Letter to The Honorable Joseph Kelliher Chairman Federal Energy Regulatory Commission

Letter to The Honorable Joseph Kelliher Chairman Federal Energy Regulatory Commission

The Honorable Joseph Kelliher
Chairman
Federal Energy Regulatory Commission
888 First Street, N.E.
Washington, D.C. 20426

Dear Chairman Kelliher,

We write to seek your assistance in ensuring the timely release of evidence the federal government has acquired during the course of its investigation of the Enron Corporation. We believe additional audiotapes, documents and emails related to Enron's market manipulation schemes may be of substantial value in crafting federal policies related to the kind of speculative financial trading in energy commodities that Enron pioneered. Since Enron's collapse, this kind of trading has become a multi-billion-dollar, unregulated industry with potentially far-reaching impacts for American oil, gasoline, natural gas and electricity markets. We are thus seeking your assistance in facilitating the release of this information.

We understand that the Department of Justice has granted FERC access to as many as 190 Enron audiotapes, some of which have also been provided to parties impacted by Enron's market manipulation schemes. FERC's Trial Staff has processed an unknown quantity of these tapes, and filed multiple exhibits under seal within the context of ongoing proceedings to determine the extent of Enron's power market abuses, dating back to 1997. It is our understanding that the materials now under seal at FERC do not constitute the entire universe of Enron-related evidence. However, public release of this material would at least provide a good start, in our efforts to more thoroughly assess the evidence related to Enron's use of its subsidiary, EnronOnline [EOL], to manipulate energy futures markets.

As you know, shortly after its founding in November 1999, EOL emerged as the "overwhelmingly dominant e-trading platform for natural gas and electric power." This development was made possible, at least in part, by a loophole included in the Commodity Futures Modernization Act of 2000 (PL. 106-554) that exempted certain online energy trading platforms from the same kind of regulatory scrutiny as registered exchanges, such as the New York Mercantile Exchange. Today, we believe that loophole is also contributing to substantial increases in the volume of unregulated trading in oil and gasoline futures. But because of the CFMA's legal exemption, little information exists about the strategies traders are now using that could contribute to the current price spike in oil and gasoline.

From the small portion of Enron-related evidence that has been publicly disclosed to date, three facts are clear that bear on our ongoing efforts to better understand the impacts of speculative trading on energy prices:

· First, we know that speculative trading and volatility in financial energy markets can prove enormously profitable. For example, an internal analysis prepared by Enron North America-Research Group suggested EOL had by 2001 logged transactions of $336 billion in gross notational value; and during the fourth quarter of 2000 averaged $3 billion in transactions on a daily basis. The importance of price volatility also figured in recent testimony offered by former Enron employees in ongoing court cases, who noted that "the price volatility in the power markets was the key contributor to increased profits;" and that "the higher the volatility that you have, the better-the higher the potential profit you can make from an open position you might have in the marketplace."

· Second, we know that EOL was used to exploit the lack of regulatory oversight in energy commodity markets. In fact, in its March 2003 report on market manipulation, FERC staff found that "The relationship between financial and physical energy products and the relatively thinner and less liquid physical markets provides opportunities to manipulate the physical markets and profit in the financial markets…The direct and indirect relationships between financial derivatives and physical transactions provide the linkage needed to exercise particular manipulation strategies."

· Finally, we know that even after EOL's demise, speculation in unregulated energy commodity markets has continued to grow. As FERC noted in its 2003 report, "when EOL 'went dark,' the trading activity at ICE doubled as traders sought alternative electronic platforms." Today, ICE [the InterContinental Exchange] bills itself as the "leading electronic energy marketplace," recently expanding its business into markets for crude oil, heating oil and gasoline futures-with no more (and possibly less) regulatory scrutiny than what was devoted to EOL during its short but profitable run.

For these reasons, we believe that the Enron-related evidence accumulated by the federal government may provide a useful roadmap for policymakers, as we attempt to further unravel the complicated interplay between physical and financial dimensions of energy trading. With oil and gasoline prices causing hardships for millions of Americans-while oil companies and energy traders rake in record profits-- we believe this information will help guide our efforts to craft policies to help tamper volatility in U.S. energy prices. As such, we ask that you take the steps necessary to facilitate the release of Enron-related evidence now under seal at FERC. Please be advised that we have also asked the Department of Justice to work with you to accomplish this goal, and have filed a Freedom of Information Act request with the Commission that we hope can be expeditiously granted.

Thank you for your attention to this matter.

Sincerely,
Maria Cantwell
Diane Feinstein

http://cantwell.senate.gov/news/record.cfm?id=255005&&days=30&