Daily Archives: September 19, 2007

Is This Any Way to Do Energy Policy, Part II?

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Michael Giberson

John Podesta, currently president of the Center for American Progress, recently spoke to the National Association of State Treasurers:

Continued leadership from state treasurers on global warming will be essential to ensure that we address the scale and urgency of climate risk—and capture the vast economic possibilities that lie ahead as the world transitions to a clean energy future.

I wonder if he was able to say that with a straight face — “continued leadership from state treasurers on global warming will be essential” — because I’m sure I would have had a hard time suppressing a hearty laugh. Not that state treasurers aren’t important, they just aren’t really in the business of climate change policy.

Podesta’s theory here is the same that provided the foundation for the New York Attorney General’s recent letters to five energy companies. Podesta explained: “Climate change is a threat to the long-term value of the economy and failure to calculate its impacts or manage or reduce its harm mean that our assets are being over valued, and the risks we face are being under reported.”

Ahem. If state treasurers (or attorneys general) believe that the state is investing in over-valued assets, the appropriate course of action would be to direct the state pension funds or other state entities maintaining investments to sell the over valued assets. Instead, the advice here seems to be to hold onto the (allegedly) over-valued assets, but require or encourage the companies to write financial disclosures intended to drive down the market price of these assets.

This is no way to run a pension fund, but then it isn’t really about the money. Instead, it is about trying to find additional leverage to achieve environmental policy goals. I’m not opposed to pursuing environmental policy goals, but I just think that state treasurers and security disclosure laws are not the best way to make this kind of policy.

The National Association of State Treasurers website states:

State treasurers serve as the chief financial officers of the states. They are guardians of the taxpayers’ money that is used to operate state governments and provide services. State treasurers are the trustees of the public purse. In this capacity, they hold the state to high ethical and professional standards.

I assume that, as trustees of the public purse, they are not buying over-valued assets and then trying to drive the value of those assets down.

CFTC Holds Hearings on Oversight of Energy Trading

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Michael Giberson

Yesterday, the Commodity Futures Trading Commission held a hearing to discuss whether it should increase oversight of energy trading on currently exempt commercial markets. Interest in the topic was heightened by disclosures related to the Amaranth Advisors LLC blow up last year, when it was determined that Amaranth sought to manipulate the price on NYMEX to influence the value of positions the investment group had on the InterContinental Exchange.

The Associated Press reported the contrast in views among the CEOs of the two major trading exchanges:

Jeffrey Sprecher, chairman and chief executive of the unregulated InterContinental Exchange Inc., told the commission that some heightened government scrutiny may be appropriate but that a “one size fits all” approach would be misguided.

James Newsome, president and CEO of Nymex, said a legislative change is “necessary and appropriate” since the CFTC cannot force exempt exchanges to self regulate or follow other trading limits and accountability standards.

Some lawmakers also want energy market trades regulated to protect consumers from further multibillion-dollar collapses like the one that struck hedge fund Amaranth Advisors LLC last September.

While most of the attention was on energy trading, metals, chemicals and other commodities also are traded on exempt exchange. The AP story:

Craig Donohue, CEO of CME Group Inc., the world’s largest derivatives exchange, disagreed. He said all exemptions for electronically traded contracts should be eliminated because there is potential for price manipulation in all unregulated markets, not just energy.

Richard Shilts, director of the CFTC’s division of market oversight, said his office spends a “disproportionate amount of time” with the exempt markets due to a lack of the routine relationships it enjoys with regulated exchanges.

The Energy Legal Blog recently noted that the CFTC may find itself coming down on the side of alleged market-manipulator Amaranth and its former chief energy trader Brian Hunter, but only on the narrow issue of whether the jurisdiction of the Federal Energy Regulatory Commission extends to transactions on futures exchanges.

FERC and the CFTC both filed market manipulation charges against Amaranth earlier this year (and both also filed manipulation charges against Energy Transfer Partners about the same time). FERC asserted authority under the first use of power granted in the Energy Policy Act of 2005 as well as on the theory that many FERC-jurisdictional contracts trade at prices benchmarked to NYMEX settlement prices.

ADDENDUM: I was re-reading the post and it struck me what was wrong with the comments of Donohue’s comment (“potential for price manipulation in all unregulated markets, not just energy”).

At least in the Amaranth case, all the alleged manipulation took place on the regulated market — NYMEX — and not on the exempt exchange ICE. Of course, Amaranth’s large position on ICE provided the company an incentive to try to push prices down at NYMEX, but any off-NYMEX position, physical or financial, could provide such an incentive. Part of the issue is that ICE contracts are tied to the NYMEX settlement price, but positions held at ICE don’t directly contribute to the liquidity of NYMEX contracts.

Part of the issue is the relatively narrow period of trading that NYMEX used to calculate settlement prices. This market problem is partially self-correcting, since other traders rapidly caught on to Amaranth’s game, and the second and third attempts at running the price down in the last few minutes of trading were much less successful. In effect, after the first surprise, all Amaranth succeeded in doing was insuring that energy traders couldn’t go home early on a few Friday afternoons.