Levin Introduces Bill to Close Enron Loophole and Prevent Manipulation and Excessive Speculation in Energy Markets

WASHINGTON – Sen. Carl Levin (D-Mich.), Chairman of the Senate Permanent Subcommittee on Investigations, today introduced legislation to help prevent price manipulation and excessive speculation that are leading to high energy prices for U.S. consumers. The bill targets energy commodity markets that are currently exempt from government oversight under the “Enron loophole,” a provision inserted at the behest of Enron and other large energy traders, without debate, into the Commodity Futures Modernization Act of 2000. The “Close the Enron Loophole Act” would subject those energy markets to Commodity Futures Trading Commission (CFTC) oversight to prevent price manipulation and excessive speculation. “Right now, the Enron loophole makes it impossible for regulators to prevent major price distortions in U.S. energy markets,” said Levin. “The result has been higher energy prices for millions of Americans. Stable and affordable energy prices are vital to our national and economic security – to heat and cool American homes, generate electricity for lighting, and power U.S. manufacturing, agriculture, and transportation. We need to put the cop back on the beat in all U.S. energy markets with effective tools to stop price manipulation, excessive speculation, and trading abuses. The legislation I am introducing today is critical to ensuring fair energy prices that reflect the fundamentals of supply and demand.” Since 2001, the Subcommittee has investigated the vulnerability of U.S. energy markets to price manipulation and excessive speculation. Earlier this year, the Subcommittee released a report, “Excessive Speculation in the Natural Gas Market,” which found that a single hedge fund named Amaranth dominated the U.S. natural gas market during the spring and summer of 2006, and that its large-scale trading significantly distorted natural gas prices from their fundamental values. The investigation examined millions of trading records from the New York Mercantile Exchange (NYMEX) and the Intercontinental Exchange (ICE) to track and analyze natural gas trading in 2006. The report concluded that the current regulatory system was unable to prevent price distortions and excessive speculation, because much of Amaranth’s trading occurred on an unregulated market. The report recommended closing the Enron loophole to restore the CFTC’s ability to police all U.S. energy markets. At a Subcommittee hearing in June 2007, the American Public Gas Association and the Industrial Energy Consumers of America testified that Amaranth’s trading activity increased hedging costs for natural gas purchasers, which ultimately led to increased costs for American industries and households. The Municipal Gas Authority of Georgia calculated that Amaranth’s excesses increased the cost of its winter gas purchases by $18 million. “Amaranth’s massive trades turned the natural gas market into a giant electronic casino,” Levin added, “where all natural gas buyers and sellers were forced to bet either with or against Amaranth. American businesses and consumers were socked with higher prices for natural gas last winter as a result. We cannot afford to let large energy traders continue to play speculation and manipulation games with U.S. energy prices and supplies. It’s way past time to close the Enron loophole and put the cop back on the beat in all U.S. energy markets.” A 2006 Subcommittee staff report entitled, “The Role of Market Speculation in Rising Oil and Gas Prices: A Need to Put the Cop Back on the Beat,” also analyzed the extent to which increasing financial speculation in energy markets contributed to the steep rise in energy prices over the past few years, especially for crude oil. The report concluded "[s]peculation has contributed to rising U.S. energy prices," and endorsed the estimate of various analysts that the influx of speculative investments into crude oil futures accounted for about $20 of the then-prevailing crude oil price of $70 per barrel. Bill Summary. Key provisions of the Close the Enron Loophole Act would: Require energy trading facilities (ETFs) to register with the CFTC and comply with the same standards as apply to futures exchanges, like NYMEX, for trading futures contracts, except for standards governing retail trading since ETFs are restricted to large traders trading amongst themselves. ETFs would function as self-regulatory organizations under CFTC oversight in the same manner as futures exchanges. Require ETFs to establish trading limits on traders, such as position limits or accountability levels, to prevent price manipulation and excessive speculation, subject to CFTC approval, in the same manner as futures exchanges. Position limits set a ceiling on the number of contracts that a trader can hold at one time on a trading facility; accountability levels, when exceeded, trigger a review by regulators of a trader’s holdings in order to prevent price manipulation and excessive speculation. The CFTC would ensure that position limits and accountability levels for similar contracts on different exchanges are on parity with each other and applied in a functionally equivalent manner. The CFTC would also ensure that a trader’s positions on multiple exchanges, when combined, are not excessive, and that trading limits are not circumvented through a trader’s use of an unregulated market. Require large-trader reporting for domestic trades on foreign exchanges. Large trades of U.S. energy commodities taking place from the United States on foreign exchanges would have to be reported to the CFTC. Traders would be relieved of this reporting requirement if the CFTC reached agreement with a foreign board of trade to obtain the same information. Define an “energy trading facility” as one that facilitates trading of contracts in an energy commodity (other than in the cash or spot market) between large traders (“eligible commercial entities”), and either provides for the clearing of those contracts or provides a price discovery function in the futures or cash market for that energy commodity. Clearing services, which are already subject to CFTC oversight, generally provide payment guarantees for trades. A trading facility performs a price discovery function when its prices become publicly known and affect the prices of subsequent transactions. Define “energy commodity” as a commodity which is used as a source of energy, including crude oil, gasoline, heating oil, diesel fuel, natural gas, and electricity, or results from the burning of fossil fuels, including carbon dioxide and sulfur dioxide.