A controversial amendment that seeks to regulate the trading of over-the-counter (OTC) energy derivatives remained in Senate limbo late last week after opposing sides failed to reach an compromise to allow the proposal to come up for a vote.

The Senate set aside the proposal last Tuesday to give Sen. Dianne Feinstein (D-CA), the measure’s sponsor, and Sen. Phil Gramm (R-TX), who was said to be “diametrically opposed” to the initiative, time to resolve their differences. The two lawmakers (as well as their staffs) met several times last week, and reportedly “were making good progress,” said a Feinstein spokesman. But other Capitol Hill sources weren’t as optimistic, with one saying it “doesn’t look like they got very far.”

Without some kind of settlement, Feinstein’s proposal could remain in Senate limbo indefinitely. “Maybe they’ll come back to it tonight [to vote], or maybe they’ll never come back to it,” a Senate source told NGI. Feinstein may be forced to offer her initiative — which has polarized the energy industry — as a stand-alone bill rather than as part of the Senate’s omnibus energy package (S. 517).

Apache Corp. supports the reforms advocated by Feinstein. The largely unregulated “OTC energy market is like Afghanistan — there are no rules,” said spokesman Tony Lentini.

Assistant Majority Leader Harry Reid (D-NV) indicated that both Feinstein and Gramm were “working in good faith” to resolve their differences over the energy derivatives amendment. If they are unable to reach accord, Majority Leader Tom Daschle (D-SD) has indicated he would file a cloture petition to limit debate on the proposal, which Feinstein submitted on March 7.

“We’re all hoping that something can be worked out” to settle the “important, but contentious” issue of derivatives, noted Sen. Larry Craig (R-ID).

The Feinstein proposal would bring regulation of energy derivative transactions — futures, swaps and options — under the umbrella of the Commodity Futures Trading Commission (CFTC). It also would subject electronic exchanges that trade energy derivatives to the same requirements as the New York Mercantile Exchange, the Chicago Mercantile Exchange and Chicago Board of Trade, and would require the on-line trading operations to maintain sufficient capital to carry out their activities.

Sen. Michael B. Enzi of Wyoming last Tuesday urged Republicans and Democrats alike to “step back” from the amendment until hearings could be held. The amendment was largely offered in response to the failure of Enron Corp., but Enzi argued that the trading of OTC energy derivatives had nothing to do with the energy company’s collapse.

“In fact, Enron’s trading platform was one of the most lucrative parts of the company,” he said on the Senate floor. “If we start to regulate an industry that’s in its infancy, we run the risk of stifling competition and reducing the possibility of its reaching its full potential.”

Enzi argued that the Feinstein proposal would likely do more harm than good. It “could be interpreted to cover all transactions between commercial parties conducted either by e-mail or over the phone,” he said. As a result, the proposed initiative would likely decrease market liquidity because of “increased legal and transactional uncertainties,” and it would discourage companies from using energy derivatives to hedge price risks. This, he believes, would lead to more price volatility in the energy markets, and higher prices for consumers.

He said Intercontinental Exhange (ICE) would be especially victimized because the amendment would require it to set aside sufficient capital for its operations, even though it doesn’t engage in trading. The company allows buyers and sellers of energy derivatives to exchange offers through an electronic program. “This requirement could [force] ICE to cease operations,” forcing buyers and sellers into the OTC derivatives market, Thomas noted.

Enzi introduced a letter from Securities and Exchange Commission Chairman Harvey Pitt in which he wrote that the Feinstein “legislative change is premature at this time.” He also noted that Federal Reserve Chairman Alan Greenspan had cautioned against regulation of energy derivatives.

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