A Comparison of Anti-Manipulation Rules in U.S. and Eu Electricity and Natural Gas Markets: A Proposal for a Common Standard

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Synopsis: In this paper, we describe the development and current status of anti- manipulation rules as they apply to wholesale electricity and natural gas markets in the United States and the European Union, including the institutions that are responsible for overseeing these rules. We then compare and contrast these jurisdictions to discuss similarities, differences, and potential gaps in coverage within and across their internal markets. We note that 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. The absence of a common EU/U.S. framework for examining manipulative behavior introduces uncertainty into compliance efforts by failing to provide safe harbors and by potentially wasting scarce resources through efforts to continually detect and deter behavior that is in fact legitimate. We propose an economic framework to describe manipulation in a manner that could generally harmonize such compliance and enforcement efforts, providing a uniform approach to the detection, analysis and punishment of manipulative behavior within and across both the U.S. and EU jurisdictions.

I. INTRODUCTION

The last decade has witnessed an unprecedented volume of legislation in the United States and the European Union prohibiting the manipulation of wholesale natural gas and electricity markets. In the United States, the Federal Energy Regulatory Commission (FERC) and Commodity Futures Trading Commission (CFTC) were given new fraud-based anti-manipulation statutes and enhanced power to monitor for, detect, and deter manipulative behavior, evidenced most recently by the FERC's $245 million settlement with Constellation Energy Commodities Group, Inc.1 The European Union has also made bold steps by revising its key piece of market abuse legislation and for the first time extending market abuse legislation to wholesale energy markets, which were previously covered only by general antitrust law. The new anti-manipulation, information disclosure, and inside information laws that will apply to energy markets represent the largest change to how EU energy markets will function since the beginning of the European Union's liberalization project in 1998 and will be overseen by two new EU level institutions.

Despite significant differences in the institutional processes used to derive their respective anti-manipulation laws and in the maturity and complexity of the physical and financial markets that are to be regulated, the behavior prohibited by the U.S. and EU statutes is strikingly similar. "Fraud-based" behavior is prohibited by all of these anti-manipulations statutes, with actions that create (or attempt to create) an "artificial price" prohibited in the European Union and by the CFTC in the United States. Although this statutory congruity suggests that a uniform approach to analyzing manipulative behavior is in place, the limited case precedent tried on such issues lacks a cohesive logic. The absence of a cogent framework for examining manipulative behavior introduces uncertainty into compliance efforts by failing to provide safe harbors from enforcement scrutiny and could waste scarce regulatory resources through inefficient efforts to continually detect and deter behavior that is poorly understood and inconsistently defined.

In this article, we seek to address these issues by proposing an economic framework that could provide uniformity to the analysis of manipulative behavior across cases, agencies, statutes, and continents. The framework could also reduce the reliance upon subjective judgment in identifying actions that do (and do not) cause manipulation. In Section II, we summarize the evolution of the anti-manipulation laws that are now relevant to wholesale electricity and natural gas markets in the United States and European Union. In Section III, we compare and contrast these enforcement regimes to show the need for the unifying framework we propose herein. …

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