Lettter to Deputy Attorney General Paul McNulty Department of Justice

Lettter to Deputy Attorney General Paul McNulty Department of Justice

May 1, 2006

Deputy Attorney General Paul McNulty
Department of Justice
950 Pennsylvania Avenue, Northwest
Washington D.C. 20530

Dear Deputy Attorney General McNulty,

As head of the President's Corporate Fraud Task Force, we write to seek your assistance in ensuring the timely release of evidence the Department of Justice (DOJ) has acquired during the course of its investigation of the Enron Corporation. We believe additional audiotapes, documents and emails related to Enron's market manipulation schemes may be of substantial value in crafting federal policies related to the kind of speculative financial trading in energy commodities that Enron pioneered. Since Enron's collapse, this kind of trading has become a multi-billion-dollar, unregulated industry with potentially far-reaching impacts for American oil, gasoline, natural gas and electricity markets. We are thus seeking your assistance in facilitating the release of this information. At the same time we understand the need to ensure this would not interfere with the criminal prosecutions being pursued by DOJ's Enron Task Force, we believe this information's release could be coordinated in such a manner as to also benefit the public interest and efforts to better understand the dynamics of highly-volatile energy commodity markets.

We appreciate that the Department of Justice's cooperation was instrumental in the 2004 release of an initial batch of Enron audiotapes, which for the first time painted for the public a picture of the company's schemes to pick the pockets of consumers during the Western energy crisis of 2000-2001. Since then, we understand that DOJ has granted the Federal Energy Regulatory Commission (FERC) access to as many as 190 Enron audiotapes, some of which have also been provided to parties impacted by Enron's market manipulation schemes. FERC's Trial Staff has processed an unknown quantity of these tapes, and filed multiple exhibits under seal within the context of ongoing proceedings to determine the extent of Enron's power market abuses, dating back to 1997. It is our understanding that the materials now under seal at FERC do not constitute the entire universe of Enron-related evidence. However, public release of this material-which would require DOJ's cooperation-would at least provide a good start, in our efforts to more thoroughly assess the evidence related to Enron's use of its subsidiary, EnronOnline [EOL], to manipulate energy futures markets.

As you may know, shortly after its founding in November 1999, EOL emerged as the "overwhelmingly dominant e-trading platform for natural gas and electric power." This development was made possible, at least in part, by a loophole included in the Commodity Futures Modernization Act of 2000 (PL. 106-554) that exempted certain online energy trading platforms from the same kind of regulatory scrutiny as registered exchanges, such as the New York Mercantile Exchange. Today, we believe that loophole is also contributing to substantial increases in the volume of unregulated trading in oil and gasoline futures. But because of the CFMA's legal exemption, little information exists about the strategies traders are now using that could contribute to the current price spike in oil and gasoline.

From the small portion of Enron-related evidence that has been publicly disclosed to date, three facts are clear that bear on our ongoing efforts to better understand the impacts of speculative trading on energy prices, including oil and gasoline:

· First, we know that speculative trading and volatility in financial energy markets can prove enormously profitable. For example, an internal analysis prepared by Enron North America-Research Group suggested EOL had by 2001 logged transactions of $336 billion in gross notational value; and during the fourth quarter of 2000 averaged $3 billion in transactions on a daily basis. The importance of price volatility also figured in recent testimony offered by former Enron employees in ongoing court cases, who noted that "the price volatility in the power markets was the key contributor to increased profits;" and that "the higher the volatility that you have, the better-the higher the potential profit you can make from an open position you might have in the marketplace."

· Second, we know that EOL was used to exploit the lack of regulatory oversight in energy commodity markets. In fact, in its March 2003 report on market manipulation, FERC staff found that "the relationship between financial and physical energy products and the relatively thinner and less liquid physical markets provides opportunities to manipulate the physical markets and profit in the financial markets…The direct and indirect relationships between financial derivatives and physical transactions provide the linkage needed to exercise particular manipulation strategies."

· Finally, we know that even after EOL's demise, speculation in unregulated energy commodity markets has continued to grow. As FERC noted in its 2003 report, "when EOL 'went dark,' the trading activity at ICE doubled as traders sought alternative electronic platforms." Today, ICE [the InterContinental Exchange] bills itself as the "leading electronic energy marketplace," recently expanding its business into markets for crude oil, heating oil and gasoline futures-with no more (and possibly less) regulatory scrutiny than what was devoted to EOL during its short but profitable run.

For these reasons, we believe that the Enron-related evidence accumulated by DOJ may provide a useful roadmap for policymakers, as we attempt to further unravel the complicated interplay between physical and financial dimensions of energy trading. With oil and gasoline prices causing hardships for millions of Americans-while oil companies and energy traders rake in record profits-- we believe this information will help guide our efforts to craft policies to help tamper volatility in U.S. energy prices. As such, we ask that you take the steps necessary to facilitate the release of Enron-related evidence now under seal. Also, please be advised that we are also asking the Commission to work with you to accomplish this goal, and have filed a Freedom of Information Act request that we hope can be expeditiously granted.

Thank you for your attention to this matter.

Sincerely,
Maria Cantwell
Diane Feinstein

http://cantwell.senate.gov/news/record.cfm?id=255005&&days=30&