In a letter to Commodity Futures Trading Commission (CFTC) Chairman James Newsome on Monday, Sens. Dianne Feinstein (D-CA) and Maria Cantwell (D-WA) berated the CFTC for continuing its fight against legislation that would allow more regulatory oversight of the over-the-counter (OTC) energy market.
The senators cited new audio tape evidence of conversations at Enron during the 2000-01 power crisis in the western United States in which Enron traders discussed ways to gouge California customers. In light of new evidence about Enron’s market manipulation, the two senators urged the CFTC to “take immediate action to put in place mechanisms that would prevent fraud and manipulation” in the OTC market and to “work with us if you do not have the adequate authority to prevent additional gaming of the energy markets.”
“While more and more evidence is released that further proves that energy companies, especially Enron, intentionally gamed the Western energy markets, it appears that the CFTC either did not use its authority, or it did not have the authority, to prevent the manipulation from occurring in the first place,” Cantwell and Feinstein said. “Furthermore, the CFTC has done very little to penalize the energy companies that manipulated the Western energy markets.”
They noted that the new evidence “provides the first snapshot of the magnitude of Enron’s unjust profits — conservatively estimated as at least $1.1 billion on days in which the company was engaged in manipulation schemes.”
The senators blasted the CFTC for “continuously oppos[ing] legislation that we have introduced to close the Enron loophole in order to provide the Commission with authority to regulate over-the-counter trading in energy markets. Yet it is obvious that these trading mechanisms have been used to exploit our constituents.”
Feinstein repeatedly has tried and failed to pass legislation that would repeal the Commodity Futures Modernization Act of 2000 (CFMA), which she says exempts OTC energy/metals derivatives from CFTC oversight. Newsome has questioned the need for such legislation, saying the CFTC retains full authority to pursue fraud and manipulation of exempted energy/metals derivatives under the CFMA.
He has suggested that Congress wait until the end of the CFTC’s investigation of energy traders to take legislative action if any is necessary.
However, Newsome has said that “unclear laws, regulations or enforcement policies can result in inefficiencies, missed opportunities and the misallocation of resources by market participants, who must factor such uncertainty into their business decisions.
“A regulatory structure that replicates the exchange-traded model is not appropriate for principal-to-principal trading between institutional counterparties, and we should approach any changes to the legal certainty in place for these specialized marketplaces with extreme caution,” he said in a speech last summer (see Daily GPI, July 10).
Newsome said that Feinstein’s legislative proposals “could result in significant, negative unintended consequences for the risk management markets.”
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