Energy Policy Act of 2003 - Continued

ENERGY POLICY ACT OF 2003—CONTINUED

AMENDMENT NO. 876, AS MODIFIED

    Mr. HARKIN. Madam President, I join Senator FEINSTEIN as a cosponsor of her amendment to strengthen Federal oversight of energy markets. I strongly support the amendment's provisions enhancing the ability of the Commodity Futures Trading Commission to investigate and punish fraud and manipulation in over-the-counter markets in energy derivatives and derivatives based on other "exempt commodities" under the Commodity Exchange Act.

    As chairman of the Committee on Agriculture, Nutrition and Forestry during the last Congress, I held a hearing on the scope of the CFTC's authority to insure market transparency and prevent fraud and manipulation in markets in OTC derivatives based on "exempt commodities," such as energy and metals, following passage of the CFMA. Following that hearing, Senator LUGAR and I worked closely with Senator FEINSTEIN on an earlier version of this amendment to improve it. At the beginning of the 108th Congress, Senator FEINSTEIN introduced S. 509, incorporating the work we did within the Agriculture Committee last summer and fall. The only difference between S. 509 and this amendment is that S. 509 was drafted to fill a gap in oversight created by the CFMA and fully and clearly affirm the CFTC's authority to oversee trading in all "exempt commodities"—OTC energy and metals derivatives as well as derivatives based on other commodities such as broadband and weather—whereas this amendment now does not change the treatment of metals derivatives. I have some concerns about this approach. Metals, like energy, are commodities of finite supply. They are equally susceptible to market manipulation and should therefore be subject to the same level of oversight. The legislative process often requires compromise in order to make progress toward important policy goals, however, and because I hope this amendment will result in significant progress in addressing a problem created by the CFMA, I support it.

    The CFMA amended the Commodity Exchange Act in a number of positive ways, based for the most part on the recommendations of the President's Working Group on Financial Markets issued in 1999. The President's Working Group recommended that certain transactions involving financial derivatives be excluded from the CFTC's jurisdiction. The President's Working Group did not recommend a similar exclusion for transactions involving energy and metals derivatives, or other commodities of finite supply.

    During 1999 and 2000, as legislation was being developed in the Senate, there was discussion of the issue of oversight of energy and metals derivatives markets, and Senator LUGAR who was at the time chairman, and I both supported, in the committee, a version of the legislation that was consistent with the recommendations of the President's Working Group, and excluded only financial derivatives—not energy and metals derivatives—from the CFTC's jurisdiction. The bill codified an exemption, with specific safeguards, for certain commodities such as energy and metals, but clearly retained the CFTC's authority to investigate and act against fraud and manipulation.

    The final version of the CFMA included in the omnibus appropriations bill in December 2000 differed from our committee bill regarding energy and metals derivatives markets. I supported the CFMA, although I had some concerns about its treatment of energy and metals products, because I thought it had a number of very positive features, and on the whole was a good bill. I still believe so. It is important that we not undermine the legal certainty that legislation brought to the OTC derivatives markets. I would not support this amendment if I thought it would do that. But I do believe it is important to close the loophole that has resulted in an important segment of the overall OTC derivatives market—that is, derivatives based on energy and other "exempt commodities," as the CFMA defined them—being completely excluded from oversight. At the time of passage of the CFMA, many Members of Congress believed these exempt commodities would no longer be subject to most requirements of the Commodity Exchange Act, but they certainly did not believe these commodities would be removed entirely from oversight by the CFTC or any other agency, which is what has happened.

    We know now that this lack of oversight has resulted in harm to consumers. Last August, the Federal Energy Regulatory Commission, FERC, issued a report finding significant evidence that Enron used its unregulated OTC electronic trading platform, Enron Online, to manipulate natural gas prices to increase its revenue. This manipulation affected prices not only for Enron's trading partners but industry-wide, as reporting firms used price information displayed electronically on Enron Online as a significant source of natural gas pricing data. And a recent report prepared by the Minority Staff of the U.S. Senate Permanent Subcommittee on Investigations, after a year-long investigation on crude oil price volatility, found that crude oil prices are similarly affected by trading on unregulated OTC markets, and that the lack of information on prices and large positions in OTC markets makes it difficult if not impossible to detect price manipulation. This report concluded that routine market disclosure and oversight of the OTC energy derivatives markets are essential to halt manipulation before economic damage is inflicted upon the market and the public.

    This amendment will provide the CFTC with the authority it needs to require routine market disclosure and ensure effective oversight of the OTC energy derivatives markets and markets for other "exempt commodities," such as broadband and weather derivatives. The amendment clarifies that the CFTC has anti-fraud and anti-manipulation authority over transactions in "exempt commodities" other than metals. This amendment is not regulatory overreaching by any means. It just gives the CFTC the authority it needs to establish adequate notice, transparency, reporting, record-keeping, and other transparency requirements which are the minimum needed to allow the agency to effectively police OTC markets in energy derivatives, and thereby detect and deter fraud and manipulation of these markets. It also increases criminal and civil penalties for manipulation, including "wash" or "round trip" trades.

    It is clear that the impact of OTC energy derivatives markets reaches well beyond the immediate parties to the transactions. Derivatives play an increasingly important role in the diverse range of energy markets, which are in turn critical to our overall economy. We must ensure the integrity of these markets and restore shareholder, investor, and consumer confidence in them. This amendment moves us in that direction, and I urge my colleagues to support it.

    Madam President, this amendment basically closes a small loophole that was left in the Commodity Futures Modernization Act passed in the year 2000. We saw what happened with Enron. And what happened is, Enron Online was used to influence energy prices far beyond Enron. This impacted consumers not only on the West Coast but in my State and all over the United States.

    As a result, we looked at this amendment last year. Both Senator Lugar and I looked at it. We had a hearing on it last year in the Agriculture Committee.

    This amendment, I believe, does exactly what we want it to do; that is, to make sure the Commodity Futures Trading Commission——

    The PRESIDING OFFICER. The Senator's time has expired.

    Mr. HARKIN. Madam President, I ask unanimous consent for 30 more seconds to complete my sentence.

    Mr. DOMENICI. I object.

    The PRESIDING OFFICER. Objection is heard.

    Mr. DOMENICI. Madam President, how much time is on this side?

    The PRESIDING OFFICER. Two minutes 39 seconds.

    Mr. DOMENICI. I have no objection.

    The PRESIDING OFFICER. Without objection, it is so ordered.

    The Senator from Iowa.

    Mr. HARKIN. I just wanted to say, this gives the CFTC the authority again to provide the oversight they need to make sure we have integrity in these markets for derivatives based on energy, but also for derivatives based on other things, too, such as weather and broadband. It is a step in the right direction to provide that oversight and transparency.

    I thank the Chair.