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Senate Dems Want Windfall Profits Tax, End to $17M in Tax Breaks

Holding to their word to rebuff an energy package offered up by Senate Republicans earlier this month, Senate Democrats last week rolled out energy legislation that would revoke $17 million in tax breaks for energy companies, impose a windfall profits tax on energy companies that don't invest in renewable energy sources and impose federal penalties for energy price gouging. The legislation proposal drew immediate criticism from industry-related business groups, including IntercontinentalExchange (ICE), the New York Mercantile Exchange (Nymex) and the National Association of Manufacturers (NAM).

The Consumer-First Energy Act of 2008 was unveiled at a press conference by Senate Majority Leader Harry Reid (D-NV) and several top Democrats. The Democrats' bill follows a package of energy legislation introduced by Sen. Pete Domenici (R-NM) and 19 Republican cosponsors, which would dramatically increase domestic production of oil and natural gas by unlocking restricted areas for exploration (see NGI, May 5).

"The Bush administration has led us down the path of the most significant energy crisis we have had in decades, if not in all time," Reid said Wednesday. "Big Oil is making money hand over fist while doing little to invest in alternative fuels yet Bush Republicans want to keep handing them huge tax breaks."

In a summary of the legislation, Democrats noted that gasoline prices have more than doubled since George W. Bush took office in 2001. At the same time, "Big Oil" companies made more than $500 billion in profits. The legislation, if enacted, would do the following:

Nymex took umbrage to the bill, noting that the subsection dealing with margins is "misguided." The exchange said it recognizes that there is broad concern over current crude oil price levels and it supports the legitimate work that Congress is doing to address high energy prices and to protect consumers.

Nymex found four points of concern regarding the margins section. It noted that in a highly transparent, regulated and competitive market, prices are affected primarily by fundamental market forces, and imposing more onerous margin levels would not affect price levels. The exchange pointed out that uncertainty in the global crude market regarding geopolitical issues, refinery shutdowns and increasing global usage, as well as devaluation of the U.S. dollar, are now market fundamentals.

Second, Nymex said that in futures markets margins function as financial performance bonds and are used to manage financial risk and ensure financial integrity, not restrict or manage trading activity. In Nymex's third point, the exchange said data consistently indicates that the percentage of open interest in Nymex crude oil futures held by noncommercial participants (relative to commercial participants) actually decreased over the last year even while prices were increasing. Finally, Nymex said that given the reality of global competition in energy derivatives, increasing crude oil margins on futures markets regulated by the CFTC inevitably will force trading volume away from regulated and transparent U.S. exchanges onto "dark unregulated venues" and onto less transparent overseas markets.

The exchange said the proposed margin provision would constitute "a significant step backward in transparency and market integrity."

ICE assailed the congressional Democrats' "hastily submitted" legislative proposals that it says place "arbitrary controls" on regulated energy futures markets.

"The various trading proposals by Senate Democrats would result in adverse consequences for consumers, market prices and on the competitiveness of the U.S. [energy] markets," Atlanta-based ICE said.

"Proposals designed to place restrictions on qualified participants would inevitably impact liquidity, leading to the degradation of price discovery, and importantly, increasing the potential for even greater price volatility," ICE said. "The presence of hedgers, and those that are willing to take on the risk that hedgers wish to lay off, are vital to properly functioning markets."

In 2006 the CFTC held hearings on the issue of foreign boards of trade and subsequently affirmed its view that mutual recognition was essential for energy markets. This "resulting mutual recognition system is now a cornerstone of CFTC policy. Since 1982 the CFTC has actively [worked] with regulatory agencies around the world to ensure fair and open access to global markets. Hastily enacted legislation that seeks to alter well-established regulatory policy could greatly impair the functioning of commodity markets to the detriment of American consumers," the electronic exchange said.

ICE called on Congress to focus its efforts on developing long-term and permanent solutions to reduce U.S. dependence on foreign energy by promoting energy efficiency, introducing new energy sources and technologies and allowing environmentally responsible drilling in North America.

Also chiming in on the legislation, NAM said the bill would impose onerous taxes, mandates and regulations.

"That's not the way to reduce energy prices and create more jobs," said NAM CEO John Engler. "This bill will have the unintended consequences of fewer jobs and higher energy and food costs."

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