A new paper by Brattle economists proposes an economic framework that would provide uniformity to the analysis, proof, or disproof of alleged market manipulations in the wholesale electricity and natural gas markets of the United States and European Union.
The paper was published this week in the Energy Law Journal. Market manipulation enforcement and compliance issues are increasingly in the spotlight in the United States, as evidenced by the Federal Energy Regulatory Commission’s (FERC’s) $245 million settlement with Constellation Energy, the creation of that agency’s new Division of Analytics and Surveillance, and the President’s calls to greatly increase the Commodity Futures Trading Commission’s (CFTC’s) anti-manipulation budget and raise the civil penalty for manipulation to $10 million per incident, per day. Europe is also expanding its anti-manipulation surveillance and enforcement regimes, demonstrated by the passage of new laws (such as the REMIT) that specifically ban wholesale energy market manipulations and create agencies to monitor and enforce these new anti-manipulation provisions in the EU. The expansion of anti-manipulation enforcement authority has raised concerns amongst energy market participants, particularly those with active trading arms. Of key concern is the lack of specificity as to the behavior to which the term “manipulation” applies. The historical precedent in the U.S. has been set by a few successful manipulation cases and settlements that identify specific types of behavior, whereas the EU’s guidance is stated in examples provided in recitals to the new REMIT laws. This reliance upon examples to define manipulation, rather than a cohesive economic theory, paints an incomplete picture of the range of behavior that may be found to be manipulative and fails to provide market participants with concrete guidance as to trading “safe harbors” that are protected from enforcement scrutiny. In their paper, Brattle economists Shaun Ledgerwood and Dan Harris compare and contrast the U.S. and EU institutions responsible for enforcing the anti-manipulation laws and determine that there is a need for a “single rulebook” appropriate for the analysis of market manipulation generally. The authors seek to address this need by proposing an economic framework that would provide uniformity to the analysis of manipulative behavior across cases, agencies, statutes, and continents. Consistent with this concept, the proposed framework could assist compliance efforts by distinguishing behavior that is patently manipulative and identifying safe harbors for legitimate trading. This would also assist surveillance and enforcement efforts by identifying the precursors of manipulative trading, such that scarce resources can be focused and coordinated within and across agencies. “While the behavior prohibited by the U.S. and EU statutes is remarkably similar, there is in fact no common standard for defining market manipulation,” said Dr. Ledgerwood. “Our proposed framework describes manipulation in a manner that could generally harmonize international compliance and enforcement efforts, providing a uniform approach that will more clearly define permissive and prohibited behavior within and across both the U.S. and EU jurisdictions.”
The paper, “A Comparison of Anti-Manipulation Rules in U.S. and EU Electricity and Natural Gas Markets: A Proposal for a Common Standard,” is available for download below.