Senators Feinstein, Fitzgerald, Harkin, Lugar, Cantwell, Wyden, Leahy Introduce Legislation to Establish Strong Federal Oversight Over Energy Markets

Senators Feinstein, Fitzgerald, Harkin, Lugar, Cantwell, Wyden, Leahy Introduce Legislation to Establish Strong Federal Oversight Over Energy Markets

March 4, 2003

Washington, DC - U.S. Senators Dianne Feinstein (D-Calif.), Peter Fitzgerald (R-IL), Tom Harkin (D-IA), Richard Lugar (R-IN), Maria Cantwell (D-WA), Ron Wyden (D-OR), and Patrick Leahy (D-VT) today introduced legislation to establish strong federal oversight over energy markets.

This legislation, called the Energy Market Oversight Act, would restore the Commodities Futures Trading Commission's (CFTC) authority over online and bilateral energy trades and give the Federal Energy Regulatory Commission (FERC) the powers it has requested to adequately investigate and punish possible instances of fraud and manipulation.

"It has been more than two years since the energy crisis began in California. It is well-past time to bring appropriate oversight to the energy market," Senator Feinstein said. "The legislation would close a loophole that allows energy trades to take place online with no transparency, no record keeping, and no audit trail - with no federal oversight to guard against fraud and manipulation. It would also give the Federal Energy Regulatory Commission - FERC - greater authority to investigate and prevent fraud and price manipulation."

"We introduce the Energy Market Oversight Act in the hope that the energy crisis in the West will never be repeated," Senator Feinstein said. "This legislation was debated during consideration of the Senate Energy Bill in the 107^th Congress, and it was the subject of a hearing in the Agriculture Committee hearing - but time ran out before the legislation could be approved."

Restore CFTC Authority

In 2000, Congress passed the Commodity Futures Modernization Act, which essentially exempted online and bilateral energy and metals trading from regulatory oversight. This loophole allowed energy companies - such as EnronOnline - to trade billions of dollars worth of energy derivatives - with absolutely no regulatory oversight.

The legislation introduced today closes this loophole, and would restore CFTC's anti-fraud and anti-manipulation authority over energy trades. In addition, the bill would:

Increase notice, reporting, bookkeeping, and other transparency requirements;
Prohibit wash trades;
Require that energy companies maintain sufficient capital to cover trades (commensurate with risk); and
Wash trades would be subject to civil penalties for each violation, and imprisonment up to 10 years.

Increase FERC Authority

The legislation introduced today would also increase FERC's ability to investigate fraud and manipulation, and impose stiffer penalties on those in violation of regulations. The legislation would:

Authorize FERC to fine companies that don't comply with requests for information. This is the same authority that the Securities Exchange Commission (SEC) has over financial institutions.
Make it easier for FERC to hire the accountants, lawyers, and investigators they need to run inquiries.
Allow FERC to launch an investigation involving more than 10 companies without obtaining prior approval from the Office of Management and Budget.
Increase penalties for violations of the Federal Power Act and the Natural Gas Act - increasing jail time from 2 years to 5 years and fines from $5,000 to $1 million per violation.

Broaden the Commission's authority to impose civil penalties - increasing penalties from $100,000 to $1 million and daily fines of $10,000 to $50,000 per violation per day.

Fraud and Manipulation in the Energy Market

In the past two years, evidence has surfaced, proving that energy companies deliberately manipulated the supply and price of energy during the Western Energy Crisis. The evidence is overwhelming:

In September 2002, a FERC Administrative Law Judge ruled that El Paso Corporation withheld natural gas from California - dramatically increasing natural gas and electricity prices in the Western region.

On May 6, 2002, FERC revealed Enron memos that showed how he company the Energy Market by engaging in a number of manipulative trading strategies - called "Death Star," "Get Shorty," "Fat Boy," and "Ricochet" - to fleece families and businesses in the West.

On December 5, 2002, a former El Paso natural gas trader was indicted for reporting fictitious natural gas transactions to an industry publication - in an effort to boost prices and company profits.

Dynegy, Duke, El Paso, Reliant, CMS, and Williams have all admitted to engaging in "round-trip" or "wash trades." These are paper trades -- designed to increase volume and revenues -- but where no energy ever actually changes hands.

Transcripts and audio tapes of conversations have revealed that plant operators at Williams and AES deliberately worked to keep power offline and drive energy prices higher and higher.

Earlier this month, Jeffrey Richter, the former head of Enron's Short-Term California energy trading desk, pled guilty to conspiracy to commit fraud as part of Enron's well known schemes to manipulate Western energy markets.

Last month, FERC released transcripts from Reliant Energy, which reveal how their traders intentionally withheld power from the California market in an attempt to increase prices.

"This legislation is not going to do anything to change what happened in California and the West in 2000 and 2001- nothing can," Senator Feinstein said. "But the legislation does provide the necessary authority for the CFTC and FERC to provide appropriate oversight over the energy industry - which will help protect against another energy crisis in the future. It is my hope that the Senate will move quickly to approve this legislation - before another crisis occurs."

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