Dianne Feinstein: Senator Feinstein Urges Senate Approval of Measure to Close "Enron Loophole"

July 9, 2007 -- Washington, DC – U.S. Senator Dianne Feinstein (D-Calif.) today urged immediate Senate approval of a measure she has sponsored to shine light on energy markets and close the “Enron Loophole.” Senator Feinstein’s comments come in the wake of a hearing by the Senate Permanent Subcommittee on Investigations on the impact of speculation in the natural gas market.

In late June, the Subcommittee released a report entitled “Excessive Speculation in the Natural Gas Market,” which concluded that energy trading by a single hedge fund, Amaranth LLC, led to high prices and extreme price volatility in the U.S. natural gas market in 2006.

In February, Senator Feinstein joined with Senators Olympia Snowe (R-Maine), Carl Levin (D-Mich.), and Maria Cantwell (D-Wash.) to introduce legislation that would increase transparency and oversight for the electronic over-the-counter trading of energy commodities, such as oil, natural gas, coal and electricity. Other cosponsors include: Senators Barbara Boxer (D-Calif.), Russ Feingold (D-Wisc.), Jeff Bingaman (D-New Mex.), Joe Lieberman (I-Conn.), Frank Lautenberg (D-N.J.), Barbara Mikulski (D-Md.), John Kerry (D-Mass.), and Bernard Sanders (I-Vt.).

“The facts are clear: the failure to provide federal oversight and prevent fraud in natural gas and oil markets enabled Amaranth and other energy traders to manipulate oil and natural gas markets. In fact, a recent report by the Permanent Committee on Investigations confirmed that this unfettered speculation resulted in inflated energy costs that were passed onto American consumers across the country.

The situation is untenable. Six years after the Western Energy Crisis, the so-called ‘Enron loophole’ must be closed. It’s time to shine light on the energy market and require energy traders to provide record-keeping and an audit trail.

And consensus is building for a legislative solution.

In fact today, top officials from the Intercontinental Exchange and the New York Mercantile Exchange – the markets where oil and natural gas futures are traded – publicly announced their support for increased transparency in energy markets.

James Newsome, CEO of NYMEX testified that: ‘legislative change may be necessary to address the real public interest concerns created by the current structure of the natural gas market and the potential for systemic financial risk from a market crisis involving significant activity occurring on the unregulated trading venue.’

And Jeffrey Sprecher, Chairman of the Board and CEO of the Intercontinental Exchange, testified that ‘we support the closing of the Enron loophole.’

Additionally, members of the Commodities Futures Trading Commission, the agency tasked with overseeing this market, testified that the Commission has attempted to increase oversight of energy markets, but ‘the agency is nearing the outer limits of its authority.’

So, the CFTC must have clear authority from Congress that all energy traders must meet similar record-keeping standards and provide an audit trail.

And that’s just what legislation that I have sponsored with Senators Snowe, Levin, Cantwell and others would do. It would increase transparency in the oil and gas markets by requiring energy traders to meet the same reporting standards as their colleagues on NYMEX.

This legislation is six years overdue – it’s time for it to become law.”

Specifically, the Oil and Gas Traders Oversight Act would:

* Require U.S. energy traders who electronically trade futures in the U.S. to keep records and report large positions carried by their market participants in energy commodities for five years or longer. These are the same requirements that apply to traders that do business on the New York Mercantile Exchange (NYMEX).
* Energy commodities include: coal, crude oil, gasoline, heating oil, diesel fuel, electricity, propane, and natural gas.
* Require traders to provide such records to the Commodity Futures Trading Commission (CFTC) or the Justice Department upon request, the same reporting requirements for NYMEX traders.
* Require persons in the United States, who trade U.S. energy commodities delivered in the U.S. on foreign futures exchanges, to keep similar records and report large trades.

Background:

Prior to 2000, U.S. energy futures were traded exclusively on regulated markets like NYMEX, where the CFTC polices the market for price manipulation or fraud. Since 2000, however, there has been a tremendous growth in the trading of oil and gas futures on unregulated, electronic markets.

These electronic trades were exempted from CFTC oversight by a provision inserted at the behest of Enron and other large energy traders into the conference report on the Commodity Futures Modernization Act of 2000.

The lack of oversight in these markets has resulted in billions of dollars of losses:

* During the Western Energy Crisis in 2000-2001, energy costs for California soared from roughly $8 billion in 1999 to $27 billion in 2000, and then $27.5 billion in 2001. In 2003, the Federal Energy Regulatory Commission (FERC) charged four energy companies – Enron Power Marketing, Enron Energy Services, Reliant Energy Services and BP Energy Company – of engaging in market manipulation.
* In September 2006, Amaranth Advisers, LLC announced that previously undisclosed speculation in natural gas trading had resulted in a loss of $6 billion. Among other investors who suffered massive setbacks when the hedge fund declared bankruptcy, the County of San Diego lost as much as $87 million in investments set aside for employee pensions. The speculative activity and collapse of Amaranth resulted in inflated natural gas costs. The American Public Gas Association reported massive losses for consumers nationwide at a recent hearing of the Senate Permanent Subcommittee on Investigations.

In January, the CFTC announced that the Intercontinental Exchange, or ICE, the largest electronic trading company, has agreed to voluntarily provide information on over-the-counter trades. The legislation introduced by the Senators would ensure that this reporting process becomes law, and therefore is not subject to an administrative decision within an individual company.

Source: Senator Dianne Feinstein

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