Washington, DC – The United States Congress has approved a measure to close the “Enron Loophole.” The measure was included in the Farm Bill conference report. This legislation was sponsored by U.S. Senators Dianne Feinstein (D-Calif.), Carl Levin (D-Mich.), Olympia Snowe (R-Maine), Maria Cantwell (D-Wash.), Susan Collins (R-Maine), Byron Dorgan (D-N.D.), Ron Wyden (D-Ore.), and Charles Schumer (D-N.Y.) and others who appeared at a news conference today to discuss the legislation.

The conference report was approved by the House yesterday, the Senate today, and will now be sent to the President. 

“Today, the Senate sends the President a bill to close the Enron Loophole once and for all,” Senator Feinstein said. “This bill is really our best bet to deter unscrupulous traders from manipulating energy prices and engaging in excessive speculation.  This has been a long, hard road – and this is a major legislative victory.” 

“The provisions in the farm bill closing the Enron loophole are the culmination of five years of work to put the cop back on the beat in energy markets that have for too long escaped federal oversight and regulation,” said Senator Levin.  “This legislation provides new tools to stop price manipulation, excessive speculation, and trading abuses that have too often clobbered American families with unfair energy price hikes.”

“The entire country is struggling to cope with the record high prices at the pump while energy executives enjoy record-high profits,” Senator Snowe said.  “At a time when the price of oil reaches new highs every week, Congress has an obligation to ensure that our energy markets are free from the possibility of tampering and manipulation that costs Americans in their excessive energy bills.”  

“We have taken an important first step in the right direction towards closing the Enron Loophole,” said Senator Cantwell.  “But we have more work to do to stomp out potential manipulation in energy commodity markets.  When Amaranth found room in the Enron Loophole in 2006 to manipulate the natural gas market, natural gas prices skyrocketed to record levels and cost consumers over $9 billion.  And now, we have oil company executives testifying before Congress that oil should be around $50-60 a barrel.  We must establish a clear, bright line to help protect consumers from any illegal activity that could be causing these out of control gas price hikes.”

Senator Collins said, “The high price of gasoline, home heating oil, and diesel is creating a tremendous hardship for families, truckers, and small businesses.  Many causes appear to have contributed to the sharp rise in oil prices and, as we first examined during an investigation hearing of the Senate Homeland Security Committee two years ago, excessive speculation on futures markets may well be one of them.  Unfortunately, despite this investigation, there is still a lack of publicly available data to track the effort of speculation on prices and manipulation still could go undetected on certain electronic markets that are unregulated.  This legislation would help expand the authority of the federal government to provide greater regulation and transparency to guard against price manipulation.”

“Right now, there is an orgy of speculation in the energy markets, which drive up prices for consumers and hurt our economy,” said Senator Dorgan. “Closing this loophole is one important step in our efforts to prevent price manipulation and to wring some of this speculation out of the market in order to put downward pressure on gas prices.”

“Today, we begin peeling back the cloak of secrecy that Enron and other energy traders got eight years ago,” said Senator Wyden. “I want to commend Sen. Feinstein and Sen. Levin for their leadership on this issue – Congress after Congress. We wouldn't be here today without their determination and commitment.”     

“In 2000, in the dead of night, Senate Republicans passed a bill that exempted oil trading from regulation by the CFTC, the agency that oversees futures trading for all other commodities. As a result, oil traders have been operating in the shadows, without transparency and without oversight. This bill will put the CFTC watchdog back on the prowl,” Senator Schumer said. 

Specifically, the bill would:   

• Require electronic energy traders to provide an audit trail and record-keeping; 
• Monitor for market manipulation;
• Impose firm speculation limits; and 
• Significantly increase financial penalties for cases of market manipulation and excessive speculation. 

Detailed Bill Summary

• Electronic Market Oversight: For contracts that are significant in determining commodity market prices, CFTC will require the electronic exchange to provide strict oversight, similar to what takes place today on regulated markets like the New York and Chicago Mercantile Exchanges.  
  
• Exchanges will be required to:
  
• Prevent manipulation and price distortion by:
  
• Monitoring trading to prevent manipulation and price distortion;
• Ensuring contracts are not susceptible to manipulation; 
• Limiting the size of positions to prevent excessive speculation, and;
• Reducing holdings of traders in violation of position limits.
  
  
• Establish an Audit Trail by: 
• Collecting information on Trading Activity, and
• Supplying large trader reports to the CFTC.
  
  
• Strengthen Transparency by: 
• Publishing price, trading volume, and other trading data on a daily basis. 

Electronic Contract Oversight. The CFTC will review all electronic contracts to identify those that are significant in determining market prices and must be regulated as described above.  CFTC will consider the following factors in making that determination:

• Volume – If the contract is traded in significant volumes;
• Price Reference – If the contract is used by traders to help determine the price of subsequent contracts.  This is like using “comps” in the real estate market or “Blue Book” for auto sales.
• Linkage – If the contract is equivalent to a regulated contract and used the same way by traders. The CFTC refers to these contracts as “look-alikes.”  

Background  

Since 2000, there has been a tremendous growth in the trading of oil and gas futures on unregulated, electronic markets.  

The lack of oversight in these markets led to billions of dollars of losses: 

• During the Western Energy Crisis in 2000-2001, energy costs for California soared from roughly $8 billion in 1999 to $27 billion in 2000, and then $27.5 billion in 2001. 
  
• In 2003, the Federal Energy Regulatory Commission (FERC) charged four energy companies – Enron Power Marketing, Enron Energy Services, Reliant Energy Services and BP Energy Company – of engaging in market manipulation during the Western Energy Crisis. 
  
• In September 2006, Amaranth Advisers, LLC announced that previously undisclosed speculation in natural gas trading had resulted in a loss of $6.6 billion, the largest hedge fund failure in history. 
  
• In July 2007, charges were brought against Amaranth – which at one point controlled more than half of the U.S. natural gas futures – by the CFTC and the Federal Energy Regulatory Commission (FERC). The charges allege that Amaranth had sought to manipulate natural gas prices in the United States. 
  
• In October 2007, BP agreed to pay $303 million to settle civil charges that it cornered the propane market three years ago and inflated heating and cooking costs for about 7 million mostly rural American households. This is the largest fine ever imposed by the CFTC.  
  
• In October 2007, the CFTC issued a unanimous Report on the Oversight of Trading on Regulated Futures Exchanges and Exempt Commercial Markets which stated: Without some increased oversight of trading in relevant mature [electronic] contracts, the Commission cannot adequately police the trading of [regulated] contracts to detect and deter price manipulation and other trading abuses….  Accordingly, the Commission believes that [electronic] contracts that become significant sources of price discovery should be subject to a higher level of regulation than is now the case…” (p. 19-20.)
  
• In November 2007, CFTC announced it had settled charges against a former gasoline trader, who agreed to pay a $400,000 fine to the CFTC for attempting to manipulate gasoline futures prices on the New York Mercantile Exchange in 2002. 
  
• In March 2008, CFTC announced that it had settled charges against a former energy trader and its three subsidiaries, who agreed to pay $10 million in fines to the CFTC for attempting to manipulate the price of natural gas.   
  
• In March 2008, a jury found a former energy trader guilty of 8 counts of attempting to manipulate the price of natural gas between October 2001 and June 2002.
   

The U.S. Senate Permanent Subcommittee on Investigations, chaired by Senator Levin, held hearings and issued reports in 2006 and 2007 establishing the need for increased government oversight of unregulated U.S. energy markets. 

In October 2007, the Government Accountability Office issued a report, Trends in Energy Derivatives Markets Raise Questions about CFTC’s Oversight, which concluded that non-commercial participants, including hedge funds, had increased participation in the exempt commercial markets.  According to GAO’s analysis of data, the notional amounts outstanding of OTC commodity derivatives grew by 854 percent since 2003.      

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