Opening Statement of Commissioner Caroline D. Pham before the Energy and Environmental Markets Advisory Committee
February 28, 2023
Good morning. Thank you Commissioner Mersinger for your leadership of the Energy and Environmental Markets Advisory Committee (EEMAC) and for holding this meeting today. Thank you to EEMAC Secretary, Lauren Fulks, and to the Committee members for the discussions and work you have planned. Your time is valuable, and I appreciate you sharing your expertise with us.
Over the course of the meeting, guest speakers and EEMAC members will present on how changes in U.S. physical energy infrastructure could impact the energy markets and CFTC-regulated metals derivatives markets. As a Commissioner, I especially appreciate the planned discussions surrounding the physical energy markets given the CFTC’s complementary jurisdictional authority with the Federal Energy Regulatory Commission, or FERC, over these markets. Each of the U.S. federal regulators has an important role to play, and it’s important to understand the nuances of each agency’s mission and how our regulatory frameworks all fit together to support the U.S. economy and serve the American people.
While the CFTC has exclusive jurisdiction over the trading of energy futures, options, and swaps, FERC has jurisdiction over the transmission and sale of electricity and natural gas in interstate commerce, including regulation of the electric grid and natural gas pipeline. The regulatory frameworks of the CFTC and FERC, however, are not mutually exclusive. When the Dodd-Frank Act granted the CFTC exemptive authority over physical commodity transactions entered into pursuant to a tariff or rate schedule approved by FERC, it also expanded the CFTC’s anti-fraud and anti-manipulation enforcement authority over physical or spot commodity transactions. For these reasons, it is important for the CFTC to be hearing first-hand from market participants about the critical issues surrounding the physical energy markets.
The world we live in is undergoing a digital transformation, with new technologies revolutionizing our daily lives and work. Anyone who has ever been in an electric vehicle that doesn’t make a sound when you drive it, knows what I’m talking about, or waking up to the daily weather report from a talking speaker. In the energy sector, this shift is particularly notable, as we witness a swift rise in the utilization of electricity to power our Nation’s infrastructure and technologies that support growth and increases in efficiency across many sectors. As we transition towards a more electrified economy, we should expect a corresponding surge in the use of CFTC-regulated derivatives to mitigate the associated risks due to the inherent complexity of physical electricity markets.
Over the last decade, we have seen significant growth in the CFTC’s energy derivatives markets as our registered exchanges continue to create new products to meet the need for companies to manage risk and invest in the necessary infrastructure to continue operations. Since 2020, some of the most actively traded contracts in the CFTC’s regulated markets are energy derivatives that reference the PJM Western Hub and Ercot North. These markets provide energy producers a means of hedging against price risk, which helps to protect consumers from volatile energy prices. These markets also allow traders to take advantage of price movements in energy markets to manage their energy portfolios more efficiently.
As the energy sector evolves, we must be aware of the challenges that lie ahead. One of the key challenges we face is the need to ensure there are significant upgrades to the grid infrastructure throughout most of the country to replace existing equipment that has proven its inability to perform during periods of severe weather. Indeed, the impacts of the Texas winter freeze of 2021 were far-reaching and damaging. As temperatures dropped to single-digits across most of the state, equipment failures at power plants and wind turbines were unable to produce enough electricity to meet demand. This led to an increase in natural gas prices and rolling blackouts throughout the state for days. A coordinated effort between the CFTC, market participants, and relevant stakeholders is needed to address challenges in ensuring that the CFTC's regulation of energy derivatives markets keeps up with the U.S. economy’s increasing dependence on electricity and any disruptions to the grid that could significantly affect interconnected markets and their financial derivatives.
Moreover, the rising reliance on electricity could result in a surge in demand for specific industrial metals that are necessary in the manufacture and distribution of new electrical infrastructure and equipment. For instance, industrial metals like copper and aluminum are widely used in power generation, transmission, and distribution systems that are part of the electrical grid. Estimates suggest that the global energy transition will require upwards of 50 million metric tons of copper a year by 2035, up from 25 million metric tons to achieve a zero-emissions economy by 2050.
This could potentially drive up prices for industrial metals, which in turn could impact the value of related exchange-traded derivatives. Additionally, these derivatives may become more attractive to market participants seeking to hedge against rising prices or to profit from potential price increases.
For all these reasons, it is important to closely monitor developments in the energy sector and their potential impacts on markets for industrial metals and related derivatives.
This is why I believe that we need to be proactive in addressing increased electrification and the potential challenges and solutions in our markets. By doing so, we can ensure that the CFTC’s derivatives markets continue to play a critical role in managing risk and promoting economic growth.
Thank you Commissioner Mersinger and to the members for their service on this Committee.
 See FERC, CFTC Sign MOUs on Jurisdiction and Information Sharing (Jan. 2, 2014), available at https://www.cftc.gov/PressRoom/PressReleases/6816-14 (MOU on Overlapping Jurisdiction and MOU on Information Sharing).
 See CFTC Final Order Regarding Southwest Power Pool, Inc. Application To Exempt Specified Transactions; Amendment to the Final Order Exempting Specified Transactions of Certain Independent System Operators and Regional Transmission Organizations, 81 FR 73062 at 73064 (Oct. 24, 2016).
 See, e.g. Commodity Exchange Act § 6(c), 7 U.S.C. § 9, as amended by section 753 of the Dodd-Frank Act.
 See CFTC Disaggregated Commitments of Traders (Jan. 31, 2023), available at https://www.cftc.gov/dea/futures/electricity_lf.htm.
 See How Does the U.S. Power Grid Work (Backgrounder), Council on Foreign Relations (last updated July 5, 2022), available at https://www.cfr.org/backgrounder/how-does-us-power-grid-work and Creaky U.S. power grid threatens progress on renewables, EVs (Reuters Special Report), Reuters.com (May 12, 2022), available at https://www.reuters.com/investigates/special-report/usa-renewables-electric-grid/.
 See Texas electrical grid remains vulnerable to extreme weather events, Federal Reserve Bank of Dallas (Jan. 17, 2023, revised Jan. 24, 2023), available at https://www.dallasfed.org/research/economics/2023/0117; Spending by U.S. natural gas consumer rose 37% in 2021, especially in Oklahoma and Texas, Today in Energy, U.S. Energy Information Administration (Feb. 14, 2023), available at https://www.eia.gov/todayinenergy/detail.php?id=55519; and Gas sellers made $11 billion while millions of Texans were without power in February, Fortune.com (July 9, 2021), available at https://fortune.com/2021/07/09/gas-sellers-made-11-billion-texas-winter-blackout/.
 See Mine 2022: a critical transition (June 2022), PwC Global Mine Report, available at https://www.pwc.com/gx/en/industries/energy-utilities-resources/publications/mine.html.
 See How copper and aluminum are powering the energy transition (Morgan Stanley Research, Dec. 5, 2022), us.etrade.com, available at https://us.etrade.com/knowledge/thematic-investing/commodities/copper-aluminum-energy-transition.
 See Looming Copper Supply Shortfalls Present a Challenge to Achieving Net-Zero 2050 Goals, S&P Global Study Finds, S&P Global (July 14, 2022), available at https://press.spglobal.com/2022-07-14-Looming-Copper-Supply-Shortfalls-Present-a-Challenge-to-Achieving-Net-Zero-2050-Goals,-S-P-Global-Study-Finds.