[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]



 
IMPACTS OF H.R. 3795, ``THE OVER-THE-COUNTER DERIVATIVES MARKET ACT OF 
                               2009,'' ON
                             ENERGY MARKETS

=======================================================================

                                HEARING

                               BEFORE THE

                 SUBCOMMITTEE ON ENERGY AND ENVIRONMENT

                                 OF THE

                    COMMITTEE ON ENERGY AND COMMERCE
                        HOUSE OF REPRESENTATIVES

                     ONE HUNDRED ELEVENTH CONGRESS

                             FIRST SESSION

                               __________

                            DECEMBER 2, 2009

                               __________

                           Serial No. 111-84


      Printed for the use of the Committee on Energy and Commerce

                        energycommerce.house.gov




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                    COMMITTEE ON ENERGY AND COMMERCE

                 HENRY A. WAXMAN, California, Chairman

JOHN D. DINGELL, Michigan            JOE BARTON, Texas
  Chairman Emeritus                    Ranking Member
EDWARD J. MARKEY, Massachusetts      RALPH M. HALL, Texas
RICK BOUCHER, Virginia               FRED UPTON, Michigan
FRANK PALLONE, Jr., New Jersey       CLIFF STEARNS, Florida
BART GORDON, Tennessee               NATHAN DEAL, Georgia
BOBBY L. RUSH, Illinois              ED WHITFIELD, Kentucky
ANNA G. ESHOO, California            JOHN SHIMKUS, Illinois
BART STUPAK, Michigan                JOHN B. SHADEGG, Arizona
ELIOT ENGEL, New York                ROY BLUNT, Missouri
GENE GREEN, Texas                    STEVE BUYER, Indiana
DIANA DeGETTE, Colorado              GEORGE RADANOVICH, California
  Vice Chairman                      JOSEPH R. PITTS, Pennsylvania
LOIS CAPPS, California               MARY BONO MACK, California
MICHAEL F. DOYLE, Pennsylvania       GREG WALDEN, Oregon
JANE HARMAN, California              LEE TERRY, Nebraska
TOM ALLEN, Maine                     MIKE ROGERS, Michigan
JANICE D. SCHAKOWSKY, Illinois       SUE WILKINS MYRICK, North Carolina
CHARLES A. GONZALEZ, Texas           JOHN SULLIVAN, Oklahoma
JAY INSLEE, Washington               TIM MURPHY, Pennsylvania
TAMMY BALDWIN, Wisconsin             MICHAEL C. BURGESS, Texas
MIKE ROSS, Arkansas                  MARSHA BLACKBURN, Tennessee
ANTHONY D. WEINER, New York          PHIL GINGREY, Georgia
JIM MATHESON, Utah                   STEVE SCALISE, Louisiana
G.K. BUTTERFIELD, North Carolina
CHARLIE MELANCON, Louisiana
JOHN BARROW, Georgia
BARON P. HILL, Indiana
DORIS O. MATSUI, California
DONNA M. CHRISTENSEN, Virgin 
Islands
KATHY CASTOR, Florida
JOHN P. SARBANES, Maryland
CHRISTOPHER S. MURPHY, Connecticut
ZACHARY T. SPACE, Ohio
JERRY McNERNEY, California
BETTY SUTTON, Ohio
BRUCE L. BRALEY, Iowa
PETER WELCH, Vermont

                                  (ii)
                 Subcommittee on Energy and Environment

               EDWARD J. MARKEY, Massachusetts, Chairman
MICHAEL F. DOYLE, Pennsylvania       RALPH M. HALL, Texas
G.K. BUTTERFIELD, North Carolina     FRED UPTON, Michigan
CHARLIE MELANCON, Louisiana          ED WHITFIELD, Kentucky
BARON P. HILL, Indiana               JOHN SHIMKUS, Illinois
DORIS O. MATSUI, California          JOHN B. SHADEGG, Arizona
JERRY McNERNEY, California           STEVE BUYER, Indiana
PETER WELCH, Vermont                 GREG WALDEN, Oregon
JOHN D. DINGELL, Michigan            SUE WILKINS MYRICK, North Carolina
RICK BOUCHER, Virginia               JOHN SULLIVAN, Oklahoma
FRANK PALLONE, Jr., New Jersey       MICHAEL C. BURGESS, Texas
ELIOT L. ENGEL, New York
GENE GREEN, Texas
LOIS CAPPS, California
JANE HARMAN, California
CHARLES A. GONZALEZ, Texas
TAMMY BALDWIN, Wisconsin
MIKE ROSS, Arkansas
JIM MATHESON, Utah
JOHN BARROW, Georgia
  
                             C O N T E N T S

                              ----------                              
                                                                   Page
Hon. Edward J. Markey, a Representative in Congress from the 
  Commonwealth of Massachussetts, opening statement..............     1
Hon. Henry A. Waxman, a Representative in Congress from the State 
  of California, opening statement...............................     3
Hon. Fred Upton, a Representative in Congress from the State of 
  Michigan, opening statement....................................     4
Hon. John D. Dingell, a Representative in Congress from the State 
  of Michigan, prepared statement................................     5
Hon. Cliff Stearns, a Representative in Congress from the State 
  of Florida, opening statement..................................     6
Hon. Michael F. Doyle, a Representative in Congress from the 
  Commonwealth of Pennsylvania, opening statement................     7
Hon. Steve Scalise, a Representative in Congress from the State 
  of Louisiana, opening statement................................     8
Hon. Doris O. Matsui, a Representative in Congress from the State 
  of California, opening statement...............................     9
Hon. G.K. Butterfield, a Representative in Congress from the 
  State of North Carolina, opening statement.....................     9
Hon. Gene Green, a Representative in Congress from the State of 
  Texas, prepared statement......................................   114
Hon. Joe Barton, a Representative in Congress from the State of 
  Texas, prepared statement......................................   116

                               Witnesses

Jon Wellinghoff, Chairman, Federal Energy Regulatory Commission..    11
    Prepared statement...........................................    13
Gary Gensler, Chairman, Commodity Futures Trading Commission.....    19
    Prepared statement...........................................    21
Elizabeth A. Moler, Executive Vice President, Government Affairs 
  and Public Policy, Exelon Corporation on behalf of the Edison 
  Electric Institute.............................................    48
    Prepared statement...........................................    50
Patrick McCullar, President and CEO, Delaware Municipal Electric 
  Corporation, on behalf of the American Public Power Association    59
    Prepared statement...........................................    61
Glenn English, CEO, National Rural Electric Cooperative 
  Association....................................................    69
    Prepared statement...........................................    71
John Shelk, President and CEO, Electric Power Supply Association.    75
    Prepared statement...........................................    77
Vincent Duane, Esquire, General Counsel, PJM Interconnection, 
  Inc............................................................    86
    Prepared statement...........................................    89


IMPACTS OF H.R. 3795, ``THE OVER-THE-COUNTER DERIVATIVES MARKET ACT OF 
                       2009,'' ON ENERGY MARKETS

                              ----------                              


                      WEDNESDAY, DECEMBER 2, 2009

    Subcommittee on Energy and Environment,
                  Committee on Energy and Commerce,
                                  House of Representatives,
                                                    Washington, DC.
    The Subcommittee met, pursuant to call, at 1:22 p.m., in 
Room 2322 of the Rayburn House Office Building, Hon. Edward J. 
Markey [Chairman of the Subcommittee] presiding.
    Members present: Representatives Markey, Doyle, Inslee, 
Butterfield, Matsui, McNerney, Welch, Dingell, Waxman (ex 
officio), Stupak, Upton, Stearns, Shimkus, Walden, and Scalise.
    Staff present: Bruce Wolpe, Senior Advisor; Greg Dotson, 
Chief Counsel, Energy and Environment; John Jimison, Senior 
Counsel; Jeff Baran, Counsel; Joel Beauvais, Counsel; Melissa 
Cheatham, Professional Staff Member; Caitlin Haberman, Special 
Assistant; Lindsay Vidal, Special Assistant; Mitchell Smiley, 
Special Assistant; Andrea Spring, Minority Professional Staff 
Member; Aaron Cutler, Minority Counsel; and Sam Costello, 
Minority Legislative Analyst.

OPENING STATEMENT OF HON. EDWARD J. MARKEY, A REPRESENTATIVE IN 
        CONGRESS FROM THE COMMONWEALTH OF MASSACHUSETTS

    Mr. Markey. Welcome to the Subcommittee on Energy and 
Environment and this very important hearing.
    As early as next week, the House will vote on legislation 
to strengthen the oversight of financial derivatives markets. 
This legislation provides the Commodities Futures Trading 
Commission a broad new authority to regulate over-the-counter 
trading in derivatives. This reform is long overdue.
    Over the past 2 years, we have once again learned the hard 
way that deregulation of financial markets is a recipe for 
robbery and ultimately recession. I have long supported tough 
regulation of derivatives beginning in the late 1980s when I 
chaired what was then the Subcommittee on Telecommunications 
and Finance. In the early 1990s, I chaired the first 
Congressional hearings on the potential for over-the-counter 
derivatives to create systemic risk in global financial 
markets, and I warned of the risks that unregulated derivative 
dealer like AIG and Bear Stearns could pose for those markets.
    I have also worked to strengthen competition and oversight 
in electricity markets. I was the author of the transmission 
access provisions of the Energy Policy Act of 1992, which 
promoted competition by requiring transmission owners to 
provide independent power providers with access to the grid. In 
the Energy Policy Act of 2005, I was amongst the principal 
supporters of the provision that gave the Federal Energy 
Regulatory Commission authority to protect against fraud and 
manipulation in electricity and natural gas markets.
    So today's hearing isn't about whether or not we need 
strong oversight of energy markets; clearly, we do. It is about 
getting regulation right. We must ensure that financial 
regulatory reform doesn't disrupt FERC's ability to properly 
structure and oversee organized energy markets. Otherwise, we 
will undermine FERC's ability to ensure reliable and affordable 
service for American consumers. We must not let this effort to 
solve one crisis, create yet another.
    The derivatives bill reported by the Agriculture Committee 
threatens to do just that. The bill's definition of swap is so 
broad that it is likely to cover a number of FERC-related 
products, including but not limited to Financial Transmission 
Rights that play a key role in the functioning of the organized 
electricity markets. These products are inextricably linked to 
the physical operation of the grid and they exist only because 
FERC has approved their terms and conditions. Congress has 
given FERC strong authority to protect against manipulation of 
these markets and there is broad agreement that FERC has 
exercised that authority thoroughly and competently. 
Nevertheless, under the pending derivatives bill, anything that 
falls within the definition of a swap is under the exclusive 
jurisdiction of the CFTC, and CFTC has no authority to exempt 
any swap from the full set of regulations that apply to 
financial markets.
    What is the upshot of all of this? Well, FERC could be 
excluded from regulating the very markets it has created to 
ensure a reliable and affordable supply of electricity. In 
FERC's place would be substituted the CFTC, an agency with no 
expertise in this area. Such an outcome is unacceptable.
    Chairman Waxman and I have proposed a straightforward and 
reasonable solution. First, the derivatives legislation should 
fully preserve FERC's existing statutory authority. Second, 
whether FERC and CFTC have overlapping authority, the two 
agencies should conclude a Memorandum of Understanding that 
sets the boundaries of their respective authority so as to 
ensure effective regulation. And third, in any area where the 
two agencies agree that FERC should have primacy, CFTC should 
be allowed to decline to exercise its regulatory authority.
    We will be working in the coming days to ensure that a 
resolution along these lines can be reached before the 
derivatives bill is brought to the House floor. We expect that 
the members of the subcommittee and the full committee will 
play an active role in this discussion. This afternoon's 
hearing will help us to flesh-out the issues and potential 
solutions.
    I thank the witnesses for their participation, especially 
the two chairmen who are sitting in front of us. They are 
working hard in trying to find a way of resolving these issues. 
We appreciate their efforts.
    Let me now turn and recognize the ranking member of the 
subcommittee, the gentleman from Michigan, Mr. Upton.
    Mr. Upton. Thank you, Mr. Chairman, and just because the 
hearing started late, I want to defer my opening statement and 
I will defer to Mr. Shimkus.
    Mr. Markey. The gentleman is recognized for that purpose.
    Mr. Shimkus. Thank you and I want to thank my friend, Fred 
Upton. I have got to go over to the Capitol floor meeting on 
the Illinois Gitmo so that is where I am headed from here.
    Thousands of companies use derivatives to manage risk. 
There are winners and losers in the market. One aspect of this 
bill is transparency and our focus on does this bill achieve 
this at the cost of the marketplace. With this bill that the 
Ways and Means and Ag have both passed, are we making it more 
difficult for these companies to manage risk? I have talked 
with many and this will cost them more and prices will go up. 
Will the CFTC and FERC both have jurisdiction? Will it be 
shared? One has in some instances, one in others. Does this 
bill make this clear or is this burdensome with the CFTC and 
the FERC or companies dealing in derivatives? Are any of these 
completely capable of this request and can they afford new cost 
placed upon them?
    This is an important hearing, Mr. Chairman. We need to fix 
the agencies. We don't need to create new ones and we will be 
focusing on that.
    I yield back my time. I thank Fred for the yielding.
    Mr. Markey. The gentleman's time has expired.
    The chair recognizes the Chairman of the full committee, 
the gentleman from California, Mr. Waxman.

OPENING STATEMENT OF HON. HENRY A. WAXMAN, A REPRESENTATIVE IN 
             CONGRESS FROM THE STATE OF CALIFORNIA

    Mr. Waxman. Thank you very much, Mr. Chairman.
    Today we are examining whether the derivatives reform 
legislation reported out of the House Agriculture Committee 
could disrupt the Federal Energy Regulatory Commission's 
current regulation of critical regional electricity markets. 
The pending legislation is intended to bring greater 
transparency and accountability to derivative markets. I 
absolutely support that goal however the bill's broad 
definition of swaps is so inclusive that it threatens to 
displace comprehensive FERC regulation over regional 
electricity market products. The bill could be read to assign 
exclusive and mandatory authority over those products to the 
Commodities Futures Trading Commission.
    In 2000 and 2001, California experienced a severe energy 
crisis. There were blackouts. There was economic chaos. Energy 
prices in the State skyrocketed. We were being victimized by 
unscrupulous traders in both power and transmission rights. 
FERC, at the time, was soundly asleep and unresponsive to the 
alarms we raised. But in the wake of that California energy 
crisis, Congress amended and Mr. Markey indicated he was the 
author, changes in the Federal Power Act to give FERC authority 
to prevent and punish fraud in market manipulation. We thought 
FERC had that authority but during that period of time, they 
claimed they needed clearer statutory authority. Well, if the 
legislation reported out of the Agriculture Committee is not 
adjusted to preserve the authority of FERC, it could undermine 
authorities that Congress gave FERC in the aftermath of that 
energy crisis to investigate and penalize market manipulation.
    FERC has strengthened its monitoring and enforcement 
practices. No one, including the CFTC or sponsors of H.R. 3795, 
has suggested to us that the current regulatory regime to 
prevent market manipulation or abuse in FERC's organized 
regional markets is broken, so we need to ensure that efforts 
to strengthen derivative regulation don't weaken existing 
regulation. Before H.R. 3795 is considered on the House floor, 
members need to understand how it would affect the organized 
regional markets FERC has created and comprehensively regulated 
pursuant to detailed tariffs. These markets not only exist 
because FERC created them, the products traded in these markets 
are directly linked to the physical limits of the transmission 
system and are not traded on broad exchanges. We need to make 
sure that the legislation doesn't unintentionally displace FERC 
as the regulator of the markets FERC has created.
    This hearing is an important opportunity for us to find out 
what impact the proposed legislation may have on these critical 
markets and what changes to the legislation may be appropriate. 
I appreciate the expert witnesses here to help us understand 
its implications. Our committee has a tradition of acting only 
on the basis of a thorough understanding of the issues before 
it and I believe we can help to improve H.R. 3795 before it is 
voted upon. And I believe we are going to need changes in that 
legislation that is reported out of the Agriculture Committee 
to make sure that we don't have consequences that would be 
harmful to what the good job that FERC is doing in this regard 
and should continue to be able to do.
    Thank you, Mr. Chairman.
    Mr. Markey. Gentleman's time has expired.
    The chair once again recognizes the ranking member, Mr. 
Upton.

   OPENING STATEMENT OF HON. FRED UPTON, A REPRESENTATIVE IN 
              CONGRESS FROM THE STATE OF MICHIGAN

    Mr. Upton. Thank you, Mr. Chairman, and I do appreciate 
having this important hearing today.
    We have two very distinguished panels and we are fortunate 
to be able to hear their thoughts and concerns for the 
legislation. H.R. 3795 as reported out of the Ag Committee has 
some serious flaws that would negatively impact the energy 
sector and I, like many members of this subcommittee, oppose 
the legislation in its current form, and it is my understanding 
that both Mr. Waxman, Mr. Markey, Mr. Barton do share my 
concerns and I hope that we can work together to change the 
bill before it is brought to the House floor as early as next 
week.
    As written, H.R. 3795 could lead to an increased energy 
cost for all Americans and disrupt our nation's energy markets. 
By limiting access to certain risk management tools as this 
legislation does, the ability of energy providers to hedge 
their market risks would be jeopardized and their customers 
would be vulnerable to increased price volatility. I understand 
that there is an appetite among many of my colleagues to create 
new regulations to curb systemic risk in the economy as a whole 
but this legislation engulfs markets that are working properly, 
and in doing so creates new problems that our economy and 
energy consumers do not need during these very difficult times.
    The legislation will undermine authorities that Congress 
gave FERC to investigate and penalize market manipulation. As 
part of the Energy Policy Act of '05, FERC was given the 
authority to protect electric and natural gas markets against 
manipulation or fraud by ensuring the transparency of those 
markets. FERC's ability to exercise these authorities to the 
full extent Congress intended would be in question with the 
passage of this bill.
    Additionally, under current law, FERC regulates interstate 
transmission and sale of electricity to ensure that electricity 
prices are just and reasonable. However, this legislation would 
disrupt transmissions markets by creating what would amount to 
contradictory regulation by the CFTC. So this bill, H.R. 3795 
in current form I don't believe is ready for primetime and I 
would hope that in the tough times of double-digit unemployment 
and a sagging economy as we try to get our businesses back to 
work and employing folks that this legislation will not move as 
it is. Let us work together to get it right.
    I look forward to the testimony and questions and I yield 
back.
    Mr. Markey. Gentleman's time has expired.
    The chair now recognizes the gentleman from Michigan, Mr. 
Dingell. I recall vividly the gentleman from Michigan back in 
2005, and the energy conference fighting vigorously in that 
conference committee to ensure that the anti-fraud, anti-
manipulation language was included in that legislation and to a 
very large extent, that is at the core now of what we are 
debating. So since I have a vivid memory of that battle and it 
was the gentleman from Michigan who was leading the fight, I 
yield him the time for an opening statement.

OPENING STATEMENT OF HON. JOHN D. DINGELL, A REPRESENTATIVE IN 
              CONGRESS FROM THE STATE OF MICHIGAN

    Mr. Dingell. Thank you, Mr. Chairman, and I very much 
appreciate your kind remarks. I will commend you for holding 
this hearing which I view as very important. If H.R. 3795, the 
Over-The-Counter Derivatives Act of 2009 is acted upon without 
significant input from the Committee on Energy and Commerce, 
much of the work that has been done by this committee over the 
years going back to before I was in this body to back when Sam 
Rayburn was Speaker, will be undone, and FERC will probably 
lose significant authority to protect electric and natural gas 
markets against fraud and manipulation, and worse then that, 
consumers will be denied protection of a consumer protection 
agency in favor of an agency that has a long tradition of 
failure in protecting consumers. So thank you for doing this 
hearing today, Mr. Chairman.
    Most recently in the Energy Policy Act of 2005, as you 
mentioned, the Congress acting on the suggestions of this 
committee gave broad authorities to FERC to protect against 
fraud and market manipulation to ensure price transparency in 
the electricity and natural gas markets. That has worked well 
and I look forward to hearing from Chairman Wellinghoff of FERC 
on the various oversight mechanisms that FERC has in place to 
ensure proper functioning of various markets. Collaterally, we 
will look forward to hearing our other witness tell us why it 
is that he can do better.
    If H.R. 3795 were enacted into law without further 
amendment, there is a serious potential that many of the 
instruments used and organized in regional electric markets and 
currently regulated by FERC would either be displaced by the 
Commodities Futures Trading Commission or confusing overlaps 
and conflicts would be created. In the past, such conflicts 
have led to FTC and a hedge fund jointly litigating to strip 
FERC of its consumer protection authorities. This would not 
seem to be beneficial then to consumers and it has been a 
matter of bipartisan concern as today's record will show. In 
fact, one of our witnesses today will testify that consumers 
would see a rate increase of 5 to 15 percent if these 
activities are forced into exchanges.
    Following the energy bubble price in natural gas and 
electricity markets during 2008, FERC economists found that 
this was caused in significant part by excessive speculation in 
futures and derivatives markets for natural gas. We will want 
to hear from the chairman of CFTC what they did about those 
matters at that time. Likewise, it was FERC that discovered a 
sharp spike in speculative activity in natural gas futures that 
led to the prosecution of the hedge fund, Amaranth Advisors. 
FERC's admission is simple, assist consumers in obtaining 
reliable and efficient energy services at a reasonable cost 
through appropriate regulatory and market mechanisms. However, 
when one considers the complexity of such task, it is 
critically important that the agency with years of experience 
and understanding of energy markets and a fine staff expertise 
required to carry out such a task, should be allowed to 
continue its successful work. We will also want to inquire as 
to why we have need of new intrusion into these matters by an 
agency without any prior expertise in these matters.
    I thank you, Mr. Chairman.
    Mr. Markey. The gentleman's time has expired.
    The chair recognizes the gentleman from Florida, Mr. 
Stearns.

 OPENING STATEMENT OF HON. CLIFF STEARNS, A REPRESENTATIVE IN 
               CONGRESS FROM THE STATE OF FLORIDA

    Mr. Stearns. Thank you very much, Mr. Chairman.
    I think the consensus on both sides is that FERC has done a 
good job of closely regulating and monitoring the regional 
transmission organizations and independent systems operator 
through the use of tariffs and audits and investigations and 
they should, I think the consensus is at least both parties 
here that they should remain the sole regulatory authority over 
such markets. However, obviously this bill acts in such a way 
to establish a new and I believe overly expansive definition of 
swap that would give the Commodity Futures Trading Commission 
this exclusive authority over a number of transactions that are 
already extensively regulated by FERC.
    Now, the regulation by FERC for 15 years here has been 
successful and, my colleagues, the products that they regulate 
did not contribute to the meltdown so it is not clear to me why 
we are moving forward on this. We all agree that transparency 
is important. Accountability and stability in the nation's 
financial market is important to minimize systematic risk and 
prevent another financial crisis but the organized power in the 
markets and the FERC regulatory system did not cause this 
meltdown. Any over-the-counter derivative legislation should 
address problems associated with unregulated financial 
derivatives and not inadvertently include FERC regulated 
markets that do not involve this type pf risk that this 
legislation is proposing. Continued unhindered operation of our 
energy markets are vital obviously to meeting our electricity 
needs of millions of Americans and obviously many of us don't 
see there is a need for a major shift in the oversight of these 
markets.
    So I think, Mr. Chairman, you and Mr. Waxman and Mr. Upton 
have all voiced this clearly and I think that it is very good 
that we have a hearing and confirm that we all believe.
    Mr. Markey. We thank the gentleman very much.
    The chair recognizes the gentleman from Pennsylvania, Mr. 
Doyle.

OPENING STATEMENT OF HON. MICHAEL F. DOYLE, A REPRESENTATIVE IN 
         CONGRESS FROM THE COMMONWEALTH OF PENNSYLVANIA

    Mr. Doyle. Mr. Chairman, thank you for holding this hearing 
and inviting all of the important stakeholders to provide their 
testimony today.
    In particular, I am happy to see Vincent Duane from PJM 
here today. As you know, PJM is the regional transmission 
organization that keeps the lights on in my district and I 
think it is important to get their input on how this bill will 
affect them.
    I am glad we are holding this hearing today to bring 
attention to some potential unintended consequences of 
reforming our financial regulatory system. It was only a year 
ago that our financial system was on the edge of grinding to a 
halt. Though there were many contributing factors, lack of 
regulations in our commodities market undoubtedly added to the 
problem.
    I applaud my colleagues, the chairman of the House 
Financial Services and Agriculture Committee, for their work on 
this legislation to remedy the poor regulation of over-the-
counter derivatives and force irresponsible speculators out of 
the market. However, in their attempt to be thorough, I am 
concerned that my colleagues have overlooked a duplicative 
effect that this bill could have on energy markets at the end 
of the day, rate payers, also.
    Since the creation of regional transmission organizations, 
FERC has had a responsibility to monitor energy markets in each 
RTO and review and report on any hint of manipulation or abuse. 
In fact, with the passage of EPACT 2005, we gave FERC even 
greater authority to protect against fraud and abuse in 
electricity and natural gas markets. Let me be clear, we need 
to clean up our financial derivatives markets and I think this 
bill does a good job of getting us there. The CFTC needs to 
increase oversight and control of these financial products and 
bring more transparency to the swaps market. We just need to be 
sure that it doesn't inadvertently require our RTOs to endure 
another layer of regulation that would keep them from providing 
electricity to consumers at competitive rates.
    I look forward to the testimony from all our distinguished 
witnesses and hope that we can produce an excellent bill to 
bring to the floor. With that, Mr. Chairman, I will yield back 
my time.
    Mr. Markey. Gentleman's time has expired.
    The chair recognizes the gentleman from Louisiana.

 OPENING STATEMENT OF HON. STEVE SCALISE, A REPRESENTATIVE IN 
              CONGRESS FROM THE STATE OF LOUISIANA

    Mr. Scalise. Thank you, Mr. Chairman.
    I am strongly in favor of pursuing policies that prevent 
another financial market collapse from occurring and I strongly 
support increasing transparency and oversight in our financial 
markets. However, I have serious concerns about provisions in 
this bill that will raise utility costs on every American 
family and will ship thousands more American jobs overseas. 
Derivatives serve many purposes including stabilizing prices 
and ensuring future deliveries of commodities. Market 
participants also use derivatives to ensure that consumers are 
protected from sudden price hikes and other events including 
natural disaster that can negatively impact costs. While I 
support increasing oversight and transparency to reign in the 
large financial institutions which contributed to the current 
economic crisis, we need to make sure to consider the effects 
on those who play by the rules.
    Mr. Chairman, as with cap and trade and other reckless 
policies, these proposals would kill American jobs and increase 
costs for businesses and families across this country. From the 
perspective of my position on this committee, I have serious 
concerns about the utility rate hikes that will result from 
provisions in this bill but it doesn't stop there. We are 
seeing a dangerous trend with this administration and the 
Democrats running Congress. Provisions in this bill will have 
serious negative impacts on our economy and these proposals 
taken with the cap and trade energy tax and the government 
takeover of healthcare will prohibit our small businesses, 
those very job creators in our country from getting our economy 
back on track. These reckless policies will result in billions 
of dollars in new taxes on American families, millions of 
American jobs lost and shipped overseas and the destruction of 
our economy. In this current economic crisis, our focus should 
be on creating new jobs not more reckless policy that run jobs 
out of our country.
    Again, Mr. Chairman, I am strongly in favor of pursuing 
policies to prevent bad players from bringing down our markets 
in the future and I believe that oversight and transparency are 
key components to that goal. The American people are asking 
where are the jobs and all they get from this tone-deaf 
Congress are more radical schemes that raise taxes on American 
families and run more jobs out of our country. Enough is 
enough.
    Thank you and I yield back.
    Mr. Markey. Gentleman's time has expired.
    The gentlelady from California, Ms. Matsui.

OPENING STATEMENT OF HON. DORIS O. MATSUI, A REPRESENTATIVE IN 
             CONGRESS FROM THE STATE OF CALIFORNIA

    Ms. Matsui. Thank you, Mr. Chairman. Thank you for calling 
today's hearing.
    I would like to thank today's panelists for joining us 
today to discuss legislation that would affect FERC's 
jurisdictional markets and the transactions and products 
created for use in these regulated markets. I look forward to 
hearing all of your expert opinions. The expertise you share 
here will be useful throughout the committee process as we 
continue to discuss these matters.
    I think all of us here would agree that the recent 
financial crisis revealed serious weaknesses in the U.S. 
financials regulation. While it is critical that we respond to 
the risky trading strategies that nearly brought the American 
economy to the brink of collapse, it is equally crucial that we 
acknowledge the potential effects that legislative efforts to 
improve transparency and stability in over-the-counter 
derivatives markets may have on our energy markets, 
particularly electricity and natural gas. Toward this end, I 
believe that it is important to note that electric utilities 
and other stakeholders have expressed serious concerns about 
providing the CFTC the authority already possessed by FERC to 
regulate regional electric markets.
    In my district, the Sacramento Municipal Utility District, 
SMUD, enters into natural gas supply contracts and OTC 
derivative agreements to reduce Sacramento's exposure to price 
volatility. Unfortunately, most Californians vividly recall at 
the beginning of this decade the rationing of electricity which 
led to an artificial scarcity that created opportunities for 
market manipulation by energy speculators. We cannot allow our 
best intentions to examine regulatory authorities to impair the 
ability of utilities to employ tools to manage price risk and 
help keep rates affordable for consumers, and we need to 
continually examine systemic risk and the implications of 
applying certain means of transparency to the derivatives 
markets.
    I look forward to hearing from the panelists on the bill 
before us today, and working with the committee and 
stakeholders on these important matters. Once again, I thank 
you, Mr. Chairman, for highlighting this important topic and I 
yield back the balance of my time.
    Mr. Markey. Thank the gentlelady.
    The chair recognizes the gentleman from North Carolina, Mr. 
Butterfield.

OPENING STATEMENT OF HON. G.K. BUTTERFIELD, A REPRESENTATIVE IN 
           CONGRESS FROM THE STATE OF NORTH CAROLINA

    Mr. Butterfield. Thank you very much, Mr. Chairman, for 
convening this important hearing.
    I am not an expert on these matters and I have tried to 
learn as much as I can but from what I can understand, these 
products minimize risk in a capricious system for end users. 
Unfortunately, excessive over-the-counter trading by 
speculators continues to increase the risk for system 
irregularity and unpredictability. I am pleased given the 
number of important domestic priorities vying for our attention 
that Congress is paying close attention to reforming the way we 
regulate derivatives. We simply cannot afford the risk of 
allowing the system to operate like an open casino and I 
appreciate the work thus far done on this bill by the two 
committees. Still, as the chairman stated it is critical that 
this subcommittee question the imprecise definitions in the 
bill given the potential problems such ambiguity would create 
for end users.
    Last year, the newspaper in my district reported on the 
importance of derivative for one of North Carolina's largest 
utilities, Progress Energy. Manned, round-the-clock progress 
power traders make OTC trades to hedge against risk and find 
the lowest energy prices that are available. These activities 
are critically important to minimize risk. According to our 
State utility commission officials interviewed in the article, 
electricity rates would be at least double, that is double, 
without the success of Progress' trading department. I mention 
this to illustrate just how critical these financial 
instruments are in controlling costs for consumers. I welcome 
and encourage the transparency this legislation would create 
and I am hopeful that the legislation will be crafted in a way 
that ensures that end users can continue to enjoy these cost-
cutting benefits.
    I look forward and thank the witnesses for their testimony 
today and this microphone is not working.
    Mr. Markey. Gentleman's time has expired.
    The chair recognizes the gentleman from Vermont, Mr. Welch.
    Mr. Welch. I will waive my opening statement.
    Mr. Markey. The chair recognizes the gentleman from 
Washington State, Mr. Inslee.
    I am sorry. I had an obstructed view here. The chair 
recognizes the gentleman from California, Mr. McNerney.
    Mr. McNerney. Thank you, Mr. Chairman, for convening 
today's important hearing on the potential impacts of H.R. 3795 
on energy markets. Reforms to our financial regulatory system 
will affect the energy sector and consumers and I appreciate 
the opportunity to hear the perspective provided by our 
witnesses today.
    As Congress proceeds with financial regulatory reform, it 
is important that we avoid creating unnecessary bureaucratic or 
jurisdictional impediments. We should build on the regulatory 
processes that are functioning well, while at the same time 
fixing flaws in the system. I am committed to working with my 
colleagues, with outside experts, with energy stakeholders to 
ensure that reforms increase transparency, protect consumers 
and allow businesses to grow and hire new workers. We should 
also carefully examine the potential consequences that 
legislative proposals pose for derivatives end users who 
represent a broad spectrum of businesses across America.
    And with that, I will yield back the balance of my time.
    Mr. Markey. Gentleman's time has expired.
    The chair recognizes the gentleman from Washington State, 
Mr. Inslee.
    Mr. Inslee. I will waive. Thank you, Mr. Chair.
    Mr. Markey. And all members of the subcommittee have 
completed their opening statements and by unanimous consent we 
will recognize the gentleman from Michigan, Mr. Stupak, to make 
an opening statement.
    Mr. Stupak. Mr. Chairman, thank you for your courtesy but I 
will waive this opening statement.
    Mr. Markey. Great, well, we thank the gentleman for that.
    So we will turn to our very distinguished panel and 
recognize our first witness, Chairman Jon Wellinghoff of the 
Federal Energy Regulatory Commission. As the head of FERC, 
Chairman Wellinghoff oversees wholesale electricity 
transactions and interstate electric transmission in the United 
States amongst other matters. He has been a member of the 
Commission since 2006, and was appointed chairman by President 
Obama in March of this year. Thank you for joining us this 
afternoon, sir. Whenever you feel comfortable, please begin.

    STATEMENTS OF JON WELLINGHOFF, CHAIRMAN, FEDERAL ENERGY 
    REGULATORY COMMISSION; AND HON. GARY GENSLER, CHAIRMAN, 
              COMMODITY FUTURES TRADING COMMISSION

                  STATEMENT OF JON WELLINGHOFF

    Mr. Wellinghoff. Good afternoon, Chairman Markey.
    Mr. Markey. If you could move that microphone down a little 
bit closer to you.
    Mr. Wellinghoff. Will do that. I think it is on.
    Chairman Markey, Chairman Waxman, Ranking Member Upton and 
members of the subcommittee, I would ask that my full testimony 
be submitted for the record.
    Mr. Markey. Without objection, it will be included.
    Mr. Wellinghoff. Thank you and I will summarize as follows.
    Organized wholesale electric markets are currently operated 
by independent entities called Regional Transmission 
Organizations or Independent System Operators. They are legally 
considered to be public utilities and fully under the 
jurisdiction of the Federal Energy Regulatory Commission. FERC 
fully and comprehensively regulates these wholesale electric 
markets and all products traded in those markets. That 
regulation extends both to the organization of those markets 
through thousands of pages of market tariffs and rules 
specifically and exclusively approved by FERC, and to their 
operation through FERC's extensive oversight, monitoring and 
enforcement. The products in those markets are intentionally 
linked in a structure established by FERC in an integrated 
market design that is intended to ensure that rates and 
services in those markets are just and reasonable. In addition 
to ensuring that market participants do not engage in market 
manipulation and fraud, only FERC has a Congressional mandate 
to ensure that rates charged and the services provided in these 
markets are just and reasonable.
    Duplicative oversight and enforcement in the RTO electric 
markets by the CFTC would create market uncertainty and the 
potential for disruption of market structure such that rates 
and services could no longer be found by FERC to be just and 
reasonable. Further, such duplication would result in market 
inefficiencies and higher costs for consumers through higher 
cost of capital and additional regulatory expense. Interposing 
a new regulator unfamiliar with the purpose and dynamic 
structure of these markets would not serve the public interest.
    Last month, Chairman Gensler testified that giving the 
Federal Reserve certain authority in financial markets as ``a 
potential of setting up multiple regulators overseeing markets 
and market functions of the United States.'' He also stated 
that ``While it is important to enhance the oversight of 
markets by both the SEC and the CFTC, I think Congress would 
want to closely consider whether it is best to set up multiple 
regulators for some functions.''
    The context of today's hearing is different but the concern 
is the same. Any improvements warranted in the RTO and ISO 
markets can be made by FERC. Interposing a new regulator or 
having multiple regulators has not been justified, is not 
needed and would be harmful to the consumers that we are all 
charged to protect.
    That completes my summary. I would be happy to answer any 
questions of the subcommittee. Thank you.
    [The prepared statement of Mr. Wellinghoff follows:]

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    Mr. Markey. Thank you, Mr. Chairman, very much.
    Our next witness is Gary Gensler. He is the chairman of the 
Commodity Futures Trading Commission. Chairman Gensler 
previously served at the United States Department of Treasury 
as Undersecretary of Domestic Finance during the Clinton 
Administration and prior to joining Treasury he worked for 18 
years at Goldman Sachs where he was a partner and co-head of 
finance. He was sworn in as chairman of the Federal, of the 
CFTC in May by President Obama. We welcome you back to the 
committee actually, Mr. Chairman. Whenever you feel 
comfortable, please begin.

                   STATEMENT OF GARY GENSLER

    Mr. Gensler. Mr. Chairman, again if my full statement could 
be in the record, I will just try to summarize.
    Mr. Markey. Without objection, it will be included at the 
appropriate place.
    Mr. Gensler. Chairman Markey, Ranking Member Upton, 
Chairman Waxman, it is good to be back here. I believe about 10 
years ago I was in front of this committee or the full 
committee, and I thank you for inviting me to testify regarding 
regulation of the over-the-counter derivatives markets, 
particularly with respect to energy markets.
    If I might just before I turn to that discuss a little bit 
what the CFTC is and we do as an agency. We oversee, as you 
know, risk management contracts called futures. We regulate 
these markets to ensure market integrity, protect against fraud 
and manipulation, promote transparency of the price discovery 
function to help lower risk to the American public. We have 
broad surveillance and enforcement powers and regulate, of 
course, exchanges, clearinghouses and then the intermediaries 
that bring transactions there. The CFTC's exclusive 
jurisdictions over the futures markets coexist alongside other 
agencies' jurisdiction for underlying commodities. For 
instance, Department of Agriculture regulates marketing 
standards for corn and cash milk prices and the CFTC regulates 
corn and milk futures. The Treasury Department oversees the 
issuance of all Treasury Bills, Notes and Bonds while, of 
course, the CFTC oversees Treasury futures. And the Federal 
Energy Regulatory Commission oversees many elements of the 
energy markets that this committee is familiar with including 
natural gas pipelines and electricity markets while the CFTC 
oversees natural gas and electricity futures. So we live and 
coexist along other Federal regulators.
    The CFTC currently oversees futures trading in crude oil, 
natural gas, electricity and other energy products, gasoline 
and ore and so forth. Just to give an example, so far this year 
futures equivalent to 114 billion barrels of oil have traded 
with the notional amount of nearly $7 trillion this year on the 
futures exchanges that we oversee. Natural gas, a similar 
number would be nearly $1.6 trillion of notional amount of 
natural gas futures. Electricity actually has futures on the 
NYMEX, on ICE and on a small exchange you might not have heard 
of, the Nodal Exchange, outside of this RTO issue that again we 
oversee some of these futures markets and there, there is about 
23 million contracts have traded. It is about 7 percent of the 
overall energy futures market is actually in electricity 
markets.
    Now, the over-the-counter derivatives market is that which 
is currently not regulated by FERC, by the CFTC, by any other 
Federal regulator and we believe that that is certainly part of 
the crisis last year, not the only part of the crisis but that 
we need broad reform in the over-the-counter derivatives market 
and it is currently out of sight of Federal regulators. As 
Congress considers this, I believe there are two principal 
goals, to lower risk to the American public and promote 
transparency to the American public, and statutory exemptions 
can undermine those two principal goals as we move forward and 
as we have seen sometimes in the past can lead to unintended 
consequences.
    In terms of transparency, four quick things, one, the 
administration has proposed that all standardized derivative 
transactions be moved to under regulated transparent exchanges. 
This allows for every treasurer, every assistant treasurer of a 
corporation to see where the real time trading is happening in 
standard contracts. Customized transactions should still be 
allowed but the dealers would be subject to comprehensive 
regulation. Two, all non-cleared transactions, those too 
customized to be on those exchanges should be in a trade 
repository and the regulators should be able to see those 
trades. Three, data on that over-the-counter derivatives market 
should be aggregated and made public as we do weekly in the 
futures market. And fourth, stringent recordkeeping and 
reporting should be established for the swap dealers in these 
markets.
    To lower risk in the market, to lower risk the 
administration has proposed first that the standard contracts 
be brought into centralized clearing. There is a very natural 
debate as to who that covers. Do some end users are they out of 
it or into it but I think that is separate from the 
transparency debate because everybody benefits from 
transparency. Secondly, swap dealers and major swap 
participants would explicitly have to have capital to back up 
what they are doing in their swap business. And third, the swap 
dealer should be required to post and collect margin for 
individual transactions. And lastly, the CFTC and SEC should be 
authorized to mandate robust business conduct standards to 
protect the market integrity, to protect against fraud and 
manipulation.
    Over-the-counter derivatives have traditionally not been 
something that have any protection against fraud, manipulation 
and importantly to this committee, position limit authority. We 
have proposed and the administration has proposed that the 
over-the-counter energy markets, oil, natural gas and the like, 
also have extended position limit authority aggregate position 
limit authority. We support that.
    I thank you for inviting me to testify today. I will be 
happy to answer any questions you may have.
    [The prepared statement of Mr. Gensler follows:]

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    Mr. Markey. Thank you, Chairman Gensler, very much for 
being here.
    The chair will recognize himself for a round of questions.
    Chairman Wellinghoff, the House Agriculture Committee has 
passed legislation dealing with the subject of derivatives 
which has an impact on the FERC. Could you tell us in your 
opinion, what is the worst case scenario that could result from 
the passage of the House Ag Committee bill without 
modification?
    Mr. Wellinghoff. I think the worst case scenario is one 
that has been discussed some by some of the members in their 
opening remarks. If the swaps in that bill are considered to be 
the exclusive jurisdiction of the CFTC and interpretive to 
include products in the RTO markets to the extent that we in 
fact can't regulate and we can't design and develop those 
markets in ways that ultimately can ensure functioning, I think 
it would be virtually impossible for us to ensure that those 
markets are producing just and reasonable rates, and we talked 
about one set of products there. There has been some discussion 
of something called FTRs, Financial Transmission Rights but 
that is just one example. There will be a number of other 
products that are going to be necessary to do things like 
bringing demand response into the markets, to bring in wind and 
other renewables into the markets. All those products are ones 
that will be functioning fully as an integrated whole in the 
RTO markets and if we in fact can't have authority and 
jurisdiction over them and instead the CFTC has that authority, 
then I think it is likely that those products cannot be fully 
developed and integrated in a way that will allow us to do 
things like bring in new renewables, bring in the demand side 
of the markets.
    Mr. Markey. So if the FERC lost jurisdiction over these 
products which are created under the authority of the FERC, 
would the FERC then have to consider not allowing for the 
issuing of those products?
    Mr. Wellinghoff. Well, certainly ultimately we could close 
down the markets and go back to cost-based regulation but I 
don't think anybody wants us to do that because I think markets 
ultimately will produce the efficiencies that we need to move 
forward towards a low-carbon future. So that is what I am 
looking for, the ability to have those markets be flexible, 
open, transparent and operated in a way that the FERC can 
ensure that they do produce just and reasonable rates.
    Mr. Markey. Chairman Gensler, how can we avoid that 
outcome?
    Mr. Gensler. Well, Chairman Markey, I believe that the CFTC 
as it coexists with other Federal regulators whether it is the 
Agriculture Department or FERC today can continue to coexist 
and we have had good productive meetings with you and Chairman 
Waxman and your staffs and Chairman Peterson on this very issue 
in the last several days. I think that we need to bring broad 
reform to the over-the-counter derivatives market. Neither 
agency currently oversees the over-the-counter derivatives 
market. Neither agency currently oversees the over-the-counter 
derivatives for natural gas, electricity, fuel oil or any 
energy product today. We need to bring that into these 
marketplaces but at the same time as you say to work together 
with FERC and with your committee staff to ensure that the 
public is best protected and we continue to coexist and promote 
the public interest.
    Mr. Markey. Well, analyzing the kind of job that the FERC 
does right now overseeing these markets, do you see any gap in 
the work that they do, any underappreciation of dangers that 
exist in the marketplace that the FERC is not observing?
    Mr. Gensler. Well, I wouldn't want to comment on FERC and 
all of its authorities. They, of course, are very important to 
the American public ensuring just and reasonable rates as the 
chairman said and as a rate regulator. Our domain is more as a 
market regulator to promote market integrity of these 
derivative marketplaces and so I think each of us right now do 
not oversee the over-the-counter derivatives marketplace and 
that is a gap to the American public.
    Mr. Markey. Chairman Wellinghoff, much of your testimony 
focuses on the potential for the bill approved by the House Ag 
Committee to harm RTO markets and mechanisms used in those 
markets to ensure just and reasonable prices such as Financial 
Transmission Rights or Forward Capacity Markets but isn't there 
also a risk that this bill could also limit your ability to 
approve these or other mechanisms in a non-RTO market as well?
    Mr. Wellinghoff. Well, we certainly maintain that we don't 
have regulatory oversight authority per se of the other markets 
beyond the RTOs but we do believe that the authority that you 
gave us in 2005 with respect to fraud and manipulation allows 
us to look at those participants in those other markets and to 
the extent they are acting in those other markets in ways that 
we determine to be engaging in fraud and manipulation that can, 
in fact, affect the cash markets and the RTOs that we oversee, 
we believe we have jurisdiction over that. We want to preserve 
that as well. We think that is absolutely essential to ensuring 
that our ability to stop fraud and manipulation in the electric 
markets and the gas markets we have to have that ability to 
look into those other areas.
    Mr. Markey. Thank you, Chairman Wellinghoff, very much and 
I just want to say to you, Chairman Gensler, your testimony 
here back in 1998 was very instrumental in ensuring that there 
was strong privacy protections in what became known as the 
Gramm-Leach-Bliley bill. Almost all of the privacy protections 
emanated from this committee and your testimony helped 
enormously and for us to be able to do that.
    Mr. Gensler. Well, I thank you. I remember working well 
with you then. I look forward to working with you well to bring 
reform to the over-the-counter markets here as well.
    Mr. Markey. We appreciate that, sir, thank you.
    The chair recognizes the ranking member, Mr. Upton.
    Mr. Upton. Thank you. Thank you very much.
    Chairman Wellinghoff, the Energy Policy Act of '05 gave 
FERC the anti-manipulation authority over electric and natural 
gas markets as you know and one of the reasons I had supported 
the bill I thought it was a good provision. Could you give us 
some examples in which FERC has used the authority to protect 
consumers over the last couple of years?
    Mr. Wellinghoff. I would be happy to. Thank you.
    The Commission settled two major manipulation cases in 
2009, Amaranth and ETP. We also analyze other cases and 
concluded in those that manipulation didn't occur but we opened 
over 100 investigations between 2007 and 2009, and an 
increasing percentage of those are for investigations in market 
manipulation. In fact, 70 percent of the investigations opened 
in fiscal year 2009 were for market manipulation specifically 
and in 2009, we recovered $39 million in penalties and $38 
million in disgorgement so we have acted extensively under that 
authority that you gave us in 2005.
    Mr. Upton. Great. I know this is--a number of us sent a 
letter to the Speaker. I don't know if you saw this letter. It 
was dated yesterday. I don't know if you saw it or not. You 
haven't seen it. That is correct, sir. Have you heard about the 
letter?
    Mr. Wellinghoff. Just now.
    Mr. Upton. Well, let me, all right, sorry. The Chairman 
Markey outlined in his opening statement what might be a 
reasonable compromise at least from this committee's standpoint 
as you heard the opening statements from both sides here as to 
a process that might be able to work. I think it is all of us 
at least that I have heard this afternoon have indicated that I 
think the underlying bill does not provide that at all and 
something that Chairman Markey outlined where you would 
actually define responsibilities. FERC would in fact take sole 
responsibility on a number of those issues might be something 
that this committee, subcommittee could support as compared to 
the underlying bill.
    Mr. Gensler, I don't know if this is the first that you 
have heard of that. It sounds like there have been some 
discussions. Is that an approach that you think the CFTC could 
accept and support?
    Mr. Gensler. There have been constructive discussions with 
the chairman directly--both chairs and their staffs and 
Chairman Peterson from the House Agriculture Committee and his 
staff--so I think those have been constructive dialogs. There 
has been no resolution. I did want to comment one thing about 
the as I understand it on the manipulation standards that were 
raised by a number of members in their opening statements. I 
believe you did, as well, Representative Upton, but from what I 
understand there is nothing in this swaps bill, the 3795 or as 
the administration proposed it that would affect FERC's anti-
manipulation authority as outlined in the 2005 Act over its 
markets, the markets that they oversee, the natural gas and the 
electricity markets as you so well put into that bill in 2005. 
I think what we have been talking a lot with the committee 
about is this issue of how we coexist. How the CFTC as a market 
regulator oversees futures and derivatives while very important 
functions that FERC oversees the electricity and natural gas 
market is, you know, for just and reasonable rates in the 
electricity markets is and so forth. How we coexist and bring 
the best to the American public particularly the thing that has 
been at the focus is these Financial Transmission Rights that 
have been raised by a number of members.
    Mr. Upton. Mr. Wellinghoff, I know that you have not been 
chairman of FERC for all that long but if you look back to when 
we gave FERC the authority in the Energy Policy Act of '05, are 
there things that FERC might have done differently in terms of 
the role that they have played?
    Mr. Wellinghoff. I am not sure that there are things that 
we could have done differently. Fortunately, you will have 
another FERC chairman before you later on. Betsy Moler will, 
former FERC chairman, so you might want to ask that question to 
her as well but I give Betsy a little question. Certainly I 
will tell you that that authority in 2005 was tremendously 
helpful to us with respect to the ability to go in and 
investigate fraud and manipulation and ensure that it wasn't 
ongoing. I think FERC prior to 2005, did have some tools in its 
toolbox. I am not sure that they used them all to the extent 
that they should have but I am not going sit here post-judging 
a prior Commission or prior chairman but certainly in 
hindsight, there are probably some things that could have been 
done. I can't give you any specifics though.
    Mr. Upton. Time has expired.
    Mr. Markey. Gentleman's time has expired.
    The chair recognizes the chairman of the full committee, 
Mr. Waxman.
    Mr. Waxman. Thank you, Mr. Chairman.
    In 1999, Californians paid $7.4 billion for wholesale 
electricity. A year later, those costs rose 277 percent to 
$27.1 billion so it was clear these prices were the result of 
deliberate market manipulation and fraud that gave rise to the 
legislation that has been referred to a number of times. Now, 
Chairman Gensler, you just said you don't think that the bill 
would interfere with FERC enforcing that law, is that your 
position?
    Mr. Gensler. As I understand it the 2005 Act which granted 
the anti-manipulation authorities that have been referred to by 
many members, I am not aware of something in 3795, nothing in 
that swaps bill that I am reading carefully because the general 
counsel for the CFTC wrote this but that it wouldn't affect 
FERC's anti-manipulation authority under that Act over the 
markets that they oversee. As you mentioned the electricity 
crisis, I do think that one of the important lessons out of the 
Enron crisis and the electricity crisis which was then, you 
know, complemented in a bad way with this terrible crisis last 
year is that we have to bring reform to the entire over-the-
counter derivatives market and not have an exception for 
instance for some part of the over-the-counter derivatives 
marketplace.
    Mr. Waxman. I don't disagree that we need regulation in 
light of the experience we have had where there was no cop on 
the beat in these over-the-counter trades but as I read H.R. 
3795, I think there is a very good chance that RTO products and 
services regulated under FERC approved rules would fall under 
the definition of a swap and that means that CFTC would have 
exclusive jurisdiction over these products and services. You 
don't think it means that. Would you disagree with the idea of 
a clarification that FERC's jurisdiction is not being intruded 
upon?
    Mr. Gensler. Well, I think that is what we are working with 
you and Chairman Markey and Chairman Peterson, hopefully 
productively on. I do think that the CFTC has an important role 
to play as a market regulator over derivatives products to 
ensure market integrity and market transparency and FERC has a 
very important public role to play.
    Mr. Waxman. If market manipulation or fraud occurred in a 
FERC regulated marketplace under CFTC's jurisdiction, would the 
exclusivity clause of the Commodities Exchange Act prevent FERC 
from exercising its anti-market manipulation authorities? In 
other words, would FERC regulation be displaced by CFTC 
regulation? You don't think so but that is what we are 
concerned about. I think it needs to be clarified if you don't 
think--if you agree with us.
    Mr. Gensler. Well, I think that anti-manipulation standard 
that you put in place in the '05 Act which talked about in 
connection with the physical markets that the natural gas 
markets and the electricity markets. Similar to how we coexist 
with the Agriculture Department that has many authorities in 
the agricultural markets.
    Mr. Waxman. Well, you coexist now with FERC, right?
    Mr. Gensler. Yes.
    Mr. Waxman. OK, so the question is well, let me ask 
Chairman Wellinghoff, what do you think of the possibility 
given that this swap is defined that they may just--some court 
may come along and say well, either you both have the 
regulation or they have exclusive regulation?
    Mr. Wellinghoff. I think it is a definite concern. Not only 
a concern but it is a looming one in that in the Amaranth case 
that we have in part pending, part of that case is still 
pending. One of the parties was not let out of the case and we 
are moving forward with it but in that case the CFTC was 
arguing in court that FERC did not have jurisdiction in the 
financial markets so it is already cloudy and I think all we 
are doing is moving in the other direction here with this 
legislation of making it more cloudy or more certain that the 
exclusive jurisdiction is on the CFTC side. So we need to 
ensure that FERC has the ability to go in and do the 
investigation and have the jurisdiction over the parties that 
are engaged in the manipulation and fraud, otherwise we can't 
do our job.
    Mr. Waxman. Well, the financial reform legislation is 
important because the financial meltdown demonstrated that 
there were significant regulatory gaps but the RTO markets are 
comprehensively regulated by FERC and we need to make sure that 
we don't unintentionally roll back important protections 
against market manipulation and fraud that are already in the 
law. And as I pointed out as a Californian, the reason that law 
was changed was to plug up the gap and we filled that gap very 
clearly by designating FERC as the agency to be responsible. I 
don't want us now to plug up another gap in regulatory 
authority by confusing FERC's jurisdiction. Yes, Chairman 
Gensler.
    Mr. Gensler. I was just going to say actually neither 
agency right now have jurisdiction over a transaction between a 
large financial house and a utility company called an over-the-
counter derivative in natural gas, heating oil, electricity. 
Where FERC has very clear jurisdiction on the RTOs and to 
protect the public, where we have very clear jurisdiction on 
something called a futures market like NYMEX or this 
Intercontinental Exchange, we do have some pretty good 
authorities and we coexist but there is a whole world out 
there, trillions of dollars notional amount. What I quoted big 
numbers the over-the-counter market is bigger and that is where 
we want to regulate the dealers to lower risk and promote 
transparency to the American public and I think we can continue 
to coexist and work with your staffs to make sure that the FERC 
doesn't inadvertently or unintentionally be less able to 
protect the public.
    Mr. Waxman. It is not that we are trying to protect FERC. 
We are trying to make sure the regulation makes sense and it 
makes sense for you to regulate futures and but it makes sense 
for FERC to regulate the manipulation of the markets, and there 
may be some ambiguity down the line. What do you think ought to 
be done then? I suppose you two ought to get together and 
figure it out but we ought not to start with a law that is so 
ambiguous that neither of you will regulate or both of you will 
regulate. And then it seems to me, Chairman Wellinghoff, if the 
chair would permit just one last thing. What do you think the 
impact would be on the energy markets if there are two 
regulators they have to respond to?
    Mr. Wellinghoff. Well, uncertainty in the markets creates 
more risk and it creates more cost, and we have seen that over 
and over and that would be the result.
    Mr. Waxman. Thank you. Thank you, Mr. Chairman.
    Mr. Markey. Gentleman's time has expired.
    The chair recognizes the gentleman from Louisiana, Mr. 
Scalise.
    Mr. Scalise. Thank you, Mr. Chairman.
    Chairman Gensler, if you have done an analysis on the 
legislation can you talk about any kind of impact that you have 
assessed that it would have on energy prices or on energy 
products?
    Mr. Gensler. I think that the legislation if able to pass 
with strong transparency initiatives where utility companies 
whether small or large could clearly see where this market 
trades on a real time basis that helps to lower cost. Right now 
this market has a significant information deficit, where Wall 
Street benefits and Main Street loses out frankly, and that is 
because that small utility company or large utility company 
can't see on a real time basis the trades in the over-the-
counter natural gas marketplace, the over-the-counter coal 
marketplace, the over-the-counter electricity marketplace. They 
can see a lot of transparency on a futures market or on some of 
the markets that FERC regulates but not on these over-the-
counter so I think that helps in a significant way. It would 
also lower the cost to the American public of the crisis that 
could come when large financial institutions concentrate so 
much risk when they keep these trades on their books.
    Mr. Scalise. All right and we have talked about the large 
financial institutions and the problem they have and the 
concern that those of us that have opposed this bill have is 
that it is not necessarily the large folks who actually did the 
damage. It is the small guys who played by the rules that would 
be hurt by this and with that I would ask, Mr. Wellinghoff, you 
talked about in your testimony you actually used the term 
harmful to consumers. If you can expand on, you know, kind of 
your take on how this legislation would be harmful to 
consumers.
    Mr. Wellinghoff. Harmful in the sense that if we had two 
regulators in the space and the industry and the participants 
in that market were uncertain as to the clarity of that 
regulation which they certainly could be if you had two 
regulators with conflicting positions. Ultimately you are going 
to increase cost because you are going to do two things. Number 
one, you are going to increase the cost of equity because risk 
is going to be increased and number two, you are going to 
increase regulatory costs as well. So both of those, all of 
those costs the consumer pays for everything. All of those 
costs are ultimately going to go to the consumer. Now, I 
haven't quantified it and I am willing to accept former 
Chairman Moler's numbers that she has presented in her 
testimony but we haven't done a specific quantification.
    Mr. Scalise. OK and then, Chairman Gensler, would there be 
more systemic risk if companies chose not to hedge their risk 
and, you know, they just thought that the cost would be 
prohibitive?
    Mr. Gensler. Congressman, hedging is a very important part 
of our economy. We are promoting that in this bill. We are 
lowering risk to the American public allowing utilities and 
energy companies to hedge customized risk but those risks that 
are standard enough, for instance a 2-year risk on natural gas 
pricing, standard contract, we want to move that onto the 
clearinghouses to lower risk and very importantly on the 
transparent trading venues. And if I might note, I don't think 
the transparency costs end users. If you didn't know what an 
apple cost when you walked in the store, does it help you if 
you have to pay an extra nickel or 10 cents for that apple 
because you don't know what it cost the prior person walking in 
the store? I don't think so. We bring every securities 
transaction and every futures transaction to transparent 
markets. Why shouldn't we do that in natural gas and 
electricity over-the-counter markets?
    Mr. Scalise. Chairman Wellinghoff, you had mentioned that 
one of FERC's responsibilities is to ensure that consumers have 
adequate supplies of energy at reasonable prices.
    Mr. Wellinghoff. Correct.
    Mr. Scalise. How important is it to you that the 
responsibility as a core tenet of energy regulatory system is 
ensuring that reasonable prices exist for consumers?
    Mr. Wellinghoff. Well, it is essential and the only way to 
have reasonable prices with these RTO markets is to ensure that 
they are well-designed as a structural package and that is why 
it is so important to have one entity who oversees that 
structural package to make certain that the design is adequate 
to ultimately get to the end result of the reasonable prices.
    Mr. Scalise. OK and then you had also talked about or I 
think in your testimony, the intensive capital expenditures, 
just the energy industry as a whole is a capital-intensive 
industry. Could you comment on the role that the FERC regulated 
financial products play in securing capital for the development 
of new technologies and if that capital is limited by new 
regulations, what that role would be on the ability to have 
newer technologies developed?
    Mr. Wellinghoff. Certainly, with respect to recovery of 
investment like in transmission to the extent that those 
entities are not able to recover their full investments, they 
are not going to invest in new technologies, the newest market 
that we need to ultimately move us into the next phase of where 
we need to go with respect to our energy futures.
    Mr. Scalise. Thank you and I yield back.
    Mr. Markey. Gentleman's time has expired.
    The chair recognizes the chairman emeritus of the 
committee, Mr. Dingell.
    Mr. Dingell. Thank you.
    Mr. Markey. Mr. Chairman, could you move the microphone 
over a little?
    Mr. Dingell. Right, the legislation would make energy 
hedging and trading subject to CFTC's exclusive jurisdiction 
and require that all of these transactions be cleared and 
traded on exchanges. FERC would lose jurisdiction. First of 
all, of what would you lose jurisdiction?
    Mr. Wellinghoff. As I understand it we would lose 
jurisdiction over these markets and their operation ultimately.
    Mr. Dingell. What would you be able to do with regard to an 
RTO that you wanted or with regard to an RTO that wanted to put 
in some carrying capacity? What would happen with regard to 
your efforts with regard to dealing with fraud or market 
manipulation? If you couldn't get at the derivative and you 
couldn't inquire into the derivative, how would you then be 
able to conduct a meaningful and complete investigation in 
those two instances?
    Mr. Wellinghoff. Our hands would be tied.
    Mr. Dingell. I am sorry.
    Mr. Wellinghoff. Our hands would be tied.
    Mr. Dingell. Your hands would be tied. Now, where else 
would your hands be tied by that provision?
    Mr. Wellinghoff. In creating new products for these markets 
as I mentioned by moving forward into things like renewables 
and energy efficiency demand response we are starting to put 
the demand side into these markets. It has never been done 
before. It is just starting to over the last couple of years.
    Mr. Dingell. And so the derivatives that would finance this 
you would not be able to go into?
    Mr. Wellinghoff. That is correct.
    Mr. Dingell. And so you would not have any way of knowing 
whether you had a successful investigation or rulemaking or 
ratemaking procedure, is that right?
    Mr. Wellinghoff. That is possible, yes.
    Mr. Dingell. All right, I would--I am going to submit and 
ask unanimous consent that I be permitted to submit a letter to 
the Commission following up with some of these questions.
    Mr. Markey. Without objection, so moved.
    Mr. Dingell. Now, what is the problem here, Mr. 
Wellinghoff, with regard to the situation which brings about 
this legislation requiring us to force all of the derivatives 
into exchanges and what authority do you lack to address these 
questions?
    Mr. Wellinghoff. I think the issue as I understand it is 
again to the extent that the definition of swaps in the 
legislation could intrude into the RTO markets it would in fact 
take away our ability to develop and shape these markets in 
ways that can ensure that rates are just and reasonable.
    Mr. Dingell. You wouldn't understand the underlying 
financing and you would have no power whatsoever to go into 
those questions, is that right?
    Mr. Wellinghoff. That is correct.
    Mr. Dingell. All right, now, FERC has stated in its State 
of the Markets report that natural gas and related electricity 
costs in the U.S. were driven up in 2008, by flows of funds in 
the derivatives and financial products such as futures and 
swaps at a time when there was adequate inventories of natural 
gas. Did the CFTC do an adequate job of regulating excessive 
speculation at that time?
    Mr. Wellinghoff. I would suggest you ask Chairman Gensler 
that question.
    Mr. Dingell. The answer is what?
    Mr. Wellinghoff. I would suggest you ask Chairman Gensler 
that question.
    Mr. Dingell. OK now, Mr. Gensler, did you do a good job of 
regulating those matters at that time?
    Mr. Gensler. It is good to be back before you, 
Representative Dingell.
    Mr. Dingell. Let us talk about your agency. Did it do an 
adequate job? The answer to that question is no is it not?
    Mr. Gensler. I keep calling you chairman I know because if 
I am allowed to, Chairman Emeritus, I came onto the agency in 
May of this year.
    Mr. Dingell. I don't want to do that. Did the agency do an 
adequate job in 1 minute and 20 seconds?
    Mr. Gensler. And what I found is the staff in the agency is 
very strong and what we have done is we have taken a serious 
look at bringing back, we have had position limits at the 
energy space until June of 2001, working with the exchanges. We 
are looking seriously about bringing them back. I also just 
wanted to comment.
    Mr. Dingell. So your answer is you did not do an adequate 
job? Now, given FERC's pervasive regulation of RTO and ISO 
markets is there a regulatory gap in those areas that must be 
filled by the CFTC and if so, what is it?
    Mr. Gensler. I think there is a significant regulatory gap 
right now in what is called over-the-counter derivatives. 
Transactions that are not on a RTO, they are transactions 
between.
    Mr. Dingell. Require you to have legislation that excludes 
the FERC in its entirety from jurisdiction over those kinds?
    Mr. Gensler. Currently, the CFTC has exclusive jurisdiction 
over futures markets and that is whether it is on NYMEX or and 
so forth and I don't think there is any dispute here between 
our agencies here on that.
    Mr. Dingell. But your legislation here would say to it that 
there could be no inquiry into those matters whatsoever by 
FERC?
    Mr. Gensler. It is not, with all respect that is not how we 
read.
    Mr. Dingell. Let me finish.
    Mr. Gensler. I am sorry.
    Mr. Dingell. That benefit by depriving FERC of any 
authority to address those questions which might lie under its 
concern?
    Mr. Gensler. Our read of 3795, it does not affect that 
which you put in place in 2005, and in fact there has been an 
exclusion from our statute since the 1930s that we don't 
regulate what we call forwards, spot markets or forward 
markets, what some people call the cash market so the day ahead 
market and the electricity market all of these are not.
    Mr. Dingell. That is splendid but not responsive. I would 
like to hear what CFTC has done to prosecute the excessive 
speculation that was cited in the FERC State of the Market 
report regarding natural gas and electricity prices be driven 
up by flows of funds into derivatives. What have you done about 
that?
    Mr. Gensler. We have a very strong and robust enforcement 
agency that would bring numerous cases. In fact, the Amaranth 
case that was earlier referred to we both brought and settled, 
and Jon and I met on that in a very constructive way. We have 
had their enforcement people working with ours and our 
enforcement people working with FERC I think in a very 
constructive way and have a memorandum on understanding which 
we can build upon.
    Mr. Dingell. Now, if you please, Mr. Wellinghoff, please 
tell us how you will be able to carry out your mission with 
regard to making the RTOs work, deal with the supply problem, 
deal with all of your other responsibilities if you don't have 
authority to get into the derivatives which are a major part of 
the financing of all of these apparitions?
    Mr. Wellinghoff. I won't with certainly with respect to 
fraud and manipulation. I need that authority, continue to have 
that authority to ensure that there is no fraud and 
manipulation.
    Mr. Dingell. Thank you. Thank you, Mr. Chairman.
    Mr. Markey. We thank the chairman.
    The chair now recognizes the gentleman from Oregon, Mr. 
Walden.
    Mr. Walden. Thank you very much, Mr. Chairman, and thank 
you for holding this hearing on this important legislation.
    Mr. Wellinghoff, I want to ask you, I have some concerns 
regarding the clarity of H.R. 3795 as to whether it would 
impact the operation and cost of the Federal power marketing 
administrations and customers? As you know, I am from the great 
northwest, the State of Oregon and we do things and we don't 
necessarily operate under an RTO but Bonneville has its own 
trading floor and so I am curious from both of you on how this 
your take on this legislation and its effect there and, Mr. 
Wellinghoff, you can start and then maybe, Mr. Gensler, if you 
could comment, as well.
    Mr. Wellinghoff. Congressman Walden, quite honestly I 
haven't looked at it from that perspective so I don't really 
want to give you a view, you know, from off the top of my head. 
I mean there may be some collateral affects but I really 
haven't analyzed it.
    Mr. Walden. Mr. Gensler.
    Mr. Gensler. Again, I am not aware of any but we would be 
glad to work with you and your staff as we are working with 
Chairman Markey.
    Mr. Walden. I think one of the issues that has been raised 
is that this should be clear it doesn't cover the physical 
delivery of commodities such as electric power and gas, and is 
that clear?
    Mr. Gensler. That is right just as in the Commodities and 
Exchange Act for 70-some years it has not only excluded the 
physical delivery but also the forward markets that is 
excluded. Similarly 3795 and the administration would exclude 
the forward, these day-ahead markets and so forth.
    Mr. Walden. And, Mr. Wellinghoff, do you concur with that 
analysis?
    Mr. Wellinghoff. Yes.
    Mr. Walden. So it is clear that real time day-ahead turn 
markets for physical delivery power and gas are not included in 
coverage of this bill?
    Mr. Gensler. That is as we understand it as well some of 
the other forward markets that are well, you know, regulated 
elsewhere. Anything that has a forward market and has a 
physical delivery is out.
    Mr. Walden. OK, then I just want to ask about your concern 
again raised to me by folks who operate in these markets about 
the concern about restriction of capital and limited ability to 
hedge under this legislation and from a power perspective, from 
FERC's perspective maybe first, what sort of concerns are you 
hearing? What sort of concerns do you have about this notion 
that it could restrict capital and limit the ability for some 
of these concerns to hedge?
    Mr. Wellinghoff. People that do hedge certain products in 
these markets, utilities primarily, their fuel have expressed 
concerns to me.
    Mr. Walden. Right.
    Mr. Wellinghoff. Again, I haven't quantified the affect. I 
think probably again the testimony of former Chairman Moler 
goes into that in some great detail and actually does some 
quantification there that might be helpful to you.
    Mr. Walden. OK.
    Mr. Gensler. I think, Congressman, commercial hedgers have 
raised two concerns. One is could they enter into commercially 
needed but particular tailored transactions that aren't 
standard and the answer is an unambiguous yes but that is a 
legitimate question they have raised. Some members of the 
Senate or the House might feel differently but the 
administration says yes. Two is on the standard contracts they 
have raised the question is how is credit priced in there? Will 
they have to post collateral if it is lowering risk to a 
clearinghouse?
    Mr. Walden. Right.
    Mr. Gensler. There is some like myself, I believe that 
standard transactions should be brought to a clearinghouse to 
lower risk to the American public but there is a legitimate 
public policy debate whether end users, commercial hedgers 
using these transactions are exempted. The 3795 does exempt 
them. I have called that they not be exempted and so that is 
the public policy debate there. I think even if Congress 
exempts this commercial end users from the clearing 
requirement, we should not inadvertently exempt them from the 
transparency. We can separate that. Congress can write the law 
that the large financial houses have to bring it into a trading 
venue and then everybody gets the benefit of transparency and 
then you sidestep the clearing issue.
    Mr. Walden. All right, thank you, Mr. Chairman, that is all 
the questions I have.
    Mr. Markey. Gentleman's time has expired.
    The chair recognizes the gentleman from Michigan, Mr. 
Stupak.
    Mr. Stupak. Thank you, Mr. Chairman.
    Mr. Wellinghoff, Mr. Dingell indicated that your State of 
the Markets report and that report strongly indicated a lack of 
physical market fundamentals was used in determining the price 
of natural gas and electricity, and the conclusion was that 
large pools of capital flowed into these various financial 
instruments that turned the commodities like natural gas into 
investment vehicles as opposed to providing a product there. 
Does that accurately reflect FERC's current position that 
financial speculation in the natural gas market has increased 
prices?
    Mr. Wellinghoff. We believe it did at that time. That was 
one reason we went after Amaranth.
    Mr. Stupak. Do you believe that is still going on now and 
we have seen 100 percent increase in the price of natural gas 
while supplies are more than adequate.
    Mr. Wellinghoff. Actually, natural gas prices have gone 
down substantially.
    Mr. Stupak. I meant gasoline. You are right, natural gas.
    Mr. Wellinghoff. Natural gas and that is what we focus on 
is natural gas.
    Mr. Stupak. Right.
    Mr. Wellinghoff. So I don't believe it is occurring now.
    Mr. Stupak. OK, do you believe that natural gas--so you 
think natural gas has leveled out then? It is not continuing to 
be distorted at all?
    Mr. Wellinghoff. We have a lot of different dynamics going 
on in natural gas right now. There has been a tremendous amount 
of new shale finds in this country and technology to develop 
those shales. Shales, as well, can be more easily shut-in then 
traditional wells and brought back up much quicker so that 
dynamic is going to affect the market, that technological and 
that resource dynamic is going to have a big affect on the 
market.
    Mr. Stupak. You mentioned Amaranth a couple times and Mr. 
Gensler has also too, that started what in about 1995 when you 
first, when Amaranth started to break? When did you start 
really getting into Amaranth?
    Mr. Wellinghoff. I believe it was 2006-2007, actually.
    Mr. Stupak. 2006, OK, were you going to bring a cease and 
desist that stopped the transaction or restraining order?
    Mr. Wellinghoff. We do not have cease and desist authority.
    Mr. Stupak. Is that something you need to?
    Mr. Wellinghoff. It would be helpful.
    Mr. Stupak. I mean on Amaranth that was like $6 billion, 
wasn't it?
    Mr. Wellinghoff. Yes, it would have been extremely helpful 
in that case.
    Mr. Stupak. And what have you been able to recover?
    Mr. Wellinghoff. We have recovered $7 and a half million.
    Mr. Stupak. $7 and a half million out of $6 billion?
    Mr. Wellinghoff. Well, the total fund was that amount yes.
    Mr. Stupak. All right, if you had cease and desist would 
that assist you?
    Mr. Wellinghoff. That would assist us tremendously, yes.
    Mr. Stupak. Mr. Gensler, let me ask you this. You made a 
number of statements for Congress a need to keep any end user 
exemption from centrally clearing swaps as narrow as possible. 
As the current bill is written, financial institutions have 
posed systemic risk to the U.S. economy are exempt from 
clearing swaps if they are a counter party to an end user so 
does CFTC have an estimate of how much of the market will be 
exempt from the clearing requirement because of this exemption?
    Mr. Gensler. It is a very good question. It is hard to 
determine because there is such a darkness in this market but 
it is very significant. The standard part of the market in oil 
and energy products may well be, the standard part of the 
market over half of the market is standard enough to be 
cleared.
    Mr. Stupak. Right.
    Mr. Gensler. But then the question is what portion of that 
do end users have. Now, and that is a very hard number to get 
but it is not in the single digit percents. I mean it is a 
significant portion and that is why we think at least we should 
do it to exchanges and if possible to clearing.
    Mr. Stupak. Well, does the CFTC then believe that tier one 
financial companies that pose systemic risk to the financial 
services industry should be exempt from centralized clearing of 
swaps?
    Mr. Gensler. No, I believe strongly that all swaps that are 
standard enough be brought into clearing and that end users be 
able to be allowed to do individual credit arrangements as they 
do now in these marketplaces and again, if Congress thinks to 
exempt them, let us not exempt them from the trading 
requirement at least.
    Mr. Stupak. Good. Well, we talked a little bit about 
liquidity too here today so if we allow the end users to remain 
exempt, would requiring tier one financial companies to 
centrally clear swaps on exchange regardless of their 
counterparty providing us liquidity in the market for pricing 
and hedging?
    Mr. Gensler. I think it does. I think right now these 
markets are internalized and there are five or six large 
concentrated pools of capital. They are sophisticated. Many 
Americans wonder as they go home for the holidays why so much 
money is being made on Wall Street. This is at the core of it. 
It is not the only reason but they internalize dark markets and 
I understand that but I think it is now time I believe working 
with Congress to bring transparency as this Congress did with 
President Roosevelt in the '30s to the securities and futures 
markets.
    Mr. Stupak. You mentioned OTC, you mentioned ICE and the 
Dubai market, has that been up and running now?
    Mr. Gensler. It has been very small, sir.
    Mr. Stupak. Still?
    Mr. Gensler. Yes.
    Mr. Stupak. Yet you see?
    Mr. Gensler. Well, it might develop larger but right now it 
has been very small. I just wanted to mention something on an 
earlier question.
    Mr. Stupak. Go ahead.
    Mr. Gensler. Right now these markets base, these Financial 
Transmission Right markets.
    Mr. Stupak. Yes.
    Mr. Gensler. From the statistics right from the PHM market, 
about 74 percent of their transactions are with the large 
financial houses, the houses you are talking about.
    Mr. Stupak. Tier one.
    Mr. Gensler. On dollar value it is apparently lower. Its 
transaction volume is high but over 30 percent is with the 
large financial houses and so they are very much participating 
in as speculators in these markets. They provide capital to 
these markets, important capital but they are part of these 
markets, as well.
    Mr. Stupak. Thank you, Mr. Chairman.
    Mr. Markey. Thank the gentleman very much.
    I would just like to ask one final question and then we 
will move to the next panel.
    Ask this of Chairman Gensler, if the CFTC is doing an 
antifraud or anti-manipulation investigation of oil futures 
trading on the New York Mercantile Exchange and you believe 
that part of the fraudulent scheme may have involved wrongdoing 
in the cash market, you have the power under the Commodities 
Exchange Act to extend your investigation to cover that part of 
the fraud and you wouldn't want the Congress to deny the CFTC 
the power to look at transactions in both the NYMEX futures 
market and the cash market in your own investigation, is that 
correct?
    Mr. Gensler. As I understand it, our authorities are in the 
futures markets and that is where it starts and then if there 
is other attributes to this.
    Mr. Markey. It tracks the cash market.
    Mr. Gensler. But it has got to track into the futures 
market because that is where our authority is.
    Mr. Markey. But you would not want your power to track it 
to be constrained. You would not want your powers to track it 
from the futures market into the cash market to be constrained?
    Mr. Gensler. Well, I don't believe that Congress has 
constrained it but it has to start, it has to be in the futures 
market. Our whole--we are a market regulator. We don't regulate 
the cash markets.
    Mr. Markey. Right, so that is but the opposite from our 
perspective should also be true. In other words, if the FERC 
finds activities in the cash market that leads it into the 
futures market we are basically concerned that they could be 
constrained in heading in the opposite direction and that is a 
problem that is actually being created by this legislation that 
we are concerned about.
    Mr. Gensler. I understand that concern. With respect, I 
don't think 3795 does that with the 2005 provisions, the 
important provisions that you provide FERC. We, of course, 
would not bring an action solely in the cash market. It always 
starts--it has got to be in the futures market where we are.
    Mr. Markey. We would like your comments on this, Chairman 
Wellinghoff.
    Mr. Wellinghoff. Well, I think you put your finger exactly 
on it although I am not sure that the 3795--I think 3795 may 
exacerbate it but the situation already exists as I mentioned. 
CFTC has, you know, gone into Federal court saying we can't go 
into the futures market in Amaranth, for example, because we 
don't have jurisdiction there yet. We started in the cash 
market. We started in the cash market. Started our action there 
and we were tracking it, trying to track it through into the 
futures market and CFTC says we don't belong there.
    Mr. Markey. So from your perspective, you don't have a 
problem if the CFTC tracks it into the cash market?
    Mr. Wellinghoff. No, problem coming to us.
    Mr. Markey. But the CFTC has filed an amicus brief in the 
Amaranth case.
    Mr. Wellinghoff. Yes, yes.
    Mr. Markey. Saying that they don't want the FERC to be able 
to track from the cash market into the futures?
    Mr. Wellinghoff. That is correct.
    Mr. Markey. So that is a problem, it seems to me in terms 
of no comity there, creating comity between, you know, sister 
agencies, Mr. Gensler.
    Mr. Gensler. You know, I think what was done, an important 
thing in 2005 that you did was that in connection with the 
purchase or sale of natural gas or electricity are subject to 
the jurisdiction of FERC that they could pursue fraud and 
manipulation if it was in connection with the purchase or sale 
of natural gas and electricity in the cash markets effectively, 
but that Congress did not expressly in that statute in 2005 
expressly say that another Federal agency should regulate in 
the futures market and, of course, back in 1974, Congress had 
adopted exclusive jurisdiction for the futures market for the 
CFTC to ensure uniformity and consistency in the derivatives 
marketplace we call futures.
    Mr. Markey. OK, you have the last word, Mr. Wellinghoff.
    Mr. Wellinghoff. Again, I just think there should be parody 
there. If they can come from the futures market into the cash 
market with respect to investigation, we should be able to do 
the same going from the cash market into the futures market.
    Mr. Markey. I agree with you, Mr. Wellinghoff, but we thank 
both of you for being here and we thank both of you for working 
together with the committee to try to find a peaceful 
resolution of these issues and I think if we continue to make 
the progress that we have in the past couple of days that we 
have a good chance of doing so but it requires good faith on 
all parties in order to accomplish that goal.
    Mr. Gensler. Thank you, it is good to be back with you.
    Mr. Wellinghoff. Thank you, Mr. Chairman.
    Mr. Markey. Thank you, I thank both of you. We appreciate 
it. So this panel has completed its testimony. I would ask the 
next panel to please come up and take their seats behind their 
nametags.
    Welcome back to this panel. This is like a hall of fame 
weekend here. We have a lot of, you know, longtime visitors to 
our committee who are returning for this very important hearing 
and we are going to begin by recognizing Betsy Moler who is the 
Executive Vice President for Governmental Affairs and Public 
Policy at Exelon Corporation. Prior to joining Exelon, Ms. 
Moler served as commissioner on the Federal Energy Regulatory 
Energy Commission from 1988 to 1998, including as chair from 
1993 to 1998. Under her leadership, FERC issued order number 
888 requiring utilities to open up their transmission lines on 
an equal access basis to their competitor paving the way for 
the development of wholesale competitive electricity 
marketplaces. She did that pursuant to the Markey amendment in 
the 1992 Energy Policy Act. We welcome you back here again, Ms. 
Moler. Whenever you are ready, please begin.

  STATEMENTS OF ELIZABETH A. MOLER, EXECUTIVE VICE PRESIDENT, 
  GOVERNMENT AFFAIRS AND PUBLIC POLICY, EXELON CORPORATION ON 
  BEHALF OF THE EDISON ELECTRIC INSTITUTE; PATRICK McCULLAR, 
PRESIDENT AND CEO, DELAWARE MUNICIPAL ELECTRIC CORPORATION, ON 
BEHALF OF THE AMERICAN PUBLIC POWER ASSOCIATION; GLENN ENGLISH, 
  CEO, NATIONAL RURAL ELECTRIC COOPERATIVE ASSOCIATION; JOHN 
 SHELK, PRESIDENT AND CEO, ELECTRIC POWER SUPPLY ASSOCIATION; 
       AND VINCENT DUANE, ESQUIRE, GENERAL COUNSEL, PJM 
                     INTERCONNECTION, INC.

                STATEMENT OF ELIZABETH A. MOLER

    Ms. Moler. Thank you very much, Mr. Chairman.
    Mr. Markey. We are going to hold you to 5 minutes each of 
you in this round so please be aware of that just because of 
the roll calls that are pending out on the House floor and our 
need to be able to telescope this process in order to make sure 
that all of the members get a chance to ask questions so none 
of that came out of your time, Ms. Moler, please begin.
    Ms. Moler. Thank you very much, Mr. Chairman, Mr. Upton and 
members of the subcommittee. It is, believe it or not, a 
pleasure to be back. I guess it is like a moth in the flame.
    Exelon is an electric and gas public utility holding 
company headquartered in Chicago. Our subsidiary is Con-Ed in 
Chicago and PECO Energy in Philadelphia, serve 5.4 million 
customers or about 12 million people, more than any other 
company. Our competitive generation affiliate, Exelon 
Generation, owns, operates or controls about 30,000 megawatts 
of generation. Our nuclear fleet is the largest in the country 
and the third largest in the world.
    I am testifying today on behalf of Edison Electric 
Institute. EEI, as you know, is the trade association of U.S. 
shareholder-owned electric companies. My testimony today 
details why utilities use over-the-counter derivatives 
products, examines the costs to consumers of duplicative 
regulation of OTC derivatives transactions and encourages the 
subcommittee to support amendments to H.R. 3795 to clarify that 
FERC has and should remain exclusive, should retain, excuse me, 
exclusive jurisdiction over organized electricity markets and 
transactions.
    We look at H.R. 3795 from the perspective of our customers 
who are electric and natural gas consumers. We support the goal 
of regulatory reform but do not support the current version of 
the bill. It would result in costly, duplicative and 
overlapping regulation over organized energy markets and higher 
costs for our customers. In our view, subjecting OTC 
transactions to additional regulations, two regulators is 
simply not warranted because they do not involve or cause the 
type of systemic risk that the legislation is theoretically 
designed to deal with.
    EEI, EPSA, American Gas Association and 69 other 
organizations have sent a letter to the members articulating 
what we believe would be an effective approach to regulating 
OTC products. In short, the energy industry is united in our 
belief that this legislation should recognize the clear 
authority of FERC or the Public Utility Commission of Texas in 
the case of ERCOT and exempt all Regional Transmission 
Organizations or Independent System Operators, products and 
services from regulation by the CFTC. Why? It is simple. 
Subjecting these types of transactions to additional layers of 
regulation would be a duplication of effort, impose potential 
conflicts and gender additional litigation where you have two 
agencies looking at the same types of transactions and both of 
them trying to assert jurisdiction over them, and most 
importantly cost our customers billions of dollars in higher 
rates.
    Your invitation asked me to focus on organized energy 
markets, the RTOs. Over 65 percent of Americans, 134 million 
customers live in regions served by RTOs and ISOs. It is not a 
trivial problem. These independent entities operate the 
electric road and operate markets. We need to make sure that 
FERC retains effective authority to regulate RTOs and ISOs.
    I do not believe that the legislation is clear on this 
subject. It gives under the Commodities Exchange Act where the 
CFTC has authority over things they maintain, ``exclusive 
authority.'' I don't see how you can have two exclusive bosses 
in this area. Nor, I might add, do I believe that it can be 
dealt with by a Memorandum of Understanding between the two 
agencies because if CFTC has the exclusive authority over these 
types of transactions, that would at least arguably trump the 
FERC's jurisdiction. I think that can only be sorted out by 
statute.
    We believe that these transactions such as FTRs, swaps, 
excuse me, and other types of transactions that routinely 
entered into as part of RTOs are important consumer protection 
mechanisms. They reduce electricity costs to our customers and 
the authority of the FERC to regulate them should not be in 
doubt. We believe that any proposed legislation should clarify 
that FERC is the sole regulatory authority governing the 
organized RTO or ISO markets and the transactions entered 
therein.
    I appreciate very much your offer to have me testify today 
and would be happy to try to answer any questions.
    [The prepared statement of Ms. Moler follows:]

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    Mr. Markey. Thank you, Madam Chairman, very much.
    Our next witness is Patrick McCullar, President and CEO of 
Delaware Municipal Electric Corporation. He is today testifying 
on behalf of the American Public Power Association. We welcome 
you, sir.

                 STATEMENT OF PATRICK McCULLAR

    Mr. McCullar. Thank you very much, Mr. Chairman.
    Chairman Markey, Ranking Member Upton and members of the 
subcommittee, I profoundly appreciate the opportunity to 
testify before you today.
    I am representing the American Public Power Association, as 
you said. We represent the interests of more than 2,000 
publicly owned, not-for-profit electric utility systems across 
the country serving approximately 45 million Americans, and the 
majority of our systems are serving communities with 
populations of 10,000 people or less.
    DMEC, my company, provides generation and other services to 
nine municipal distribution utilities in the State of Delaware 
and is constituted as both a load-serving entity and a 
generation owner in the PJM RTO. I have also served as the 
chairman of the PJM members committee which means I am very 
familiar with markets and processes within the RTO. I also 
represent and I often remind my colleagues at PJM that I 
represent the folks who at the end of the day write the checks 
to pay for all of these services and our mission is to make 
sure those checks are as reasonable as possible for the value 
received.
    My statement is going to focus on three areas, energy 
markets in general, the regulatory overlap between FERC and the 
CFTC, mandatory clearing of over-the-counter derivative 
contracts. While energy markets suffer from volatility for many 
reasons including storage capacity, weather and economics, in 
recent years the price of energy commodities has not been 
determined solely by these traditional variables. Manipulation 
and speculation for profit in energy markets have often caused 
artificially high prices.
    APPA and DMEC have therefore consistently supported 
increased transparency in these markets to mitigate market 
manipulation. For example, APPA passed two resolutions the last 
few years in support of increased transparency in regulation in 
over-the-counter or OTC natural gas markets, therefore we 
support the provisions of H.R. 3795 that enhance transparency 
in these markets including reporting by large traders of OTC 
positions and the application of aggregates speculative 
position limits. Because of these strong concerns with market 
manipulation, APPA and DMEC recognize that the CFTC can help to 
police and prevent manipulation in the energy markets but CFTC 
and FERC should work together to prevent manipulation in the 
energy markets that are run by RTOs, including PJM. However, we 
urge Congress to avoid creating duplicative authorities between 
CFTC and FERC over the many other aspects of power supply and 
transmission markets that are run by the RTOs.
    In regions with RTOs, market participants buy and sell a 
variety of electric products and services in the centralized 
RTO-run markets. One such market is for the purchase and sale 
of Financial Transmission Rights or FTRs which APPA members and 
other Load Serving Entities use to hedge the cost of 
transmission congestion created when moving their power from 
the generation sources to their retail customers which is often 
referred to as load. While these Financial Transmission Rights 
are financial contracts, their terms, conditions and rates are 
comprehensively regulated by FERC and they should remain under 
FERC jurisdiction. LSE's access to FTRs is absolutely essential 
to their ability to serve their retail loads at reasonable 
rates and with less price volatility.
    RTO markets are fully regulated by FERC and are set out in 
FERC-approved tariffs. The rates, terms and conditions 
applicable to any RTO product under a FERC tariff should not be 
subject to concurrent jurisdiction by CFTC. Concurrent 
jurisdiction could result in inconsistent regulations and 
uncertainty over the enforceability of transactions. Because of 
this concern, if concurrent jurisdiction is found, CFTC should 
be required to consult with FERC regarding these markets and 
should be given statutory authority to cede jurisdiction to 
FERC. However, as I mentioned, we recognize CFTC has helped to 
police and prevent manipulation of prices in energy markets. 
APPA would therefore support concurrent FERC and CFTC 
jurisdiction over market manipulation in RTO administered 
markets. APPA would urge the two agencies to pool their 
resources and expertise to provide more comprehensive oversight 
in this specific area.
    I would also like to mention the critical importance of 
continuing to allow LSEs and energy end users to use non-
cleared, individually negotiated OTC transactions to hedge the 
price of energy fuels in order to continue to offer the best 
electric rate possible to our customers. APPA supports the 
clearing language in H.R. 3795 that provides an exemption from 
clearing for LSEs and end users. Specifically, requiring not-
for-profit public power systems to clear would pose significant 
financial hardships to them and the local governments that own 
them without addressing any of the systemic problems that cause 
the financial crisis in which we now find ourselves. 
Derivatives end users such as Plug Power Systems do not pose 
systemic risks to the market as do the bank-to-bank exchanges 
for the purposes of profit making, therefore, derivative end 
users should not be subject to the same type of regulation as 
other entities.
    Mr. Markey. If you could summarize, sir.
    Mr. McCullar. Thank you. Therefore, APPA and DMEC's 
perspective from our perspective a well-drafted bill will 
include provisions necessary to curb market manipulation while 
preserving FERC's primary jurisdiction over RTO markets 
including the FTR markets in preserving the ability of energy 
end users to use non-cleared OTC swaps to hedge against energy 
price volatility. Thank you.
    [The prepared statement of Mr. McCullar follows:]

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    Mr. Markey. Thank you very much. We appreciate it.
    Our next witness is an old friend and the year is winding 
down and it is great to have another visit from Glenn English, 
our former colleague in the Congress and the CEO of the 
National Rural Electric Cooperative Association. He served 10 
terms in Congress representing the great State of Oklahoma and 
is a great friend of our committee, and he spent the whole year 
tutoring us on how rural America interacts with all of the 
major energy issues in our country and we thank you for that, 
and whenever you feel comfortable, please begin.

                   STATEMENT OF GLENN ENGLISH

    Mr. English. Thank you very much, Mr. Chairman, and being 
very mindful of vote pressures that you are under, the 
committee is under I will move right along.
    I would ask that my entire written testimony be made a part 
of the record.
    Mr. Markey. Without objection, so ordered.
    Mr. English. And also as the chairman pointed out, electric 
cooperatives, of course, are very important to rural America. I 
am the CEO of the National Rural Electric Cooperative 
Association. We have 47 States in which we have some 930 co-
ops, 42 million consumers. We are not for-profit and consumer-
owned, and we are very proud of that so as you can imagine has 
been the case all this year, Mr. Chairman, our focus has been 
on the issue of affordability, and once again, I come to talk 
to you about the issue of affordability.
    First of all, I would like to commend Chairman Peterson for 
the work that he has done, certainly increasing transparency 
and reduces systemic risk for end users. I think it is 
extremely commendable. I think the legislation goes far in 
achieving these objectives, however the subject of this hearing 
focuses on a very narrow area and it is one that we have great 
concern over and I know that this committee does, and I want to 
commend you, Mr. Chairman, for having this hearing and calling 
attention to this issues.
    We have what I think many of us are very familiar with in 
which you have two Federal agencies here that could potentially 
have jurisdiction over an area that is very sensitive, and I 
would point out to the committee and I think most members of 
the committee are very aware of the fact that certainly this is 
a very volatile, sensitive area when you talk about movement of 
power in this country. And it is extremely important, as this 
committee has discussed many times that that power move freely, 
and that it move in a timely fashion, and it move in an 
affordable way. And in this particular area, I know of no 
problems that have occurred with regard to the Federal Energy 
Regulatory Commission in helping bring that about. I am not 
familiar with any market manipulation issues that have arisen 
since 2005, and the legislation passed by this committee, and 
certainly I think that we all are very mindful that it is in 
all of our best interests, whether we be for-profit or 
consumer-owned as part of the electric utility industry that we 
continue to make certain that the power in this country moves 
in an efficient manner. That is important to consumers and it 
is certainly important to keep the lights on throughout this 
nation.
    So we have become very concerned, Mr. Chairman, in that we 
have some questions that have arisen here of exactly how we are 
going to proceed, and this is something that troubles us a 
great deal. We would strongly suggest, Mr. Chairman, that as we 
talk about these transactions, both before the transaction 
takes place and during the period in which the transaction is 
being carried out that we have one agency that focus on meeting 
those responsibilities and that be the Federal Energy 
Regulatory Commission. I would suggest, Mr. Chairman, a very 
bright line can be painted after the transaction. They should 
be fair gain for anyone on any wrongdoing, any market 
manipulation that is detected whether it be the Federal Energy 
Regulatory Commission or the Commodity Futures Trading 
Commission Either way we should encourage and hope that they 
root out any wrongdoing, and they take those steps that are 
necessary to deal with it but I think it is very important for 
us to keep in mind, Mr. Chairman, that we need one agency to 
focus on that very sensitive, critical period of time as to 
when these transactions are being carried out. And I know the 
chairman is very sensitive to time in this area as well so I 
will wind up by simply saying, I hope that you encourage the 
two Federal agencies to come together, work with us and work 
with the two committees in Congress into resolving this 
difficulty so that we don't have any interference taking place 
in this marketplace.
    Thank you, Mr. Chairman.
    [The prepared statement of Mr. English follows:]

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    Mr. Markey. Thank you, Mr. Chairman, as well. When did you 
leave, Glenn?
    Mr. English. That was 1994, and we did have jurisdiction 
out of my subcommittee at the Commodity Futures Trading 
Commission back in those days.
    Mr. Markey. I remember that yes, long ago.
    Mr. English. I am afraid so, very long ago. We are both 
getting older.
    Mr. Markey. Our next witness is John Shelk. He is the 
President and CEO of the Electric Power Supply Association. 
That is the national trade association representing competitive 
power suppliers, and back when I was the chairman of this 
subcommittee in 1985 and 86, John was the chief counsel for the 
ranking member of the committee at the time. We did the 
Appliance Efficiency Act that year, Carlos the refrigerator 
warhead and that was when, if you remember, William ``the 
Refrigerator'' Perry couldn't get a bigger and better nickname 
than that. But I don't know if you know this but refrigerators 
now basically consume 50 percent less electricity for the same 
size device as they did in 1986, and so Mr. Shelk has--what 
John?
    Mr. Shelk. That is a long time ago.
    Mr. Markey. It is a long time ago but we welcome you back, 
John.

                    STATEMENT OF JOHN SHELK

    Mr. Shelk. Thank you, Mr. Chairman, we appreciate the 
invitation.
    As you indicated, EPSA represents competitive wholesale 
suppliers including generators and marketers who do business 
both in the two-thirds of the country with organized markets 
and in the one-third without them. The competitive sector has 
40 percent of U.S. generating capacity with an even greater 
role in the organized markets.
    As you kindly mentioned, for 10 years I had the honor of 
working for members of this committee including on FERC 
matters, and more recently I have joined the CFTC's Energy and 
Environment Markets Advisory Committee and fully support the 
transparency goals Chairman Gensler outlined to you this 
afternoon, the question is how to do so. Our position is that 
there is no more important issue to be acted upon by the 
Congress in the near future that will impact the electric 
sector than maintaining cost-effective access to OTC risk 
management products for all the reasons you have heard from the 
other panelists. We commend the CFTC for listening to our 
concerns and we also appreciate changes to the original version 
on H.R. 3795 made by the Committees on Financial Services and 
Agriculture, however for reasons that you have heard, three 
crucial details remain.
    First, definitions should ensure access to OTC risk 
management products by those of us primarily managing 
commercial risks without imposing mandatory clearing due to how 
it would constrain our capital availability at a time when you 
rightly expect us to be investing in the energy infrastructure 
of the future. Second, margin requirements should not apply to 
those who use OTC products to manage commercial risks for the 
same reason and for what you have been focusing on this 
afternoon, we agree that a clear line should be drawn in the 
statutory language between the important responsibilities 
Congress assigns to the two agencies. Understandably, for those 
actually implicated in the financial crisis, the bill as it 
stands today defines what is within the CFTC's exclusive 
purview very broadly, however as you have heard this raises 
very serious questions as to FERC's exclusive regulation of 
wholesale markets, markets which were not implicated by the 
financial crisis and we share those concerns.
    FERC's exclusive jurisdiction should be preserved by adding 
a provision to the bill that excludes any products transacted 
through or in reference to the RTOs and ISOs FERC regulates, 
and most importantly for my members who serve many of your 
constituents, these are the markets from which electricity 
suppliers receive the revenues necessary to operate and invest. 
As a result, electricity markets are systems that are 
physically and financially integrated so extensively as this 
committee is well aware, as to sharply distinguish electricity 
from the corn and Treasury bill examples you heard earlier, 
thus dual or coexisting regulation while not impossible, is 
more problematic, hence the recommendation for a statutory 
bright line because as you know, all these things are 
interrelated. Physically you cannot pull them apart like you 
can corn and T-bills from the different agencies.
    For all the reasons you have heard that I won't belabor, 
RTOs and ISOs are subject to multiple layers of oversight. The 
extent of this oversight and the documented competitive market 
results that the organized markets produced to benefit 
consumers are ample evidence of the effectiveness of FERC's 
regulation that should be preserved. Unfortunately, the bill as 
it stands, as I mentioned, does not yet expressly and fully 
address this important issue. We strongly urge you to do so to 
preserve FERC's jurisdiction over the organized markets of 
which a large and growing share of the country depends for its 
electricity.
    And again, we thank you for the invitation and look forward 
to your questions.
    [The prepared statement of Mr. Shelk follows:]

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    *************** INSERT 6 ***************Mr. Markey. Thank 
you, Mr. Shelk, very much.
    Our final witness is Vincent Duane, General Counsel for 
PJM, that is Pennsylvania, Jersey and Maryland.
    Mr. Duane. Originally, that is correct.
    Mr. Markey. Right, the regional transmission organization 
that serves much of the mid-Atlantic and parts of the 
Midwestern region of the country. So what other States are in 
now?
    Mr. Duane. We are, Chairman, in 14 States if you include 
the District of Columbia, 13 States and the District of 
Columbia, as far out west as Illinois up to the New Jersey-New 
York border down into North Carolina and a good part of the 
country in between.
    Mr. Markey. And they wouldn't want to be run by a group 
called Pennsylvania, Jersey and Maryland so the name change is 
to protect, you know, the innocence.
    Mr. Duane. Hence, my reluctance in agreeing with you on the 
original, historical derivation.
    Mr. Markey. I see, yes. You probably made a consultant 
$100,000 to make that recommendation so you joined PJM in 2003 
as deputy general counsel and has served as general counsel 
since 2007. Have you ever been before this committee before?
    Mr. Duane. This is my first time, sir.
    Mr. Markey. First time so we have a brand new witness. 
Welcome to our committee and, you know, it is just great to 
have some new faces coming before us so whenever you feel 
ready, please begin.

                   STATEMENT OF VINCENT DUANE

    Mr. Duane. Well again, thank you, Mr. Chairman, Ranking 
Member Upton and the rest of the committee members for the 
invitation to be here today.
    I am testifying on behalf of PJM and I would request that 
the written testimony be included as part of the record.
    Mr. Markey. Without objection, it will be so ordered.
    Mr. Duane. Thank you very much.
    We are as has been mentioned a RTO, Regional Transmission 
Organization, and a public utility. That means we are regulated 
by the FERC. We perform several functions and the one that is 
of most interest today is our function in administering 
organized wholesale electricity markets. We administer these 
markets for two reasons.
    First, we want to bring competitive forces to the 
transacting of wholesale purchases in the electricity markets 
and we use them and this is very important as a tool to help us 
discharge our responsibility in managing the grid reliably. It 
is a tool that incents people, be they generators, transmission 
customers and increasingly consumers and load interests in 
responding to prices that result in behavior that keeps the 
grid reliable and basically helps us in our mission in keeping 
the lights on. But the markets are the focus today and with 
particular attention being given to the FTR product that we 
administer in PJM. This product has caught the attention of the 
CFTC. I believe it is part of its overall interest as Chairman 
Gensler mentioned in bringing oversight to the over-the-counter 
markets.
    My first point, and probably the most important point I 
want to make is that the public policy and they are very 
important public policy imperatives that are driving financial 
market reform are simply not present when it comes to the RTO 
markets. Its not that we don't share in the objectives that 
Chairman Gensler mentioned, lowering risk, promoting 
transparency and bringing integrity to the public. Absolutely 
do we endorse those risks, in fact, we feel we put those at the 
very front of our windshield. We just get them to them and we 
get to those objectives in a slightly different way.
    We are not an OTC environment. We are a centralized 
marketplace and one that is pervasively, some would say 
intrusively regulated by the FERC. Our markets are not opaque. 
It is hard to think of a more transparent environment than an 
RTO. Let us look at the FTR with particular reference here. 
When an FTR is bought and sold, the name of the holder of the 
FTR is publicly available. The price they pay for that FTR is 
publicly available and the identity of the particular FTR 
pathway is publicly available. It is all available to market 
participants in the FTR markets on the PJM Web site and there 
is no transparency issue. We get to that through the 
centralized markets regulated by the FERC and the products are 
not synthetic financial products. Admittedly they do settle 
financially but they are very closely tied to the physical 
capability of the transmission system and they are essential to 
our mission of delivering firm transmission to customers and 
ensuring that those customers have some degree of price 
certainty in moving their electricity from point A and point B, 
and these are missions that this committee and the Congress has 
squarely entrusted to the FERC.
    The second point I would like to make is we are not and we 
are quite distinct from the sort of financial institutions that 
operate in the OTC markets. We are a non-profit entity. We 
don't make money on FTRs and we don't have structuring desk 
that is populated by Ph.D. mathematicians devising exotic 
instruments, packaging them and marketing them to other 
financial institutions. That is not what an FTR is all about. 
In fact, we have another function that I mention in my 
testimony where we are a transmission planner and we look at 
opportunities to expand the transmission system to remove 
congestion to increase transfer capability which is to say the 
ability to move electricity from one point to another and in 
doing so reduce the reliance on FTRs. So we are quite distinct 
from a financial institution that might be trying to market a 
product. We are in a sense, trying to eliminate the need for or 
at least lessen the reliance on the FTR product.
    The last point I would like to make is to sort of answer 
the question I think is at the heart of this which is well what 
is so wrong with having a dual role with the CFTC and the FERC, 
and why is this a matter that needs some statutory attention, 
and it is not just a desirability to bring clarity. It is not 
just to eliminate duplication and dare I say it is not just to 
avoid costs. It is really a question that the tools that the 
CFTC uses just have not been a very good fit for the products 
and markets and environments that we operate. We get to those 
objectives through different mechanisms and don't see the same 
need to get to the risks that have been identified.
    I would like to close on that point and make myself 
available for questions.
    [The prepared statement of Mr. Duane follows:]

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    Mr. Markey. Thank you so much. We appreciate it, Mr. Duane.
    The chair will now recognize himself for some questions.
    Ms. Moler, your position is that FERC should have exclusive 
authority over RTO products and services. That is a much more 
aggressive position then Mr. Waxman and I and Mr. Upton and Mr. 
Barton have taken. We basically say lets preserve FERC's 
authority and where there is overlapping authority, let the 
FERC and the CFTC work it out. Why is your approach better in 
your opinion?
    Ms. Moler. My concern is born of the language in the bills 
that have gone through the two other committees. Under the 
Commodity Exchange Act, if the CFTC has jurisdiction over a 
transaction, it supplants other agencies' jurisdictions. They 
have exclusive jurisdiction and I do not understand having 
negotiate a number of Memoranda of Understanding when I was at 
FERC and when I was Deputy Secretary of Energy how one agency 
that has preemptive authority over transactions that are 
currently regulated by another agency, how those two agencies 
can successfully negotiate a Memorandum of Understanding.
    So if you give the CFTC authority over or if they claim 
authority over things like Financial Transmission Rights, that 
trumps FERC's authority and FERC's ability, at least arguably, 
and FERC's ability to allocate transmission rights and the 
like, and I worry about that. I understand that they have under 
the Energy Policy Act of 2005, authority to look at fraud and 
manipulation but they wouldn't have anything to do with those 
transactions. That is why I am not as comfortable with the MOU 
approach.
    Mr. Markey. OK, great.
    Mr. English, what would be the practical impacts on 
consumers and your members if FERC's authority over Financial 
Transmission Rights and other RTO products were eliminated as a 
result of the pending bill?
    Mr. English. I think the problem is we don't know, Mr. 
Chairman. We have an agency that really is not equipped to 
regulate these markets and certainly that would raise questions 
I think about as I mentioned earlier a very volatile 
marketplace and how well it would work so I have serious 
questions whether it would work.
    Mr. Markey. Great.
    Mr. Shelk.
    Mr. Shelk. As I indicated, these are the markets in which 
we receive the revenue on which we rely to operate and invest 
so our concern would be, depending on what aspects of the RTOs 
and the ISO markets the CFTC might consider under its purview, 
and as Ms. Moler said this is the later enacted statute so if 
it stands as it is today, we would be subsequently basically 
reaffirming and even strengthening the CFTC's role which would 
raise concerns in our minds about the revenue strengths we 
depend on.
    Mr. Markey. OK, great.
    And, Mr. McCullar.
    Mr. McCullar. We heard the two chairmen discussing the very 
issue and it is our position that FERC should maintain primary 
jurisdiction in these markets but CFTC can be helpful in an 
oversight mode and in, frankly, combining resources to deal 
with these problems could only help the markets and the 
consumers.
    Mr. Markey. Great, thank you.
    Mr. Duane, what changes would be made if PJM had to adhere 
to the principals in place under the Commodities Exchange Act 
as a derivative clearing organization? What effect would those 
requirements have on the marketplace?
    Mr. Duane. Let me first state I am not sure we would be 
able to comply with those directives. Again, those directives 
are designed to promote transparency, to limit lower risk and 
to preserve the integrity of markets. That is well and good and 
those are objectives that we share that the FERC shares as well 
and we just use different tools to do that. If we were forced 
somewhat akin to a square peg into a round hole, I am very 
concerned that the products themselves wouldn't survive. 
Alternatively, there would be sort of qualification given to 
such a degree that I am not sure anything will have improved or 
changed. We have got what we have got today. It is workable. I 
think that is the answer to the question.
    Mr. Markey. Great, thank you, Mr. Duane, very much.
    My time has expired. The gentleman from Michigan, Mr. 
Upton, if recognized.
    Mr. Upton. Thank you, Mr. Chairman. I just want to say as I 
listened to the testimony of all five witnesses, it really does 
seem like we are at Fox News, fair and balanced. Everyone was 
on the same page, including Mr. English, former Ag Committee 
member, right, correct? Have you talked to Chairman Peterson 
about this? Has anyone here?
    Mr. Markey. The CFTC, by the way, has its own channel one 
floor down that it can turn to.
    Mr. Upton. Yes, has anyone here, I should ask, has anyone 
here in the audience from the Ag Committee? Going once, no 
hands, OK.
    Mr. English. Well, Mr. Upton, as I pointed out I have high 
praise for Chairman Peterson.
    Mr. Upton. I know you do. I know you do.
    Mr. English. There is just this one little narrow area. It 
is not much, just a little tweaking here and there would take 
care of the problem.
    Mr. Upton. Yes, you know, Mr. Wellinghoff, Chairman 
Wellinghoff in one of his answers talked about uncertainty 
creates more risk and clearly I think that is what this 3795 
really does. It does need to be maybe a little more than 
tweaked but it needs to be fixed. There is an old saying if it 
ain't broke, don't fix it but in fact, I think this would 
really send us back and the bottom line would be that the extra 
burden would probably increase rates for most America. I know 
PJM, I thought stood for Michigan in this thing but that is all 
right. But it would, the burden would in fact have the 
potential of increasing rates for all consumers is that--does 
anyone disagree with that? So and, you know, the electric 
industry is unified, right? Is there anyone else that is not on 
the same page, any major organization that is not with your 
testimony, right?
    Mr. Shelk. And as you know that is a unique development in 
our system, the fact that we are unified.
    Mr. Upton. We are still working on cap and trade to make 
sure we get people back in the corral but we will see what 
happens. But yes, I just want to say I appreciate your 
testimony and I look forward to working with Chairman Markey 
and Waxman and Barton to fix this problem before it gets to the 
House floor because it will increase rates and that is the last 
thing that, you know, as I look at Michigan's economy and the 
nation as well. We don't need this. We really don't need this.
    Ms. Moler. Mr. Upton, several earlier participants have 
mentioned an analysis that Exelon has done by looking at what 
would happen if our types of transaction were required to be 
cleared and our analysis shows a rate increase of between 5 and 
15 percent. With your permission, I would like to put an 
example or two in the record that shows how we came up with 
those numbers based on some real typical kinds of power 
transactions.
    Mr. Markey. Without objection, so ordered, thank you.
    Mr. Upton. Thank you and I have no further questions. I 
yield back.
    Mr. Markey. The gentleman yields back his time.
    And the chair recognizes the gentleman from Michigan once 
again, Mr. Stupak.
    Mr. Stupak. Thank you, Mr. Chairman. Sorry I missed the 
testimony. I had to take another meeting but I have been asking 
the last time I asked about the swap clearing for end users so 
let me ask this question this way. Bona fide hedgers are 
participating in derivatives markets for commercial purposes 
and really are not the cause of our excessive speculation as I 
call it in the energy markets. Electric utilities are not the 
cause of our current financial crisis, however in the 
legislation exemption from a swap clearing for end users also 
allows large financial institutions that serve as your 
counterparties to also remain off the hook for stricter 
oversight. So my question was this and whoever wants to chime 
in, please do, would you support a change in the legislation 
that allows a bona fide hedger, including electric utilities to 
remain exempt from clearing requirements but mandating that 
tier one financial companies clear their swap transactions on a 
regulated market? All right, Glenn, it looks like you are ready 
to go.
    Mr. English. Our concern still is the fact, you know, we 
are very small and certainly whenever you look at the size of 
these markets you can't hardly see us with a magnifying glass 
but these are very important markets to us to hedge our risk. 
We don't have the kind of capital at hand to be able to handle 
a great deal of risk and it really puts us in a bind for this. 
Anything that would increase those costs, I think are going to 
push our people out of those markets and it increases risk to 
our members considerably.
    Mr. Stupak. But if we exempt you out and let your 
counterpart though it would still regulate that.
    Mr. English. That the key word here is what kind of impact 
is that going to have on you, yes.
    Mr. Shelk. Mr. Chair, we support Mr. Stupak's interest in 
transparency. The question is how do you do it and the concern 
with the tier one provision is as Chairman Gensler indicated 
most of our counterparties are the larger banks so they can be.
    Mr. Stupak. Counterparts.
    Mr. Shelk. So under the version that you have suggested 
essentially the tier one bank wouldn't post the collateral, we 
would have to post the collateral as the counterparty to the 
tier one institution and as I indicated earlier, the problem 
with that is it would tie-up, and the examples we have come up 
with about an average a quarter of the capital of the end user 
so we fully agree with your comments that the electric 
utilities and other generators didn't cause the problem. We 
think the way to get to your transparency goal which we share 
because we are in the market too, is to have a data repository 
so that information on these trades would be available to the 
CFTC and others, and the problem with electricity is it is very 
customized. These products are traded over hundreds of 
different nodes around the country so it doesn't really lend 
itself, the CFTC doesn't lend itself to the corn example, and 
the T-bill example and kinds of commodities that the chairman 
indicated.
    Mr. Stupak. You know, we will try to get to these large 
pools coming in and driving up those prices and even if they 
are your counterpart, they still fluctuate.
    Mr. Shelk. That is why we agree with you. You can help us 
so we would like to see the data repository as the way to put 
on the bulletin board to the CFTC so they would know what is 
happening in these markets whereas Chairman Gensler said today, 
they don't. I think that would get at what you are trying to 
accomplish.
    Ms. Moler. Mr. Stupak, there are lots of estimates floating 
around about how much this costs but if you require these 
transactions to be cleared on exchange, they have margin 
requirements, and we are talking billions of dollars of 
additional cost to our sector. And you can't just exempt 
Exelon, or PECO, or Com-Ed, or DTE, or anything but not their 
counterparty because if their counterparty has to go through 
the clearing process then drags the reluctant counterparty with 
them. Both parts, if one is subject to it, then both parts of 
the transaction get subject to it and that is where the costs 
come from. So yes, I understand it may not be popular to think 
about exempting some of the large investment houses but they 
are our counterparties and we need these markets to be robust. 
Deep liquid is the phrase that our guys always use but that is 
the way we save our customers money.
    Mr. Stupak. But also led to our financial meltdown.
    Ms. Moler. Not with these kinds of products. They, I mean 
the housing derivatives and mortgage securities, et cetera, et 
cetera, but I don't think that you find that transactions for 
FERC RTO markets and hedging instruments used by our sector 
have been part of that problem.
    Mr. Stupak. Well, I think Mr. Waxman might disagree with 
you on that after the California electric debacle and again, I 
am not saying you caused it but when you got that much money 
moving around and as quickly as it is moving around that is 
where your excess speculation comes in, and so how do we do it 
that keeps you, a bona fide hedger, you are bona fide. These 
other folks come in with this money, they are not bona fide. 
They are just in there to make money and as long as if they are 
not cleared anywhere and even depositories is the place to look 
at. I am not quite sure but I am still saying making them 
clear. I am still trying to--I am still wrestling with that 
one.
    Mr. McCullar. If I could have a comment that may give some 
comfort here.
    Mr. Markey. Please do it quickly because our roll calls are 
about to start.
    Mr. McCullar. We work in the light in our industry. It is 
very open and it is very transparent, and when we have these 
counterparties, we require them to come into the light with us 
and especially public power systems or community-owned systems. 
We would not participate as a counterparty in something that 
was not in the light and transparent and I think that should 
give comfort.
    Mr. Markey. Gentlemen, the former police officer from 
Michigan's time has expired, a former state trooper. He prefers 
that everything be in the light as a former state trooper. It 
works better for crime prevention and detection.
    The gentleman from Louisiana, Mr. Scalise, is recognized.
    Mr. Scalise. Thank you, Mr. Chairman.
    I would just ask for the whole panel if, I know a few of 
you made some different remarks about this in your statements 
but if you could each say first if you do think there would be 
any increases to consumers by this legislation and if so, what 
rough percentage, and if you can just go across starting with 
Ms. Moler.
    Ms. Moler. Yes, and our best estimate is somewhere between 
5 to 15 percent to have a clearing requirement.
    Mr. Scalise. Thanks.
    Mr. McCullar. Thank you and from our point of view it would 
be at least a 5 percent increase in cost of operations and 
those costs would have to be passed onto the consumers.
    Mr. English. In looking at the issue that we are talking 
about today, we have a major concern over the law of unintended 
consequences and any time you leave a hole open with this kind 
of a question, you are likely to have increased costs and 
unintended consequences.
    Mr. Shelk. The short answer is yes for all the reasons you 
have heard.
    Mr. Duane. From the RTO perspective, it would frustrate 
programs that are essential to the delivery of services to our 
customers. That would increase cost and perhaps take away the 
programs altogether.
    Mr. Scalise. OK and then earlier we talked to you about 
capital and how this may tie-up capital that would make it more 
difficult for companies to become more energy efficient. Can 
each of you just briefly touch on that, as well?
    Ms. Moler. I agree with Mr. Shelk's earlier observations on 
that subject. We are like all businesses these days we are very 
careful where we put our capital. If we have to put it all on 
margin requirements, we won't be able to do other new projects, 
transmission projects, new generation. We are building a solar 
project in South Chicago. The money there wouldn't be there.
    Mr. McCullar. I agree with Ms. Moler's statement. It is a 
capital-constrained environment now for all the reasons we 
know. This would only aggravate that situation.
    Mr. English. And I also agree but I also think that it 
could have the additional complication of the flow of power in 
this country.
    Mr. Shelk. On the point of the capital it is not only the 
amount, it is the uncertainty because you have to post margin 
in the beginning and as the transaction continues over time so 
it is not just the amount which in and of itself is significant 
but it is also the fact that it would change over time. Again, 
we think unnecessarily so; we can accomplish the transparency 
goals that Mr. Stupak understandably wants to achieve without 
having to tie-up roughly a quarter of each company's capital in 
the clearinghouse to get the transparency that you should want.
    Mr. Duane. And again, from the RTO perspective and the FTR, 
the FTR is essential to assist people in long term contracting. 
Long term contracting provides a stream of revenue necessary to 
support capital formation and investment of any technology so 
yes, again, if the program is threatened the whole unintended 
consequence flows through the whole system.
    Mr. Scalise. Thanks and then I will just throw this one out 
there for anybody that wants to take it. Do you believe that 
some market participants would cease hedging exposure if 
clearing were mandatory due to the increased cost associated 
with exchange trading and if that were the case would that even 
bring more risk into the market if anybody wants to?
    Mr. English. Yes, as far as electric cooperatives are 
concerned, we wouldn't have a choice.
    Mr. McCullar. Yes, the capital constraint, public power 
systems would basically be priced out of using those tools and 
it would impact our customers.
    Ms. Moler. We use hedging to level out the prices we charge 
our customers. If we can't hedge, we are going to charge them 
more, and we will also be less likely to enter into long term 
contracts.
    Mr. Shelk. The short answer is yes, it would.
    Mr. Duane. The only point I will add is to remind everyone 
here that electricity is an extraordinary volatile commodity 
and the ability to hedge that price volatility is essential.
    Mr. Scalise. And, of course, benefits consumers too; I 
appreciate all of your candor and I yield back.
    Mr. Markey. The gentleman's time has expired.
    The chair recognizes the gentleman from Michigan, Mr. 
Dingell. You, Mr. Chairman, would be the last member recognized 
to ask questions. I thank the chair for that and I want to 
thank all of our witnesses for their testimony today. The 
hearing has underscored the need for the derivatives bill 
reported out of the House Agriculture Committee to be modified 
so it does not interfere with the ability of the Federal Energy 
Regulatory Commission to oversee electricity and natural gas 
markets. We have heard about the potential for the bill to 
disrupt the RTOs as well as mechanisms used by many RTOs. These 
include Financial Transmission Right used to hedge the 
volatility of transmission prices forward capacity markets use 
to ensure that there is sufficient generation capacity and 
potentially demand side energy management programs. We have 
also heard about the potential for this legislation to 
exacerbate an existing dispute over the reach of the FERC's 
antifraud and anti-manipulation authorities. Clearly, we need 
to correct these problems and work with the members who have 
come here today on a bipartisan basis and with the witnesses 
who have been gracious enough to come here today to testify as 
expert witnesses so we thank you all.
    And with that and the thanks of this committee, this 
hearing is adjourned.
    [Whereupon, at 3:45 p.m., the Subcommittee was adjourned.]
    [Material submitted for inclusion in the record follows:]

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