Energy Policy Act of 2003

ENERGY POLICY ACT OF 2003

AMENDMENT NO. 876

    Mr. CRAPO. Mr. President, I rise to address the Feinstein amendment dealing with derivatives. I think it is a very bad idea. It is one we debated last year and one which is dangerous to our economy.

    In order to understand, we have to go back 2 years. Several years ago, Congress wanted to know exactly how our country should approach the regulation of derivatives. As a result of that, and after a few years of study and debate in which a precise time was put together to evaluate the issue, that team came back with recommendations. Those recommendations were enacted by Congress in the Commodity Futures Modernization Act of 2000. This landmark legislation provided certainty with respect to the legal enforceability and regulatory status of swaps and other off-exchange derivatives—what we call over-the-counter derivatives—under the Commodity Exchange Act. The Feinstein amendment would undermine that certainty for OTC derivatives and would impose a new persuasive and unnecessary regulatory regime with respect to OTC derivatives based on energy or on other nonfinancial, nonagricultural commodities.

    This act gets complicated, but these commodities are called "exempt commodities." The term is a little bit confusing because it creates the impression sometimes that these commodities are not regulated at all. They are covered fully by the Commodity Futures Modernization Act and by the Commodity Exchange Act. The point is that they are not regulated in the same way that other securities are regulated.

    OTC derivatives, including those based on energy, are critical risk management tools. Congress, key financial regulators and others recognize that OTC derivatives are critical tools that are used by businesses, government, and others to manage the financial, commodity, credit and other risks inherent in their core economic activities with a degree of efficiency that would not otherwise be possible.

    It is important to state at the outset as we are discussing this issue that we are not talking about transactions that many people think of in securities where they think about investing in a stock in the stock market, a stock that may be regulated under our securities regulations system. These are not transactions that are engaged in by unsophisticated buyers or sellers. These are very sophisticated transactions. Those engaging in these transactions are sophisticated buyers and sellers. They are not the kinds of transactions most people think of when they think of investing in the stock market.

    OTC derivatives based on energy products are an especially important tool, allowing market participants to manage risk. In fact, last year when we had Alan Greenspan testify at the Banking Committee, I asked him directly about whether he believed the management of derivatives, the regulation of derivatives, was being properly handled today and whether there was any aspect of our approach to regulating derivatives that led to the Enron debacle or any of the other problems California faced.

    At that time, the answer I got from Mr. Greenspan was that he was not aware of any evidence that indicated the problems we faced in the Enron circumstance were as a result of our regulatory regime for derivatives, and also that it was his opinion the use of derivatives was a very important tool to help to allocate risk in our economy in such a manner that it helped us stabilize and strengthen our economy.

    In fact, he even went so far as to say he believed that one reason our economy had not dipped further as we faced a lot of the economic trials and tribulations we have faced in the last couple of years was because of our ability to utilize derivatives and to share and allocate risk in these complicated transactions.

    Today, for example, airlines use over-the-counter derivatives to manage their risks with respect to the price and availability of jet fuel. Energy-intensive companies such as aluminum producers use OTC derivatives to hedge their risks of change in the cost of electricity, and energy producers likewise use OTC derivatives to minimize the effects of price volatility.

    Again, I reiterate the point that these are complicated, sophisticated transactions being engaged in by very sophisticated participants in the market.

    A Wall Street Journal article dated March 10, 2003, entitled "U.S. Airlines Show Disparity in Hedging for Jet-Fuel Costs," illustrated the impacts of using derivatives to hedge in the U.S. airline industry. The article noted that jet fuel, now more than twice as expensive; as a year ago, is emerging as a major factor in survival and bankruptcy for airlines, as several carriers, including some of the weakest, find themselves with few protective price hedges in place.

    In other words, these airlines did not effectively utilize the hedging tool, and now they are facing a doubling in the cost of their fuel prices against which they could have hedged. They could have spread that risk if they had used these hedging tools.

    Congress should avoid actions that unnecessarily deter the use or increase the cost of these risk management tools.

    Key financial regulators also oppose legislation such as this amendment. As I indicated earlier, Alan Greenspan indicated his opposition to increasing or changing the regulatory regime with regard to transactions in OTC derivatives. We are expecting anytime today to get a brandnew response from all of our financial regulators. But last year when this same debate was held, the Chairman of the Board of Governors of the Federal Reserve, the Secretary of the Treasury, the Chairman of the Securities and Exchange Commission, and the Chairman of the Commodity Futures Trading Commission, collectively known as the President's Working Group on Financial Markets, opposed the earlier versions of the amendment we debated.

    In a September 18, 2002, letter to Senators CRAPO and MILLER, these regulators highlighted the benefits of OTC derivative noting that "the OTC derivatives markets in question have been a major contributor to our economy's ability to respond to the stresses and challenges of the last two years." The President's working group also observed "while the derivatives markets may seem far removed from the interests and concerns of consumers, the efficiency gains that these markets have fostered are enormously important to the consumers and to our economy." They urged Congress to protect these markets' contributions to the economy and to be aware of the potential unintended consequences of legislative proposals to expand regulation of the OTC derivatives markets, and changing the President's working group proposals which we enacted into law in 2000.

    Federal Reserved Chairman Alan Greenspan told the Senate Banking Committee in March of last year that there was:

    a significant downside if we regulate [OTC derivatives based on energy] where we do not have to .    .    . because if we step in as government regulators, we will remove a considerable amount if the caution that is necessary to allow these markets to evolve. [W]hile it may appear sensible to go in and regulate, all of our experience is that there is a significant downside when you do not allow counterparty surveillance to function in an appropriate manner.

    The CFTC does not need new authority to address acts of manipulation that appear to have occurred in California.

    One of the arguments we often hear in favor of jumping in and increasing the regulatory scheme with regard to derivatives is that Enron destroyed the energy markets in California and if we had had a tough regulatory regime, that wouldn't have happened.

    The CFTC's recent enforcement action against Enron demonstrates that it has adequate tools under the CFMA to address situations such as those, which arose in California. The following enforcement actions have been brought forth by the CFTC this year: No. 1, CFTC charges Enron with price manipulation, operating an illegal, undesignated futures exchange and offering illegal lumber futures contracts through its internet trading platform; No. 2, energy trading company agrees to pay the CFTC $20 million to settle charges of attempted manipulation and false reporting; and No. 3, former natural gas trader charged criminally under the Commodity Exchange Act with intentionally reporting false natural gas price and volume information to energy reporting firms in an attempt to affect prices of natural gas contracts.

    The point here is, there is law in place prohibiting the kinds of things that happened in the Enron situation, and those laws are being enforced with criminal penalties being imposed. The fact they are already regulated is apparent. The fact that the acts that occurred in California are the subject of intense regulatory review and criminal enforcement conduct shows we do have regulatory protections in place. The fact there are bad actors who violate the law does not always mean we should necessarily increase the regulatory burdens we face in this country, that our economy deals with in this country.

    The CFTC's Division of Enforcement continues to work closely with other Federal law enforcement officers across the country on investigations of possible round-trip trading, false reporting, and fraud and manipulation by energy companies, their affiliates, their employees, or their agents. Again, the point is, there is no evidence that any aspect or lack of aspect in our regulatory regime for the regulation of derivatives had anything to do with the actions of Enron and the occurrences in California that caused such a difficult problem in their energy economy.

    There is no evidence that enactment of the CFMA, for example—the 2000 reforms, the modernization of our regulatory system—contributed to the collapse of Enron. Enron's collapse was caused by a failure of corporate governance and controls which, when it became public, led others to refuse to do business with them. As in the case of California, neither the CFTC nor any other key financial regulators has suggested more restrictive regulation of derivatives or derivatives dealers would have prevented the fall of Enron or is needed to prevent future similar events in the future.

    The Feinstein amendment would cause more problems than it would cure. This amendment, among other items, would create jurisdictional confusion between the Federal Energy Regulatory Commission and the Commodity Futures Trading Commission. It would impose problematic capital requirements to facilities trading in the OTC energy derivatives markets. It would require futures-like reporting and recordkeeping requirements.

    It would create both legal and regulatory uncertainty for brokered trading in OTC energy derivatives, as well as OTC derivatives based on other nonfinancial, nonagricultural commodities. It would subject to new regulation a broad range of market participants that have not traditionally been subject to the more intensive CFTC regulation. It would allow the CFTC to regulate any exempt commodity transaction and presumably any market participant that engages in such a transaction in a dealer market. Again, I repeat, these are sophisticated transactions between sophisticated actors in these markets. This proposal would create the very sort of uncertainty that Congress and the Commodity Futures Trading Commission have worked for more than a decade to avoid.

    This amendment, in my opinion, is a solution in search of a problem. Since the collapse of Enron and the actions of some market participants to improperly exploit the weaknesses in the California energy price deregulation scheme, remedial actions have occurred on all fronts. The CFTC, the FERC, and others have initiated civil and criminal actions. The Financial Accounting Standards Board has aggressively pursued necessary changes in accounting rules, and private-sector groups have developed and implemented "best practices" rules and improved the techniques of managing credit and other risks in the OTC energy derivatives transactions.

    The lessons of Enron and of California have been learned. The misdeeds and regulatory violations involving Enron and California have challenged regulators under the existing regulatory structure. Law enforcement agencies and private litigants are dealing with it under the existing regulatory structure. The energy markets are beginning to rebound, and they are becoming less volatile, notwithstanding the current uncertain economy. As a result and because of all this, the Feinstein amendment is little more than a solution in search of a problem, but for reasons I have already mentioned, it is a solution that is dangerous and unnecessary and will put more rigidity into our economy at a time when we need the flexibility and the resilience that will make our economy more dynamic in these difficult times.

    Mr. President, there are a lot of other aspects of this debate we need to review before we vote on this amendment. I am hopeful by the end of the day we are going to be in a position where we can, as a Senate, deal with this amendment, as we dealt with it last year, by rejecting it and telling our energy derivatives markets, and all of our OTC derivatives markets, that the current modernized regulatory structure we put into place in 2000, as we follow the President's working group recommendations as to how to deal with these issues, will be maintained and will not be changed, and they can continue to utilize these important financial tools to keep our economy strong and dynamic.

    Mr. President, I yield the remainder of my time.