Energy Policy

Course Syllabus

GEMBA 9

December, 2011

Professor Craig Pirrong

 

Phone  713-743-4466      

E-mail cpirrong@uh.edu and cpirrong@gmail.com.   

 

COURSE DESCRIPTION

This course will examine some important new policy developments, in particular those related to energy trading and risk management, the Dodd-Frank act, and regulations that have or will be issued to implement the act.   After an introduction to energy trading and price risk management, I will analyze rules related to speculation, manipulation, clearing, capital, and collateral to try to understand how these rules will affect energy trading, energy markets, and energy firms.

COURSE MATERIALS

All of the materials for the course are online.  Hyperlinks to these materials are in the syllabus.  My Streetwise Professor blog also has many posts that analyze issues discussed in the course.

GRADING

Grading for the course is based on a short policy paper.

COURSE OUTLINE

8 December. An Introduction to Energy Derivatives & Energy Trading. In this week we will describe futures contracts, learn how they are traded, and analyze their purpose, focusing particularly on price risk management.  We will examine concepts such as arbitrage, delivery, hedging, basis, basis risk, and clearing.  There will also be an examination of the basics of energy trading, focusing on the transformations (over time, space, and form) in energy, and how trading can help maximize the value of these transformations. Reading:

11 December.  Speculation and Commodity Pricing.  Speculation is a controversial subject in commodity markets.  We will examine the economics of speculation, and its effects on prices.  We’ll then consider the potential for speculation to distort prices, and the evidence relating to the effects of speculation.  Finally, we will analyze the rationale for limits on speculation, notably position limits.  Reading:

·        Pirrong, “No Theory?

 No Evidence? No Problem” (Regulation, 2010)

15 December.  Commodity Market Manipulation. Manipulation--and accusations of manipulation--have bedeviled commodity markets since the birth of commodities trading in the 19th century.  Just what constitutes manipulation is highly controversial, and the subject of considerable legal dispute.  Acting pursuant to Dodd-Frank, the CFTC has implemented a new anti-manipulation rule.  (The FTC has a similar anti-manipulation rule that applies specifically to petroleum and petroleum products).  This class will analyze the economics of manipulation, the ways it can be detected, the economically efficient way to deter it, and actual government policies.  Reading:

·        Pirrong, “Squeezes, Corpses, and the Anti-Manipulation Provisions of the Commodity Exchange Act” (Regulation, 1994).

·        Pirrong, “Energy Market Manipulation: Definition, Diagnosis, and Deterrence” (Energy Law Journal, 2010).

·        CFTC Manipulation Rule (2011).

·        Senate Permanent Subcommittee Report on Amaranth.

18 December. Clearing, collateral, and counterparty risk.  Any derivatives trade is a promise, and one of the parties making the promise may not perform.  Thus, any derivatives contract is subject to counterparty credit risk.  There are a variety of mechanisms to allocate and manage this risk, including bilateral OTC trading and clearing through central counterparties (CCPs).  The energy industry voluntarily adopted OTC clearing on a more widespread in the early-2000s in the aftermath of the merchant energy meltdown, but Dodd-Frank mandates more extensive use of clearing.  In this class we will discuss the pros and cons of clearing, and the potential dangers of clearing mandates. Reading:

·        Pirrong, The Inefficiency of Clearing Mandates (2011).

·        CME Group, Clearport Energy Product Slate