05.22.08

Senators Cantwell and Snowe Push for More Oversight in Energy Markets

WASHINGTON, D.C. – U.S. Senators Maria Cantwell (D-WA) and Olympia J. Snowe (R-ME) will send a letter to the Commodity Futures Trading Commission (CFTC) calling for the Commission to require greater scrutiny of foreign trading of U.S. delivered commodities.  Energy traders in the United States utilize foreign futures platforms that trade U.S. delivered energy goods.  Most notably, substantial trading occurs on the International Petroleum Exchange in London, while the United Kingdom’s Financial Service Authority does not regulate these markets with the same degree of regulations as the CFTC in the United States.  At a time, when energy speculators are having substantial impact on the price at the pump it is essential that these markets are transparent and not subject to manipulation. 
 
 "The price at the pump keeps going up and up, yet we have oil company executives testifying before Congress that oil should be around $50-60 a barrel," said Cantwell.  "We must establish a clear, bright line to help protect consumers from any illegal activity that could be causing these out of control gas price hikes and burst the oil price bubble."
 
“With Memorial Day weekend upon us, millions of Americans will be traveling nationwide paying record-high gas prices at the pump while oil companies enjoy record-high profits,” said Senator Snowe.  “There couldn’t be a more important time to ensure that the playing field is level and we have consistent oversight of our energy markets.”
 
While the Farm Bill Congress recently passed brings some transparency and oversight to these markets, speculators essentially still have a free hand to continue gaming the market using the “Foreign Exchange” loophole. Under this administrative loophole, federal regulators can issue so-called “no-action letters” to overseas energy trading platforms.  As the letter’s name implies, it promises that the CFTC will take “no-action” against them to enforce U.S. anti-manipulation laws and allow trading of energy products for delivery and consumption within the U.S.  One such “no-action letter” allows the trading of U.S.-based crude oil, home heating oil, and gasoline futures upon the ICE Futures Europe exchange, even though that exchange is U.S. owned, run out of Atlanta, Georgia and dominated by U.S. financial interests.
 
[The full text of the letter below]
 
May 23, 2008
 
Commodity Futures Trading Commission
Three Lafayette Centre
1155 21st Street, NW
Washington, DC 20581
 
 
Dear Acting Chairman Lukken and Commissioners Dunn, Sommers, and Chilton:
 
We are writing to request that the Commission take immediate action to protect consumers by ensuring that U.S. energy futures markets are fully transparent and subject to direct Commission oversight. The doubling of crude oil prices in just one year is unprecedented in its volatile century old history. With oil central to our nation’s economy and current standard of living, today’s skyrocketing oil prices represent a massive new tax on American families and businesses, and in effect a massive transfer of wealth from energy consuming nations to countries such as Saudi Arabia, Iran, and Venezuela that control most of the world’s remaining oil reserves.
 
Congress has received testimony from energy market experts, oil company executives, and major industrial energy consumers that the price of oil and gas can no longer be explained or predicted by normal market dynamics or their historic understanding of supply and demand fundamentals. Last month, an executive from Exxon Mobil testified under oath that the price of crude oil should be about $50 to $55 per barrel based on the supply and demand fundamentals he had observed. Yet current crude oil prices, and crude oil futures, are expected to remain well above $100 for the next several years with one prominent investment bank active in these markets predicting the price of crude could soon reach $200 a barrel.  
 
Congress has given the Commodity Futures Trading Commission (CFTC) the authority and responsibility to prevent fraud, manipulation, and excessive speculation in U.S. commodity markets. However, recent investigative reports by Congress and the Government Accountability Office (GAO), corroborated by substantial Congressional testimony from market users and experts, have documented that the lack of oversight on electronic energy future trading platforms—such as the InterContinental Exchange (ICE)—may be contributing to today’s out-of-control energy prices. For example, the Senate Permanent Subcommittee on Investigations found in its comprehensive June 2007 report that the now-defunct Amaranth Advisors hedge fund purposefully utilized energy futures markets not under Commission oversight to control huge speculative positions in order to manipulate natural gas futures prices. It is estimated that Amaranth’s alleged manipulative schemes cost consumers over $9 billion.
 
In the recently passed CFTC Reauthorization Act of 2008, Congress requires the CFTC to establish oversight over electronic energy exchanges such as ICE. However, we believe that an informal Commission staff “no action” letter process is continuing to allow electronic exchanges located beyond our borders to trade U.S. based commodities, effectively free from direct U.S. regulation meant to prevent fraud, manipulation, and excessive speculation. In particular, one such “no action” letter permits trading of U.S.-based West Texas Intermediate (WTI) crude oil and related products such as home heating oil and gasoline upon ICE Futures Europe, a wholly owned subsidiary of Atlanta based ICE. The WTI contract is trading in ICE Futures Europe in direct competition with the New York Mercantile Exchange’s (NYMEX) signature oil futures contract, which is regulated by the CFTC. It is estimated that now over a third of U.S. delivered WTI contracts go thru ICE, extraordinary considering ICE only began trading WTI contracts in February 2006 and that the price of oil has risen from about $60 a barrel to over $130 during the same time period. 
 
The Commission’s abdication of oversight responsibility seems to stem primarily from two deeply flawed assumptions. The first is that the lax regulatory structure of the United Kingdom’s Financial Service Authority (FSA) is comparable to CFTC and sufficient to police this critical market sector. We note that the FSA has been the subject of recent and intense criticism for its relaxed “principles based” regulation, which led to the collapse and then the need to nationalize England’s Northern Rock bank. Second, that the foreign board of trade status granted to the International Petroleum Exchange in 1999 when it was a United Kingdom entity serving as an exchange for trading foreign delivered energy products is still applicable even after the International Petroleum Exchange was purchased by the ICE in 2001 and began listing American commodities. 
 
We believe that the increased oversight of electronic energy exchanges established by Congress in the CFTC Reauthorization Act of 2008 requires a reevaluation of these assumptions. The Commission’s no-action policy may be allowing for excessive speculation and manipulation responsible for today’s outrageous oil and gasoline prices, and the Commission’s inability to promptly respond to Congressional inquiries regarding the amount of speculation and market monitoring in these markets alarm us. 
 
Therefore we insist that the Commission require ICE to show cause as to why its U.S. based contracts should not be subject to the same level of oversight and transparency as is applied to fully regulated U.S. exchanges. Effectively revoking the Commission’s no-action letters is one of the few actions the federal government can take to reduce pump prices within the next two to three months. Absent expeditious Commission action, Congress may need to step in to protect consumers and ensure that all markets trading U.S. delivered energy futures are transparent and free of fraud, manipulation, and excessive speculation. We look forward to working with you to meet our shared goals of protecting American consumers and ensuring a fair and well-functioning energy futures market. Please respond to us in writing by June 5, 2008 as to actions the Commission has taken in response to this request.
 
Sincerely,
 
 
Sens. Maria Cantwell and Olympia Snowe
 
 
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