process by which the Commissioners decide whether to institute a 

more comprehensive investigation? 

c. What is the process by which the Commissioners determine whether to contact 

the CFTC? 

d. What is the process by which the Commissioners determine whether to contact 

state regulators or make public the existence of an anomaly or investigation? 

e. Does written guidance exist regarding these policies? 

Response 

As an initial matter, it would be helpfbl to provide some additional background on 

the MOU. Pursuant to that agreement, the CFTC staff and the Commission's Office of 

Enforcement staff are in regular contact with res ect to matters of mutual interest and 

2J' concern through meetings and teleconferences. One reason for the MOU was to ease 

sharing of information between the two agencies. Before the MOU, the Commission had 

to authorize each information exchange. Under the MOU, information sharing occurs 

continually at the staff level without any need of Commission authorization. That 

improves the ability of both agencies to detect market manipulation. Both staffs routinely 

advise each other of investigations pertaining to their agencies' respective jurisdictions, 

and also typically work together to investigate and resolve matters where appropriate. 

These communications occur at the staff level on almost a weekly basis and the Chairmen 

and Commissioners of each agency are kept informed by their respective staffs. In 

" In September 2006, NYMEX began supporting simultaneous trading at its 

Exchange and electronically through GLOBEX through the settlement period. Thus, 

Commission staff follows trading in real time through each of these two NYMEX trading 

mechanisms, both of which contribute to the calculation of the settlement. 

" MOU fl5, 6. 
addition, the CFTC Chairman and I confer as necessary or appropriate. Written guidance 

exists regarding the process on contact with the CFTC, namely the MOU. 

The principal objective of the MOU was to carry out Congress's directive in 

EPAct 2005 to ensure that "information requests to markets within the respective 

jurisdictions of each agency are properly coordinated to minimize duplicative information 

requests and to address the treatment of proprietary trading inf~rmation."~~ Accordingly, 

the MOU requires the Commission to proceed through the CFTC to obtain data from any 

designated contract markets." And, nohuithstanding this sharing of information between 

the agencies, the staffs of each agency are bound to maintain the important restrictions in 

place at each agency as to the further dissemination of non-public inf~rrnation.~~ 

Your other questions primarily relate to Commission processes. Indeed, these 

processes pertain to Commission oversight of any of the markets or aspects of the 

markets over which the Commission has jurisdiction (electric, natural gas, hydropower, 

oil). In this regard, the Office of Enforcement Division of Energy Market Oversight 

(DEMO) conducts a daily meeting at 1.1 a.m. where staff, mainly from DEMO but also 

from other Commission program offices, discusses current market conditions and 

identifies issues that require further review. Individual Commissioners and their personal 

staffs, of course, are also invited to attend these meetings, as long as there are no more 

than two Commissioners present at the same time. When staff detects market anomalies, 

they notify the Chairman and Commissioners through a variety of methods (reports, emails, meetings). In addition, DEMO staff is available to brief the Commission, the 

Chairman, individual Commissioners, or their staffs upon request and frequently do so. 

Sometimes, an anomaly identified by DEMO may warrant an investigation. At 

this time, the Office of Enforcement Division of Investigations pursues the matter, 

according to the processes and restrictions discussed above at pages 4-6. In short, the 

Commission staff is authorized to open an investigation on their own initiative. The 

Commission may also order the initiation of an investigation. In practice, most 

investigations are initiated by staff. The origins of investigations initiated by staff vary. 

As indicated above, sometimes an investigation is initiated when staff observes market 

anomalies. Other Office of Enforcement investigations are initiated based on a referral 

by a Commission program office, a complaint, a hotline call, a tip by an informant, a self 

report, or a referral by a market monitor, among other ways. 

Individual Commissioners are notified of the opening of staff-initiated 

investigations through a variety of methods (reports, e-mails, meetings) and staff is 

available to brief individual Commissioners or their staffs as requested and frequently do 
so. In addition, the Commission periodically convenes "Closed Meetings" where staff 

briefs the full Commission in a non-public forum on the progress of investigations that 

may pertain to suspected market anomalies (as well as possible violations of the 

Commission's statutes, rules, regulations, and orders). These meetings are closed to the 

public pursuant to the Government in the Sunshine Act, referenced above on page 6. 

As to discussing investigations outside of the Commission (other than with the 

CFTC under the MOU), neither staff nor the Chairman or an individual Commissioner 

may make public or otherwise disclose an investigation.29 An unauthorized disclosure is 

a violation of the law and a serious ethical violation. However, the Commission staff 

does regularly interact with the staff of state regulators as to general market activities as 

described in greater detail below in the response to Question 4. The controlling written 

guidance on most of these matters is contained in the Commission's regulations at 18 

C.F.R. Part Ib and 18 C.F.R. 8 3c.2 (b), and also the MOU. In addition, of course, the 

Commission staff is prohibited from engaging in any off-the-record communication about 

an issue in a contested on-the-record proceeding.'0 

Question 3 

Last fall's collapse of the Amaranth hedge fund-with its very large positions in 

financial natural gas markets-has led to heightened concerns about market transparency 

and potential consumer impacts of speculative trading on the prices being paid for natural 

gas. In 2006, were there any times FERC's market monitoring or enforcement staff 

detected and brought to your attention potentially anomalous market behavior related to 

gas futures contract trading, including end of month trading, which may affect the 

accuracy or representative nature of NYMEX indices used in LDC supply contracts? If 

so: 

a. Please identify the days and months in which the suspected anomalies occurred. 

b. Please describe any subsequent discussions or correspondence between you or 

your staff, and your counterparts at the CFTC. 

c. Please describe any subsequent discussions or correspondence between you or 

your staff and any members of the industry or financial communities. 

d. Please describe any subsequent discussions or correspondence between you or 

your staff and any state regulators. 

e. At any point or in any forum, did the Commission consider notifying the public 

or state regulators, given potential impacts for the end-use natural gas consumers? 

" 18 C.F.R. 8 lb.9 (2006). 

'O 18 C.F.R. 5 385.2201 (2006). 
DEMO staff began reviewing NYMEX Futures settlement closes in Fall of 2004. 

Starting in April 2006, DEMO staff has monitored in real time trading patterns into the 

last half hour of NYMEX Futures settlement closes and has regularly reported such 

patterns to the Commission. Staff also discussed the concept of physical basis and its 

role linking the NYMEX Futures settlement close with monthly indices in a September 

26,2006 public workshop on the transparency of natural gas and electric energy prices. 

The material was shared with individual Commissioners and their staffs, who were 

invited to the workshop. Staff also included a comprehensive analysis of many of the 

market fundamentals and relationships pertaining to NYMEX Futures and physical 

natural gas markets in Section 7 of its 2006 State of the Markets Report, which is 

available at www.ferc.gov/oversight. In that discussion, and as discussed more fully 

below in response to Question 4, staff addressed the increase in the last decade of trading 

volume and open interest in NYMEX Futures, the relationship between trading in 

NYMEX Futures and physical basis transactions and indices, and the relative degree of 

transparency of these markets. With respect to other aspects of Question 3 that may 

implicate the existence or nature of an ongoing nonpublic investigation, as indicated 

above, I am unable to comment publicly pursuant to, inter alia, 18 C.F.R. Part lb. 

Question 4 

In its September 2006 report, the GAO identified a number of categories of 

information FERC should consider providing to states and the public in a more timely 

fashion. In addition to the recent release of the new market oversight website, is the 

Commission contemplating the development of additional policies to implement these 

recommendations? 

Response 

In its September 2006 report titled Roles of Federal and State Regulators in 

Overseeing Prices, the GAO noted that the Commission has taken many steps to improve 

the understanding of the Commission's role in overseeing the market and deterring 

market manipulation. GAO com limented how the Commission had implemented its 5: expanded EPAct 2005 authority. The report also discussed the substantial efforts the 

Commission has made in the past to inform state regulators about our oversight activities 

regarding gas markets." GAO recognized that disclosure of information can damage the 

integrity of market manipulation investigations and impede enforcement efforts? 

'' Roles of Federal and State Regulators in Overseeing Prices at 14 (U.S. Gov't 

Accountability Off., ~e~tember 2006) ("FERC has made substantial progress 

implementing the additional authorities related to natural gas provided to it in EPAct 

2005"). 

32 Id. at 19. 

33 Id. at 22 ("We agree that disclosure of information that is specific or detailed 
The report provided recommendations that the Commission could consider to 

further improve our market oversight and deterrence of market manipulation by 

providing stakeholders, particularly state regulators, information regarding: (1) how staff 

analyzes natural gas markets and identifies anomalies or unusual behavior, (2) the types 

of unusual market behavior that warrant further investigation, and (3) investigations 

under way. My letter to the GAO with respect to the report generally concurred in its 

conclusions and findings. I also pointed out that the Commission continues to work 

toward instilling greater overall confidence in the natural gas market by developing 

vigilant market oversight to ensure that commodity prices are competitive and free from 

manipulation. 

Shortly after the GAO report was released, I asked to meet with the National 

Association of Regulatory Utility Commissioners' Gas Committee at its Annual 

Convention. Commissioner Donald L. Mason from Ohio, Chairman of the Gas 

Committee, graciously granted my request. I met with the Gas Committee, accompanied 

by Susan J. Court, Director of the Office of Enforcement. At that meeting, I reviewed the 

Commission's new enforcement role under EPAct 2005, how we have implemented our 

new authorities, and how we conduct oversight of gas markets. I also discussed how we 

conduct investigations, and the remedies available in the event we find there have been 

violations of our rules, orders, and tariffs. I had a good discussion with Chairman Mason 

and Committee members, and will continue to work with them. 

The Commission has made, or is in the process of making, several changes to the 

way market oversight efforts are conducted. First, as you noted, the Commission 

released its new market oversight web pages at www.ferc.gov/oversi~ht in January. The 

web site allows Commission staff to share more information about natural gas markets 

faster than in the past and with a wider set of interested stakeholders. The web pages 

were inaugurated with five regularly updated slides relating to NYMEX trading, two of 

which focus explicitly on the relationship between Henry Hub physical (or "cash") and 

htures trading. 

The Commission also recently posted on its website the staffs 2006 State of the 

Markets report, mentioned also in response to Question 3. In coordination with the new 

web pages, the State of the Markets report is an up-to-date assessment of major issues in 

the electric and natural gas markets. The 2006 State of the Markets report includes 

detailed discussions of trading in financial and fbtures markets and the relationship to 

physical markets, including a discussion of physical basis as a link between NYMEX 

Futures and monthly gas indices. The regular update of web pages permits the staff to 

present this kind of market assessment far sooner than was possible in the past (when 

could provide would-be market manipulators with information about FERC's sources and 

methods of operations."). 
State of the Market reports were published months into the next year and, being in book 

form, could not be updated with new data). 

Further, DEMO staff has been for some months conducting conference calls with 

interested state regulatory staffs to discuss electric and gas market observations on a 

regional basis. Staff is in the process of reorganizing its monthly conference calls in 

order to improve regional coverage, extend participation more broadly, and make use of 

information now available through the web pages. There have been frequent meetings 

with state staff, predominantly in New England and the West, often involving discussion 

of natural gas price trends and relationships with NYMEX Futures trading. 

As a final matter, in response to Question 4, in coordination with the meeting of 

the National Association of Regulatory Utility Commissioners this week here in 

Washington, D.C., DEMO staff has begun promoting a more intensive program of 

working with state regulatory staff members, inviting as many as three at a time to spend 

a week working closely with market oversight staff both in their daily market monitoring 

efforts and on a natural gas or electricity research topic of interest to them in their 

regulatory efforts. It is my hope that this coordination will better inform state regulators 

about our oversight and investigation activities. 

I hope this information is usehl to the Committee in its evaluation of these 

important matters. If I can be of any further assistancewith this or any other 

Commission matter, please let me know.