[Congressional Record Volume 149, Number 34 (Tuesday, March 4, 2003)]
[Senate]
[Pages S3094-S3100]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mrs. FEINSTEIN (for herself, Mr. Fitzgerald, Mr. Lugar, Mr. 
        Harkin, Ms. Cantwell, Mr. Wyden, and Mr. Leahy):
  S. 509. A bill to modify the authority of the Federal Energy 
Regulatory Commission to conduct investigations, to increase the 
penalties for violations of the Federal Power Act and Natural Gas Act, 
to authorize the Chairman of the Federal Energy Regulatory Commission 
to contract for consultant services, and for other purposes; to the 
Committee on Agriculture, Nutrition, and Forestry.
  Mrs. FEINSTEIN. Madam President, yesterday the State of California 
submitted a filing to the Federal Energy Regulatory Commission which 
provides a wholesale indictment of energy companies and shows how a 
number of energy firms engaged in deceptive trading practices to drive 
up prices in the Western Energy Market. I have called on FERC to make 
this evidence public

[[Page S3095]]

and I want to reiterate my request again.
  I am also introducing a bill with Senators Fitzgerald, Harkin, Lugar, 
Cantwell, Wyden, and Leahy to close a loophole which allows energy 
trades to take place electronically, in private, with no transparency, 
record, audit trail or any oversight to guard against fraud and 
manipulation.
  But before I reintroduce this bill, I want to reiterate the important 
revelations that have been uncovered in the past year and detail what 
we know about yesterday's filing at FERC.
  Last week I came to the floor to update the Senate on recent evidence 
of fraud and manipulation in the energy sector. Today I want to pick up 
where I left off and introduce the Energy Market Oversight Act.
  Mr. President, I draw my colleagues' attention to a filing made at 
FERC. This ``Public Version'' is a 27-page summary of the filing with 
confidential information removed, but it provides a detailed overview 
of the fraud and manipulation carried out by energy companies during 
the Western energy crisis.
  In addition to testimony by expert witnesses, 348 exhibits, 
transcripts of depositions, tapes of trader telephone conversations, 
emails, and other data, the California parties submitted a 161-page 
brief to FERC. The document I have inserted into the Record includes 
the Table of Contents, the Introduction and Overview, and the 
Conclusion of this 161-page document. To be clear, it is part, but not 
all of the brief filed by the State of California.
  Mr. President, the filing submitted by the State of California 
yesterday shows that there was an extensive and coordinated attempt by 
energy companies to engage in the following schemes to drive up prices 
in the Western Energy Market:

       1. Withholding of Power--driving up prices by creating 
     false shortages;
       2. Bidding to Exercise Market Power--suppliers bid higher 
     after the California ISO declared emergencies, knowing the 
     State would need power and be willing to pay any price to get 
     it;
       3. Scheduling of Bogus Load, aka ``Fat Boy'' or ``Inc-
     ing''--suppliers submitted false load schedules to increase 
     prices;
       4. Export-Import Games, aka ``Ricochet or ``Megawatt 
     Laundering''--suppliers exported power out of California and 
     imported it back into the State in an attempt to sell power 
     at inflated prices;
       5. Congestion Games, aka ``Death Star''--suppliers created 
     false congestion and were then paid for relieving congestion 
     without moving any power;
       6. Double-Selling--suppliers sold reserves, but then failed 
     to keep those reserves available for the ISO;
       7. Selling of Non-Existent Ancillary Services, aka ``Get 
     Shorty''--suppliers sold resources that were either already 
     committed to other sales or incapable of being provided;
       8. Sharing of Non-Public Generation Outage Information--the 
     largest suppliers in California shared information from a 
     company called Industrial Information Resources that provided 
     sellers detailed, non-public information on daily plant 
     outages;
       9. Collusion Among Sellers--sellers were jointly 
     implementing or facilitating Enron-type trading strategies;
       10. Manipulation of the Nitrous Oxide (NOX) 
     Emission Market--sellers manipulated the market for 
     NOX emissions in the South Coast Air Quality 
     Management District through a series of wash trades that 
     created the appearance of a dramatic price increase that may 
     have been fabricated. For example, Dynegy, together with AES 
     and others, entered into a series of trades of NOx 
     credits in July and August of 2000 by which Dynegy would sell 
     a large quality of credits and then simultaneously buy back a 
     smaller quantity of credits at a higher per credit price.

  We can assume that the thousands of pages filed by the California 
parties at FERC detail these examples of market abuse. At this point we 
cannot know all of the instances because the specifics remain 
confidential, but we have plenty to go on.
  Yesterday I wrote another letter to FERC Chairman Pat Wood asking the 
Commission to lift its ``Protective Order'' to make this information 
public so that families and businesses harmed during the Western Energy 
Crisis can know the extent of fraud and manipulation that occurred.
  I believe the filing yesterday presents a key decision for FERC. 
Clearly the Commission cannot ignore this mountain of new evidence 
submitted--especially since it comes at a time when other disclosures 
have been made to show pervasive fraud and manipulation in the Western 
Energy Market.
  Last month Jeffrey Richter, the former head of Enron's Short-Term 
California energy trading desk, pled guilty to conspiracy to commit 
fraud as part of Enron's well known schemes to manipulate Western 
energy markets. Richter's plea follows that of head Enron trader Tim 
Belden in the fall of 2002. Belden admitted that he schemed to defraud 
California during the Western energy crisis and also plead guilty to 
conspiracy to commit wire fraud.
  The Enron plea came on the heels of FERC's release of transcripts 
from Reliant Energy that reveal how their traders intentionally 
withheld power from the California market in an attempt to increase 
prices. This is one of the most egregious examples of manipulation and 
it is clear and convincing evidence of coordinated schemes to defraud 
consumers.
  Let me read just one part of the transcript to demonstrate the greed 
behind the market abuse by Reliant and its traders.
  On June 20, 2000 two Reliant employees had the following conversation 
that reveals the company withheld power from the California market to 
drive prices up:

       Reliant Operations Manager 1: ``I don't necessarily foresee 
     those units being run the remainder of this week. In fact you 
     will probably see, in fact I know, tomorrow we have all the 
     units at Coolwater off.'' (The Coolwater plant is a 526 
     Megawatt plant.)
       Reliant Plant Operator 2: ``Really?''
       Reliant Operations Manager 1: ``Potentially. Even number 
     four. More due to some market manipulation attempts on our 
     part. And so, on number four it probably wouldn't last long. 
     It would probably be back on the next day, if not the day 
     after that. Trying to uh . . .''
       Reliant Plant Operator 2: ``Trying to shorten supply, uh? 
     That way the price on demand goes up.''
       Reliant Operations Manager 1: ``Well, we'll see.''
       Reliant Plant Operator 2: ``I can understand. That's 
     cool.''
       Reliant Operations Manager 1: ``We've got some term 
     positions that, you know, that would benefit.''

  Six months after this incident, as the Senate Energy Committee was 
attempting to get to the bottom of why energy prices were soaring in 
the West, the President and CEO of Reliant testified before Congress 
that the State of California ``has focused on an inaccurate perception 
of market manipulation.''
  Reliant's President and CEO went on to say, ``We are proud of our 
contributions to keep generation running to try to meet the demand for 
power in California. Reliant Energy's plant and technical staffs have 
worked hard to maximize the performance of our generation.''
  These transcripts prove otherwise and reveal the truth about market 
manipulation in the energy sector.
  Despite this clear and convincing evidence of fraud, on January 31 of 
this year, the Federal Energy Regulatory Commission chose to only give 
Reliant a slap on the wrist for this behavior. The company paid only 
$13.8 million to sweep this criminal behavior under the rug and settle 
with FERC.
  Let me turn to some other recent examples that demonstrate how other 
energy companies manipulated the Western Energy Market as Reliant did. 
On December 11th, FERC finally released audio tapes that show how 
traders at Williams conspired with AES Energy plant operators to keep 
power offline and drive prices up.
  The tapes depict how on April 27, 2000, Williams outage coordinator 
Rhonda Morgan encouraged an AES operator at the company's Alamitos 
plant to extend a plant outage because the California grid operator was 
paying ``a premium'' for power at the time. The Williams employee 
stated, ``that's one reason it wouldn't hurt Williams' feelings if the 
outage ran long.''
  Later that day, Eric Pendergraft, a high-ranking AES employee called 
to confirm with Ms. Morgan that Williams wanted the plant to stay 
offline by saying, ``you guys were saying that it might not be such a 
bad thing if it took us a little while longer to do our work?'' ``I 
don't want to do something underhanded,'' Ms. Morgan responded, ``but 
if there is work you can continue to do . . .'' At this point Mr. 
Pendergraft interrupted to cut off their suspicious conversation, 
saying, ``I understand. You don't have to talk anymore.''
  Clearly, this is evidence of a calculated intent to withhold power to 
raise prices. I find it unconscionable.

[[Page S3096]]

  Let's turn to some other examples.
  On January 27, 2003, Michelle Marie Valencia, a 32-year-old former 
senior energy trader for Dynegy was arrested on charges that she 
reported fictitious natural gas transactions to an industry 
publication.
  On December 5, 2002, Todd Geiger, a former vice president on the 
Canadian natural gas trading desk for El Paso Merchant Energy, was 
charged with wire fraud and filing a false report after allegedly 
telling a trade publication about the prices for 48 natural gas trades 
that he never made in an effort to boost prices and company profit.
  These indictments are just the latest examples of how energy firms 
reported inaccurate prices to trade publications to drive energy prices 
higher.
  Industry publications claimed they could not be fooled by false 
prices because deviant prices are rejected, but this claim was 
predicated on the fact that everyone was reporting honestly--which we 
now know they weren't doing.
  CMS Energy, Williams, American Electric Power Company, and Dynegy 
have each acknowledged that its employees gave inaccurate price data to 
industry participants. On December 19th Dynegy agreed to pay a $5 
million fine for its actions.
  In September an Administrative Law Judge at FERC issued a landmark 
ruling concluding that El Paso Corporation withheld natural gas from 
California and recommended penalty proceedings against the company. 
Since the El Paso Pipeline carries most of the natural gas to Southern 
California, this ruling has tremendous implications. The FERC 
Commissioners are expected to take up this case for a final judgement 
soon.
  These have been the latest revelations in a series of energy 
disclosure bombshells that began on Monday, May 6th when the Federal 
Energy Regulatory Commission posted a series of documents on their 
website that revealed Enron manipulated the Western Energy Market by 
engaging in a number of suspect trading strategies.
  These memos revealed for the first time how Enron used schemes called 
``Death Star,'' ``Get Shorty,'' ``Fat Boy,'' and ``Ricochet'' to fleece 
families and businesses in the West.
  The filing made yesterday to FERC shows how other companies did 
engage in these Enron-type trading strategies. The brief submitted by 
the State of California and others states that suppliers ``were jointly 
implementing or facilitating Enron-type trading strategies.''
  Let us turn to other types of fraudulent trades that many energy 
firms have admitted to.
  Dynegy, Duke Energy, El Paso, Reliant Resources Inc., CMS Energy 
Corp., and Williams Cos. all admitted engaging in false ``round-trip `` 
or ``wash trades.''
  What is a ``round-trip'' trade, one might ask?
  ``Round-trip'' trades occur when one firm sells energy to another and 
then the second firm simultaneously sells the same amount of energy 
back to the first company at exactly the same price. No commodity ever 
actually changes hands, but when done on an exchange, these 
transactions send a price signal to the market and they artificially 
boost revenue for the company.
  How widespread are ``round-trip'' trades? Well, the Congressional 
Research Service looked at trading patterns in the energy sector over 
the last few years and reported, ``this pattern of trading suggests a 
market environment in which a significant volume of fictitious trading 
could have taken place.''
  Yet, since most of the energy trading market is unregulated by the 
government, we have only a slim idea of the illusions being perpetrated 
in the energy sector.
  Consider the following recent confessions from energy firms about 
``round-trip'' trades:

       Reliant admitted 10 percent of its trading revenues came 
     from ``round-trip'' trades. The announcement forced the 
     company's President and head of wholesale trading to both 
     step down.
       CMS Energy announced 80 percent of its trades in 2001 were 
     ``round-trip'' trades.

  Remember, these trades are sham deals where nothing was exchanged, 
yet the company booked revenues from the trades.

       Duke Energy disclosed that 1.1 billion dollars-worth of 
     trades were ``round-trip'' since 1999--roughly two-thirds of 
     these were done on InterContinental Exchange, which means 
     that thousands of subscribes would have seen these false 
     price signals.
       A lawyer for J.P. Morgan Chase admitted the bank engineered 
     a series of ``round-trip'' trades with Enron.
       Dynegy and Williams have also admitted to this round-trip 
     trading.
       And although these trades mostly occurred with electricity, 
     there is evidence to suggest that ``round-trip'' trades were 
     made in natural gas and even broadband.

  By exchanging the same amount of a commodity at the same price, I 
believe these companies have not engaged in meaningful transactions, 
but deceptive practices to fool investors and possibly drive energy 
prices up for consumers.
  It is therefore imperative that the Department of Justice, FERC, the 
SEC, the Commodities Futures Trading Commission and every other 
oversight agency conduct an aggressive and vigorous investigation into 
all of the energy companies who participated in Western Energy Market.
  Beyond that I believe Congress must re-examine what tools the 
government needs to keep a better watch over these volatile markets 
that are little understood. In the absence of vigilant government 
oversight of the energy sector, firms have the incentive to create the 
appearance of a mature, liquid, and well-functioning market, but it is 
unclear whether such a market exists.
  The ``round-trip'' trades, the Enron memos, and the filing at FERC 
raise questions about illusions in the energy market.
  To this end, I believe it is critical for the Senate to act soon on 
the legislation I offered last April to regulate online energy trading.
  I am re-introducing this legislation to subject electronic exchanges 
like Enron On-Line to the same oversight, reporting and capital 
requirements as other commodity exchanges like the Chicago Mercantile 
Exchange, the New York Mercantile Exchange and the Chicago Board of 
Trade.
  I am pleased Senator Fitzgerald, Senator Harkin, Senator Lugar, 
Senator Cantwell, Senator Wyden, and Senator Leahy have again signed on 
to this legislation. I am proud of the work we did in the 107th 
Congress and I hope we can complete action on this bill soon.
  Without this type of legislation, there is insufficient authority to 
investigate and prevent fraud and price manipulation since parties 
making the trade are not required to keep a record.
  Right now, energy transactions are regulated by the Federal Energy 
Regulatory Commission (FERC) when there is actual delivery.
  For example, if I buy natural gas from you, and you deliver that 
natural gas to me, FERC has the authority to ensure that this 
transaction is transparent and reasonably priced.
  However, many energy transactions no longer result in delivery. A 
giant loophole has opened where there is no government oversight when 
these transactions are done on internet exchanges.
  In 2000, Congress passed the Commodity Futures Modernization Act in 
2000 which exempted energy and metals trading from regulatory oversight 
and excluded it completely if the trade was done electronically.
  So today, as long as there is no delivery, there is no price 
transparency. Again, this lack of transparency and oversight only 
applies to energy. It does not apply if you are selling wheat or pork 
bellies or any other tangible commodity.
  And it did not take long for Enron Online, and others in the energy 
sector, to take advantage of this new freedom by trading energy 
derivatives absent any regulatory oversight.
  Thus, after the 2000 legislation was enacted, Enron OnLine began to 
trade energy derivatives bilaterally without being subject to proper 
regulatory oversight. It should not surprise anyone that without the 
transparency, prices soared.
  Just yesterday Warren Buffett published a warning in Fortune Magazine 
saying that ``Derivatives are financial weapons of mass destruction.'' 
In his annual warning letter to shareholders about what worries him 
about the financial markets, Warren Buffett called derivatives and the 
trading activities that go with them ``time bombs.''
  In the letter, Warren Buffett states, ``In recent years some huge-
scale frauds and near-frauds have been facilitated by derivatives 
trades. In the energy and electric utility sectors, for example, 
companies used derivatives and

[[Page S3097]]

trading activities to report great `earnings'--until the roof fell in 
when they actually tried to convert the derivatives-related receivables 
on their balance sheets into cash.''
  We clearly saw this with Enron.
  Was Enron and its energy derivative trading arm, Enron-On-Line the 
sole reason California and the West had an energy crisis? No.
  Was it a contributing factor to the crisis? I certainly believe that 
it was. Unfortunately, because of the energy exemptions in the 2000 
CFMA, which took away the CFTC's authority to investigate, we may never 
know for sure.
  In the 107th Congress, this legislation was debated during 
consideration of the Senate Energy Bill and it was the subject of a 
hearing in the Agriculture Committee, but time ran out before the 
legislation could be marked up and passed.
  Since that time, Senators Lugar and Harkin have made significant 
improvements to the legislation and we have added stronger penalties 
for market abuse and wrongdoing.
  Today I am pleased to note that the following companies and 
organizations are supporting this legislation:

       The National Rural Electric Cooperative Association,
       The Derivatives Study Center,
       The American Public Gas Association,
       The American Public Power Association,
       The California Municipal Utilities Association,
       The Southern California Public Power Authority,
       The Transmission Access Policy Study Group,
       The U.S. Public Interest Research Group,
       The Consumers Union,
       The Consumers Federation of America,
       Calpine,
       Southern California Edison,
       Pacific Gas and Electric, and
       FERC Chairman Pat Wood.

  I ask unanimous consent that the letters of support from these 
organizations and companies be printed in the Record.
  There being no objection, the material was ordered to be printed in 
the Record, as follows:

                                                    Federal Energy


                                        Regulatory Commission,

                                Washington, DC, February 21, 2003.
     Hon. Dianne Feinstein,
     U.S. Senate,
     Washington, DC.
       Dear Senator Feinstein: Thank you for bringing to my 
     attention your proposed legislation on, inter alia, the 
     penalty provisions in the Federal Power Act (FPA) and the 
     Natural Gas Act (NGA), refund provisions in the FPA, and 
     federal oversight of financial transactions involving energy 
     commodities. Your amendment would expand the penalties 
     allowed under the FPA and NGA, and also allow oversight by 
     the Commodity Futures Trading Commission (CFTC) of financial 
     transactions involving energy commodities.
       I support your proposed changes to the FPA and NGA. 
     Increased penalty authority will help ensure compliance with 
     the requirements of these statutes. Also, your proposed 
     changes to the FPA refund provisions will allow greater 
     protection of utility customers.
       Finally, you know how strongly I feel about customers 
     having access to the broadest range of useful market 
     information. Greater transparency is needed in energy 
     markets. Thus, I support providing for, or clarifying, CFTC 
     or other Federal regulatory oversight of trading platforms 
     that are relied on for price discovery. However, the details 
     of your proposed changes to the Commodity Exchange Act would 
     be better addressed by the CFTC or others and I would defer 
     to them with respect to any changes to the Commodity Exchange 
     Act.
           Best regards,
                                                     Pat Wood III,
     Chairman.
                                  ____



                                             PG&E Corporation,

                               San Francisco, CA, January 8, 2003.
     Hon. Thad Cochran,
     U.S. Senate, Russell Senate Office Building,
     Washington, DC.
       Dear Senator Cochran: Congratulations on your assumption of 
     the Chairmanship of the Agriculture, Nutrition, and Forestry 
     Committee. We are writing to communicate our support for an 
     important bipartisan legislative proposal considered by the 
     Committee last year to provide oversight of energy 
     derivatives trading markets.
       As you know, the Committee considered last summer a 
     proposal introduced by Senator Feinstein and co-sponsored by 
     Senators Harkin and Lugar, S. 2724, to repeal the current 
     exemption of energy derivatives trading from the jurisdiction 
     of the Commodity Futures Trading Commission (``CFTC''). The 
     proposal was similar to legislation offered earlier in the 
     year by Senator Feinstein as an amendment to the Senate 
     Energy Bill. Enclosed for your information is a letter that 
     was sent from our corporation to Senator Feinstein last year 
     concerning her amendment.
       The legislation, which we hope Congress will consider again 
     this year, would re-establish authority over energy 
     derivatives trading to the CFTC, which has the most relevant 
     oversight capability, having regulated such trading prior to 
     2000. As a market participant, we believe that Senator 
     Feinstein's legislation will encourage transparency of market 
     information and ensure market stability, which in turn would 
     enable market participants to better manage risk, reduce 
     price volatility for electricity consumers and preserve 
     ultimately the viability of this marketplace.
       We appreciate your considering our views on this important 
     issue, and look forward to working with you in the 108th 
     Congress.
           Sincerely,
                                                      Dan Richard,
     Senior Vice President, Public Affairs.
                                  ____



                                                      Calpine,

                                   San Jose, CA, February 5, 2003.
     Hon. Dianne Feinstein,
     U.S. Senate, Hart Senate Office Building,
     Washington, DC.
       Dear Senator Feinstein: I am writing to let you know of 
     Calpine's continuing support for additional oversight of 
     certain energy derivative markets, as intended by the 
     legislation you plan to introduce again this year. While we 
     do not believe that energy trading was a primary cause of the 
     California energy crisis, we do believe there is a crisis of 
     confidence in the energy markets and that your legislation 
     will assist in restoring much needed public confidence in the 
     energy sector.
       Specifically, we support the bill's strengthening of the 
     CFTC's anti-fraud and anti-manipulation authority and its 
     provision for increased cooperation and liaison between the 
     CFTC and the FERC. We are also pleased that your legislation 
     addresses concerns about the oversight and transparency of 
     electronic trading platforms. It is important that such 
     facilities, which play a significant price discovery role in 
     the energy trading markets, be subject to appropriate 
     reporting and oversight by the CFTC.
       However, I also understand that typical over the counter 
     bilateral trading operations, such as those that operate from 
     a trading desk where various potential counterparties are 
     separately contacted by phone or email, are not intended to 
     be treated as electronic trading facilities under your bill. 
     This is an important distinction and one that may need 
     further clarification as the bill proceeds through the 
     legislative process.
       Calpine would like to thank you for your leadership in 
     advocating reasonable measures to ensure the integrity of 
     important energy trading markets and we stand ready to 
     provide you with any information or assistance that you may 
     need.
           Sincerely,

                                         Joseph E. Ronan, Jr.,

                                            Senior Vice President,
     Government and Regulatory Affairs.
                                  ____



                                         Edison International,

                                   Rosemead, CA, February 4, 2003.
     Hon. Dianne Feinstein,
     U.S. Senate,
     Washington, DC.
       Dear Senator Feinstein: Thank you for asking Edison 
     International for our views on your Exempt Commodities 
     Transactions Act, soon to be reintroduced in the 108th 
     Congress. As you know, Edison shares your concern over 
     manipulation of the California electricity market by some 
     market participants, which contributed to the serious 
     problems the state faced from out-of-control energy prices. 
     Your legislation would provide transparency in the 
     electricity derivatives trading market, an industry that is 
     currently exempted from regulation under the Commodity 
     Futures Modernization Act of 2000 (CFMA).
       I support your legislation, with a suggestion for your 
     consideration to further refine it. Our company and others 
     use energy derivatives trading to protect and hedge the 
     revenue from our power plants. This is in contrast to 
     companies that conduct middleman financial trading with no or 
     few power plants and trade to make money on financial 
     arbitrage. There should be guidance in the final language 
     which recognizes the difference between these two types of 
     businesses, particularly regarding further capital 
     requirements. Otherwise companies that trade in order to 
     hedge physical assets may be required to pay twice--once in 
     order to obtain capital for the assets and a second time in 
     order to meet any capital requirements to back their trades.
       Thank you again for your efforts on behalf of California 
     consumers and businesses.
           Sincerely,

                                               John E. Bryson,

                                           Chairman, President and
     Chief Executive Officer.
                                  ____



                              American Public Gas Association,

                                    Fairfax, VA, January 22, 2003.
     Re amending the Commodities Exchange Act.

     Hon. Dianne Feinstein,
     Hart Senate Office Building, U.S. Senate,
     Washington, DC.
       Dear Senator Feinstein: The American Public Gas Association 
     (APGA) is very pleased that you and Senator Lugar have again 
     taken the lead to amend the Commodity Exchange Act (CEA). The 
     provisions you propose, which amend the CEA, are significant 
     steps towards ensuring that natural gas prices are determined 
     in a competitive and informed marketplace. We applaud your 
     efforts to undo special exclusions and exemptions granted in 
     the closing hours of the

[[Page S3098]]

     106th Congress, especially when those exclusions and 
     exemptions were specifically rejected by the Senate 
     Agriculture Committee.
       The Commodity Futures Trading Commission (CFTC) plays a 
     front-line role in promoting a competitive natural gas 
     marketplace. Closing the gaps that impede effective federal 
     oversight of the natural gas marketplace is essential in 
     order to foster competitive commodity futures markets and 
     protect market users and the public from fraud, manipulation, 
     and abusive practices. APGA fully supports your provisions to 
     clarify and restore the CFTC's ability to monitor activity in 
     off-exchange, or over-the-counter (OTC), derivatives markets 
     that trade substantial volumes of natural gas derivatives. 
     Your limited and measured steps ensure a fair balance between 
     free market activities and the necessary protections from bad 
     conduct, which undermines the confidence and integrity of 
     market participants and consumers.
       Eliminating those special exclusions and exemptions, which 
     were already rejected three years ago in the committee of 
     jurisdiction, will help the CFTC meet its obligation to make 
     sure that no important trading activities fall between the 
     cracks leaving some energy markets without a federal agency 
     with oversight authority. The consumers served by public gas 
     utilities across the country will benefit from your efforts 
     because they are less likely to be victimized by activities 
     that occur in a market where the CFTC exercises oversight.
       Again, public gas utilities and the hundreds of communities 
     that we serve commend you for your thoughtful and deliberate 
     leadership on this very important issue. While there may be 
     some who will oppose this amendment, one need not look far to 
     see whether the opposition is looking out for the best 
     interests of Wall Street or Main Street. We pledge to work 
     with you in any way we can to pass this much-needed 
     amendment. Please let me know how I can assist you.
           Sincerely,
                                                         Bob Cave,
     President.
                                  ____



                            American Public Power Association,

                                    Washington, DC, March 4, 2003.
     Hon. Dianne Feinstein,
     U.S. Senate, Hart Senate Office Building,
     Washington, DC.
       Dear Senator Feinstein: On behalf of the American Public 
     Power Association (APPA), I want to express support for the 
     intent and thrust of your legislation entitled the ``Energy 
     Market Oversight Act'' and to commend you for your leadership 
     in addressing these important consumer protection issues.
       APPA represents the interests of more than 2,000 publicly 
     owned electric utility systems across the country, serving 
     approximately 40 million citizens. APPA member utilities 
     include state public power agencies and municipal electric 
     utilities that serve some of the nation's largest cities. 
     However, the vast majority of these publicly owned electric 
     utilities serve small and medium-sized communities in 49 
     states, all but Hawaii. In fact, 75 percent of our members 
     are located in cities with populations of 10,000 people or 
     less.
       It is my understanding that your legislation would provide 
     the Commodity Futures Trading Commission (CFTC) with 
     jurisdiction over trading in energy derivatives and other 
     financial products. APPA is particularly supportive of 
     language in your bill that would increase the Federal Energy 
     Regulatory Commission's (FERC) ability to investigate market 
     manipulation and penalize such behavior.
       Some of APPA's members may have concerns regarding the 
     impact the bill may have on public power, and I look forward 
     to working with you and your staff in an effort to resolve 
     these concerns. I would also like to join the California 
     Municipal Utilities Association (CMUA) in raising an issue 
     that I believe is consistent with the intent of your bill. 
     CMUA has attempted to get the California ISO to do a 
     benchmarking study comparing their costs to other ISOs 
     throughout the United States. The California ISO has informed 
     CMUA that they cannot conduct such a study because they 
     cannot get the information from other ISOs. To address this 
     problem, while keeping with your bill's goal of increasing 
     transparency, I would use you to add a provision to the bill 
     that would require FERC to gather such information as is 
     necessary from each ISO to compare their cost of services on 
     an annual basis.
       APPA looks forward to working with you and your staff on 
     this legislation and other issues in the 108th Congress.
           Sincerely,
                                               Alan H. Richardson,
     President and CEO.
                                  ____



                                 New York Mercantile Exchange,

                                                     New York, NY.
     Senator Dianne Feinstein,
     Hart Senate Office Building,
     Washington, DC.
       Dear Senator Feinstein: As a result of concerns surrounding 
     the Enron bankruptcy, numerous congressional committees, 
     regulators, and financial institutions are closely examining 
     the broad impact of the collapse on American markets, 
     investors and employees. Much attention has been paid to 
     corporate governance, financial and accounting standards, and 
     market practices, with considerable focus on the energy 
     marketplace. On behalf of the New York Mercantile Exchange, 
     Inc. (``NYMEX'' or the ``Exchange''), we wish to applaud your 
     efforts to bring more accountability and greater transparency 
     to this nation's vitally important energy marketplace.
       NYMEX is the world's largest forum for the trading and 
     clearing of energy futures contracts. As a federally 
     chartered marketplace, it is overseen by the independent 
     federal regulatory agency, the Commodity Futures trading 
     Commission (``CFTC''). NYMEX serves a diverse domestic and 
     international customer base by bringing price transparency, 
     market neutrality, competition and efficiency to energy 
     markets, and provides businesses with the financial tools to 
     deal with market uncertainty.
       After studying your legislative proposal, we have concluded 
     that it is very worthy of support for the following reasons:
       The proposal would refine the definition of trading 
     facility as applied to energy derivatives markets and would 
     further require that any such market not otherwise regulated 
     by the CFTC would be accountable to them.
       In addition, the proposal would give the CFTC vitally 
     important tools to monitor such markets, including large 
     trader reporting and net capital standards.
       The proposal would also ensure that the CFTC has the 
     authority and ability to obtain access to information 
     critical to market oversight and to make market information 
     public to the extent that the Commission determines that it 
     is in the public interest to do so.
       With numerous reports of reduced confidence in market 
     integrity in the wake of the Enron bankruptcy, never has it 
     been more important to restore faith in the great American 
     resource, our competitive markets. S. 517's provisions 
     relating to addressing regulatory gaps in the CFTC regulatory 
     ``umbrella'' can provide an important and meaningful 
     improvement in market oversight, and is an important step in 
     building faith and confidence in a competitive energy 
     marketplace.
       We strongly support your efforts to enhance market 
     transparency and accountability, and we look forward to 
     working with you in this important endeavor.
           Sincerely,
     Vincent Viola,
       Chairman.
     J. Robert Collins,
       President.
                                  ____

                                               Southern California


                                       Public Power Authority,

                                                February 28, 2003.
     Hon. Dianne Feinstein,
     U.S. Senate,
     Washington, DC.
       Dear Senator Feinstein: On behalf of the Southern 
     California Public Power Authority (SCPPA), I would like to 
     express our support for your proposed legislation, the 
     ``Energy Market Oversight Act,'' which would provide more 
     authority to the Federal Energy Regulatory Commission (FERC) 
     and the Commodity Futures Trading Commission (CFTC) to 
     oversee the trading in energy derivatives and other financial 
     transactions and to investigate and punish market 
     manipulation.
       SCPPA is a non-profit, joint action agency formed in 1980 
     to represent the cities of Anaheim, Azusa, Banning, Burbank, 
     Cerritos, Colton, Glendale, Los Angeles, Pasadena, Riverside, 
     and Vernon; and the Imperial Irrigation District. The 
     community-owned utilities that make up SCPPA's membership 
     serve approximately five million citizens from northern Los 
     Angeles County to the Mexican border.
       We support the intent of your legislation because we 
     believe it will enhance safeguards for consumers and foster a 
     more fully functioning competitive market. As you are well 
     aware, lack of effective market monitoring and market 
     transparency combined to allow for manipulation of the 
     markets, to the extreme detriment of California consumers. We 
     believe that federal legislation that promotes more effective 
     monitoring and remedies for fraud and market abuses will 
     improve the climate for investment in new generation, 
     increase consumer confidence, and reduce market volatility.
       We are encouraged that this legislation increases the civil 
     and criminal penalties for manipulation, allows for prompt 
     investigatory action by FERC, and allows for an earlier 
     refund effective date when rates are not ``just and 
     reasonable.'' We think these actions will provide an improved 
     regulatory deterrent, as well as a means for swift and 
     complete refunds to consumers.
       SCPPA commends you for taking a leadership role on these 
     critical issues and looks forward to working with you to 
     address a few issues of particular concern to our municipal 
     utility members.
           Sincerely,
                                                    Bill Carnahan,
     SCPPA Executive Director.
                                  ____

                                           National Rural Electric


                                      Cooperative Association,

                                  Arlington, VA, January 29, 2003.
     Hon. Dianne Feinstein,
     U.S. Senate, Hart Office Building,
     Washington, DC.
       Dear Senator Feinstein: I would like to take this 
     opportunity to express the appreciation of the National Rural 
     Electric Cooperative Association for our efforts to restore 
     transparency and integrity to the energy markets. We are 
     pleased that you have introduced legislation with Senators 
     Lugar, Harkin, Fitzgerald and others (the Energy Market 
     Oversight Act) that reestablished the ability of the 
     Commodity Futures Trading Commission to police all energy 
     derivatives

[[Page S3099]]

     markets for fraud and commodity price manipulation.
       Today, consumers and investors have little confidence that 
     the energy markets are operating fairly and for the benefit 
     of all. Much blame for the current crisis in confidence can 
     be placed on the so-called ENRON exemption, adopted in 2000, 
     as part of the legislation that deregulated the over-the-
     counter derivatives market for energy commodities.
       The legislation created a gap in the regulation of energy 
     derivatives where price and trade manipulation can occur 
     unchecked by adequate regulatory oversight. Although the 
     Commodity Futures Trading Commission (CFTC) has authority to 
     prosecute fraud and price manipulation that occurs on the 
     commodity exchanges, the CFTC has no clear authority to 
     pursue violations of the Federal anti-fraud and anti-
     manipulation laws in the over-the-counter energy market.
       Energy derivatives contracts, whether traded on well-
     regulated commodities exchanges or in the over-the-counter 
     market, play an important role in determining the costs and 
     availability of electricity and other energy products to 
     consumers. But, consumers suffer when much of the market for 
     energy derivatives lacks transparency and operates without 
     accountability for manipulation and fraud, which is the case 
     for the over-the-counter markets.
       Recent headlines underscore the need for this important 
     legislation. The news has been filed with the indictments of 
     energy traders for manipulation of the energy markets and 
     admissions by energy companies that they have engaged in 
     deceptive market practices, including wash trades on an 
     unregulated over-the-counter exchange.
       Consumer-owned electric co-ops now purchase more than 50% 
     of their electric power on the market and are exposed to the 
     risks that an unstable market creates. As the representative 
     of America's 900 consumer-owned electric co-op utilities, the 
     NRECA believes that it is vitally important to restore 
     confidence in the energy markets by ensuring that market 
     participants have access to reliable and credible 
     information.
       Your legislation represents an important step in creating 
     more transparent energy markets. I want to thank you for your 
     leadership on this critical issue and offer the support of 
     America's electric cooperatives in this effort to restore 
     credibility to the nation's energy markets. We look forward 
     to working with you and your staff to improve the legislation 
     as it moves forward.
           Sincerely,
                                                    Glenn English,
     Chief Executive Officer.
                                  ____



                                               Washington, DC,

                                                 February 7, 2003.
       Dear Senator Feinstein: We are writing to express our 
     support for the Energy Market Oversight Act being offered by 
     yourself and Senators Lugar, Cantwell and Leahy. This 
     important legislation will assure that over-the-counter 
     derivatives markets in ``exempt'' commodities such as energy 
     will be covered by federal prohibitions on fraud and 
     manipulation. This regulatory assistance comes at a critical 
     time. According to the Federal Energy Regulatory Commission's 
     Director of the Office of Market Oversight, ``energy markets 
     are in severe financial distress.'' Along with the decline in 
     credit quality in these markets, the loss of confidence and 
     trust has led to a ruin in the liquidity and depth of these 
     markets. This legislation will go a long way to address this 
     problem.
       Derivatives are highly leveraged financial transactions, 
     and this allows investors to potentially take a large 
     position in the market without committing an equivalent 
     amount of capital. Moreover, derivatives traded in over-the-
     counter markets are devoid of the transparency that 
     characterizes exchange-traded derivatives such as futures, 
     and this lack of transparency that characterizes exchange-
     traded derivatives such as futures, and this lack of 
     transparency introduces a greater potential for abuse through 
     fraud and manipulation.
       Derivatives are often combined into highly complex 
     structured transactions that are difficult--even for seasoned 
     securities traders and finance professionals--to understand 
     and price in the market. Enron used such over-the-counter 
     derivatives extensively in order to hide the nature of their 
     activities from investors. The failure of Enron and the 
     demise of other energy derivatives dealers has had a 
     devastating impact of the level of trust in energy markets.
       This legislation would help ensure that over-the-counter 
     derivatives markets operate with proper federal oversight 
     which will make the markets more stable and transparent. It 
     is appropriate to place this oversight authority with the 
     Commodity Futures Trading Commission which, as the principal 
     federal regulator of derivatives transactions since its 
     founding in 1975, will provide oversight, surveillance and 
     enforcement of anti-fraud and anti-manipulation laws. The 
     CFTC has the experience to handle these complex financial 
     transactions and to develop the best rules to implement these 
     protections. The legislation also requires the cooperation of 
     the Federal Energy Regulatory Commission, the entity charged 
     with overseeing the energy markets, in providing a stable and 
     honest market for the investing public.
       At a time when these energy markets are deeply distressed 
     and the investing public looks skeptically at derivatives 
     trading and firms engaged in derivatives trading, we should 
     take decisive steps to ensure that the public is protected 
     from Enron-like abuses. This amendment is just such a step, 
     and we support it.
       Thank you for introducing this important legislation.
           Sincerely,
     Adam J. Goldberg,
       Policy Analyst, Consumers Union.
     Mark N. Cooper,
       Director of Research, Consumer Federation of America.
     Edmund Mierzwinski,
       Consumer Program Director, U.S. Public Interest Research 
     Group.
     Randall Dodd,
       Director, Derivatives Study Center.
                                  ____

                                               Transmission Access


                                           Policy Study Group,

                                                February 25, 2003.
     Re Energy Market Oversight Act.

     Hon. Dianne Feinstein,
     U.S. Senate, Hart Senate Office Building,
     Washington, DC.
       Dear Senator Feinstein: I understand that you will be 
     introducing shortly a stand-alone bill, entitled The Energy 
     Market Oversight Act, which is similar to the amendment you 
     offered last season to S. 517, the Energy Policy Act of 2002. 
     This bill would, among other things, place derivative 
     products for energy under the jurisdiction of the Commodities 
     Future Trading Commission (CFTC), and enhance the Federal 
     Energy Regulatory Commission's (FERC) remedial and penal 
     authority.
       On behalf of the Transmission Access Policy Study Group 
     (TAPS), I would like to express our support for the policy 
     objective of your proposed legislation: better protecting 
     consumers from manipulation in the volatile energy markets. 
     We look forward to working with you to refine the bill as it 
     moves through the legislative process. Expanding the CFTC and 
     FERC role in preventing and redressing energy market abuses 
     is one of a number of avenues for enhanced consumer and 
     market power protection that should be included if an 
     electricity title moves forward this year. TAPS 
     representatives would like to sit down with your staff and 
     discuss the details of your bill and related matters, when 
     convenient.
       The other key related components of any electricity title 
     are (i) strong consumer protections, as were offered in the 
     Cantwell amendment (SA 3234) to the Energy Policy Act of 
     2002, (ii) expanding FERC's merger review authority as was 
     done in S. 517, (iii) a strong market transparency 
     requirement, and (iv) further strengthening FERC powers to 
     remedy and penalize abuses of market power and market 
     manipulation. Finally, we would strongly urge you to oppose 
     repeal of the Public Utility Holding Company Act this year. 
     Repealing PUHCA would lead to massive consolidation in the 
     industry, increasing dramatically opportunities for 
     manipulation of the market.
           Very truly yours,
                                                       Roy Thilly,
                                                    TAPS Chairman.

  Mrs. FEINSTEIN. Mr. President, here is an explanation of what this 
bill does: It applies anti-fraud and anti-manipulation authority to all 
exempt commodity transactions--an exempt commodity is a commodity which 
is not financial and not agricultural and mainly includes energy and 
metals.
  The bill sets up two classes of swaps. For those made between 
``sophisticated persons,'' basically institutions and wealthy 
individuals, that are not entered into on a ``trading facility''--for 
example, an exchange--anti-fraud and anti-manipulation provisions apply 
and wash trades are prohibited.
  The following regulations would apply to all swaps made on an 
``electronic trading facility'' and a ``dealer market'', which includes 
dealers who buy and sell swaps in exempt commodities, and the entity on 
which the swap takes place: anti-fraud and anti-manipulation provisions 
and the prohibition of wash trades apply; if the entity on which the 
swap takes place serves a pricing or price discovery function, 
increased notice, reporting, bookkeeping, and other transparency 
requirements; and the requirement to maintain sufficient capital 
commensurate with the risk associated with the swap;
  Except for the anti-fraud and anti-manipulation provisions, the CFTC 
has the discretion to tailor the above requirements to fit the 
character and financial risk involved with the swap or entity. While 
the CFTC could require daily public disclosure of trading data like 
open and closing prices, similar to the requirements of futures 
exchanges, it could not require real-time publication of proprietary 
trading information or prohibit an entity from selling their data.
  The CFTC may allow entities to meet certain self-regulatory 
responsibilities- as provided in a list of ``core principles.'' If an 
entity chose to become a

[[Page S3100]]

self-regulator, these core principles would obligate the entity to 
monitor trading to prevent fraud and manipulation as well as assure 
that its other regulatory obligations are met.
  The penalties for manipulation are greatly increased. The civil 
monetary penalty for manipulation is increased from $100,000 to $1 
million. Wash trades are subject to the monetary civil penalty for each 
violation, and imprisonment up to 10 years.
  The FERC is required to improve communications with other Federal 
regulatory agencies. A shortcoming in the main anti-fraud provision of 
the CEA is also corrected by allowing CFTC enforcement of fraud to 
apply to instances of either defrauding a person for oneself or on 
behalf of others.
  It requires the FERC and the CFTC to meet quarterly and discuss how 
energy derivative markets are functioning and affecting energy 
deliveries.
  It grants the FERC the authority to use monetary penalties on 
companies that don't comply with requests for information. It is 
essentially the same authority that the SEC has.
  It makes it easier for FERC to hire the necessary outside help they 
need including accountants, lawyers, and investigators for 
investigative purposes.
  It eliminates the requirement that FERC receive approval from the 
Office of Management and Budget before launching an investigation or 
price discovery of electricity or natural gas markets involving more 
than 10 companies.
  It increases the penalty amounts to $1 million instead of the current 
$5,000 for violations of the Federal Power Act and the Natural Gas Act; 
five years instead of the current two for violations of the statute; 
and, $50,000 per violation per day instead of the current $500 for 
violations of rules or orders under the Federal Power Act and Natural 
Gas Act.
  The Commission's authority to impose civil penalties is broadened to 
all sections of Part II of the Federal Power Act and the penalty amount 
is increased from $10,000 to $50,000 per violation per day.
  It modifies Section 206 of the Federal Power Act to allow for an 
earlier refund effective date to increase the opportunity for refunds 
as a deterrent to fraudulent and manipulative behavior in the energy 
markets.
  This legislation is not going to do anything to change what happened 
in California and the West. But it does provide the necessary authority 
for the CFTC and FERC which will help protect against another energy 
crisis.
  When regulatory agencies have the will but not the authority to 
regulate, Congress must step in and ensure that our regulators have the 
necessary tools. Unfortunately, sometimes an agency has neither. In 
this case I am glad to have the support of FERC and I hope that the 
CFTC will reconsider and support this legislation.
                                 ______