04.08.08

Cantwell: American Consumers Must Be Protected from Possible Market Manipulation

WASHINGTON, D.C. – As American consumers face record high gas prices, U.S. Senator Maria Cantwell (D-WA) urged the Federal Trade Commission to use the new regulatory authority she granted them in the 2007 Energy Bill making it illegal to manipulate oil and petroleum markets. Today, oil is over $100 per barrel and gas prices are at the highest average price ever recorded at $3.33 per gallon nationally, and $3.50 in Washington state.
 
“With volatile oil prices exceeding $100 per barrel, and gasoline and diesel pump prices already topping $4 per gallon in some regions, consumers are struggling to make ends meet with ever shrinking disposable incomes,” said Cantwell.  “Airlines are going bankrupt.  Truckers aren’t even getting paid enough to cover diesel prices that exceed $4 dollar a gallon.  And families have to cut back on going out to dinner or the mall further exacerbating our economic downturn.  We are staring at the highest average national gasoline prices in history – triple what they were in 2002-- and who knows how much higher they might go.”
 
Over the years, Cantwell has worked determinedly to increase transparency and root out manipulation in the energy markets, including helping secure anti-manipulation provisions in the Energy Policy Act of 2005 to provide Federal Energy Regulatory Commission (FERC) expanded authority over manipulation in the electricity and natural gas markets.  Last December, Senator Cantwell’s legislation banning manipulation in the oil and petroleum markets became part of the 2007 Energy Bill.  Her provision also empowers the FTC to levy civil penalties of up to $1 million per day.  During the hearing, Cantwell announced her intention to send a letter to the FTC, along with Senators Olympia Snowe (R-ME) and Byron Dorgan (D-ND), asking them to complete the rulemaking necessary to aggressively implement this new responsibility by the end of the year.
 
Cantwell has also cosponsored legislation, which passed the Senate as part of the Farm Bill, to help prevent price manipulation and excessive speculation in energy commodity markets that are leading to high energy prices for U.S. consumers.  Currently, some energy commodity markets are exempt from government oversight under the so-called “Enron loophole,” included in the Commodity Futures Modernization Act of 2000. 
 
“I hear from my constituents in Washington state all the time that they no longer have the confidence that the prices they are paying at the pump are fair, or even linked to underlying supply and demand forces anymore,” continued Cantwell.  “With global energy supplies tight, markets become increasingly volatile and any change in market conditions can have a substantial effect on prices at the end of the supply chain.”
 
[The text of Senator Cantwell’s letter below]


April 8, 2008
 
Federal Trade Commission
600 Pennsylvania Avenue, NW
Washington, DC 20580
 
Dear Chair Kovacic and Commissioners Harbour, Leibowitz, and Rosch:
 
With volatile oil prices exceeding $100 per barrel, and gasoline and diesel pump prices already topping $4 per gallon in some regions, our constituents have expressed serious concerns as to whether current petroleum prices can be explained by normal market fundamentals. To help correct this harmful perception, we request you complete the rulemaking necessary to aggressively implement the Federal Trade Commission’s (FTC) new responsibility to prohibit oil and petroleum market manipulation, as mandated by Congress in the Energy Independence and Security Act of 2007 (P.L. 110-140), by the end of the year.
 
In passing Title VIII, Subtitle B of the Energy Independence and Security Act, Congress reaffirmed that it is the responsibility of the federal government to establish clear procedures to ensure that the U.S. petroleum market is as free from manipulation as possible, and to levy penalties against those who might seek to profit from such illegal activities. Utilized effectively, we believe this new authority will substantially augment consumer protections, help lower and stabilize prices, increase market transparency, and provide drivers the confidence that retail gasoline and diesel prices are free from the influence of anticompetitive practices and the exercise of market power, which might rightly be considered manipulation. 
 
As you know, the new authority granted to the FTC is modeled on the anti-manipulation authorities utilized by other agencies such as the Securities and Exchange Commission (SEC) and the Federal Energy Regulatory Commission (FERC). As such, we believe the FTC can pursue its own rulemaking in relatively short order. Specifically, Title VIII, Subtitle B of the Energy Independence and Security Act carefully tracks section 10(b) of the Securities Exchange Act of 1934 for which a substantial body of case law has been developed over the last half century. In fact, the Supreme Court has compared this body of law to “a judicial oak which has grown from little more than a legislative acorn.” Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 737 (1975). 
 
We believe it’s worth noting that section 10(b) of the Securities Exchange Act simply ensures the integrity of the securities markets by giving the Securities and Exchange Commission the ability to prevent or remedy fraudulent or manipulative practices aimed at artificially affecting those markets. The language is not intended to catch sellers who take advantage of the natural market forces of supply and demand, only those who attempt to affect the market or prices “by artificial means ... unrelated to the natural forces of supply and demand.” Mobil Corp. v. Marathon Oil Co., 669 F.2d 366, 374 (6th Cir. 1981). Similarly, the Supreme Court has read “the words ‘manipulative or deceptive’ used in conjunction with ‘device or contrivance’” to cover only “knowing or intentional misconduct.”   Ernst & Ernst v. Hochfelder, 425 U.S. at 197. The word “manipulative,” it has said, “connotes intentional or willful conduct designed to deceive or defraud ... by controlling or artificially affecting ... price[s]....” 425 U.S. at 199. It means “practices ... that are intended to mislead ... by artificially affecting market activity.” Santa Fe Industries v. Green, 430 U.S. 462, 476 (1977).
 
Much of the inspiration for the new authority granted to the FTC was based on the success of complementary provisions established for the electricity and natural gas markets in the Energy Policy Act of 2005, which in turn were a reaction to clear evidence of market manipulation by Enron and others in the Western electricity markets in 2000 and 2001 that cost consumers billions. By modifying the Natural Gas Act and the Federal Power Act, these provisions provided FERC with stronger enforcement authority which has succeeded in increasing market transparency and punishing cheaters in those particular energy markets. We note that FERC was able to propose its anti-manipulation rule within three months of enactment of the Energy Policy Act of 2005 and adopt the final rule three months later. To date, FERC has used its expanded authority to complete 64 investigations, 14 of which have resulted in settlements involving payment of civil penalties or other monetary remedies for alleged market manipulations totaling over $48 million. In addition, two investigations have led to FERC bringing enforcement actions for alleged market manipulation against two energy trading companies that would total over $458 million in civil penalties. The new law has also motivated market participants to be more vigilant at self reporting and policing. 
 
While we appreciate that oil and petroleum markets differ from the electricity and natural gas markets, and the Commission’s regulatory role may not always be the same as either the SEC or FERC, oil and gas markets are also susceptible to fraud and manipulation. Indeed, the Commission’s Congressionally-mandated investigation of gasoline prices after Hurricane Katrina, released May 2006, acknowledged the possibility that the petroleum industry could manipulate prices by reducing production, distribution, or inventories. Likewise, recent enforcement cases brought by the Commodity Futures Trading Commission have pointed to tactics designed to artificially influence the price of physical petroleum supplies.
 
We look forward to hearing from the Commission in writing on its plans and efforts to date on developing rulemaking and a detailed timeline for implementing this urgently needed new anti-manipulation authority. If the 2000 and 2001 Western energy crisis taught us anything, it is that energy markets operate best when they are subject to effective and consistent oversight. Without a bright line demarcating the distinction between healthy market practices and illegal manipulation --especially when supplies are tight in markets with extremely inelastic demand-- unscrupulous market participants may be more apt to take advantage of consumers. Such actions may already be seriously burdening our country’s economy and the impacting the welfare of our constituents. 
 
Sincerely,
 
 
Senator Maria Cantwell (D-WA)
 
 
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