Sen. Dianne Feinstein’s initiative to regulate trading of over-the-counter (OTC) energy derivatives, which was defeated during the debate over the Senate energy bill last month, has sprung to life again. The California Democrat has persuaded Sen. Tom Harkin (D-IA), who supports her effort and is chairman of the Senate Agriculture Committee, to hold a hearing on the measure.

“We likely will have a hearing [on it] either before the Memorial Day break or in early June,” said Seth Boffeli, a spokesman for the committee, which has jurisdiction over the Commodity Futures Trading Commission (CFTC), an independent agency that oversees the commodity futures and options markets.

Feinstein has introduced her proposal as a stand-alone bill, S. 1951. “I don’t know if it will go through any revisions as it goes to the Agriculture Committee,” said Scott Gerber, a spokesman for the senator.

Gerber, as well as others, believes the Feinstein bill could find greater support in the Senate this time following FERC’s release of Enron Corp. memos that identify questionable trading practices used in energy markets in California and other western states. The latest disclosures by Reliant Resources, Dynegy Inc. and CMS Energy that they participated in phony “round-trip” transactions to boost their trading volumes and revenues may provide even further backing for the measure.

“We’re going to resurrect the derivatives cause because, if anything, the events of the last 10 days have highlighted [the need]” for regulation of these financial instruments, said Sen. Ron Wyden (D-OR) during a Senate Energy Committee hearing last week. He asked FERC Chairman Pat Wood to “aggressively” support the measure, as well as the initiative for a federal ratepayer advocate.

“I think there will continue to be more interest in the issue as more revelations come out” about the practices of Enron and other energy suppliers in California, Gerber told NGI. FERC currently is investigating charges that energy prices were manipulated during the height of the California energy crisis. As part of the probe, the agency says it also is looking more closely at the sham “round-trip” transactions, or so-called “wash” trades.

These damaging disclosures about Enron and other energy suppliers may “take some of the hubris out of the objections” by certain senators to Feinstein’s effort to repeal the Commodity Futures Modernization Act (CFMA), which exempts energy derivatives from regulation, said Randall Dodd, director of the Washington, DC-based Derivatives Study Center.

While the Feinstein bill does not expressly address “wash” derivatives trades, Dodd noted that it would impose more reporting requirements on traders, and give the CFTC and the Federal Energy Regulatory Commission more information on these transactions. Currently, “wash” derivatives trades — unlike “wash” cash trades — are untraceable, he said.

The energy companies that have admitted to engaging in “wash” trades contend the transactions were designed to purely inflate volumes, and that they made no net profits. But Dodd says the transactions do influence energy commodity prices. Wash trades are intended to move prices up or down, or are used to “create a false sense of liquidity” at a certain price level, he said. For example, traders may engage in a series of sham “wash” trades, selling natural gas valued at $2.80/Mcf for $3/Mcf, to “create the false impression that the market is ‘deep’ at $3.” These kinds of trades are a “real threat to the integrity of the marketplace,” he told NGI.

Based on “my own windshield survey,” Dodd believes the Feinstein derivatives measure will fare better in the Senate this time around. “More and more people are calling up, and [are] motivated to weigh into the debate,” Dodd noted. In addition, Democrats have signaled they may pursue this as a partisan issue during upcoming congressional elections.

Feinstein’s bill, as originally proposed, would bring OTC energy and metals derivatives under the regulatory umbrella of the CFTC. Specifically, it would subject online trading exchanges to the reporting and capital requirements that already are imposed on other established exchanges, such as the New York Mercantile Exchange, the Chicago Board of Trade and Chicago Mercantile Exchange.

Feinstein believes that the largely unregulated online trading platforms, such as the former EnronOnline (now owned by UBS Warburg), were to blame for the high natural gas and electricity prices that plagued California throughout 2000 and in early 2001. UBS Warburg attorneys assured Feinstein last week that UBS was not engaged in Enron-like manipulation practices.

©Copyright 2002 Intelligence Press Inc. Allrights reserved. The preceding news report may not be republishedor redistributed, in whole or in part, in any form, without priorwritten consent of Intelligence Press, Inc.