Jeff Bingaman United States Senator from New Mexico

Mr. BINGAMAN. Mr. President, I want to congratulate the primary sponsors of this amendment on achieving a hard-won compromise on an issue that has been intensely debated by Members of this body for a number of years. As I understand the purpose of the amendment, it would essentially close what is come to be known as the ``Enron Loophole'' in the Commodity Exchange Act, CEA.

This loophole in the law, included in the Commodity Futures Modernization Act, CFMA, of 2000, has allowed large volumes of energy derivatives contracts to be traded over-the-counter, OTC, and on electronic platforms, without the federal oversight necessary to protect both the integrity of the market and our nation's energy consumers. 

Mr. President, my Committee--the Senate Committee on Energy and Natural Resources--first heard testimony on this issue on January 29, 2002. At that hearing, Mr. James Newsome, then the chairman of the Commodity Futures Trading Commission, described the impacts of the CFMA thusly: 

With respect to the energy markets, the CFMA exempts two types of markets from much of the CFTC's oversight. Such markets are described in Section 2(h) of the CEA, as amended by the CFMA. The Act defines exempt commodities as, roughly speaking, all commodities except agricultural and financial products. This category, which for the most part represents futures contracts based on metals and energy products may be traded on the two types of markets covered by Section 2(h). The first is bilateral, principal-to-principal trading between two eligible contract participants ..... The second is electronic multilateral trading among eligible commercial entities, which include, among others, eligible contract participants that can also demonstrate an ability to either make or take delivery of the underlying commodity and dealers that regularly provide hedging services to those with such ability. 

It is my understanding that the amendment before us would address the current lack of regulatory authority governing the second category of trading that Mr. Newsome described back in 2002. It would grant the CFTC new authority to impose important requirements on electronic, OTC transactions that rely on the current exemption contained in Section 2(h)(3) of the CEA, but serve a significant price discovery function. These requirements include the implementation of market monitoring, the establishment of position limitations or accountability levels, the daily publication of trading information, and a number of other standards key to restoring transparency to this important corner of our energy markets. 

Ensuring that proper oversight exists in these markets is of critical importance to our nation's energy consumers, and to the efficient operation of the physical, or cash, energy markets that fall under the purview of the Federal Energy Regulatory Commission--FERC--and my committee's jurisdiction. To illustrate why, I would like to once again go back to the testimony we heard at our January 2002 hearing. As described by Mr. Vincent Viola, the then-chairman of the NYMEX: 

[In] the energy marketplace, there is a very substantial interaction between NYMEX and the unregulated, physical and over-the-counter energy markets. The interaction was clearly apparent in the case of Enron. 

Indeed, subsequent to that hearing, FERC, CFTC and the Department of Justice conducted investigations of the various aspects of what became perhaps one of the largest scandals in American corporate history. In its March 2003 ``Final Report on Price Manipulation in Western Markets,'' the FERC staff reported the following: 

FERC Staff obtained information indicating that Enron traders potentially manipulated the price of natural gas at the Henry Hub in Louisiana to profit from positions taken in the over-the-counter--OTC--financial derivatives markets--OTC markets. It is staff's opinion that Enron traders, through transactions falling within the commission's jurisdiction and authorized through a blanket certificate, successfully manipulated the physical natural gas markets. The manipulation yielded profits in the financial OTC markets. 

It was findings like these that motivated a number of Members of my Committee to work together to ensure FERC had the proper tools at its disposal, to stamp out the kind of manipulation that occurred during the Western energy crisis of 2000-2001. During consideration of the Energy Policy Act of 2005, EPACT 2005, Public Law 109-58, I was pleased to work with Senators Cantwell, Feinstein and Wyden on these provisions, along with Senator Domenici, who then chaired the Energy Committee, and Senators Craig and Smith. 

Indeed, sections 315 and 1283 of EPACT 2005 added anti-manipulation provisions to both the Natural Gas Act and the Federal Power Act, respectively. Both make it unlawful for anyone to use ``any manipulative or deceptive device or contrivance ..... in contravention of'' the rules of the Federal Energy Regulatory Commission. Both closely track the language used in section 10(b) of the Securities and Exchange Act and define ``any manipulative or deceptive device or contrivance'' by reference to section 10(b). The Federal Energy Regulatory Commission issued a final rule implementing the two anti-manipulation provisions in January 2006. 

The Energy Policy Act of 2005 provided FERC these much-needed, new authorities in response to the Western energy crisis. However, it is also clear that further regulatory authority is needed, to ensure the CFTC has the tools at its disposal to ensure the integrity of financial energy markets. The present circumstance is one in which the CFTC has essentially been blind to a large portion of these markets for a number of years. This is of critical concern to me, and to my committee, because--as Mr. Viola observed in 2002, and as Enron demonstrated--all of these markets are linked. 

In fact, there is also significant reason to believe that these markets have become more fully intertwined since that hearing 5 years ago. In its 2006 State of the Markets Report, FERC devoted an entire section, section 7, to the ``Growing Influence of Futures and Financial Energy Markets'' on physical energy prices. The report notes that this impact is particularly acute as it relates to natural gas prices--but effects electricity prices as well, to the extent that a growing percentage of our nation's electric generating capacity is gas-fired. The FERC report details the link between prices set in the financial derivatives market, and the physical natural gas contracts that ultimately dictate the prices paid by American consumers. 

Overall, I believe the current situation was most recently and accurately described by FERC Chairman Joseph Kelliher in December 12, 2007, testimony before the Subcommittee on Oversight and Investigations of the House Committee on Energy and Commerce: 

[It] is important to understand that price formation in sophisticated energy markets has become increasingly complex. Regulators must understand and consider the interplay between financial and futures energy markets, on the one hand, and physical energy markets, on the other hand. While FERC has jurisdiction over physical wholesale gas sales, and the Commodity Futures Trading Commission (CFTC) has jurisdiction over futures, the link between futures and physical markets cannot be overstated. In a sense, these markets have effectively converged. Manipulation does not recognize jurisdictional boundaries and we must be vigilant in monitoring the interplay of these markets if we are to adequately protect consumers. 

For these reasons, I support the amendment being offered today. It would enhance the CFTC's authority to protect the integrity of financial energy markets, which in turn play an increasingly important price discovery role in physical energy markets. And it would do so in a manner that also preserves FERC's important role in guarding against market manipulation and protecting American natural gas and electricity consumers. For that, I congratulate the sponsors. In addition, I will enter into a colloquy with the distinguished Chairman of the Senate Agriculture Committee, Senator Harkin, along with Senators Feinstein and Levin, regarding the intent of this amendment with respect to its jurisdictional implications for FERC and the CFTC.