Senators move to establish stronger federal oversight of energy markets

A group of US senators yesterday introduced legislation, called the Energy Market Oversight Act, that seeks to restore the Commodity Futures Trading Commission’s (CFTC) authority over online and bilateral energy trades and give the Federal Energy Regulatory Commission (Ferc) powers to investigate and punish possible instances of fraud and manipulation in the over-the-counter energy markets.

The senators pushing for the legislation are: Dianne Feinstein (Democrat, California), Peter Fitzgerald (Republican, Illionois), Tom Harkin (Democrat, Iowa), Richard Lugar (Republican, Indiana), Maria Cantwell (Democrat, Washington), Ron Wyden (Democrat, Oregon) and Patrick Leahy (Democrat, Vermont).

The act is, in effect, a resurrection of last year’s Feinstein-led proposals to impose tighter control of the OTC markets in the wake of Enron’s collpase and the California power crisis. Her proposals were defeated in a routine procedural vote in April 2002 that required 60 affirmative senate votes for her legislation to advance.

“The legislation would close a loophole that allows energy trades to take place online with no transparency, no record keeping and no audit trail – with no federal oversight to guard against fraud and manipulation,” Feinstein said.

In 2000, Congress passed the Commodity Futures Modernization Act, which essentially exempted online and bilateral energy and metals trading from regulatory oversight. This loophole, the senators argue, allowed energy companies – such as EnronOnline – to trade billions of dollars worth of energy derivatives with no regulatory oversight. Their proposed legislation would increase notice, reporting, bookkeeping and other transparency requirements, and require energy companies to maintain sufficient capital to cover trades commensurate with risks.

The bill also seeks to prohibit 'wash trades', a practice that gained notoriety last year as a number of firms were found to be trading the same asset at the same price to boost trading volume figures. If the legislation passes, wash trades would be subject to civil penalties for each violation, and those found guilty could be imprisoned for up to 10 years. In December 2002, a former El Paso natural gas trader was indicted for reporting fictitious natural gas transactions to an industry publication, and Dynegy, Duke, El Paso, Reliant, CMS, and Williams have all admitted to engaging in wash trades.

The legislation also seeks to authorise Ferc to fine companies that do not comply with requests for information. This is the same authority that the Securities Exchange Commission has over financial institutions.