Energy Speculation: Can Congress Really Pull The Plug?


This post is from features writer Ken Stier.

Washington is on the warpath against high energy prices by going after excessive speculation in energy markets.

Its latest efforts--closing the so-called ‘Enron loophole’ and just last week, siccing the Federal Trade Commission on energy markets--will either finally make a difference, or soon be exposed as another feckless, false promise to American consumers.

Sometimes there is clear market manipulation. The Enron-led manipulations of energy and electricity prices, which resulted in the bilking of Californian consumers of nearly $40 billion earlier in the decade, is an example.

Since then, California's Senator Diane Feinstein has been trying to close the Enron loophole which exempted energy trading on electronic platforms from regulation. The loophole was a provision slipped into the Commodities Future Modernization Act of 2000 by Phil Gramm, then a Texas senator, now a key economic adviser to Sen. John McCain.

Besides Enron’s shenanigans, the loophole also led allowed Amaranth Advisers hedge fund to corner the natural gas market (before it imploded) by shifting trades from NYMEX, which is regulated, to unregulated ‘dark markets’ of Intercontinental Exchange (ICE), which is based in Atlanta.

After many tougher earlier drafts, Congress finally closed the loophole. It is now part of a bill reauthorizing the Commodities Futures Trading Commission (CFTC). Attached to the Farm Bill, it becomes law if President Bush agrees to the farm legislation.

Sponsors trumpet the move as finally bringing “all significant energy trades” on electronic platforms under CFTC regulation, for more reporting requirements, and for imposing size limits on trader’s positions and raising penalties to $1 million a day.

“I’m hopeful that this legislation could go a long way toward preventing the next energy crisis,” says Feinstein.

The new regulatory reach has the CFTC talking tough. It will be “fantastically important,” says CFTC Commissioner Bart Chilton, for rooting out fraud. As a result “any fraudulent speculator or anybody attempting to try to manipulate these markets is going to head for the hills… in a cloud of dust because they know we are going to be looking at them,” he says.

But not everyone is so enthused. Michael Greenberger, a former director of CFTC, says it “defrauds the American public to advertise this as a measure that will help with gasoline prices.” Or heating oil, for that matter.

That’s because US crude oil contracts traded on the ICE are still regulated by the UK’s Financial Services Authority, which has a reputation--recently besmirched by the need to nationalize Northern Rock Bank--of being a light touch.

Chilton recently kicked up a teapot tempest when he had the temerity to point this out to our thin-skinned friends across the pond in a recent London speech. ICE officials say the new provisions essentially codifies information sharing already being done voluntarily. They welcome more transparency to generate more confidence in their market--they say.

But there is enough concern about British laxness that the Senate is expected to soon take up legislation that will encourage the Brits to be even tougher.

Questions? Comments?