Driven by skyrocketing oil prices and howls of business and consumer pain heading into the November election, the Senate is expected to take up major legislation Tuesday designed to limit energy futures market speculation, which has been attacked as one of the major causes of the high prices.
The legislation includes a section directing the Federal Energy Regulatory Commission to undertake a study of the role of financial institutions in natural gas markets, and opens a whole new data collection arena for the Energy Information Administration (EIA).
One of the fruits of the extensive hearings on oil and gasoline prices held all over Capitol Hill in recent weeks is the Stop Excessive Energy Speculation Act of 2008 (S. 3268), introduced last Tuesday by a group of Democratic senators led by Majority Leader Harry Reid of Nevada. The measure aims to vastly expand the mission of the Commodity Futures Trading Commission (CFTC), reduce pure speculation in the futures market, reach a regulatory arm into the over-the-counter realm of derivatives, swaps and index funds, and expand federal energy data information collection
The CFTC would be directed to set reasonable speculative position limits on non-commercial futures market traders, adding a new definition of "legitimate hedge trading." Commercial traders above certain thresholds could establish their exemption from the limits by filing monthly reports of their physical commodity buy/sell agreements, stocks owned and storage capacity owned or leased with the EIA. That agency also would be directed to create a Financial Market Analysis Office and collect on a weekly basis more complete information on company-specific ownership of oil and natural gas volumes and storage and transportation capacity owned or leased.
The CFTC would be directed to routinely collect detailed data on large OTC traders and index traders and swap dealers. The agency would have to review its trading practices to ensure that index traders are not adversely impacting the price-discovery process. It also would be required to release data each month on the number and value of index funds in the energy markets, as well as data on speculative positions of those index funds in relation to normal market hedgers.
The CFTC would be authorized to hire at least 100 new employees to accomplish the additional tasks. Another feature of the bill calls for an interagency work group on energy markets, chaired by the energy secretary and including the treasury secretary and the chairmen of FERC, the CFTC, the Federal Trade Commission, the Securities and Exchange Commission and the EIA administrator, to recommend actions to prevent excessive speculation in energy commodities, coordinate energy emergencies and review energy security considerations related to international developments.
The working group would report back to Congress within a year on price speculation and any regulatory gaps.
FERC's study of natural gas would cover the role of financial institutions on natural gas markets: including trends in investment in storage and pipeline capacity; factors contributing to potential effects on wholesale natural gas prices; the character and number of related financial positions; and any international considerations the Commission deems relevant.
Financial and investment houses have lobbied heavily against this type of legislation, and last week both the U.S. president and the treasury secretary warned against disrupting markets with excessive regulation saying fundamentals are the main cause of energy price hikes (see related stories).
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