To exclude metals from regulatory oversight by the Commodity Futures Trading Commission.

ENERGY POLICY ACT OF 2003

The ACTING PRESIDENT pro tempore. Under the previous order, the
Senate will resume consideration of S. 14, which the clerk will report.
The legislative clerk read as follows:

A bill (S. 14) to enhance the energy security of the United
States, and for other purposes.

Pending:

Feinstein amendment No. 876, to tighten oversight of energy
markets.
Reid amendment No. 877 (to amendment No. 876), to exclude
metals from regulatory oversight by the Commodity Futures
Trading Commission.

The ACTING PRESIDENT pro tempore. The Senator from the great State of
Idaho.
Mr. CRAIG. Mr. President, we are now resuming debate on S. 14, the
national energy policy for our country. I have been on the floor
several times over the last number of weeks as we have debated
different amendments. Yesterday, there were a couple of critical votes
as it related to nuclear. We have a derivatives amendment at this time
by the Senator from California, and I think the Senator from Nevada has
a second degree on it.
A fundamental question again emerges, and emerged yesterday at a
hearing on the Hill, with the statement of our Federal Reserve Chairman
Alan Greenspan as to the importance of a national energy policy.
Why is the Chairman of the Federal Reserve, who is interested in the
prime rate and the management of monetary supply of our country,
concerned about energy? It is fundamental why he is concerned about
energy. He is concerned about the economy of our country and its
strength, stability, and ability to grow and provide jobs for the men
and women who currently do not have them, and to strengthen and
stabilize those jobs for the men and women who currently do have jobs.
What was he talking about yesterday? He was talking about one of the
primary feed stocks for energy in our country, natural gas; the
problems that we currently have with the supply of natural gas because
this country has not effectively explored and developed, for a variety
of reasons, our natural gas supply.
In the context of not providing supply, we have provided
extraordinary demands on the current supply. Under the Clean Air Act,
to meet those clean air standards, and out in the Western States and
those air sheds specifically, the only way you can meet those standards
and bring a new electrical generating plant on line is to choose to use
gas to fire a turbine, to generate electricity. That is a tremendously
inefficient way to use the valuable commodity of natural gas, but that
is exactly what the Federal Government has told our utilities over the
last two decades: If you are going to bring a new generation on line,
it will be a gas-fired electrical turbine. Coal has problems; we are
working on clean coal technology. This legislation embodies trying to
get us to a cleaner technology to fire the coal electrical generation
in our country.
As a result, what are we talking about? What has been said and what
we believe to be true is that there is now rapidly occurring a major
shortage in natural gas. As a result, that is not only going to drive
up the cost to the consumer in his or her individual home--and I will
read from an article: Another witness, Donald Mason, head of the Ohio
Public Utilities Commission, predicted that the average residential
heating bill next winter will be at least $220 higher per household
than last winter.
That is a real shock to an economy and to a household and why Alan
Greenspan is obviously worried that you spread that across a consuming
nation, and we are talking about hundreds of millions of dollars pulled
out of the economy to go to the cost of heating when it had not been
the case before. That was one of the concerns.
The other concern is the tremendous price hike we are seeing at this
time and the impact that will have. Gas prices have nearly doubled in
the past year to about $6.31 per Btu, and there is a 25-percent change
expected. We expect prices to peak and we have seen one instance, about
3 months ago, over a 200-percent increase in the price of natural gas
as a spike in the market.
S. 14 is legislation to help facilitate the construction of a major
delivery system out of Alaska. In Alaska at this moment we are pumping
billions of Btu's of gas back into the ground because we simply cannot
transport it to the lower 48 States, and we do not want to flare it
into the atmosphere as has been the approach in the past in gasfields.
It is too valuable a commodity, and we do not want to do that to the
environment.
We have also looked at other opportunities for access. Part of the
difficulty today is delivery systems and building gas pipelines across
America. This legislation has provisions to help facilitate more of
that as it relates to right of way and, of course, the recognition of
the environmental need and the consequence and appropriate adjustment
there.

What Alan Greenspan underlines in his comments, what Donald Mason

[[Page S7655]]

from the Ohio Public Utilities Commission underlines, was what Spence
Abraham said last Friday when he called for a June 26 meeting of the
National Petroleum Council to talk about this impending gas shortage
crisis: Our country needs a national energy policy.
I hope all of my colleagues rally to that reality. Why should we
force upon the American consumer a $200- or $300-increase in their
energy costs next year simply because this Senate and this Congress
will not do its work or can't do its work? We debated mightily a year
ago an energy policy. We got it to a conference. The differences were
too great. Ultimately, we could not arrive at a final product to go to
our President's desk.
What Senator Domenici has done as chairman of the Energy and Natural
Resources Committee is craft a broad-based national energy policy that
is as much production as it is conservation. It is as much new
technology as it is the advancement and the improving of existing
technology. It is truly a broad-based national energy policy for our
country. More gas? Yes. More coal usage? Yes. More wind usage? Yes.
More photovoltaic or sunlight usage? You bet. The development of new,
safe, clean, more effective utilization of nuclear? Absolutely. Why shy
away from any energy source at this moment when we are forcing them on
the American consumer and the economy of this country is increasing
costs in the area of energy?
Lastly, when we do all of that and we drive up the costs of the job
itself and the cost of the product produced by that job, we make
ourselves increasingly less competitive around the world.
I was out in the Silicon Valley this weekend. I met with 50 CEOs of
high-technology companies in San Jose. They are interested in a lot of
issues, but their No. 1 issue is energy and the ability to know that
when they build a plant in this country, whether it is in California or
in any other State, they are going to be guaranteed a supply of high-
quality constant energy. The reality is when they do not have it, they
will shop elsewhere to build that plant. If they can't get quality
sustainable energy in this country, then they will go elsewhere. That
means U.S. jobs go to some other country.
Shame on us as a country for having failed for the last decade to
produce a national energy policy, and in failing to do so, bringing
Alan Greenspan to the Hill to talk about an impending energy crisis
again in domestic supply of gas, and to have a utility commissioner
talk about a $220-per-year increase in the cost of heating the average
American home by natural gas.
Less food on the table, less money in the college trust fund for the
children--all of those could be the consequence of a home that is
unemployed, a home that has to choose between staying warm and doing
other things. In a cold winter, ultimately, they will want to stay warm
and they will have to pay their heating bill. We should not ask
Americans to make that choice if it is our failure to produce a
national energy policy and to produce energy that has caused them to
have to make that choice. That is the issue.
I hope the Senate will expedite the passage of S. 14. We have been on
it now nearly 4 weeks, 3 weeks to be exact. We are being told there are
hundreds of amendments out there. There are not hundreds of amendments
on this side of the aisle. There are a few. We ought to ask, and I hope
we can get by the end of business this week, a finite list and a
unanimous consent that will bring this issue together so we can say to
our colleagues and to the American people: The Senate is ultimately
going to vote on this legislation, help produce a national energy
policy, get it into conference with the House, and get it on the
President's desk as soon as we possibly can.
Not only does the absence of a national policy have a negative impact
on our economy, the presence of one--this legislation--could have a
tremendously positive impact. Many have said in the analysis of S. 14,
there are 500,000 new jobs in this legislation alone. That could be
more jobs that would be created over the next 10 years by this
legislation than could be created by the economic stimulus package,
although we believe that will have a tremendously positive impact.
That is why we are here in the Chamber debating it. I am frustrated
by those who say: Oh, no, not now; we can't do this; we can't do that;
or we have hundreds of amendments; or we are obstructing or dragging
our feet.
Let's get a unanimous consent agreement. Let's get Senators to bring
those amendments to the floor. I am certainly willing to debate them. I
think we ought to vote on them. The American people ought to sort us
out and see who is for energy production in this country, who is for
driving down the projected costs to the average home when it comes to
their heating bill, who is in favor of creating hundreds of thousands
of new jobs in clean technology, environmentally sound technology, and
making this Nation once again self-reliant in the area of energy.
S. 14 is critical legislation. We ought to be voting on it now. We
ought not be dragging our feet or, in some instances, obstructing. The
debate is critical. Senators, bring your amendments to the floor. The
chairman has pleaded with us time and time again to craft a unanimous
consent agreement. The Senator from Nevada, the whip for Democrats, has
worked with us to try to get a unanimous consent agreement. If, on
Friday, we cannot produce a unanimous consent agreement of the body of
amendments that will finally be offered and debated on this bill, then
it begins to look as if somebody is obstructing this process, somebody
simply does not want it to go forward in an effective way to finalize
and produce for this country a national energy policy.
I certainly hope we can get on with the business that the Senate does
best--get to the floor, debate the issues, offer the amendments, vote
on them, and ultimately get this legislation to our President's desk so
our country can once again stand tall and strong in the field of
energy.
I yield the floor.
The PRESIDING OFFICER. The Senator from Nevada.
Mr. REID. Mr. President, I say to the distinguished Senator from
Idaho, we will, as I indicated to the majority leader today, have a
list sometime today, a finite list of amendments on our side. I would
also say the holdup, the slowdown on this bill in the last 24 hours is
not anything that we on this side have done. Senator Feinstein has
offered an amendment. That amendment needs to be disposed of before we
move forward. I hope the majority will make a decision in the near
future as to what they want to do with that amendment.
As indicated, I filed an amendment--I am confident my friend from
Idaho would agree with it--to exempt from her amendment minerals, which
are such an important part of the American West. They have agreed to
accept that amendment. Senator Feinstein has agreed to accept the
amendment--not, I am sure, because she likes the amendment a lot but
because she realizes what happened when there was a vote on this last
year.
I hope that amendment will be accepted, the majority will allow that
amendment to be accepted, and we can move forward on the Feinstein
amendment with an up-or-down vote or move to table, whatever they
decide to do on it, but let's move on.
Senator Feinstein, for example, has other amendments she wishes to
offer. She has one dealing with CAFE standards. That was debated last
time, but I am sure we will have to debate it this time. But we should
move forward on this legislation.
I want the record simply to reflect we are not holding up this
legislation. I have made public statements here, with the full
knowledge of the Democratic leader, that we are cooperating on this
Energy bill in the very best way we can. As we know, last year when we
had this bill up, there were 8 weeks of debate, approximately 125
amendments, and we had 35 recorded votes. I hope we need not do that
this time. I hope we can condense things and do it in fewer than 8
weeks.
I also said publicly I appreciate very much how Senator Frist has
handled the bills generally since he has taken the leadership of the
Senate--not filing cloture immediately. As long as we are cooperating,
which we are on this, offering substantive amendments, he has been very
good about allowing debate to go forward.
We continue, on this measure, to cooperate with the majority. We will

[[Page S7656]]

move forward with this most important legislation. I agree with the
Senator from Idaho, this country needs an energy policy. I underline,
underscore this. I didn't hear all his remarks, I was called off the
floor, but I did hear some of his statements regarding alternative
energy. The State of Nevada is the Saudi Arabia of geothermal. We are
waiting for that development. We need certain tax incentives included
in the tax portion of this bill.
We would thrive on more solar energy production. That can be done
with tax incentives that are in the underlying tax part of this bill.
Of course, the Senator from Idaho and I know how much the wind blows in
parts of Idaho and Nevada, and we should be using that wind to our own
benefit. It is renewable energy.
Even though there are certain things in the bill the Senator from New
Mexico produced that I was not wild about, that is what the process is
about. Amendments are offered. The Senator from New Mexico had strong
feelings about the nuclear portions of this legislation. We had a good
debate on that yesterday and a very close vote. That is what the Senate
is all about. There are other parts of the bill we are going to try to
amend. No one at this stage is trying to stall--I should not say no
one. I am sure some people would love this legislation never to come
about, but the general belief of the people on this side of the aisle
is we should have an Energy bill, and we are going to work toward that
end.

Mr. CRAIG. Will the Senator yield?
Mr. REID. I am happy to yield.
Mr. CRAIG. I appreciate those comments. I think we are all
frustrated, when we have an issue as mature as this issue is, not to be
able to define an arena of amendments and get a unanimous consent
agreement that sets a course of action for us. To me, that is what
defines progress and ultimate conclusion of what we do on the floor.
As I said earlier, I welcome all amendments that Senators want to
have come to the floor. Let's get at the business of debating them and
voting on them. When I see an hour quorum call because we cannot get
somebody to come to the floor to offer an amendment--and I know the
manager of the bill, the chairman of the Energy Committee, has worked
mightily to get that done--I have to begin to question what is our
intent here.
I am extremely pleased that the Senator from Nevada has recognized
the possibility of getting a unanimous consent with a group. I did
mention in my remarks that I know the Senator worked to accomplish
that, and I appreciate that. But in the absence of doing that, it
appears we are wandering a bit in a wilderness of undefinable
amendments and no determination as to when we can conclude this
process.
It is extremely pleasing to hear we may ultimately get that done
because this is a critical issue.
Mr. REID. I will respond to my friend from Idaho. No. 1, we hope to
have a list of amendments today sometime before the close of business.
No. 2, as the Senator from Idaho knows, as the Senator from New Mexico
knows, the lull in the proceedings here is not any fault of the
minority. We are waiting for the majority to make a decision as to what
they are going to do on the derivatives amendment filed by the Senator
from California and the Senator from Illinois.
We are here to do business. We are simply waiting, until a decision
is made on derivatives, as to what is the next amendment before us. We
have lots of people willing to offer amendments on this side.
The PRESIDING OFFICER (Mr. Graham of South Carolina). The Senator
from New Mexico.
Mr. DOMENICI. Mr. President, first I thank the distinguished Senator
from Idaho for his remarks this morning and for his assistance on this
bill. I thank him very much.
This morning I want in particular to thank the distinguished minority
whip, the Senator from Nevada, for his comments on the floor and his
commitment. We are working on a list on our side. We will certainly be
ready at the same time or sooner, which means whether we finish by this
Friday or not, although we will try mightily once we have the list to
wean them down and to move with dispatch. Obviously, we will be on a
course to get an Energy bill this year, which is clearly what we want
to do. From listening to the minority leader, I have no doubt
whatsoever that is what the minority desires to do. I thank him very
much for the comments here this morning.

As far as the pending amendment is concerned, it is in our hands at
this point. The Senator from California has her prerogative of not
wanting to set it aside. We have an obligation to decide what we are
going to do with it. We ought to do that pretty soon. Our leadership
will make that decision. It is not directly within the jurisdiction of
this committee, or I would be making decisions with the leadership. It
is more within the jurisdiction of the Agriculture Committee, and the
leadership is taking a look.
I understand we have a vote this morning on a judge. Is that correct?
That will give leadership a chance to be here in the Chamber, I say to
my friend from Nevada, after which time we will make a decision on what
we want to do with the pending amendment.
In the meantime, the Senator from New Mexico yields the floor knowing
there are others who want to speak to this issue. The junior Senator
from Idaho desires to speak. I will yield at this point so he may
proceed.
The PRESIDING OFFICER. The Senator from Idaho.

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

[[Page S7657]]

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.

[[Page S7658]]

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.
The PRESIDING OFFICER. Who seeks recognition?
Mr. REID. I suggest the absence of a quorum.
The PRESIDING OFFICER. The clerk will call the roll.
The assistant legislative clerk proceeded to call the roll.
Mr. REID. Mr. President, I ask unanimous consent that the order for
the quorum call be rescinded.
The PRESIDING OFFICER. Without objection, it is so ordered.
Mr. REID. Mr. President, what is the matter now before the Senate? Is
it the Reid amendment to the Feinstein amendment?
The PRESIDING OFFICER. The Reid amendment is the pending question.

Amendment No. 877, As Modified

Mr. REID. Mr. President, I have a modification to my amendment which
I send to the desk.
The PRESIDING OFFICER. The amendment is so modified.
The amendment (No. 877), as modified, is as follows:
On page 18, strike line 1 and insert the following:
``(10) Metals.--Notwithstanding any other provision of this
subsection, an agreement, contract, or transaction in
metals--
``(A) shall not be subject to this subsection (as amended
by section ____04 of the Energy Policy Act of 2003); and
``(B) shall be subject to this subsection and subsection
(h) (as those subsections existed on the day before the date
of enactment of the Energy Policy Act of 2003).
``(11) No effect on other authority.--

Mr. REID. I state, Mr. President, I did this with no one from the
majority being here, but it does not take unanimous consent, so I was
not trying to take advantage of anyone.
I suggest the absence of a quorum.
The PRESIDING OFFICER. The clerk will call the roll.
The assistant legislative clerk proceeded to call the roll.
Mr. ENZI. Mr. President, I ask unanimous consent that the order for
the quorum call be rescinded.
The PRESIDING OFFICER. Without objection, it is so ordered.
Mr. ENZI. Mr. President, I rise to address the overlying amendment
pending before us concerning the issue of energy derivatives. I know
there is a second-degree amendment to that. I am a little disappointed
there is a second-degree amendment to it. I understand why it was done.
I know the Senator from California wants to separate off those people
who are interested in metals derivatives from those who are interested
in energy derivatives. She knows there is considerable interest on both
of those parts. So this is a divide-and-conquer strategy, where later
they will pick up the metals folks, thinking it will probably work
better, because we debated this last year. We debated the same issue.
We are back to an amendment that is slightly revised but still not good
enough to make it through this body before.
We voted on this and we defeated this. One significant change is the
second-degree amendment that takes the metals derivatives out of it.
That is clever, but I hope the metals folks don't fall for it because
they are next on the list.
The proponents of the amendment believe the trading of derivatives--
especially in the energy area--was the cause of energy problems faced
by Western States in recent years. The proponents believe energy
trading of derivatives by Enron contributed significantly to the energy
problem. Unfortunately, the problems that caused Enron to fail were
based upon failures in corporate governance and outright fraud.
Chairman Greenspan has testified several times before congressional
committees that derivatives did not cause the collapse of Enron.
Last year we debated the same issue and we voted it down. The issue
of derivatives trading is one of the most complicated and detailed
issues to come before us. I have been tempted to see how many of us
could even spell derivatives, and we are being called on here to make
some major judgments on the issue. If you are a derivatives dealer or a
small company that uses derivatives to stabilize revenues, or you are a
purchaser of derivatives, this would probably be a stimulating debate.
But it is one of those detailed ones, and I think that is why I get to
speak on it. It is more the accounting type of thing. Consequently,
most people will not be able to understand the implications or even how
it operates other than in general details, and I am including myself in
that.
I must admit that as chairman of the Securities and Investment
Subcommittee of the Banking Committee, I have encountered especially
complex market structure orders. However, the issue of derivatives goes
beyond those issues. This may have been the most complicated matter I
have looked at since I have been in the Senate.
Nobody really knows what a derivative is, including myself. They are
very complicated, tailored instruments, each one being unique, which
explains why, from the beginning of the trading of derivatives, it has
been deregulated. It has never been regulated. In very basic terms, the
selling of derivatives is a way for companies that cannot afford risk
to pass it on to companies that are willing to accept the risk, to buy
the risk. It is a form of corporate insurance. However, beyond this
simple definition, the experts should be left to structure and
negotiate the instruments. I want to mention that each instrument is
unique. That is why it is not traded on the stock market. However,
beyond this simple definition, we do need to leave it to the
professionals, the ones who understand how this works. And there are
professionals out there working on it.

While the amendment before us is very similar to last year's
amendment, the changes made to the amendment do not completely solve
the underlying problems. In fact, the amendment may have cause for
greater confusion as to the jurisdiction of derivatives between the
Commodity Futures Trading Commission, the Securities and Exchange
Commission, the Office of the Comptroller of the Currency, and the
Federal Energy Regulatory Commission.
In 2000, during the debate on the Commodity Futures Modernization
Act, we discussed extensively the oversight and regulation of energy
derivatives. We concluded that the proper amount of oversight for a new
and emerging business had been put into law. I believe we took the
proper course. That law gave the Commodity

[[Page S7659]]

Futures Trading Commission additional powers to regulate market
manipulation where appropriate.
One argument that was made over and over during the debates last year
and is being made this year is that somehow the 2000 legislation
exempted these derivatives and swaps from regulation. That argument is
not true. They never have been regulated. In fact, Congress acted in
passing the Futures Trading Practice Act in 1992 to give the Commodity
Futures Trading Commission specific power to exempt these derivatives
and swaps as being inappropriate for regulation under the Commodity
Futures Trading Commission, which has the job of regulating futures--
not regulating tailored swaps between sophisticated customers.
The Congress passed the Futures Trading Practice Act in 1992 that
directed the Commodity Futures Trading Commission to grant these
exemptions. Those exemptions were granted in the previous
administration, and the issue was not controversial until we started
looking for a scapegoat. Nor have these swaps and derivatives ever come
under Federal regulation in terms of an ongoing regulatory process.
Taxpayers take a dislike to the addition of programs to increase tax
burden or regulation. This one is regulation. I am reminded of a poem
from the play ``Big River'' that describes the emotions of a taxpayer.
It goes:

Well you sole selling no-good
Son-of-a-shoe-fittin' firestarter
I ought to tear your no-good
Perambulatory bone frame
And nail it to your government walls
All of you, you Bureaucrats.

There is a concern across this country for bureaucrats setting up
regulation, particularly regulation if it is not needed and regulation
that is not understood by the regulators.
During his testimony before the Senate Banking Committee last March,
Chairman Greenspan reiterated it was crucially important that Congress
and Federal regulators permit the derivatives market to evolve amongst
professionals who are the most capable of protecting themselves far
better than Congress, the Federal Reserve, CFTC, or the Office of
the Comptroller of the Currency. Unfortunately, there is a considerable
downside for the Federal Government to get involved where the
individual private parties are already looking at the economic events
of their trading partners.

With respect to the Enron matter, there is no indication that the
trading of energy derivatives contributed in any way to the collapse of
Enron. Proponents of the amendment argue that Enron had such a large
market share of this business that they were able to have undue
influence over energy trading. However, to the contrary, during and
after Enron's collapse, there were no interruptions of trading. If it
had been a disaster, there would have been interruptions, but there
were no interruptions of trading. The market continued.
One fear that existed in earlier debates, and still exists today, was
that the CFTC did not have the regulatory power to correct abuses in
trading of derivatives. However, on page 43 of the Senate companion
bill, S. 3283, to the Commodity Futures Modernization Act of 2000,
paragraph (4)(B) gives the Commodity Futures Trading Commission the
power to intervene and enforce any action where fraud is present.
In listening to proponents of this amendment, one would believe that
Federal regulators were powerless in the energy trading markets. Not
only does the power exist, but it was strengthened in the 2000
legislation by a provision written into the energy section of the bill
in the House of Representatives. In paragraph (4)(C) is a provision
relating to price manipulation and that grants the Commodity Futures
Trading Commission the power to intervene in cases where price
manipulation occurs.
It should be noted that the Commodity Futures Trading Commission on
April 9 of this year issued a ``Report on Energy Investigations,''
which details civil and criminal enforcement actions brought in energy-
related markets since the passage of the Commodity Futures
Modernization Act in 2000. The powers granted to the Commodity Futures
Trading Commission appear more than sufficient to oversee market
manipulation and, therefore, make the unwieldy regulatory scheme
proposed by this amendment unnecessary.
I ask unanimous consent that the entire ``Report of the Energy
Investigations'' be printed in the Record.
There being no objection, the material was ordered to be printed in
the Record, as follows:

Commodity Futures Trading Commission's Report on Energy
Investigations--April 9, 2003

The Commodity Futures Trading Commission (the Commission or
CFTC) has launched an extensive investigation of alleged
misconduct in energy-related markets. To date, the Commission
has investigated over 25 energy companies, including Enron
and its affiliates, interviewed or taken testimony from over
200 individuals and reviewed in excess of 2 million
documents. The Commission's efforts have already resulted in:
the filing of three major enforcement actions, two of which
were settled with civil monetary penalties totaling $25
million (see discussion below in Section I); related criminal
filings (Section II); cooperative enforcement with Federal
law enforcement officers; and public outreach efforts
(Section IV).
The Commission has devoted significant resources to this
investigation, including committing the full-time efforts of
30 staff members, which represents 25 percent of its total
enforcement program staff. Through the first six months of
fiscal year 2003, above and beyond its human resource costs,
the Commission has spent $122,000 on expenses for its energy
investigation, which is 30 percent of its enforcement
program's total expenses during this time period. The
Commission estimates its total energy investigation costs for
the entire fiscal year should likely exceed $250,000.
Commission Chairman James E. Newsome, who is a member of
the President's Corporate Fraud Task Force, remarked in
connection with the commission's filing of an action against
two energy companies in December 2002: ``My philosophy has
been, and will continue to be, that the Commission has a
responsibility to investigate alleged wrongdoing in a
comprehensive and timely fashion. And, when violations are
found, the Commission will come down hard. Over the course of
the past year, the news has been peppered with admissions,
accusations, and speculation of wrongdoing in the energy
markets and, as a result, I have committed the Commission's
resources to finding and punishing the wrongdoers. It is my
belief that with the filing and simultaneous settling of this
enforcement action, the Commission sends a clear message to
all companies that engaged in similar behavior . . . a
message that their actions will not be tolerated and that
they will be prosecuted and subjected to the full
consequences of the law.''

I. Civil Injunctive Actions Filed by the Commission

A. Enron and Former Enron Vice President Charged With Manipulating
Prices in Natural Gas Market; Enron Charged Further With Operating an
Illegal, Undesignated Futures Exchange and Offering Illegal Lumber
Futures Contracts Through Its Internet Trading Platform

On March 12, 2003, the Commission filed a complaint in
federal district court in Houston, Texas, charging defendants
Enron Corp. (Enron), an Oregon Corporation headquartered in
Houston, and Hunter S. Shively (Shively) of Houston, Texas,
with manipulation or attempted manipulation, and charging
Enron with operating an illegal futures exchange, and trading
an illegal, off-exchange agricultural futures contract.
Until its bankruptcy in December 2001, Enron was one of the
largest energy companies in the United States. Its natural
gas trading unit was based in Houston and managed several
natural gas over-the-counter (OTC) products. Enron's natural
gas trading unit was divided into geographical regions and
included a natural gas futures desk. Shively was the desk
manager for Enron's Central Desk from May 1999 through
December 2001.
From November 1999 through at least December 2001, Enron
Online (EOL) was Enron's web-based electronic trading
platform for wholesale energy, swaps, and other commodities,
including the Henry Hub (HH) natural gas next-day spot
contract that was delivered at the HH natural gas facility in
Louisiana. The HH is the delivery point for the natural gas
futures contract traded on the New York Mercantile Exchange
(NYMEX), and prices in the HH Spot Market are correlated with
the NYMEX natural gas futures contract. During its existence,
EOL became a leading platform for natural gas spot and swaps
trading.
The complaint charges that on July 19, 2001, Shively,
through EOL, caused Enron to purchase an extraordinarily
large amount of HH Spot Market natural gas within a short
period of time, causing artificial prices in the HH Spot
Market and impacting the correlated NYMEX natural gas futures
price.
The complaint also charges Enron with operating EOL as an
illegal futures exchange from September through December
2001. According to the complaint, in September 2001, Enron
modified EOL to effectively allow outside users to post bids
and offers. Enron listed at least three swaps on EOL that
were commodity futures contracts. The complaint further
alleges that with this modification, Enron was required to
register or designate EOL with the CFTC or notify the CFTC
that EOL was exempt from registration. Enron

[[Page S7660]]

failed to do either of these things, and the complaint
charges that, because of this failure, EOL operated as an
illegal futures exchanged.
Finally, the complaint charges Enron with offering an
illegal agricultural futures contract on EOL. According to
the complaint, between at least December 2000 and December
2001, Enron offered a product on EOL it called the US
Financial Lumber Swap. The complaint alleges that the EOL
lumber swap was an agricultural futures contract that was not
traded on a designated exchange or otherwise exempt, and
therefore was an illegal agricultural futures contract. The
CFTC is seeking against each defendant a permanent
injunction, civil monetary penalties and other remedial and
ancillary relief.

b. el paso merchant energy, l.p. settles claims under the commodity
exchange act that it intentionally reported false natural gas price and
volume information to energy reporting firms in an attempt to affect
prices of natural gas contracts

On March 25, 2002, the Commission issued an administrative
order settling charges of attempted manipulation and false
reporting against energy company El Paso Merchant Energy,
L.P. (EPME), a division of El Paso Corporation (El Paso). The
CFTC settlement order finds that from at least June 2000
through November 2001, EPME reported false natural gas
trading information, including price and volume information,
and failed to report actual trading information, to certain
reporting firms. According to the order, price and volume
information is used by the reporting firms in calculating
published indexes of natural gas prices for various hubs
throughout the United States. The order finds that EPME
knowingly submitted false information to the reporting firms
in an attempt to skew those indexes for EPME's financial
benefit. According to the order, natural gas futures traders
refer to the published indexes for price discovery and for
assessing price risks. The CFTC found that EPMS's false
reporting conduct violated the Commodity Exchange Act (CEA).
The order also finds that EPME's employees provided false
trade data because they believed it benefited their trading
positions or derivative contracts. In addition, the order
finds that EPME did not maintain required records concerning
the information that it provided to the reporting firms or
the true source of the information related to those firms, as
required by Commission regulations. As a result of its
actions, EPME violated the CEA and Commission regulations.
The order further finds that EPME specifically intended to
report false or misleading or knowingly inaccurate market
information concerning, among other things, trade prices and
volumes, and withheld true market information, in an attempt
to manipulate the price of natural gas in interstate
commerce, and that EPME's provision of the false reports and
failure to report true market information were overt acts
that furthered the attempted manipulation. According to the
order, EPME's conduct constituted an attempted manipulation
under the CEA, which, if successful, could have affected
prices of NYMEX natural gas futures contracts.
The CFTC order imposed the following sanctions: required
EPME to cease and desist from further violations of the EA
and Regulations; required EPME and El Paso, jointly and
severally, to pay a civil monetary penalty of $20 milliion--
$10 million immediately and $10 million plus post-judgment
interest within three years of the entry of the order; and
obliged EPME and El Paso to comply with various undertakings,
including an undertaking to cooperate with the Commission in
this and related matters, including any investigations of
matters involving the reporting of natural gas trading
information.
EPME provided significant cooperation in the course of the
Commission's investigation by, among other things, conducting
an internal investigation through an independent law firm,
waiving work product privilege as to the results of that
investigation, and compiling and analyzing trading data
which detailed all reported and actual trades in the
natural gas markets. The Commission took that significant
cooperation into consideration in its decision to accept
EPME's settlement offer.

c. dynegy marketing & trade and west coast llc settle claims under the
commodity exchange act that the intentionally reported false natural
gas price and volume information to energy reporting firms in an
attempt to affect prices of natural gas contracts

On December 19, 2002, the Commission issued an
administrative order settling charges of attempted
manipulation and false reporting against energy companies
Dynegy Marketing & Trade (Dynegy) and West Coast Power LLC
(West Coast). The CFTC settlement order finds that from at
least January 2000 through June 2002, Dynegy and West Coast
reported false natural gas trading information, including
price and volume information, to certain reporting firms.
According to the order, price and volume information is used
by the reporting firms in calculating published surveys or
indexes (indexes) of natural gas prices for various hubs
throughout the United States. The order finds that Dynegy
knowingly submitted false information to the reporting firms
in an attempt to skew those indexes for Dynegy's financial
benefit. According to the order, natural gas futures traders
refer to the published indexes for price discovery and for
assessing price risks. The CFTC found that Dynegy's false
reporting conduct violated the CEA.
The order further finds that in an effort to ensure that
its reported information would be used by the reporting
firms, Dynegy caused West Coast to submit information
misrepresenting that West Coast was a counterparty to
fictitious trades. In addition, the order finds that Dynegy
did not maintain required records concerning the information
which it provided to the reporting firms or the true source
of the information relayed to those firms, as required by
Commission Regulations. As a result of their actions,
Respondents violated the CEA and Commission Regulations.
The order further finds that Respondents specifically
intended to report false or misleading or knowingly
inaccurate market information concerning, among other things,
trade prices and volumes, to manipulate the price of natural
gas in interstate commerce, and that Respondents' provision
of the false reports and their collusion, which was designed
to thwart the reporting firms' detection of the false
information, were overt acts that furthered the attempted
manipulation. According to the order, Respondents' conduct
constitutes an attempted manipulation under the CEA, which if
successful, could have affected prices of NYMEX natural gas
futures contracts.
The CFTC order imposed the following sanctions: required
Dynegy and West Coast to cease and desist from further
violations of the CEA and Regulations; required Dynegy and
West Coast, jointly and severally, to pay a civil monetary
of $5,000,000; and obliged Dynegy and West Coast to comply
with their undertakings, including an undertaking to
cooperate with the CFTC in this and related matters.

II. Related Criminal Actions

a. enron's former chief energy trader pled guilty to conspiracy to
commit wire fraud in scheme to manipulate energy market

On October 17, 2002 the Office of the United States
Attorney for the Northern District of California announced
that Timothy N. Belden, who was Enron's Chief Energy Trader,
had agreed to plead guilty to conspiracy to commit wire fraud
in a scheme with others at Enron to manipulate California's
energy market. Specifically, Belden admitted that beginning
in approximately 1998, and continuing through 2001, he and
others at Enron conspired to manipulate the energy markets in
California by: (1) misrepresenting the nature and amount of
electricity Enron proposed to supply in the California
market, as well as the load it intended to serve; (2)
creating false congestion and falsely relieving that
congestion on California transmission lines, and otherwise
manipulating fees it would receive for relieving congestion;
(3) misrepresenting that energy was from out-of-state to
avoid federally approved price caps, when in fact, the energy
it was selling was from the State of California and had been
exported and re-imported; and (4) falsely represented that
Enron intended to supply energy and ancillary services it did
not in fact have and did not intend to supply. A sentencing
date has yet to be scheduled for Belden, but a status hearing
in his case is set for April 17, 2003. In announcing the plea
agreement, the efforts of the Commission, Federal Energy
Regulatory Commission (FERC) and Federal Bureau of
Investigation (FBI) were recognized.

b. former head of enron's short-term california energy trading desk
pled guilty to criminal charges based upon his and other enron traders'
criminal manipulation of the california energy markets

On February 4, 2003 the Office of the United States
Attorney for the Northern District of California announced
that Jeffrey S. Richter, who was the head of Enron's Short-
Term California energy trading desk, had agreed to plead
guilty to conspiracy to commit wire fraud in a scheme with
others at Enron to manipulate California's energy markets and
also to making false statements to investigators.
Specifically, Belden admitted to making false statements to
the FBI and U.S. Attorneys Office during the continuing
investigation into fraudulent trading practices in those
markets. Specifically, Richter admitted his participation on
behalf of Enron in two fraudulent schemes devised by Enron
traders, known internally within Enron as ``Load Shift'' and
``Get Shorty.'' Enron's ``Load Shift'' trading scheme
involved the filing of false power schedules to increase
prices by creating the appearance of ``congestion'' on
California's transmission lines, which permitted Enron to
profit through its ownership of transmission rights on the
lines and by offering to ``relieve'' the congestion through
subsequent schedules. Enron's ``Get Shorty'' trading scheme
involved the company's traders fabricated and sold
emergency back-up power (known as ancillary services) to
the California Independent Service Operator, received
payment, then cancelled the schedules and covered their
commitments by purchasing through a cheaper market closer
to the time of delivery. In announcing the plea agreement,
the efforts of the Commission, FERC, FBI, and the
Antitrust Division of the Department of Justice were
recognized.

[[Page S7661]]

C. Former Dynegy National 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

On January 27, 2003 the Office of the United States
Attorney for the Southern District of Texas, Houston
Division, unsealed a seven count federal indictment charging
Michelle Valencia, a former Senior Trader at Dynegy, with
three counts of false reporting under the CEA. Additionally,
Valencia was charged with four counts of wire fraud. The
indictment alleges that on three separate occasions in
November 2000, January 2001 and February 2001, Valencia,
responsible for trading natural gas through Dynegy's ``West
Desk'' caused the transmission of a report which include
price and volume data to certain publications knowing that
the trades had not actually occurred. In announcing the
indictment, the efforts of the Commission and the FBI were
recognized.

III. Cooperative Enforcement--Commission Seminar With Federal Law
Enforcement Officers on Energy Markets

On February 12, 2003 the Commission hosted forty federal
criminal law enforcement officers at a cooperative
enforcement session on current issues in energy
investigations. Attending were Assistant United States
Attorneys, Federal Bureau of Investigation agents, and United
States Postal Inspectors. The Commission's Division of
Enforcement, which coordinated the program, has been working
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 and their affiliates, employees and agents. The
meeting was designed to share expertise, and to discuss ways
for federal enforcers to cooperate in these inquiries.

IV. Public Outreach

In carrying out its regulatory and enforcement
responsibilities under the CEA, the Commission relies upon
the public as an important source of information. A
questionnaire, available by clicking on the Enron Information
link on the CFTC's homepage at
www.cftc.gov
, has been
prepared by the CFTC's Division of Enforcement to assist
members of the public in reporting suspicious activities or
transactions involving Enron, its subsidiaries, affiliates,
or related entities. The Division is also interested in
receiving information relating to suspicious activities or
transactions that may have affect West coast electricity or
natural gas prices, particularly in January 2000 through
December 31, 2001. Interested person can also call the
Commission's toll-free voice mailbox and leaving relevant
information at (866) 616-1783.

Mr. ENZI. Mr. President, I believe the amendment is overly broad and,
if adopted, will likely decrease market liquidity because of increased
legal and transactional uncertainties. Additionally, energy companies
may be discouraged from using derivatives to hedge price risks,
resulting in increased volatility in the energy markets. In the end, I
believe this will hurt the very consumers the legislation seeks to
help.
The amendment appears to grant the Federal Energy Regulatory
Commission primary jurisdiction over energy derivatives, but if the
Federal Energy Regulatory Commission determines that the derivative or
financial instrument is not under its jurisdiction, then the Federal
Energy Regulatory Commission should refer the derivative or financial
instrument to the appropriate Federal regulator. Unfortunately, this
will create great uncertainty for market participants as to which
agency's regulatory scheme the derivative would fall under.
I recently was involved in some pipeline questions and ran into the
circular path of fingerpointing where each agency said the other agency
and the other agency and the other agency was responsible until it
pointed back to the first agency, and nobody would look at the problem.
That is the kind of circular problem we are creating with this
amendment.
In addition, it goes without saying that Federal agencies want to
expand their jurisdiction and get bigger. It should be noted that while
the Federal Energy Regulatory Commission seeks to expand its authority
to regulate these energy derivatives markets, other Federal agencies,
particularly the financial regulatory agencies, believe such a
regulatory scheme would be detrimental to the market.
The amendment also would subject to regulation a broad class of
``covered entities,'' including both electronic trading facilities and
``dealer markets'' that are not otherwise trading facilities. As
discussed above, this definition may be too broad as to deter
participants from entering the trading markets.
In addition, the amendment would permit CFTC to impose notice,
reporting, price dissemination, recordkeeping, among other
requirements. Not only would these requirements apply to dealer
markets, but also to exemption commodity transactions on such an
entity.
The secondary amendment that would exempt metals from the proposed
regulatory scheme of the underlying amendment is not a good idea.
Congress should be very cautious about carve-outs without fully
understanding the implications. With regard to metals, Congress may
start down a slippery slope where this initial carve-out is for the
metals industry and then move on to other industries. I believe we need
to explore this in the committees before having it considered on the
floor. Therefore, I urge Members to resist the free vote without
knowing all the consequences.
Letters were recently sent to the Senate Energy Committee by the
Chicago Board of Trade, the Chicago Mercantile Exchange, and the New
York Mercantile Exchange opposing legislation introduced this Congress
that is very similar to the amendment before us.
Various other groups have been outspoken about this amendment,
including the National Mining Association, the International Swaps and
Derivatives Association, and the Bond Market Association, just to name
a few. In addition, during last year's debate on the Energy bill, the
President's working group, comprised of the Chairman of the Board of
Governors of the Federal Reserve, the Secretary of the Department of
the Treasury, the Chairman of the SEC, the Chairman of the CFTC,
opposed a similar amendment and we defeated it. Individually, the
Chairman of the CFTC and the then-Chairman of the SEC sent letters
directly to me opposing the energy derivative amendment.
On the overall topic of derivatives, Chairman Greenspan stated:

Although the benefits and costs of derivatives remain the
subject of spirited debate, the performance of the economy
and the financial system in recent years suggests that these
benefits have materially exceeded the costs.

If the proponents of this amendment are attempting to remedy the
problems caused by Enron, I do not believe this amendment will make a
difference to prevent future Enrons. However, if last year's Sarbanes-
Oxley Act had been in place sooner, then the corporate governance
requirements of the act may have served as an early warning system to
Enron's audit committee and have covered the fraudulent activities
early in the process.
What I am saying is, we corrected the fraudulent problem. I am very
concerned that if we adopt this amendment, we may fundamentally change
the emerging derivatives market. Once the structure is in place, it may
place such a burden on the market participants that it may not be
worthwhile to pursue. In addition, the amendment may have caused
unintentional confusion as to which regulator may or may not oversee
individual participants or components of the marketplace. Before we
make any fundamental change, we should, at a minimum, try to understand
the ramifications first.
I am afraid this amendment might fit under the congressional precept
that if it is worth reacting to, it is worth overreacting to, and that
is something we have to avoid if we want to make sure that the markets
continue to exist. Like Chairman Greenspan, I believe the derivative
trading, even in the energy derivative area, has been extremely
beneficial to our economy and I hope we continue it.
I request that Members vote against the overlying amendment.
I ask unanimous consent that a letter from Jack Gerard of NMA be
printed in the Record.
There being no objection, the material was ordered to be printed in
the Record, as follows:

National Mining Association,

Washington, DC, June 11, 2003.
Hon. Mike Enzi,
U.S. Senate, Russell Senate Office Building, Washington, DC.
Dear Senator Enzi: The National Mining association opposes
attempts by Senator Feinstein or Senator Levin to further
regulate the derivatives OTC market. Over the Counter
derivatives including those based on energy and metals are
critical risk management tools.

[[Page S7662]]

We appreciate Senator Reid's positive work to exclude
metals from the pending amendment, but continue to oppose the
Feinstein or Levin amendments which unnecessarily increases
regulation of the OTC energy derivatives.
Attached are additional talking points generated by us and
our partners in the financial community. Thank you for your
interest.
Sincerely,
Jack Gerard.
____

Hon. Bill Frist,
Majority Leader, U.S. Senate,
Washington, DC.
Hon. Tom Daschle,
Democratic Leader, U.S. Senate,
Washington, DC.
The Honorable Bill Frist and the Honorable Tom Daschle: We
urge you to oppose any financial derivatives, energy
derivatives, metals derivatives and energy trading market
provisions contained in S. 509 that may be offered as
amendments by Senator Feinstein to H.R. 6, the Energy Policy
Act of 2003.
The provisions of S. 509 (introduced by Senator Feinstein
in March and referred to the Senate Agriculture Committee)
include, in addition to other problematic provisions,
language that would expand FERC jurisdiction, creating
uncertainty and unnecessary jurisdictional confusion between
the FERC and CFTC for financial and energy derivatives
transactions. The amendment also contains specific provisions
to expand FERC jurisdiction over ``other financial
transactions.'' In addition to creating legal uncertainty
within the OTC derivatives markets, this provision would
potentially call into question the CFTC's exclusive
jurisdiction over futures and options on futures.
Provisions contained in S. 509 are similar to the Feinstein
amendment, which was offered to last year's Senate energy
bill. The amendment was defeated in a cloture motion on April
10, 2002. In addition, key financial regulators have also
opposed these types of provisions. 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 (PWG), all opposed earlier
versions of the proposed legislation.
We ask that you preserve the legal activity achieved with
passage of the Commodity Futures Modernization Act of 2000
and oppose any amendments relating to financial derivatives
and the energy trading markets.
Sincerely,
American Bankers Association, ABA Securities Association,
Association for Financial Professionals, The Bond
Market Association, Emerging Markets Trade Association,
Financial Services Roundtable, The Foreign Exchange
Committee, Futures Industry Association, International
Swaps and Derivatives Association, Managed Funds
Association, National Mining Association, Securities
Industry Association.

1. what are derivatives?

The term ``derivatives'' refers to a wide array of
privately negotiated over-the-counter (``OTC'') and exchange
traded transactions. Over the last decade, OTC derivatives
transactions have grown to include not only interest rate and
currency swaps, but also interest rate caps, collars and
floors, swap options, commodity price swaps, equity swaps,
credit derivatives, weather derivatives and other financial
derivative products.

2. what is the over-the-counter market?

The OTC market is the principals' market whereby business
is transacted directly between the buyer and seller. There is
no middleman, exchange or clearinghouse involved. The OTC
market now sees most of the derivative activity, and dwarfs
the exchanges.

3. why do companies use derivatives?

Companies use derivatives to manage risk and enhance profit
potential. Derivatives have been around since the 1970s and
generally have been regarded as efficient tools that lend
stability to business operations. Corporations typically use
them to reduce risk from swings in currency values or
interest rate movements.

4. are derivatives important to the mining industry?

Since 1974, when the Commodity Exchange Act (CEA) was
enacted by Congress, derivatives have become very important
to the metals mining industry as a method to protect against
market volatility. Many of these products did not exist when
the Act was first adopted. These derivatives play a key role
in the metals hedging programs that gold producers have used
in periods of declining gold prices to sell their production
forward. Miners of other metals commodities also use
derivatives to manage the risk of fluctuating prices. Since
their creation, these metals derivatives products have always
been sold over-the-counter, mainly because the transactions
occur between or among large institutions and high worth
companies and the products can be customized for the
particular needs of the parties.

5. how have derivatives benefited market participants?

The growth of the derivatives market has been of
considerable benefit to users individually. In the gold
sector, central banks have been able to earn income on gold
holdings, while gold fabricators have been able to insulate
themselves from the impact of fluctuations in the price of
gold on their inventory holdings. Hedging has enabled
producers to develop new mines using project finance.

6. how would a company use derivatives to hedge their mine production?

A hedging program will typically include a mix of over-the-
counter derivative products, including ``Forward Sales'' and
``Spot Deferred Contracts.'' For example, in a spot deferred
contract a bullion dealer borrows gold from a central bank,
and sells it into the spot market at a price of $350 per
ounce. The proceeds are placed on deposit and earn interest
of 4%. A fee of 1% is paid by the bullion dealer to the
central bank. The interest difference of 3.0% is called
``contango.'' The mining company receives the original
proceeds from the spot sale ($350) plus the five years of
accrued interest ($56) for a total amount of $406 per ounce.

Talking Points for Feinstein Amendment to Senate Energy Bill

Senator Feinstein is offering an amendment to the
comprehensive energy bill which is now being considered on
the Senate floor. This amendment would subject OTC energy
derivatives to comprehensive, exchange-type regulation
including capital requirements.
Although Senator Feinstein has made some changes to her
original legislation as introduced, these are not significant
and do not address the concerns we have raised with you and
others.
The legislation still contains inappropriate layers of
regulation, including capital requirements for electronic
exchanges that only bring parties together and have no role
in any resulting transactions. This amount of regulation
sends the business offshore.
The legislation creates legal uncertainty by giving the
CFTC vastly expanded and undefined jurisdiction over all
types of commodities transactions, not just futures
contracts. The clarity of CFTC jurisdiction, and accompanying
legal certainty that transactions will not be deemed illegal
and voidable, created by the CFMA enacted in 2000 is
destroyed.
Legal uncertainty is compounded by the fact that FERC now
has a role that is supposedly dependent on whether energy is
actually delivered. However, the decision whether to deliver
energy may be made years after the transaction is entered
into, leaving the parties uncertain during the life of the
contract which agency has jurisdiction.
Message: Oppose the Feinstein Amendment. If action needs to
be taken, it should be done in a thoughtful, deliberate
manner through the Committee process, not as a floor
amendment.
Mr. ENZI. I yield the floor.

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