[Congressional Record Volume 148, Number 14 (Thursday, February 14, 2002)]
[Senate]
[Page S859]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mrs. FEINSTEIN (for herself, Ms. Cantwell, Mr. Wyden, and Mrs. 
        Boxer):
  S. 1951. A bill to provide regulatory oversight over energy trading 
markets, and for other purposes; to the Committee on Agriculture, 
Nutrition, and Forestry.
  Mrs. FEINSTEIN. Mr. President, I am pleased to introduce this bill 
today with Senators Cantwell and Wyden to make sure that all energy 
transactions are transparent and subject to regulatory oversight. With 
passage of this legislation, we can reinstate regulatory oversight to 
the marketplace and help ensure there is not a repeat of the energy 
crisis that had such a devastating impact on California and the West.
  The Enron bankruptcy has uncovered many gaping holes in our 
regulatory structure, everything from accounting and investment 
practices to on-line energy transactions. Congress must take a look at 
all of this. The bill we are introducing today is a first step. The 
exemptions and exclusions to the 2000 Commodity Futures Modernization 
Act essentially gave EnronOnline, and the entire energy sector, the 
ability to operate a bilateral electronic trading forum absent any 
regulatory oversight or price transparency.
  Let me give you an example of what that lack of transparency meant to 
California: On December 12, 2000, the price of natural gas on the spot 
market was $59 in southern California while it was $10 in nearby San 
Juan, NM. We know it costs less than $1 to transport gas from New 
Mexico to California because this was the cost when these 
transportation routes were transparent and regulated. So there was $48 
unaccounted for that undoubtedly found its way into someone's pocket.
  This problem lasted from November, 2000 to April, 2001, and all this 
time no one knew where all this money was going. The Senate Energy 
Committee looked at this issue last year but was not able to piece 
together all of what happened. In the wake of Enron's bankruptcy, 
however, we are beginning to learn a lot more. By controlling a 
significant number of energy transactions affecting California, some 
traders estimate that Enron controlled up to 50-70 percent of the 
natural gas transactions into southern California, and by trading in 
secret, Enron had the unique ability to manipulate prices and gouge 
customers. And the consumes, particularly those in California, 
ultimately bore the brunt of the costs. In fact, through the course of 
the crisis in California, the total cost of electricity soared from $7 
billion in 1999 to $27 billion in 2000 and $26.7 billion in 2001.
  A market does not function properly without transparency. 
Additionally, regulators need the authority and the tools to step in 
and do their jobs when markets have gone awry. This bill, then, is 
intended to close the regulatory loopholes that allowed EnronOnline to 
operate unregulated trading markets in secret. The Commodity Futures 
Modernization Act provided a regulatory exemption for bilateral 
transactions between sophisticated parties in nonagriculturual and 
nonfinancial commodities. This exclusion includes energy products and 
electronic trading forums. Because many of the EnronOnline transactions 
did not involve physical delivery, there was also no oversight by the 
Federal Energy Regulatory Commission. In determining which agency, FERC 
or the CFTC should have the proper authority, we are faced with two 
challenges: 1. FERC does not have the necessary expertise in derivative 
transactions; and 2. CFTC does not have the necessary expertise to 
protect consumers from out-of-control energy prices.
  This bill tries to utilize the unique talents of each agency.
  In summary, our legislation: 1. Repeals exemptions and exclusions 
provided for by the Commodity Futures Modernization Act of 2000; 2. 
ensures that energy dealers in derivatives markets (such as 
EnronOnline) cannot escape federal regulation; 3. makes sure that all 
multilateral markets and dealer markets in energy commodities are 
subject to registration, transparency, disclosure and reporting 
obligations; 4. gives FERC regulatory oversight authority over 
bilateral transactions not subject to CFTC oversight. Although CFTC 
would have antimanipulation authority over these transactions; 5. 
expands FERC jurisdiction to include derivatives transactions, which 
are defined to include transactions based on the cost of electricity or 
natural gas and include futures, options, forwards and swaps unless 
such transactions are under the jurisdiction of the CFTC or the state; 
and 6. Ensures that entities running on-line trading forums must 
maintain sufficient capital to carry out its operations and maintain 
open books and records for investigation and enforcement purposes.

  This last point is also very important. Enron saw its future as a 
``virtual'' company. As such it sold off many of its physical assets 
over the past few years. Investors lost confidence in Enron's ability 
to back up its trades since Enron did not have enough assets to back up 
its trades. This was a contributing factor in Enron's final spiral into 
bankruptcy.
  Energy trading has gotten extremely arcane and complex over the last 
three decades. Very few people fully understand how swaps and other 
derivatives actually work. Without adequate transparency, regulatory 
oversight, and a regulatory agency willing to do its job, the 
likelihood is that consumers will pay the price. This is what happened 
in the California Energy Crisis and has happened with Enron. It would 
be unconscionable not to do everything we can to prevent the same thing 
from happening again.
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