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ENERGY SPECULATION: IS GREATER REGULATION 

NECESSARY TO STOP PRICE MANIPULATION? 

HEARING 

BEFORE THE

SUBCOMMITTEE ON OVERSIGHT AND 

INVESTIGATIONS 

OF THE

COMMITTEE ON ENERGY AND 

COMMERCE 

HOUSE OF REPRESENTATIVES 

ONE HUNDRED TENTH CONGRESS 

FIRST SESSION 

DECEMBER 12, 2007 

Serial No. 110–78 

( 

Printed for the use of the Committee on Energy and Commerce 

energycommerce.house.gov 

COMMITTEE ON ENERGY AND COMMERCE 

JOHN D. DINGELL, Michigan, Chairman 

HENRY A. WAXMAN, California 

EDWARD J. MARKEY, Massachusetts 

RICK BOUCHER, Virginia 

EDOLPHUS TOWNS, New York 

FRANK PALLONE, JR., New Jersey 

BART GORDON, Tennessee 

BOBBY L. RUSH, Illinois 

ANNA G. ESHOO, California 

BART STUPAK, Michigan 

ELIOT L. ENGEL, New York 

ALBERT R. WYNN, Maryland 

GENE GREEN, Texas 

DIANA DEGETTE, Colorado 

Vice Chairman 

LOIS CAPPS, California 

MICHAEL F. DOYLE, Pennsylvania 

JANE HARMAN, California 

TOM ALLEN, Maine 

JAN SCHAKOWSKY, Illinois 

HILDA L. SOLIS, California 

CHARLES A. GONZALEZ, Texas 

JAY INSLEE, Washington 

TAMMY BALDWIN, Wisconsin 

MIKE ROSS, Arkansas 

DARLENE HOOLEY, Oregon 

ANTHONY D. WEINER, New York 

JIM MATHESON, Utah 

G.K. BUTTERFIELD, North Carolina 

CHARLIE MELANCON, Louisiana 

JOHN BARROW, Georgia 

BARON P. HILL, Indiana 

JOE BARTON, Texas 

Ranking Member 

RALPH M. HALL, Texas 

FRED UPTON, Michigan 

CLIFF STEARNS, Florida 

NATHAN DEAL, Georgia 

ED WHITFIELD, Kentucky 

BARBARA CUBIN, Wyoming 

JOHN SHIMKUS, Illinois 

HEATHER WILSON, New Mexico 

JOHN B. SHADEGG, Arizona 

CHARLES W. ‘‘CHIP’’ PICKERING, 

Mississippi 

VITO FOSSELLA, New York 

STEVE BUYER, Indiana 

GEORGE RADANOVICH, California 

JOSEPH R. PITTS, Pennsylvania 

MARY BONO, California 

GREG WALDEN, Oregon 

LEE TERRY, Nebraska 

MIKE FERGUSON, New Jersey 

MIKE ROGERS, Michigan 

SUE WILKINS MYRICK, North Carolina 

JOHN SULLIVAN, Oklahoma 

TIM MURPHY, Pennsylvania 

MICHAEL C. BURGESS, Texas 

MARSHA BLACKBURN, Tennessee 

PROFESSIONAL STAFF

DENNIS B. FITZGIBBONS, Chief of Staff 

GREGG A. ROTHSCHILD, Chief Counsel 

SHARON E. DAVIS, Chief Clerk 

DAVID L. CAVICKE, Minority Staff Director7*ERR03* 

SUBCOMMITTEE ON OVERSIGHT AND INVESTIGATIONS

BART STUPAK, Michigan, Chairman 

DIANA DeGETTE, Colorado 

CHARLIE MELANCON, Louisiana 

Vice Chairman 

HENRY A. WAXMAN, California 

GENE GREEN, Texas 

MIKE DOYLE, Pennsylvania 

JAN SCHAKOWSKY, Illinois 

JAY INSLEE, Washington 

JOHN D. DINGELL, Michigan (ex officio) 

ED WHITFIELD, Kentucky 

Ranking Member 

GREG WALDEN, Oregon 

MIKE FERGUSON, New Jersey 

TIM MURPHY, Pennsylvania 

MICHAEL C. BURGESS, Texas 

MARSHA BLACKBURN, Tennessee 

JOE BARTON, Texas (ex officio) 

(II) 

(III) 

C O N T E N T S 

Page 

Stupak, Hon. Bart, a Representative in Congress from the State of Michigan, 

opening statement ................................................................................................ 1 

Whitfield, Hon. Ed, a Representative in Congress from the Commonwealth 

of Kentucky, opening statement ......................................................................... 5 

Dingell, Hon. John D., a Representative in Congress from the State of Michigan, opening statement ....................................................................................... 6 

Burgess, Hon. Michael C., a Representative in Congress from the State of 

Texas, opening statement .................................................................................... 7 

Green, Hon. Gene, a Representative in Congress from the State of Texas, 

opening statement ................................................................................................ 9 

WITNESSES

Greenberger. Michael, professor of law and director, Center for Health and 

Homeland Security, University of Maryland ..................................................... 10 

Prepared statement .......................................................................................... 14 

Answers to submitted questions ...................................................................... 281 

Campbell, Laura, assistant manager, energy resources, Memphis Light, Gas, 

and Water ............................................................................................................. 32 

Prepared statement .......................................................................................... 34 

Cota, Sean, president and co-owner, Cota & Cota Incorporated ......................... 40 

Prepared statement .......................................................................................... 43 

LaSala, Tom, chief regulatory officer, division of compliance and risk management, New York Mercantile Exchange, Incorporated ....................................... 55 

Prepared statement .......................................................................................... 57 

Vice, Charles A., president and chief operating officer, Intercontinental Exchange, Incorporated ............................................................................................ 88 

Prepared statement .......................................................................................... 89 

Answers to submitted questions ...................................................................... 284 

Kelliher, Joseph T., Chairman, Federal Energy Regulatory Commission .......... 128 

Prepared statement .......................................................................................... 134 

Lukken, Walter, Acting Chairman, U.S. Commodity Futures Trading Commission .................................................................................................................. 188 

Prepared statement .......................................................................................... 191 

Answers to submitted questions ...................................................................... 286 

SUBMITTED MATERIAL

Staff Report, dated June 27, 2006 .......................................................................... 218 

Letter of December 10, 2007, from U.S. Commodity Futures Trading Commission to Committee on Energy and Commerce .................................................... 278 

(1) 

ENERGY SPECULATION: IS GREATER REGULATION NECESSARY TO STOP PRICE MANIPULATION? 

WEDNESDAY, DECEMBER 12, 2007 

HOUSE OF REPRESENTATIVES, 

SUBCOMMITTEE ON OVERSIGHT AND INVESTIGATIONS, 

COMMITTEE ON ENERGY AND COMMERCE, 

Washington, DC. 

The subcommittee met, pursuant to call, at 9:35 a.m., in room 

2123 of the Rayburn House Office Building, Hon. Bart Stupak 

(chairman) presiding. 

Members present: Representatives Melancon, Green, Barrow, 

Inslee, Dingell, Whitfield, Walden, Murphy, Burgess, Blackburn, 

and Barton. 

Also present: Representatives Fossella and Shimkus. 

Staff present: Richard Miller, Scott Schloegel, John Arlington, 

John Sopko, Carly Hepola, Alan Slobodin, Dwight Cates, and Kyle 

Chapman. 

OPENING STATEMENT OF HON. BART STUPAK, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF MICHIGAN 

Mr. STUPAK. The subcommittee will come to order. 

Today we have a hearing titled ‘‘Energy Speculation: Is Greater 

Regulation Necessary to Stop Price Manipulation?’’ Before we 

begin, I would like to make two quick comments. This is the 19th 

hearing of the Oversight and Investigations Subcommittee in 2007. 

I want to take a moment to thank all the staff and the members 

for their hard work throughout the year. This has been a very aggressive schedule, and I know staff on both sides of the dais have 

logged countless hours of investigations and research, and Members have done the same. 

I also want to thank my good friend, Mr. Whitfield, the ranking 

member, for his work and friendship on this subcommittee. Due to 

the departure of the former Speaker, Mr. Hastert, the minority redrew their subcommittee assignments, and this will be Mr. 

Whitfield’s last hearing as ranking member. However, you are 

going to remain on the committee, so your expertise will still be 

shared with all of us, and we thank you for your time and the courtesy you have shown me, personally, as chairman of the subcommittee this year. 

I would now like to recognize members for an opening statement, 

and I will begin. 

2 

Of the 19 hearings this subcommittee has held this year, today’s 

hearing is perhaps the most technical and complex. Americans do 

not sit around the dinner table and discuss futures markets, swaps, 

position limits, look-alike contracts, and exempt commercial markets. What families do talk about is the cost of gas, oil, home heating oil, and propane. They talk about how the high energy costs are 

literally taking food off their table to pay for their basic needs, such 

as transportation and warmth. 

In 1 day, we saw a 45-percent hike in gasoline prices in my district. In another energy spike example, one senior high-rise in my 

district saw their natural gas bill jump from just over $5,000 in November 2005 to an astonishing $13,000 one month later, in December. 

Futures contracts for energy are traded on New York Mercantile 

Exchange, NYMEX, which is regulated by the Commodity Futures 

Trading Commission, the CFTC. The unregulated international exchange market was created by the Enron loophole as part of the 

Commodity Futures Modernization Act of 2000. 

Unregulated markets are known as dark markets, because there 

is very little oversight of the trades. By trading on the dark ICE 

market, traders can avoid CFTC rules, which are in place to prevent price distortions and supply squeezes. This makes it difficult 

for regulators to detect excessive large positions, which could lead 

to price manipulation. Trading volumes on this dark market have 

skyrocketed in the past 3 years and are now as large, or even larger, in some months as the volumes traded on the regulated futures 

market. 

[Chart shown.] 

Chart 3 that is before us shows the quantity of natural gas futures contracts on NYMEX and ICE are almost equal in 2006; 239 

trillion cubic feet on NYMEX versus 237 trillion cubic feet on ICE. 

To put this trading volume in perspective, the total U.S. consumption of natural gas in 2006, represented by the yellow, horizontal 

line near the bottom, was only 21.6 trillion cubic feet. So why is 

trading on each market 10 times more than necessary to supply 

America? 

[Chart shown.] 

Chart 4 shows that only 600,000 natural gas contracts were traded on the dark ICE market in January 2005, but increased by 433 

percent to 3.2 million contracts by October 2007. And why is that? 

The spiraling growth in commodity trading and dark markets has 

left regulators with a blind spot and the public without information 

to track how non-commercial traders could be affecting energy 

prices. 

The CFTC has no control over dark markets, and they lack 

enough staff to police the regulated markets, let alone the unregulated dark markets. This lack of oversight means that traders who 

exceed limits or who shun openness of futures markets will merely 

take their business to the dark markets. 

Less than one percent of futures contracts ever result in physical 

delivery. Thus, most future trades are not interested in delivery of 

a product. They are interested in profit. The Energy Information 

Administration recently observed that oil markets have been drawing increased interest and participation from investors and finanVerDate Nov 24 2008 14:00 Feb 24, 2009 Jkt 037690 PO 00000 Frm 00006 Fmt 6633 Sfmt 6633 C:\DOCUMENTS AND SETTINGS\CWELLS1\110-78 SCOM1 PsN: JIMC
3 

cial entities without direct commercial involvement in physical oil 

markets. A report from Lehman Brothers entitled ‘‘Frenzied Oil 

Futures Frustrate Fundamentals’’ states: ‘‘The surge in oil markets 

to $90, the mirror image of last winter’s price fall, seems underpinned more by financial flows and political risk than by fundamental factors.’’ 

Oil and gas trader Steven Schrock, who published the Schrock 

Report on Energy Markets, wrote ‘‘factors other than supply and 

demand are now impacting the price. We now have to factor in how 

the speculators are going to affect the market, because they have 

different priorities in managing their portfolios.’’ Rather than a 

market that is serving a price discovery function, we have a market 

that is more and more driven by profits and excessive prices. Often 

it is speculation based on fear, which leads to greed. 

Because of the Enron loophole, several major energy companies 

and hedge funds have been charged with price manipulation. In 

February 2004, British Petroleum acquired 90 percent of all U.S. 

propane supplies. Once in control of the market, BP intentionally 

withheld propane from the market and charged buyers artificially 

inflated prices in a classic supply squeeze. In a recent Court settlement, BP agrees to pay $303 million in penalties and restitution. 

In July of this year, FERC and the CFTC brought anti-manipulation cases against Amaranth, a Connecticut-based hedge fund, 

which dominated natural gas financial markets for most of 2006 

until its ultimate collapse in September of 2006. FERC charged 

that Amaranth manipulated prices paid in the physical natural gas 

markets by driving down natural gas futures contracts through 

massive selling during the last 30 minutes of trading for the 

months of March, April, and May 2006 contracts. This then allowed 

Amaranth to profit from such larger short positions traded on the 

dark ICE market that bet on this price decline. FERC has proposed 

a $291 million in penalties and disgorgement of unjust profits. 

A June 2007 staff report by the Senate Permanent Subcommittee 

on Investigations entitled ‘‘Excess Speculation in Natural Gas Market’’ found Amaranth trading price increased volatility to the point 

that traders deemed the price ‘‘out of whack’’ with regard to supply 

and demand fundamentals. These out-of-whack prices may have 

cost industrial, commercial, and homeowners as much as $9 billion. 

When the regulated mark at NYMEX directed Amaranth to reduce 

its excessive positions in the natural gas contracts, Amaranth shifted 80 percent of its gas contracts over to the dark ICE market, allowing them to maintain and even increase their overall speculative position. 

[Chart shown.] 

Chart No. 6 shows that on August 28, 2006, Amaranth held 

nearly 100,000 contracts for September on ICE. To put this in perspective, by holding 100,000 contracts, a mere penny increase in 

price would result in profit to Amaranth of $10 million. Amaranth 

traders knew this move would be invisible to regulators. In an August 29 instant message about a large price move, Amaranth lead 

trader wrote, ‘‘classic pump and dump. Boy, I bet you see some 

CFTC inquiries in the last 2 days.’’ 

But another trader reminded him that most of the trades had 

taken place on the dark ICE market, using swaps. He replied, ‘‘only 

4 

until the monitor swaps, no big deal.’’ No big deal? Tell that to the 

homeowners across America who are paying record heating costs to 

heat their homes. Tell that to the domestic manufacturers who are 

paying exponentially higher energy prices to manufacture their 

goods. Tell that to the people who have been laid off because the 

manufacturing plant they worked in closed down and moved their 

operations offshore, where energy and labor costs are lower. Tell 

that to Municipal Gas Authority of Georgia, which buys natural 

gas for public utilities in four States and took $18 million in losses, 

which they contend was due to Amaranth’s trading scheme. 

In another case of market manipulation, in July of 2007 FERC 

and CFTC charged that the Energy Transfer Partners, ETP, manipulated natural gas prices by using its dominant market share 

in the Houston ship channel to force the price of natural gas down 

in order to profit from much larger short positions, many of which 

were held on the dark ICE market. This strategy earned ETP nearly $70 million in unjust profits, according to FERC. Driving down 

prices might seem to help consumers in the short term. However, 

in the long run, distorting price signals will drive up costs to consumers. 

I would like to now play voice recordings of individuals from the 

British Petroleum and Energy Transfer Partner cases. Here they 

are, in their own words. 

[Playing TV broadcast.] 

Shades of Enron all over again. So what are possible solutions 

to these problems of manipulation? CFTC recently proposed legislation to regulate dark markets. Witnesses today will explore whether these proposals go far enough to restore integrity to energy markets or will increase oversight of the dark market’s drive energy 

commodity trading overseas to less regulatory jurisdictions. ICE futures already trade oil, gasoline, and heating oil swaps for U.S. delivery in London under the UK’s Financial Services Authority, 

which has weaker market rules. 

Another tool in addressing manipulation is ensuring FERC’s authority to police price manipulation trades that impact delivery of 

energy. Legislative intent on the part of this committee is clear. We 

fully expect the authority granted to FERC through the Energy 

Policy Act of 2005 will be upheld. We question whether CFTC, in 

trying to block FERC from enforcing its anti-manipulation authority, is circumventing congressional intent. Consumers could pay 

dearly if CFTC prevails, and this committee is unlikely to be a bystander, should that unlikely event occur. 

A third possible solution which has been proposed by Professor 

Michael Greenberger, who will testify before us today, is for the 

CFTC to close the loophole that allows U.S. traders to avoid CFTC 

regulation by using less regulated foreign markets to trade energy 

commodities. There are also several pending legislative proposals 

intended to address this problem: H.R. 3009, The Market Trust Act 

of 2007, sponsored by Representatives Barrow and Graves, H.R. 

4066, Close the Enron Loophole Act, introduced by Representative 

Welch from Vermont, and H.R. 5942, Preventing Unfair Manipulation of Price Act, which I introduced with Chairman Dingell. 

In the end, what we need is less of the greed, of which we just 

heard from the traders’ own voices a few moments ago and more 

5 

honesty. We need to close the Enron loophole to close the foreign 

market loophole, and we need additional enforcement by the CFTC 

and FERC to clamp down on the fear and speculation that lead to 

greed and market manipulation. 

And with that, that is the end of my opening statement. I would 

next like to yield to Ranking Member, Mr. Whitfield. 

OPENING STATEMENT OF HON. ED WHITFIELD, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF KENTUCKY 

Mr. WHITFIELD. Thank you, Chairman Stupak, and I appreciate 

your comments about our working relationship on Oversight and 

Investigation, and I have certainly enjoyed working with you and 

look forward to continuing to do so as we move forward. 

I also appreciate this hearing this morning, and today’s hearing 

will cover many diverse and complicated topics regarding how energy markets operate and whether further regulation is necessary. 

We will hear testimony about the lack of market transparency and 

excess speculation in the designated contract markets regulated by 

the Commodity Futures Trading Commission and the Wholesale 

Energy Markets, regulated by the Federal Energy Regulatory Commission. We will hear about regulatory arbitrage between the regulated futures market managed by the New York Mercantile Exchange and the unregulated over-the-counter market managed by 

the Intercontinental Exchange, or ICE. 

These matters are important and complex. Daily trading volumes 

in the energy markets have grown significantly over the past few 

years. In January 2005, only 600,000 natural gas swaps were traded on the ICE Exchange. This number has grown to 3.3 billion in 

October of 2007. Increased trading activity has had an impact on 

price volatility, and concerns have been voiced about excess speculation and its potential impact on energy prices. Because of the crucial role energy prices have in our economy, Congress must ensure 

that regulators have the tools to protect energy consumers. As we 

consider all of these complex matters, I think we all share one fundamental concern. Do the prices consumers pay for energy represent fundamental supply and demand conditions in the marketplace, or are prices influenced by manipulation or other forces? 

According to the testimony of Ms. Laura Campbell, who represents the American Public Gas Association, the public utilities 

have lost confidence in the natural gas markets. She believes that 

market prices for natural gas are not an accurate reflection of supply and demand. I look forward to hearing her views, and I am 

sure that other members of the panel will also have views on this. 

However, there is some good news to report today from FERC. 

In response to provisions we included in the Energy Policy Act of 

2005, FERC acted quickly to establish its office of enforcement. As 

a result, FERC has an enhanced ability to police the electricity and 

natural gas wholesale markets to prevent market manipulation. 

We look forward to the testimony of FERC Chairman Joe Kelliher 

regarding FERC’s efforts to protect energy consumers. 

In his written testimony, Chairman Kelliher points out that Congress gave FERC all the tools needed 2 years ago. And at this time 

he testifies he does not believe that FERC needs any additional 

legal authority to protect consumers from market manipulation. I 

6 

also look forward to the testimony of the New York Mercantile Exchange and the Intercontinental Exchanges, based in Atlanta. 

NYMEX is highly regulated by the CFTC, and ICE is not regulated. As Congress considers changes to the Commodity Exchange 

Act to increase regulation of over-the-counter markets like ICE, we 

must ensure that FERC’s consumer protection authorities are not 

diminished in this process. 

Fundamentally, FERC is a consumer protection agency. With respect to the alleged manipulative trading by the hedge fund 

Aeromat, FERC was the first to identify the problem and open an 

investigation. CFTC followed behind FERC with its own investigation, and I think this demonstrates the important and aggressive 

role that they are playing in protecting the American consumer. 

Mr. Chairman, I was going to introduce Marsha Blackburn, who 

I think has a constituent testifying, but she had to leave for another matter. So I yield back my 32 seconds. 

Mr. STUPAK. I thank the gentleman, and hopefully Mrs. Blackburn will be back, because she is a vital member of this subcommittee. Next, I turn to the chairman of the full committee, Mr. 

Dingell, for an opening statement, please. 

OPENING STATEMENT OF HON. JOHN D. DINGELL, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF MICHIGAN 

Mr. DINGELL. Mr. Chairman, thank you, and good morning. I 

very much appreciate your holding this important hearing. 

The cost of energy is becoming an ever-enlarging component of 

the average citizen’s household budget for electricity, gasoline, 

heating, and for all kinds of products and services based on hydrocarbons. Energy costs are rising rapidly for industrial users as 

well. This in turn raises the price of products and services in virtually every sector of the American economy. 

The collapse of Enron in late 2001 confirmed what many had 

suspected. Not all the increases in energy prices are the result of 

supply and demand. Much of Enron’s business consisted of speculative trading in electronic, over-the-counter market exempt from 

regulation. It was virtually impossible for anyone, including the 

government regulators, to know what Enron was doing or how it 

was affecting the broader market. We now know that Enron engaged in fraud on a massive scale and manipulated California electronic and electric power markets, to the tune of millions of dollars 

out of the pockets of American consumers. Unfortunately, Enron 

was and is not alone. Over the past 6 years, the rise in energy 

prices has been outpaced only by the rise in speculation. 

In short, energy speculation is a growth industry, and it has gone 

global. A case in point is Amaranth. Over recent months in 2006, 

Amaranth, a $9 billion hedge fund, dominated trading in the U.S. 

natural gas contracts and intentionally drove down the price of natural gas futures on NYMEX so that it could make tens of millions 

of dollars on its undisclosed holdings in the so-called dark markets, 

the unregulated over-the-counter markets. This is not a victimless 

crime. In the summer of 2006, Amaranth took enormous positions 

which appeared to have inflated the price of natural gas for delivery in the following winter. Businesses, utilities, schools, and hosVerDate Nov 24 2008 14:00 Feb 24, 2009 Jkt 037690 PO 00000 Frm 00010 Fmt 6633 Sfmt 6633 C:\DOCUMENTS AND SETTINGS\CWELLS1\110-78 SCOM1 PsN: JIMC
7 

pitals, as well as individual consumers, wound up paying abnormally high rates as a result, to the benefit of Amaranth. 

As a result, and according to a recent Senate report, speculation of this nature may have added $20 to $25 per barrel to the price 

of crude in 2006. The Industrial Energy Consumers of America estimates that Amaranth’s speculation alone cost consumers of natural gas as much as $9 billion from April to August of last year. 

At a time when people everywhere in this country are paying 

record prices for gasoline and record prices to heat their homes, 

government has a responsibility to put an end to this speculative 

excess. 

This raises the interesting question of what the Federal Energy 

Regulation Commission, FERC, and the Commodity Futures Trading Commission, CFTC, two agencies that share jurisdiction over 

these matters, have done to address the problem. I understand that 

FERC has made considerable progress over the past years in providing its market surveillance capabilities to be improved and to be 

better in exercising its enforcement authorities. On the other hand, 

there are indications that CFTC may have been more enthusiastic 

in granting exemptions from regulation than it has been in routing 

out possible energy market manipulations. I look forward, as do 

you and the members of this committee, to exploring this matter 

further with CFTC. 

I am also disappointed to see that CFTC has challenged FERC’s 

authority to investigate and pursue the energy market manipulators, despite Congress’s explicit granting of authority to FERC in 

the Energy Policy Act of 2005. We will look forward to explanations 

of this rather curious behavior. I would hope that by the time we 

conclude this hearing, CFTC will have rethought its views on this 

issue, and we will try and help them to achieve that end. 

Mr. Chairman, speculative excess in the energy market has cost 

American consumers billions of dollars in unnecessary energy costs. 

It is time for us to close the loopholes that have allowed this unscrupulous consumer exploitation and see to it that the Federal 

agencies do what it is they are supposed to do to protect the American consumers. Thank you, Mr. Chairman. 

Mr. STUPAK. Thank you, Mr. Dingell. Mr. Burgess, for an opening statement. 

OPENING STATEMENT OF HON. MICHAEL C. BURGESS, A 

REPRESENTATIVE IN CONGRESS FROM THE STATE OF TEXAS 

Mr. BURGESS. Thank you, Mr. Chairman. And just like everyone 

else up here on the dais, I am concerned about the manipulation 

of energy market prices and want to thank you and Ranking Member Whitfield for holding the hearing today. This subcommittee has 

a long standing in overseeing the health and competitive prosperity 

of the American public. And although I wasn’t able to participate 

in the Enron hearings held before this committee in 2001 and 2002, 

I am pleased to be able to participate here today. 

Like many members of this body, I hear from constituents on a 

near-daily basis about the high prices they pay for their energy 

needs. In fact, in Texas in November, we were paying $3 a gallon 

for gas. If we are paying $3 a gallon for gas in November, I can 

promise you it will be at least a dollar higher in May, because that 

8 

is when our prices typically go up as we have to transition to the 

summer blends because of regulations under the Clean Air Act. I 

do find it odd that in November 2006 I was criticized for gas prices 

that were $2.20. In November 2007, no one is criticizing gas prices 

of $3 a gallon, but that is a separate matter. 

But I am looking forward to hearing from the witnesses on the 

second panel today, who actually have the authority to properly 

oversee commodities futures markets and wholesale energy markets. 

Manipulation of the natural gas market is especially pertinent in 

my district, because the exploration of what is known as tight gas 

reservoirs in a geologic formation known as a Barnett shale in 

north Texas has become a very successful exercise in drilling for 

clean, domestic energy and is a key to the recent economic prosperity in the area of Texas that I represent. In 2006, the Barnett 

shale was responsible for over 50,000 permanent jobs and over 

$225 million in revenues to local governments in Texas—not to investors, to local governments in Texas. I want to ensure that the 

price consumers pay for natural gas is fair and that the natural gas 

is sold in an open and competitive basis. 

In economic terms, we need to ensure perfect competition. More 

competition in the energy markets drives us towards less collusion, 

and by the definition of perfect competition, no producer, no consumer has the market power to influence or manipulate prices. In 

true competitive markets, risk has already been calculated, and a 

technical analyst will tell you that all available information is already incorporated into the market commodity price. Any manipulation of our open, free, and competitive energy markets must be 

investigated publicly, and that is what we are here about today. 

And for that, I am grateful. 

Now, Mr. Chairman, I just can’t help but notice that, because of 

the issue of global climate change, not so much in this committee, 

but in other subcommittees, we have been working on how to manage the issue of global climate change. And you hear a lot of people 

talk about instituting a cap-and-trade system as perhaps a method 

for regulating carbon in the environment. And today’s hearing 

brings up the question, who is going to regulate this new cap-andtrade market? Will FERC regulate it? Will some other entity be 

created or crafted to regulate this? How do we guard against manipulation in really what is going to be a new and untested market 

environment? 

And, Mr. Chairman, I would just like to point out that we may 

go from a situation where we are talking about from dark markets 

to a dark America, because we are going to be replacing all of 

America’s energy with lethargy. But that is a separate point as 

well. 

From my understanding, through the Energy Policy Act of 2005, 

it is the intent of this committee and, in fact, the intent of Congress, to provide the Federal Energy Regulatory Commission with 

the necessary tools to enforce their anti-manipulation authority. I 

believe this authority was given to the Federal Energy Regulatory 

Commissions for reasons that will be supported by their testimony 

here today. And certainly want to welcome Chairman Kelliher back 

9 

to the Energy and Commerce Committee and thank him for his 

leadership in the matter. 

Mr. Chairman, in the spirit of the holiday season, I am going to 

yield back the minute of my time. 

Mr. STUPAK. You know I don’t take carryovers. Mr. Green, for 

opening statement, please. 

OPENING STATEMENT OF HON. GENE GREEN, A 

REPRESENTATIVE IN CONGRESS FROM THE STATE OF TEXAS 

Mr. GREEN. Thank you, Mr. Chairman, for holding the hearing 

today on energy speculation. As a representative from Houston, 

Texas, where we call ourselves energy capital of the world, including the use and ship channel, I understand the critical need for 

transparency in the marketplace. The debacle played out by former 

energy giant Enron Corporation showcased to the world what happens when lax government and private sector oversight collapses 

under its own weight. Houston is the home of many families who 

benefited from Enron during the good times and suffered tremendously when it fell apart. Congress must remain vigilant to help 

prevent similar failures and to ensure American consumers are not 

being played by any future gaming of the system. Unfortunately, 

recent allegations brought against a small handful of U.S. companies indicate that gaming may continue to manipulate the price of 

energy supplies in the marketplace. 

Our congressional district manufactures aviation fuel, diesel gas 

for our trains, planes, cars, and trucks, and our ships. Energy trading is supposed to help move these products efficiently, and it does 

not add one gallon to our supply. But then it can add substantial 

amount to the cost to the consumer. Several economists’ reports 

question whether the standard economic principle, supply and demand, are no longer the sole factors affecting energy prices. Current petroleum and natural gas prices are set by a complex mix of 

factors, including global crude prices, increased world and U.S. demand, gasoline imports, extreme weather conditions, and geopolitical events. Most of these factors are out of our control. What 

factors are within our control, like the evidence of market manipulation, I believe the appropriate Federal agency should find and 

prosecute manipulation to the fullest extent of the Law. 

To bring this problem home to an energy-producing area, in 

2005, the CEO of Shell Western Hemisphere sat in my office and 

said, we are transferring chemical jobs from the chemical plant in 

Deer Park, Texas, that is in our district, to the Netherlands because of the high price of natural gas. It just so happens that ETP, 

the allegations of FERC, includes 2003 to 2005. Now I have to add 

the full statement. It was also the high cost of healthcare in Deer 

Park, Texas, compared to the Netherlands, which is also the purview of our full committee, and I hope we would deal with that. 

But when you have someone like Shell, who probably imports 

enough of their own, but they use the trading market for either to 

sell back or maybe to buy what they need for their chemical production, we see what happens. 

Both the Commodity Futures Trading Commission and the Federal Energy Regulatory Commission have a complementary role to 

play in protecting both the integrity in our markets and our conVerDate Nov 24 2008 14:00 Feb 24, 2009 Jkt 037690 PO 00000 Frm 00013 Fmt 6633 Sfmt 6633 C:\DOCUMENTS AND SETTINGS\CWELLS1\110-78 SCOM1 PsN: JIMC
10 

sumers. Closer attention should be paid to the largely under-regulated over-the-counter markets which are a rapidly growing segment of the marketplace. If energy supplies are indeed manipulated, the consumer runs the risk of paying distorted prices to 

drive, fly, heat, and cool our homes. No one in Congress wants to 

see American families pay distorted energy prices. If we can shine 

the bright light of accountability on commodity transactions, we 

can help foster fair and open and transparent markets for American consumers, businesses, industry, and utilities. 

Mr. Chairman, I hope today’s panels will help flesh out these 

complex issues, and I look forward to working with you and other 

members on improving our transparency of our energy markets. 

And I will actually have a better Christmas spirit. I will yield back 

more than a minute. Thank you. 

Mr. STUPAK. Thank you. Mr. Walden, for an opening statement, 

please. You are going to waive yours at this point in time? That 

concludes the opening statements. It should be noted for the record 

Mr. Barrow, who is from Georgia, was here. He is up in Agriculture. He might be popping back down. Mrs. Blackburn was here. 

Congressman Welch has entered a statement for the record. I want 

to recognize you, Mr. Cota, for being here. And on behalf of Mr. 

Welch, thank you. So it will be entered in record without objection. 

Any objection, Mr. Whitfield? Hearing none, it will be entered. That 

concludes the opening statements by members of the subcommittee. 

Mr. STUPAK. I now call our first panel of witnesses to come forward. On our first panel, we have Mr. Sean Cota, president and coowner of Cota & Cota, Incorporated; Ms. Laura Campbell, assistant 

manager of energy resources at Memphis Light, Gas, and Water; 

Mr. Tom LaSala, chief regulatory officer at the New York Mercantile Exchange; Mr. Charles Vice, president and chief operating 

officer at Intercontinental Exchange, ICE; Mr. Michael 

Greenberger, professor of law and director of Center for Health and 

Homeland Security at the University of Maryland. 

It is the policy of this subcommittee to take all testimony under 

oath. Please be advised that witnesses have the right under the 

rules of the House to be advised by counsel during your testimony. 

Do any of our witnesses wish to be represented by counsel? Everyone is shaking their heads no. OK, then I am going to ask you to 

please rise and raise your right hand to take the oath. Let the 

record reflect that all witnesses replied in the affirmative. You are 

now under oath. We are going to start on my left, your right. Professor Greenberger, if you would like to start, sir, for an opening 

statement, I appreciate it. 

STATEMENT OF MICHAEL GREENBERGER, PROFESSOR OF 

LAW, AND DIRECTOR, CENTER FOR HEALTH AND HOMELAND SECURITY, UNIVERSITY OF MARYLAND 

Mr. GREENBERGER. Thank you, Chairman Stupak. In my statement today, I have in the beginning a one-page summary, which 

I think encapsulates everything I want to say. I have a detailed 

statement that follows that is supported with footnotes and academic information. 

The agricultural industry founded the concept of futures markets. In the 1960s and 1970s, futures markets were introduced in 

11 

the energy sector. The futures markets today and historically have 

served a price discovery function. When somebody goes to sell a 

commodity in the business world, they most often look to the Wall 

Street Journal or some other information to see what the futures 

price is, and that tells them what a fair price is to sell or buy a 

commodity. 

The agriculture industry learned the hard way that the futures 

market, if unregulated, can be subject to manipulation, excessive 

speculation, and fraud. And therefore the futures price can be different than what economic fundamentals dictate. The farmers got, 

in their words, in the late 19th century and the early 20th century, 

‘‘screwed’’ by the futures markets. And in 1921, Congress began to 

introduce regulatory legislation, which now comes to us in the form 

of the Commodity Exchange Act, which was principally designed to 

regulate futures markets to prevent excessive speculation, fraud, 

and manipulation so when someone goes to sell their wheat or 

their natural gas or their crude oil or their heating oil, and they 

look to the newspaper or online data to see what the natural gas 

price is, et cetera, that is an honest price. And that is the job of 

the CFTC, to ensure it is an honest price. 

In a lame duck session in December 2000, a 262-page bill was 

added to an 11,000-page omnibus appropriation bill on the Senate 

floor with no substantial consideration. And my view is that nobody 

but the Wall Street lawyers who drafted that legislation understood what that legislation meant. For today’s hearings, the intent 

of the President’s Working Group and the Senate draft, before it 

was amended late in the night in December 2000, was that agriculture and energy commodities would continue to be regulated 

fully by the CFTC. Late in the night of December 2000, the word 

energy was struck from that bill. So the Agriculture Committee 

made sure that the farmers were still protected by the CFTC, but 

the energy sector was now allowed to operate outside the confines 

of the CFTC. 

Everybody agrees today that that loophole should be ended. The 

problem is that people are offering thousands of pages of bills to 

fix a simple thing. Stick the words ‘‘or energy’’ back in so that energy will be regulated fully by the CFTC. And, for simple purposes, 

that would mean ICE would be regulated like NYMEX. NYMEX 

has chosen to be regulated for energy commodities. ICE has chosen 

not to be regulated for energy commodities. 

Because of the Enron loophole—and believe me, if Christmas had 

come earlier that year, and that bill had not been passed—we 

would still have an Enron today. It was Enron’s undoing to get that 

loophole through. That loophole allows ICE to be unregulated, and 

Mr. LaSala has chosen to be regulated. The CFTC prevents fraud 

and manipulation and excessive speculation on NYMEX. They can’t 

do it on ICE. It is as simple as that. 

Now the Senate Permanent Investigating Committee, in a bipartisan way, once in a Republican Congress, once in a Democratic 

Congress, in 2006 and 2007, has pinpointed and proven now, I 

think, beyond all doubt that the price you pay for crude oil and the 

price you pay for natural gas has been driven up by the kinds of 

conversations you broadcast there today. And you heard those guys 

say the CFTC can’t touch us because ‘‘or energy’’ was dropped from 

12 

agriculture or energy in 2000. Energy can now be traded without 

watching or reporting for fraud, manipulation or excessive speculation. 

And as Senator Levin and the Republicans as well in that staff report have said, the economists say that at least $20, maybe as 

high as $30, added to the price of crude oil is because the futures 

price is being conducted with those kinds of conversations and manipulated upward without any relation to what supply/demand creates. $20 to $30, what does that mean for gasoline, which is made 

by crude oil? What does that mean for heating oil, which is made 

from crude oil? And what does it mean for natural gas, which everybody is dependent on? And in fact, the farmers were so dependent on it that Congressman Graves, Republican, of Missouri, 

worked through a floor amendment in the Republican-controlled 

House in December 2005 to do something about the unregulated 

price of natural gas. At that point, it was $14 per million BTU. 

Within 6 weeks, it dropped to $9, just because an amendment 

passed the House. 

The day after Amaranth failed, the futures price of natural gas dropped from about $8.50 to $4.50. The manipulator was gone. Economic fundamentals took over. The price dropped about $4 in a 

day, in half. What does that mean to your consumers? Now, it 

jumped right back up to $10, and then hearings were held on it. 

And it is now back at $7. 

With a very simple legislative fix, adding ‘‘or energy’’ ‘‘and energy’’ back into the Exchange Act, you can fix this problem. 

There is one other point I want to make. ICE not only operates 

under this exemption—and, by the way, I want to say ICE is not 

doing the manipulating here. ICE has used this exemption to profit 

successfully. It is the traders on ICE that are taking advantage of 

this exemption, not ICE. ICE not only operates under this Enron 

loophole, but in 2000 they bought the United Kingdom’s International Petroleum Exchange. It is now fully owned by ICE, which 

is a United States company. I understand that while it is not relevant, those exchange platforms are in the United States. And they 

are now trading West Texas Intermediate Crude in direct competition with NYMEX. 

Now, because the International Petroleum Exchange was a foreign exchange, they said we need to get exemptions from the CFTC 

or you will be discriminating against us on the basis of world trade. 

We are a foreign company. Want to sell foreign crude oil products, 

brand oil, on foreign terminals. Exempt us. And the CFTC staff, 

not the commission, the staff, in a no-action letter, said, fine. ICE, 

a U.S. company, bought the International Petroleum Exchange. 

The CFTC staff never changed the no-action letter. ICE decided it 

was going to trade U.S.-delivered commodities. The CFTC never 

changed the no-action letter. 

All of the legislation that is being offered today does not affect 

that foreign board of trade exemption, which allows ICE, a U.S. 

company trading U.S.-delivered products, significantly affecting the 

price of crude oil in the United States. They are now regulated by 

the United Kingdom, not the CFTC. This afternoon, the CFTC 

could go back to its offices and terminate that no-action letter. It 

has a termination-at-will clause. 

13 

Now, if they did, ICE would come back—— 

Mr. STUPAK. Well, sir, I am going to need you to wrap up 

your—— 

Mr. GREENBERGER. OK, if they did, ICE would come back and 

say, well, now we use the Enron loophole. So you have to close the 

Enron loophole. You have to end U.S. companies’ trading U.S products saying they should be regulated by the United Kingdom. 

When I am asked questions, I will tell you why the CFTC’s proposal to the Enron loophole is not a regulatory fix. It is regulation 

in name only, and your consumers in February would be screaming 

if you passed the CFTC legislation today. Thank you. 

[The prepared statement of Mr. Greenberger follows:] 

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Mr. STUPAK. Thank you, Professor. And Ms. Campbell, please, for 

an opening statement. 

STATEMENT OF LAURA CAMPBELL, ASSISTANT MANAGER, 

ENERGY RESOURCES, MEMPHIS LIGHT, GAS AND WATER 

Ms. CAMPBELL. Chairman Stupak and members of the subcommittee, I appreciate the opportunity to testify before you today, 

and I thank you for calling this hearing to examine the critically 

important issue of the need for greater transparency in the energy 

markets. 

My name is Laura Campbell, and I am the assistant manager of 

energy resources for Memphis Light, Gas and Water, or MLGW. 

MLGW is the Nation’s largest three-service municipal utility, and 

we currently provide services to over 420,000 customers. I am testifying today on behalf of the American Public Gas Association, or 

APGA. 

APGA is the national association for publicly-owned natural gas 

distribution systems. There are approximately 1,000 public gas systems in 36 States, and almost 700 of these systems are APGA 

members. Publicly-owned gas systems are not-for-profit, retail distribution entities owned by and accountable to the citizens they 

serve. APGA’s top priority is the safe and reliable delivery of affordable natural gas. 

To bring gas prices back to affordable level, we ultimately need 

to increase the supply of natural gas. However, also critical is to 

restore public confidence in the natural gas pricing. This requires 

the natural gas market to be fair, orderly, and transparent so that 

the price consumers pay reflects the fundamental supply-and-demand forces and not the result of manipulation or abusive conduct. 

An appropriate level of transparency does not currently exist, and 

that has led to a growing lack of confidence by our members in the 

natural gas market. 

Without question, natural gas futures contracts traded on 

NYMEX and financial contracts for natural gas traded on the overthe-counter or OTC markets are economically linked. The market 

for financial and natural gas contracts is composed of a number of 

segments, which include futures contracts traded on NYMEX, the 

financial contracts for natural gas traded on the OTC markets. 

OTC contracts may be traded on multi-lateral electronic trading facilities known as exempt commercial markets, or ECMs. They also 

may be traded bilaterally on electronic platforms through voice brokers and in direct bilateral transactions between counter parties. 

The impact of last year’s activities by the Amaranth advisors’ 

hedge fund exemplifies both the linkage and the harm caused by 

the lack of transparency in these markets. When the positions accumulated by Amaranth began to unwind, gas prices decreased. 

Unfortunately, many of APGA’s members had already locked in 

prices prior to that period at levels that did not reflect the current 

supply-and-demand conditions. 

As a result, the elevated prices during that period when Amaranth held these exceedingly large positions, many of APGA’s members were forced to pay a premium, which was passed through to 

their customers on their gas bill. 

33 

Today the Commodity Futures Trading Commission has effective 

oversight of NYMEX, and the CFTC and the NYMEX provide a significant level of transparency. But the simple fact is that the 

CFTC’s large trader reporting system, its chief tool in detecting 

and deterring manipulative market conduct, generally does not 

apply with respect to transactions in the OTC markets. This lack 

of transparency in a very large and rapidly growing segment of the 

natural gas market leaves open the potential for participants to engage in manipulative or other abusive trading strategies with little 

risk of early detection by the CFTC until after the damage is done 

to the market. 

It simply makes no sense to have transparency with respect to 

one small segment of the market and none with respect to a larger 

and growing segment. Accordingly, APGA believes that transparency in all segments of the market is critical to ensure that the 

CFTC has a complete picture of the market. We believe that the 

CFTC does not currently have the tools necessary to police its beat. 

The CFTC has done a good job in catching market abuses after the 

fact. However, by the time these cases are discovered using the 

tools currently available to government regulators, our members 

and their customers have already been injured by the higher natural gas prices that result from these abusive activities. 

It is beyond dispute that the CFTC did not have a complete picture of the full extent of Amaranth’s trading position until after 

Amaranth’s collapse and that Amaranth was able to use the current gaps in transparency to obscure their abusive activities from 

the regulatory authorities while Amaranth was engaging in those 

abuses. Greater transparency with respect to the traders’ large positions, whether entered into on a regulated exchange or in the 

OTC markets in natural gas, will provide the CFTC with the tools 

to detect and deter potential manipulative activity before our members and their customers suffer harm. 

One additional issue I would like to briefly address relates to the 

enforcement response to Amaranth. Both the CFTC and FERC 

have brought enforcement actions against Amaranth. FERC’s enforcement action was the first brought under its anti-manipulation 

authority contained in the Energy Policy Act of 2005. APGA supported congressional action to provide FERC with this new antimanipulation authority, and we support FERC’s use of this authority through its recent enforcement action. 

APGA’s view was then and remains that FERC’s new anti-manipulation authority affords consumers an important additional 

measure of protection. We support having multiple cops on the beat 

and urge the CFTC and FERC to work closely together to provide 

consumers with the full measure of protection that Congress intended. 

The current situation is not irreversible. Congress can provide 

American consumers with the protection they deserve by passing 

legislation that would turn the lights on in these currently dark 

markets. APGA looks forward to working with you to accomplish 

this goal, and I will be happy to answer any questions that you 

may have. 

[The prepared statement of Ms. Campbell follows:] 

34 

TESTIMONY OF LAURA CAMPBELL

Chairman Stupak and Members of the Subcommittee, I appreciate this opportunity to testify before you today and I thank you for calling this hearing to examine 

the critically important issue of the need for greater transparency in our energy 

markets. My name is Laura Campbell and I am the Assistant Manager of Energy 

Resources for Memphis Light Gas & Water (MLGW). MLGW is the nation’s largest 

three-service municipal utility and currently provides service to more than 420,000 

customers. Since 1939, MLGW has met the utility needs of Memphis, Tennessee and 

Shelby County residents by delivering reliable and affordable electricity, natural gas 

and water service. Natural gas is the most popular means of residential heating in 

the MLGW service area and we currently provide natural gas to more than 313,000 

customers. 

I testify today on behalf of the American Public Gas Association (APGA). APGA 

is the national association for publicly-owned natural gas distribution systems. 

There are approximately 1,000 public gas systems in 36 states and almost 700 of 

these systems are APGA members. Publicly-owned gas systems are not-for-profit, retail distribution entities owned by, and accountable to, the citizens they serve. They 

include municipal gas distribution systems, public utility districts, county districts, 

and other public agencies that have natural gas distribution facilities. 

APGA’s members have lost confidence that the prices for natural gas in the futures and the economically linked over-the-counter (‘‘OTC’’) markets are an accurate 

reflection of supply and demand conditions for natural gas. This lack of confidence 

has increased over the past several years as volatility in the natural gas market 

has drawn hedge funds and others to the market. Restoring our trust in the validity 

of the pricing in these markets requires a level of transparency in natural gas markets which assures consumers that market prices are a result of fundamental supply and demand forces and not the result of manipulation or other abusive market 

conduct. APGA strongly believes that this level of transparency currently does not 

exist, and this has directly led to the current lack of confidence in the natural gas 

marketplace. Although APGA’s number one priority is the safe and reliable delivery 

of affordable natural gas, which ultimately will require an increase in the supply 

of natural gas, it is equally critical that public confidence in the pricing of natural 

gas be restored through increased transparency. 

APGA believes that statutory changes are necessary to remedy the lack of market 

transparency which undermines the public’s confidence in the pricing integrity of 

these markets. Accordingly, APGA has called upon Congress to move quickly to pass 

legislation that would increase transparency in the natural gas markets. 

THE MARKET IN NATURAL GAS CONTRACTS

The market for natural gas financial contracts is composed of a number of segments. Contracts for the future delivery of natural gas are traded on the New York 

Mercantile Exchange (‘‘NYMEX’’), a designated contract market regulated by the 

Commodity Futures Trading Commission (CFTC). Contracts for natural gas are also 

traded in the OTC markets. OTC contracts may be traded on multi-lateral electronic 

trading facilities which are exempt from regulation as exchanges (‘‘exempt commercial markets’’ or ‘‘ECMs’’). They may also be traded in direct, bi-lateral transactions 

between counterparties, through voice brokers or on electronic platforms. OTC contracts may be settled financially or through physical delivery. Financially-settled 

OTC contracts often are settled based upon NYMEX settlement prices and physically delivered OTC contracts may draw upon the same deliverable supplies as 

NYMEX contracts, thus economically linking the various financial natural gas market segments, including regulated futures markets, ECMs and bilateral trading, 

whether conducted on an electronic trading platform or otherwise. 

The exemption under Section 2(h)(3) of the Act providing for ECMs was added as 

part of the Commodity Futures Modernization Act of 2000 (‘‘CFMA’’). In general, the 

greater flexibility of a principles-based regulatory framework provided for by the 

CFMA has worked exceedingly well with respect to the regulated markets, as has 

the CFMA’s overall concept of tiered regulation based upon the characteristics of the 

trader and of the commodity traded. However, since enactment of the CFMA, 

changes in the nature of trading and the composition of traders on ECMs warrant 

reconsideration of the provisions relating to ECMs. More broadly, as discussed in 

greater detail below, issues surrounding the lack of transparency are particularly 

acute with respect to trading in contracts for natural gas and the lack of transparency with respect to the market for natural gas should be reconsidered. In this 

regard, differentiating the appropriate regulatory response based upon the characVerDate Nov 24 2008 14:00 Feb 24, 2009 Jkt 037690 PO 00000 Frm 00038 Fmt 6633 Sfmt 6633 C:\DOCUMENTS AND SETTINGS\CWELLS1\110-78 SCOM1 PsN: JIMC
35 

teristics of the particular commodity traded is consistent with the overarching 

framework and philosophy of the CFMA. 

Specifically, with respect to ECMs, there is scant legislative or regulatory history 

with respect to the intent behind the Section 2(h)(3) exemption. Nevertheless, the 

trading platforms that have qualified for exemption under this provision have 

evolved since enactment of the CFMA in a number of ways. Initially, such markets 

tended to be an electronic substitute for voice brokers with respect to the trading 

of OTC contracts. Their participants were generally limited to those in the trade 

and trading likely carried with it counterparty credit exposure. Since then, however, 

ECMs have introduced cleared transactions, effectively removing the counterparty 

risk of such transactions which initially distinguished their trading from trading on 

futures exchanges. In addition, ECMs over the years have attracted greater numbers of non-trade market participants, such as hedge funds. The introduction of 

clearing of contracts that are financially settled based upon the settlement prices 

of regulated futures contracts along with this broader and deeper non-trade customer base has, over time, rendered trading on some ECMs to be largely indistinguishable from trading on regulated futures markets. These markets are economically linked through arbitrage and the prices on one affect prices on the other. 

The economic links between the natural gas futures contracts traded on NYMEX 

and those contracts, agreements and transactions in natural gas traded in the OTC 

markets (which include but are not limited only to trading on ECMs) are beyond 

dispute. Without question, a participant’s trading conduct in one venue can affect, 

and has affected, the price of natural gas contracts in the other. 1

Increasingly, the price of natural gas in many supply contracts between suppliers 

and local distribution companies (‘‘LDC′′), including APGA members, is determined 

based upon monthly price indexes closely tied to the monthly settlement of the 

NYMEX futures contract. Accordingly, the futures market serves as the centralized 

price discovery mechanism used in pricing these natural gas supply contracts. Generally, futures markets are recognized as providing an efficient and transparent 

means for discovering commodity prices.2 However, any failure of the futures price 

to reflect fundamental supply and demand conditions results in prices for natural 

gas that are distorted and which do not reflect its true value. This has a direct affect on consumers all over the U.S., who as a result of such price distortions, will 

not pay a price for the natural gas that reflects bona fide demand and supply conditions. If the futures price is manipulated or distorted, then the price a consumer 

pays for the fuel needed to heat their home and cook their meals will be similarly 

manipulated or distorted. 

Today, the CFTC has effective oversight of NYMEX, and the CFTC and NYMEX 

provide a significant level of transparency with respect to NYMEX’s price discovery 

function. But, the OTC markets, which include but are not limited to ECMs, lack 

such price transparency. The lack of transparency in a very large and rapidly growing segment of the natural gas market leaves open the potential for a participant 

to engage in manipulative or other abusive trading strategies with little risk of early 

detection; and for problems of potential market congestion to go undetected by the 

CFTC until after the damage has been done to the market. It simply makes no 

sense to have transparency over one segment of the market and none over a much 

larger segment, especially when the OTC markets are the fastest growing sectors 

of the natural gas marketplace. APGA strongly believes that it is in the best interest of consumers for Congress to rectify this situation by passing legislation that 

would ensure an adequate level of transparency with respect to OTC contracts, 

agreements and transactions in natural gas. 

REGULATORY OVERSIGHT

NYMEX, as a designated contract market, is subject to oversight by the CFTC. 

The primary tool used by the CFTC to detect and deter possible manipulative activity in the regulated futures markets is its large trader reporting system. Using that 

regulatory framework, the CFTC collects information regarding the positions of 

large traders who buy, sell or clear natural gas contracts on NYMEX. The CFTC 

in turn makes available to the public aggregate information concerning the size of 

the market, the number of reportable positions, the composition of traders (commercial/non-commercial) and their concentration in the market, including the percentage of the total positions held by each category of trader (commercial/non-commercial). 

The CFTC also relies on the information from its large trader reporting system 

in its surveillance of the NYMEX market. In conducting surveillance of the NYMEX 

natural gas market, the CFTC considers whether the size of positions held by the 

largest contract purchasers are greater than deliverable supplies not already owned 

36 

by the trader, the likelihood of long traders demanding delivery, the extent to which 

contract sellers are able to make delivery, whether the futures price is reflective of 

the cash market value of the commodity and whether the relationship between the 

expiring future and the next delivery month is reflective of the underlying supply 

and demand conditions in the cash market.3

Although the CFTC has issued ‘‘special calls’’ to one electronic trading platform, 

and that platform has determined to voluntarily provide information on traders’ 

large positions,[4] the CFTC’s large trader reporting surveillance system does not 

routinely reach traders’ large OTC positions.5 Despite the links between prices for 

the NYMEX futures contract and the OTC markets in natural gas contracts, this 

lack of transparency in a very large and rapidly growing segment of the natural gas 

market leaves open the potential for participants to engage in manipulative or other 

abusive trading strategies with little risk of early detection and for problems of potential market congestion to go undetected until after the damage has been done 

to the market, ultimately harming the consumers or producers of natural gas. 

AMARANTH ADVISORS LLC 

Last year’s implosion of Amaranth Advisors LLC (‘‘Amaranth’’) and the impact it 

had upon prices exemplifies these linkages and the impact they can have on natural 

gas supply contracts for LDCs. Amaranth was a hedge fund based in Greenwich, 

Connecticut, with over $9.2 billion under management. Although Amaranth classified itself as a diversified multi-strategy fund, the majority of its market exposure 

and risk was held by a single Amaranth trader in the OTC derivatives market for 

natural gas. 

Amaranth reportedly accumulated excessively large long positions and complex 

spread strategies far into the future. Amaranth’s speculative trading wagered that 

the relative relationship in the price of natural gas between summer and winter 

months would change as a result of shortages which might develop in the future 

and a limited amount of storage capacity. Because natural gas cannot be readily 

transported about the globe to offset local shortages, the way for example oil can 

be, the market for natural gas is particularly susceptible to localized supply and demand imbalances. Amaranth’s strategy was reportedly based upon a presumption 

that hurricanes during the summer of 2006 would make natural gas more expensive 

in 2007, similar to the impact that hurricanes Katrina and Rita had had on prices 

the previous year. As reported in the press, Amaranth held open positions to buy 

or sell tens of billions of dollars of natural gas. 

As the hurricane season proceeded with very little activity, the price of natural 

gas declined, and Amaranth lost approximately $6 billion, most of it during a single 

week in September 2006. The unwinding of these excessively large positions and 

that of another previously failed $430 million hedge fund-MotherRock- further contributed to the extreme volatility in the price of natural gas. The Report by the Senate Permanent Subcommittee on Investigations affirmed that ‘‘Amaranth’s massive 

trading distorted natural gas prices and increased price volatility. 6

The lack of OTC transparency and extreme price swings surrounding the collapse 

of Amaranth have caused bona fide hedgers to become reluctant to participate in 

the markets for fear of locking-in prices that may be artificial. 

GREATER TRANSPARENCY NEEDED

APGA members, and the customers served by them, do not believe there is an 

adequate level of market transparency under the current system. This lack of transparency leads to a growing lack of confidence in the natural gas marketplace. Although the CFTC operates a large trader reporting system to enable it to conduct 

surveillance of the futures markets, it cannot effectively monitor trading if it receives information concerning positions taken in only one segment of the total market. Without comprehensive large trader position reporting, the government is currently handicapped in its ability to detect and deter market misconduct. If a large 

trader acting alone, or in concert with others, amasses a position in excess of deliverable supplies and demands delivery on its position and/or is in a position to control a high percentage of the deliverable supplies, the potential for market congestion and price manipulation exists. 

Over the last several years, APGA has pushed for a level of market transparency 

in financial contracts in natural gas that would routinely, and prospectively, permit 

the CFTC to assemble a complete picture of the overall size and potential impact 

of a trader’s position irrespective of whether the positions are entered into on 

NYMEX, on an OTC multi-lateral electronic trading facility which is exempt from 

regulation or through bi-lateral OTC transactions, which can be conducted over the 

37 

telephone, through voice-brokers or via electronic platforms. The passage of legislation is necessary to achieve this needed level of transparency. 

BI-LATERAL TRADING

Because Amaranth’s trading was largely conducted on both a regulated futures 

exchange and on an unregulated electronic trading facility, the immediate focus has 

been confined to the relative inequality of transparency between those two multilateral trading venues. Moreover, because the volume of transactions in bi-lateral 

markets may not be as apparent as the volume of transactions on exchanges or electronic trading facilities there may be a tendency to discount the impact that the bilateral markets have upon the price discovery process. APGA believes that, to be 

comprehensive, a large trader reporting system must include large positions 

amassed through the OTC bi-lateral markets in addition to those accumulated on 

futures exchanges or on OTC electronic trading facilities. 

Bi-lateral trading can also take place on an electronic trading venue that may be 

as attractive to traders as multi-lateral trading facilities. Enron On-line, for example, was an all-electronic, bi-lateral trading platform. Using this platform, Enron offered to buy or sell contracts as the universal counterparty to all other traders. On 

the Enron On-line trading platform, only one participant--Enron--had the ability to 

accept bids and offers of the multiple participants--its customers-- on the trading 

platform. This one-to-many model constitutes a dealer’s market and is a form of bilateral trading.7

Section1a(33) of the Act further defines bi-lateral trading by providing that, ‘‘the 

term ‘trading facility’ does not include (i) a person or group of persons solely because 

the person or group of persons constitutes, maintains, or provides an electronic facility or system that enables participants to negotiate the terms of and enter into bilateral transactions as a result of communications exchanged by the parties and not 

from interaction of multiple bids and multiple offers within a predetermined, nondiscretionary automated trade matching and execution algorithm. . . . .’’ This means 

that it is also possible to design an electronic platform for bi-lateral trading whereby 

multiple parties display their bids and offers which are open to acceptance by multiple parties, so long as the consummation of the transaction is not made automatically by a matching engine. 

Both of these examples of bi-lateral electronic trading platforms might very well 

qualify for exemption under the current language of sections 2(g) and 2(h)(1) of the 

Commodity Exchange Act. It is entirely foreseeable that if a CFTC large-trader reporting regime were expanded to require the reporting of positions entered into only 

on multi-lateral electronic trading facilities and does not include bi-lateral electronic 

trading platforms too, traders who wish to evade the new reporting requirement 

would simply be able to move their trading activities from an electronic trading facility to a bi-lateral electronic trading platform, just as Amaranth moved its trading 

from NYMEX to ICE. 

Moreover, even in the absence of electronic trading, the ability of traders to affect 

prices in the natural gas markets through direct or voice-brokered bi-lateral trading 

should not be underestimated. For example, a large hedge fund may trade bi-laterally with a number of counterparty/dealers using standard ISDA documentation. 

By using multiple counterparties over an extended period of time, it would be possible for the hedge fund to establish very large positions with each of the dealer/ 

counterparties. Each dealer in turn would enter into transactions on NYMEX to offset the risk arising from the bi-lateral transactions into which it has entered with 

the hedge fund. In this way, the hedge fund’s total position would come to be reflected in the futures market. 

Thus, a prolonged wave of buying by a hedge fund, even through bi-lateral direct 

or voice-brokered OTC transactions, can be translated into upward price pressure 

on the futures exchange. As futures settlement approaches, the hedge fund’s bi-lateral purchases with multiple dealer/counterparties would maintain or increase upward pressure on prices. By spreading its trading through multiple counterparties, 

the hedge fund’s purchases would attract little attention and escape detection by either NYMEX or the CFTC. In the absence of routine large-trader reporting of bilateral transactions, the CFTC will only see the various dealers’ exchange positions 

and have no way of tying them back to purchases by a single trader. 

NEED FOR LEGISLATION

As previously stated in this testimony, establishing the level of transparency that 

APGA maintains is warranted will require the passage of legislation. There have 

been a number of bills introduced in the House that directly address market transparency. Those bills include the PUMP Act introduced by Chairman Stupak, the 

38 

Market TRUST Act introduced by Congressmen Barrow (D-GA) and Graves (R-MO) 

and the Close the Enron Loophole Act introduced by Congressman Welch (D-VT). 

The CFTC has also recommended changes to the Act that would extend its large 

trading reporting system and other regulatory requirements to contracts traded on 

an ECM that are significant price discovery contracts.8

APGA believes that the legislation that Congress enacts to enhance transparency 

in these markets should require that large traders report their positions regardless 

of whether they are entered into on designated contract markets, on electronic trading facilities, on OTC bi-lateral electronic trading platforms, in the voice-brokered 

OTC markets or in direct bilateral OTC markets. This would treat all trading positions in financial natural gas contracts equally in terms of reporting requirements. 

Extending large trader reporting to OTC natural gas positions and to positions entered into on electronic trading facilities will provide the CFTC with a complete picture of the natural gas marketplace and ensure that the cop on the beat has the 

tools necessary to be effective. 

Although some have raised concerns about the costs of expanding the large trader 

reporting system, APGA believes the costs would be reasonable. Insofar as the 

CFTC’s large trader reporting system is already operational, there would be no need 

to create an entirely new program to collect this information. In addition, large traders, such as those which would be required to report to the CFTC, will likely have 

automated recordkeeping systems for their own internal risk management purposes 

that could be adapted for the purpose of reporting positions to the CFTC. APGA believes that the costs of a comprehensive large trader reporting system for natural 

gas would be reasonable and are far outweighed by the benefits in terms of helping 

assure consumers that the market price is a reflection of appropriate market forces. 

Even if Congress determines to extend the CFTC’s routine large trader reporting 

system only to contracts traded on ECMs, it should take care that the enhanced 

level of transparency is not drawn too narrowly. In this regard, unlike some of the 

legislative proposals such as the Market TRUST Act and the Close the Enron Loophole Act which apply broadly to ECMs, the CFTC’s legislative recommendations 

apply only to those specific contracts traded on an ECM that have been found to 

be a significant price discovery contract. Where some contracts on an ECM are 

found to be a significant price discovery contract but other, related contracts are not, 

there is the danger that in response to regulatory inquiries or disciplinary action, 

a trader would move his positions to the less transparent, less regulated contracts 

trading on the same trading platform. This is the very course of action that Amaranth followed when, in order to avoid regulatory scrutiny, it liquidated its positions 

on NYMEX and opened similar positions on ICE. In order to avoid this possibility, 

APGA urges Congress to extend the CFTC’s large trader reporting system to all contracts traded on an ECM for a commodity the prices of which are discovered to a 

material degree by trading on the ECM. In this way, a trader will not be able to 

obscure its positions by moving them between contracts, some regulated and others 

not, which are traded on the same ECM.9

CFTC ENFORCEMENT AUTHORITY

The need to provide the CFTC with additional surveillance tools through legislation does not imply that the CFTC has not been vigilant in pursuing wrongdoers 

using its current statutory enforcement authorities. In this regard, we note that the 

CFTC has assessed over $300 million in penalties, and has assessed over $2 billion 

overall in government settlements relating to abuse of these markets. These actions 

affirm the CFTC’s vigor in pursuing misconduct in these markets. However, while 

APGA applauds the CFTC’s vigorous enforcement efforts to address misconduct with 

respect to trading in the energy markets, it notes that increased coordination between Federal regulators is necessary to provide U.S. consumers with the full measure of protection that Congress has provided. 

In this regard, both the CFTC and the Federal Energy Regulatory Commission 

(FERC) initiated enforcement actions against Amaranth in connection with 

Amaranth’s trading activities in natural gas, alleging that Amaranth had engaged 

in price manipulation. The CFTC brought a civil enforcement action against Amaranth in the United States District Court for the Southern District of New York. 

10 The FERC brought an administrative action, issuing an Order to Show Cause and 

Notice of Proposed Penalties with respect to Amaranth’s trading activities.11 Significantly, FERC’s enforcement action was the first brought by it under the anti-manipulation authority granted to FERC by the Energy Policy Act of 2005, Pub. L. No. 

109-58 (2005). 

In response to FERC’s commencement of its enforcement action, Amaranth argued 

to the U.S. District Court that its futures trading activities are subject to the excluVerDate Nov 24 2008 14:00 Feb 24, 2009 Jkt 037690 PO 00000 Frm 00042 Fmt 6633 Sfmt 6633 C:\DOCUMENTS AND SETTINGS\CWELLS1\110-78 SCOM1 PsN: JIMC
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sive jurisdiction of the CFTC and beyond the jurisdiction of FERC. FERC maintains 

that its authority to impose penalties upon those who manipulate markets in natural gas applies not only to direct participants in the physical gas markets, but also 

to entities whose manipulative conduct in the financial markets directly or indirectly impacts the price of FERC-jurisdictional transactions. On September 28, 2007 

the American Public Gas Association, American Public Power Association (APPA) 

and National Rural Electric Cooperative Association (NRECA) jointly filed an amicus memorandum of law with the court in support of FERC’s authority to bring an 

enforcement action against Amaranth in connection with Amaranth’s futures-related 

trading activities. 

As a group that represents consumers, APGA supported Congress’ action in providing FERC with its new anti-manipulation authority in the Energy Policy Act of 

2005. APGA’s view was then, and remains, that the anti-manipulation authority 

granted to FERC affords consumers an important additional measure of protection. 

Accordingly, APGA urges the CFTC and FERC to work closely together towards exercising their respective authorities in a way that increases the protection of energy 

consumers from market abuses, as we believe, Congress intended. 

In any event, it must be borne in mind that although these efforts to punish those 

that manipulate or otherwise abuse markets are important, catching and punishing 

those that manipulate markets after a manipulation has occurred is not an indication that the system is working. To the contrary, by the time these cases are discovered using the tools currently available to government regulators, our members, and 

their customers, have already suffered the consequences of those abuses in terms 

of higher natural gas prices. Greater transparency with respect to traders’ large positions, whether entered into on a regulated exchange or in the OTC markets in natural gas will provide the CFTC with the tools to detect and deter potential manipulative activity before our members and their customers suffer harm. 

Finally, APGA believes that greater public involvement would assist the CFTC as 

its policies necessarily evolve to meet the challenge of these new conditions in the 

energy markets. In this regard, APGA strongly commends the CFTC for its recent 

announcement of its intention to establish an Advisory Panel on Energy Markets 

composed of industry experts, including representatives of consumer organizations, 

to offer technical advice on issues relating to reporting and surveillance of the markets. APGA believes this group will play a valuable role in providing technical advice to the CFTC on issues relating to reporting and surveillance of the markets. 

* * * * * 

Natural gas is a lifeblood of our economy and millions of consumers depend on 

natural gas every day to meet their daily needs. It is critical that the price those 

consumers are paying for natural gas comes about through the operation of fair and 

orderly markets and through appropriate market mechanisms that establish a fair 

and transparent marketplace. Without giving the government the tools to detect and 

deter manipulation, market users and consumers of natural gas who depend on the 

integrity of the natural gas market cannot have the confidence in those markets 

that the public deserves. 

1 See ‘‘Excessive Speculation in the Natural Gas Market,’’ Report of the U.S. Senate Permanent Subcommittee on Investigations (June 25, 2007) (‘‘PSI Report’’). The 

PSI Report on page 3 concluded that ‘‘Traders use the natural gas contract on 

NYMEX, called a futures contract, in the same way they use the natural gas contract on ICE, called a swap. . . . The data show that prices on one exchange affect 

the prices on the other.’’ 2 See the Congressional findings in Section 3 of the Commodity Exchange Act, 7 

U.S.C. §1 et seq. (‘‘Act’’). Section 3 of the Act provides that, ‘‘The transactions that 

are subject to this Act are entered into regularly in interstate and international 

commerce and are affected with a national public interest by providing a means for 

. . . discovering prices, or disseminating pricing information through trading in liquid, fair and financially secure trading facilities.’’ 3 See letter to the Honorable Jeff Bingaman from the Honorable Reuben Jeffery 

III, dated February 22, 2007. 4 Id, at 7. The CFTC presumably issued this call for information under Section 

2(h) (5) of the Act. 5 As explained in greater detail below, special calls are generally considered to 

be extraordinary, rather than routine, requirements. Although special calls may be 

an important complement to routine reporting requirements in conducting market 

surveillance, they are not a substitute for a comprehensive large trader reporting 

system. 

40 

6 See PSI Report at p. 119 7 This stands in contrast to a many-to-many model which is recognized as a multilateral trading venue. This understanding is reflected in section 1a (33) of the Act, 

which defines ‘‘Trading Facility’’ as a ‘‘group of persons that . . . provides a physical 

or electronic facility or system in which multiple participants have the ability to execute or trade agreements, contracts or transactions by accepting bids and offers 

made by other participants that are open to multiple participants in the facility or 

system.’’ 8 ‘‘Report on the Oversight of Trading on Regulated Futures Exchanges and Exempt Commercial Markets,’’ Report of the Commodity Futures Trading Commission, 

http://www.cftc.gov/stellent/groups/public/@newsroom/documents/file/pr5403-07— 

ecmreport.pdf (October 2007). 9 As part of this authority, the CFTC could determine that particular contracts 

with de minimus levels of trading would be exempt from the reporting requirement. 

This would enable the CFTC to exempt particular contracts traded on the ECM that 

are inactive or too illiquid to be used in this way by a trader with large positions. 10 See, U.S. Commodity Futures Trading Commission v. Amaranth Advisors, 

L.L.C., Amaranth Advisors (Calgary) ULC and Brian Hunter, No. 07CIV 6682 

(SDNY filed July 25, 2007). 11 Amaranth Advisors, LLC et al, Federal Energy Regulatory Commission Docket 

No. IN07-26-001. 

Mr. STUPAK. Thank you, Ms. Campbell. Mr. Cota, please, opening 

statement. 

STATEMENT OF SEAN COTA, PRESIDENT AND CO-OWNER, 

COTA & COTA INC. 

Mr. COTA. Honorable Chairman Stupak, Ranking Member Whitfield, and distinguished members of the committee, thank you for 

this invitation to testify before you today. I currently serve as the 

regional chair of Petroleum Marketers Association of America, a 

national federation of 46 States in regional associations representing over 8,000 independent fuel marketers that account for 

about half the gasoline sold and nearly all of the distillate sold to 

American consumers in the United States. I am also the president 

of New England Fuel Institute, which represents over 1,000 heating oil fuel dealers in related service companies throughout the 

Northeast. NEFI members’ companies deliver approximately 40 

percent of the nation’s heating oil, and many market diesel fuel, 

heating oil, propane, kerosene, jet fuel, and off-road diesel and 

motor vehicle fuels. 

Finally, I provide insight today as a co-owner and President of 

Cota & Cota of Bellows Falls, Vermont, a third-generation familyowned and operated heating fuel provider in southern Vermont and 

western New Hampshire. Unlike larger energy companies, most retailer dealers are small, family-run businesses. Also unlike larger 

energy companies, heating oil and propane dealers deliver product 

directly to the doorstep of American homes and businesses. 

With the winter weather once again settling across the country, 

American families are facing a new and cold reality. In the Northeast, where consumers use over 80 percent of the nation’s heating 

oil, the increase in heating oil costs has left them not only wondering how to fit the heating bill into the family budget but also 

wondering—and this is the billion-dollar question—why energy 

prices have skyrocketed so abruptly. 

Excessive speculation in the market is driving this runaway 

train. Even the general secretary of OPEC said this week, ‘‘the 

market is not controlled by supply and demand. It is totally controlled by speculators who consider oil as a financial asset.’’ The 

41 

rise in heating oil prices and crude prices in recent months has 

dragged with it nearly every single refined product, especially heating oil. Since March 2007, when the industry recognized the end 

of the peak heating season demand, the wholesale price of heating 

oil had risen a remarkable 32 percent from $1.88 per gallon to 

$2.77 per gallon, despite reports by the EIA that heating inventories remain well above the 5-year average. 

Home heating fuel dealers do not benefit from inflated prices 

now set by activity in the energy commodities market. For us, volatility and skyrocketing prices mean strained credit lines with terminals, suppliers, and their banks, increased cash demands. A load 

of heating oil to me now costs $27,000, where just a few years ago 

it was less than $10,000. Struggling families find it harder to pay 

their bills, further straining the dealers’ credit obligations with 

their banks and suppliers. Consumers are more likely to use credit 

cards for their purchases, due to hidden credit card company interchange fees, and consumers ultimately pay more for their fuel. Federal and State LIHEAP dollars, already at severely insufficient levels, become diluted by rising prices, and each dollar invested in the 

energy assistance program is only able to help fewer families in 

need. 

Additionally, many heating fuel companies like mine hedge in an 

effort to protect consumers against roller-coaster-like price volatility in energy commodity markets. Because of this we strongly 

support open, transparent exchanges subject to the rule of Law. In 

fact, it is essential to a business like me, which began to offer fixed 

pricing to our consumers 20 years ago. We enter into NYMEXbased futures contracts with our suppliers, who purchase contracts 

for future delivery and then resell these contracts to me for profit. 

In this way, companies like mine are able to financially hedge heating fuels to the benefit of the consumer and help protect them 

against uncertainty and volatility. 

However, the ability of commodities markets to set the price 

based upon economic fundamentals has become less and less reliable, and, as a result, so do our hedging programs. As the influence 

of price setting functions under the under-regulated markets continue to grow, American consumers are forced to ride the same 

speculative roller coaster as the energy trader. My Congressman, 

Peter Welch, from Vermont, has helped to bring this important 

question for my State and for all American consumers nationwide 

to these halls. 

For far too long, insufficient oversight in transparency has encouraged excessive speculation in creating a trading environment 

that rewards misdeeds like the recent allegations against Amaranth Hedge Funds in British Petroleum. Loopholes in Federal 

Law have created what I call ‘‘dark markets’’, energy trading environments that operate without adequate Federal oversight or regulation. Today, the vast majority of trading occurs in these markets. 

We strongly urge that Congress make and take swift action to 

bring these dark markets to light. We would recommend that, one, 

closing the notorious Enron loophole ripped open by the Commodities Futures Modernization Act, through which billions of dollars 

have poured since it was created in 2001. Virtually overnight, this 

loophole freed electronic trading from the Federal oversight. ConVerDate Nov 24 2008 14:00 Feb 24, 2009 Jkt 037690 PO 00000 Frm 00045 Fmt 6633 Sfmt 6633 C:\DOCUMENTS AND SETTINGS\CWELLS1\110-78 SCOM1 PsN: JIMC
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gress needs to close the loophole and enclose it for all energy commodities, thereby returning the CFTC to the statutory authority 

that it lost 7 years ago. 

Two, investigate the CFTC’s use of no-action letters, which Professor Greenberger alluded to earlier, which I call the no-action 

loophole. In this area, the CFTC could provide regulatory exemptions to applicable foreign boards of trade that offer contracts for 

delivery within the United States. The current process may fail to 

provide sufficient public notice and consultation and may not take 

into account the impact that these letters have had on the market. 

Moreover, in order to obtain such exemptions, the CFTC requires 

that a comparable regulatory authority be presented in a country 

where these exchanges operate. Congress should examine whether 

or not it determined such regulatory authorities be comparable. 

And finally, we are concerned that no-action letters may have been 

approved for exchanges that sought to establish electronic platforms overseas in order to circumvent U.S. regulatory authority. 

And three, provide adequate funding to the CFTC, which currently receives approximately one tenth of the funding of its sister 

regulator, the Securities and Exchange Commission. We make 

these recommendations while acknowledging that there are several 

different policy recommendations floating around on Capitol Hill 

from an array of sources, including legislators, the Commission, 

Administration officials, futures groups, and commodity exchanges 

themselves. We ask that your deliberations take into account all 

trading environments in all energy commodities, not just the regulation of one commodity to the exclusion of others. 

Moreover, we urge lawmakers and Administration officials take 

into account the impact of these reforms in rulemaking on the 

American consumer and small businesses like mine. Again, thank 

you, Mr. Chairman, and to your colleagues for this opportunity to 

present my insight on this issue. And I am open to any questions 

later. 

[The prepared statement of Mr. Cota follows:] 

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Mr. STUPAK. Thank you. Mr. LaSala, please, opening statement. 

STATEMENT OF THOMAS F. LASALA, CHIEF REGULATORY OFFICER, DIVISION OF COMPLIANCE AND RISK MANAGEMENT, 

NEW YORK MERCANTILE EXCHANGE, INC. 

Mr. LASALA. Yes, Mr. Chairman and members of the subcommittee, my name is Tom LaSala, and I am the chief regulatory 

officer of the New York Mercantile Exchange, Inc. NYMEX is the 

world’s largest forum for trading of physical-commodity-based futures contracts, including energy and metals products. NYMEX has 

been in business for 135 years and is a federally chartered marketplace, fully regulated by the Commodity Futures Trading Commission, both as a derivatives clearing organization and as a designated contract market, or DCM. A DCM maintains the highest 

and most comprehensive level of regulatory oversight to which a 

derivatives trading facility may be subject under current Law and 

regulation. 

On behalf of the Exchange, its Board of Directors, and shareholders, I thank you and the members of the Subcommittee on 

Oversight and Investigations for the opportunity to participate in 

today’s hearing. NYMEX is regulated by the CFTC, which by statute has long had exclusive jurisdiction over futures contracts, trading, and markets. As a benchmark for energy prices around the 

world, trading on NYMEX is transparent, open, and competitive. 

In the CFTC’s direct monitoring of futures trading, NYMEX, as 

a DCM, has an affirmative statutory obligation to act as a self-regulatory organization, relying upon the standards set by statute and 

by CFTC regulation and interpretation. As an SRO, NYMEX routinely uses tools such as large trader reporting, position accountability, and position limits to monitor and police trading in our contracts. A new statutory tier of trading facility, the Exempt Commercial Market, or ECM, was added to the CFTC’s governing statute in 2000. The ECM is essentially exempt from substantive 

CFTC regulation and also has no explicit SRO duties by statute. 

In addition, to date, ECMs have not voluntarily assumed any SRO 

duties. 

As a result of market changes that were not anticipated in 2000, 

such as the effective linking of trading on unregulated venues with 

trading on regulated venues of competing products, certain ECMs 

now serve in a price discovery role and thus trigger public policy 

concerns and warrant a higher degree of CFTC oversight and regulation. From its vantage point as a DCM, NYMEX was able to observe firsthand how this regulatory disparity operated in the failure of Amaranth, a $7 billion hedge fund that focused upon trading 

of energy products that was active in a NYMEX natural gas contract. 

In August of 2006, NYMEX proactively took steps to maintain 

the integrity of its markets by ordering Amaranth to reduce its 

open positions in the National Gas Futures Contract. Instead, Amaranth sharply increased its positions on the unregulated and nontransparent ICE electronic trading platform. Because ICE and 

NYMEX trading venues for natural gas are tightly linked and highly interactive with each other, Amaranth’s response to NYMEX’s 

regulatory directive admittedly reduced its positions on NYMEX 

56 

but did not reduce Amaranth’s overall risk or the risk to 

Amaranth’s clearing member. Unfortunately neither NYMEX nor 

the CFTC had efficient means to monitor Amaranth’s positions on 

ICE or to take steps to have Amaranth reduce its participation in 

that trading venue. 

A recent CFTC report to Congress recommends that such contracts should be subject by statute to large trader reporting, position limits, or position accountability, self-regulatory oversight, obligations, and emergency authority for both the CFTC and for the 

ECM itself. NYMEX strongly supports the CFTC’s legislative proposals. These proposals are also supported by the President’s Working Group on Financial Markets. 

Finally, Congress created the CFTC in 1974, providing the new 

agency with exclusive jurisdiction over futures markets. Congress 

intended the CFTC Act of 1974 to strengthen futures regulation, 

create a comprehensive regulatory structure for futures trading, 

and avoid regulatory gaps. Further, Congress intended that the 

new agency be an expert in futures regulation, a function which requires highly specialized skills. The CFTC has demonstrated such 

expertise. In subsequent reauthorizations, when Congress intended 

to create limited exemptions to that authority, it has always done 

so through express amendments of the CFTC’s governing statute. 

Consequently, most observers have concluded that Congress did 

not intend to alter the CFTC’s exclusive jurisdiction with the Energy Policy Act of 2005. The contrary interpretation now being pursued by FERC substantially harms futures markets by adding the 

cost and uncertainty of conflicting standards. It also severely undermines the ability of NYMEX and other regulated exchanges to 

carry out their SRO responsibilities. 

I thank you for your time today and welcome any subsequent 

questions you may have. 

[The prepared statement of Mr. LaSala follows:] 

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Mr. STUPAK. Thank you, Mr. LaSala. Mr. Vice, for an opening 

statement, please, sir. 

STATEMENT OF CHARLES A. VICE, PRESIDENT AND CHIEF 

OPERATING OFFICER, INTERCONTINENTAL EXCHANGE, INC. 

Mr. VICE. Chairman Stupak, Ranking Member Whitfield, I am 

Chuck Vice, president and chief operating officer of the Intercontinental Exchange, or ICE. We very much appreciate the opportunity 

to appear before you today to give our views on energy markets. 

As background, ICE was established in 2000 as an over-thecounter market. Since that time, ICE has grown significantly, both 

through product and technology innovations as well as through acquisition of other exchanges. Today ICE operates a leading global 

marketplace in futures and OTC derivatives across a variety of 

asset classes. Commercial hedgers use our products to manage 

risks while investors provide liquidity necessary to maintain and 

grow the markets. ICE hosts four separate marketplaces on our 

electronic trading platform. 

First there is ICE’s OTC energy market, which operates under 

the Commodity Exchange Act as an exempt commercial market, or 

ECM. Second, there’s ICE Futures Europe, formerly known as the 

International Petroleum Exchange, which is regulated by the UK 

Financial Services Authority. Third, there is ICE Futures US, formerly known as the Board of Trade of the City of New York, or the 

NYBOT, which is a CFTC-regulated, DCM contract market. And 

fourth, there is the Winnipeg Commodity Exchange, which is regulated by the Manitoba Securities Commission. 

ICE has always been and continues to be a strong proponent of 

competitive markets and of regulatory oversight of those markets. 

To that end, we have continuously worked with FERC, the CFTC, 

and other regulatory agencies in the U.S. and abroad to ensure 

that they have access to all relevant information regarding trading 

activity in our markets. We strongly support legislative and regulatory changes that will enhance the quality of oversight and available information with respect to the energy markets. Over the past 

several months, ICE has been working with members of Congress 

to create an enhanced but appropriate level of oversight over OTC 

energy markets that are either economically linked to a designated 

contract market and its price discovery function or serve a significant price discovery function themselves. 

By appropriate, ICE means that any regulatory changes that are 

made need to reflect the varying nature of ICE’s many OTC markets and the key differences between contracts on ICE that serve 

a significant price discovery function and those that do not. We 

welcome the opportunity to work with the subcommittee and its 

staff on these important issues. 

Because OTC markets tend to be global in nature, most are increasingly electronic. ICE responded to the transparency and speed 

enjoyed in other OTC markets as an ECM by establishing its 

many-to-many electronic marketplace for trading physical energy 

commodities and financially settled derivatives or swaps. In effect, 

ICE performs the same function as a voice broker in the OTC market but does so through an electronic platform. Voice brokers offer 

limited transparency and only then to the largest firms. ICE, howVerDate Nov 24 2008 14:00 Feb 24, 2009 Jkt 037690 PO 00000 Frm 00092 Fmt 6633 Sfmt 6633 C:\DOCUMENTS AND SETTINGS\CWELLS1\110-78 SCOM1 PsN: JIMC
89 

ever, provides the same high-quality information to all traders, 

large and small, and at the same instant. ICE offers faster and 

more efficient execution while providing regulators with a comprehensive audit trail, none of which is available from voice brokers. 

The introduction of ICE’s platform has promoted competition and 

innovation in the energy derivatives market to the benefit of all 

market participants and consumers generally. As the CFTC pointed out in its Senate PSI testimony, ‘‘the ability to manipulate 

prices on either NYMEX or ICE has likely been reduced, given that 

ICE has broadened participation in contracts for natural gas.’’ Importantly, greater participation means increased liquidity, lower 

transaction costs, and tighter bid/ask spreads, which lowers the 

cost of hedging energy price risk for businesses. 

The problem with one-size-fits-all regulation can be illustrated by 

contrasting the historic nature of futures markets with the OTC 

markets. Recognizing the importance of futures pricing benchmarks to the general public and the retail accessibility of these 

markets, core principles were developed to facilitate regulation of 

futures trading by the designated contract market. The high level 

of liquidity typical in benchmark contracts makes application of 

core principles, such as market monitoring and position accountability, feasible and appropriate. Suggesting that these same DCM 

core principles, which were developed with the futures exchange 

model in mind, should apply to all OTC contracts traded on an 

ECM market is attempting to fit a square peg in a round hole. 

While some level of additional reporting and a system of accountability limits is appropriate for certain contracts, most of the energy swaps on ICE are niche OTC products that have little in common with futures benchmarks and are not amenable to the application of DCM core principles. 

I would now like to offer a quick comment on the CFTC/FERC 

jurisdictional question. Although many believe that FERC and 

CFTC’s jurisdictions conflict, ICE believes they are complementary. 

That said, overlapping regulation in any market creates uncertainty over compliance with two separate varying and sometimes 

conflicting legal standards. There is a clear role for each regulator, 

and we believe that FERC and the CFTC should be able to coordinate rather than duplicate their responsibilities. 

In conclusion, as an operator of global futures and OTC markets 

and as a publicly-held company, ICE understands the importance 

of ensuring the utmost confidence in its markets. To that end, we 

have continuously worked with the CFTC and FERC to ensure that 

they have access to all relevant information regarding trading activity in our markets. Mr. Chairman, thank you for the opportunity 

to share our views. 

[The prepared statement of Charles A. Vice follows:] 

TESTIMONY OF CHARLES A. VICE

1. ICE Operates a Transparent Platform. ICE provides a reliable, transparent 

over-the-counter market for trading physical energy commodities and financially-settled OTC derivatives. ICE has promoted competition and innovation on the derivatives market, which has lowered transaction costs for energy users. 

90 

2. One Size Regulation Does not Fit All Markets or Contracts. Many of the products on ICE are niche OTC products that trade in illiquid markets. Applying Designated Contract Market (DCM) core principles to these markets does not make 

sense. ICE supports creating appropriate oversight of energy markets that serve a 

significant price discovery market or impact a significant price discovery market on 

a DCM. However, the two-tier regulatory structure currently in place should be kept 

for DCMs and Exempt Commercial Markets. 

3. The Federal Energy Regulatory Commission and the Commodity Futures Trading Commission have Complementary Jurisdiction. ICE believes that FERC and the 

CFTC have complementary jurisdiction in energy markets. However, dual regulation 

would cause harm to the markets. There is a clear role for each regulator to oversee 

the energy markets and FERC and the CFTC should be able to coordinate their 

oversight and enforcement responsibilities. 

4. Funding of the CFTC. The CFTC is currently under-funded and ICE supports 

increasing their budget. However, ICE urges caution in levying a ′′transaction tax′′ or ′′user fee.′′ 

December 12, 2007 

Chairman Stupak, Ranking Member Whitfield, I am Chuck Vice, President and 

Chief Operating Officer of the IntercontinentalExchange, Inc., or ′′ICE.′′ We very 

much appreciate the opportunity to appear before you today to give our views on 

energy markets. 

As background, ICE was established in 2000 as an over-the-counter (OTC) market. Since that time, ICE has grown significantly, both through its own market 

growth fostered by ICE’s product, technology and trading innovations, as well as by 

acquisition of other markets to broaden its product offerings. 

Today, ICE operates a leading global marketplace in futures and OTC derivatives 

across a variety of product classes, including agricultural and energy commodities, 

foreign exchange and equity indexes. Commercial hedgers use our products to manage risk and investors provide necessary liquidity to the markets. Headquartered in 

Atlanta, ICE has offices in New York, Chicago, Houston, London, Singapore, Winnipeg and Calgary. 

ICE hosts four separate markets on our electronic trading platform - ICE’s OTC 

energy market, which operates under the Commodity Exchange Act (CEA) as an 

′′exempt commercial market,′′ or ECM, and three subsidiaries: ICE Futures Europe, 

formerly known as the ′′International Petroleum Exchange,′′ which is regulated by 

the UK Financial Services Authority; ICE Futures US, formerly known as ′′The 

Board of Trade of the City of New York (NYBOT),′′ which is a CFTC-regulated Designated Contract Market (DCM), and the Winnipeg Commodity Exchange, which is 

regulated by the Manitoba Securities Commission. 

ICE has always been and continues to be a strong proponent of open and competitive markets in energy commodities and related derivatives, and of regulatory oversight of those markets. As an operator of global futures and OTC markets and as 

a publicly-held company, we strive to ensure the utmost confidence in the integrity 

of our markets and in the soundness of our business model. To that end, we have 

continuously worked with FERC, the CFTC and other regulatory agencies in the 

U.S. and abroad in order to ensure that they have access to all relevant information 

available to ICE regarding trading activity on our markets and we will continue to 

work with all relevant agencies in the future. ICE strongly supports legislative and 

regulatory changes that will enhance the quality of oversight and available information with respect to the energy markets. 

Over the past several months, ICE has been working with members of Congress 

to create appropriate oversight of certain energy markets that either impact a designated contract market, and its price discovery function, or which separately serve 

a significant price discovery function. By appropriate, ICE believes that any legislative or regulatory changes that are made need to reflect the different nature of 

ICE’s varied markets and the significant differences between contracts on ICE that 

serve a significant price discovery function and those that do not. We also believe 

that any consideration of possible changes to the current regulatory structure must 

be based upon an understanding of the operations of ′′exempt commercial markets,′′ 

such as ICE, and of the balance struck by Congress and the CFTC between overseeing these markets while still allowing them to function in the context of OTC 

trading by commercial and institutional participants. We welcome the opportunity 

to work with the Subcommittee and its staff on these important issues. 

ICE OPERATES A TRANSPARENT PLATFORM

Broadly, because OTC markets tend to be global in nature, most OTC markets 

are now conducted electronically across most asset classes, including OTC markets 

91 

for U.S interest rate instruments, foreign exchange and debt securities. ICE responded to the transparency and speed enjoyed in other OTC markets by establishing its many-to-many electronic marketplace for trading physical energy commodities and financially-settled over-the-counter derivatives, primarily swaps, on 

energy commodities. ICE in effect performs the same function as a ′′voice broker′′ 

in the OTC market, but does so through an electronic platform. Voice brokers offer 

limited transparency and only then to the largest trading firms. ICE, however, provides the same high quality information to all traders, big and small, and at the 

same instant. The ICE electronic market also offers faster and more efficient execution while providing regulators with a comprehensive audit trail with respect to orders entered, and transactions executed - none of which is available from voice brokers. The introduction and development of ICE’s platform have promoted competition and innovation in the energy derivatives market, to the benefit of all market 

participants and consumers generally. The reliability of ICE’s markets has also resulted in an increasing preference for electronic trading in these markets. NYMEX, 

in its recent testimony before the Senate Permanent Subcommittee on Investigations (the ′′Senate PSI′′), noted that 80-85% of its volume is now traded electronically, a development driven largely by competition from ICE. The CFTC also pointed 

out, in its Senate PSI testimony, that ′′the ability to manipulate prices on either 

[NYMEX or ICE] has likely been reduced, given that ICE has broadened participation in contracts for natural gas.′′ Importantly, greater participation means heightened liquidity, which results in lower transaction costs and tighter bid/ask spreads. 

This makes the cost of hedging energy price risk lower, which results in cheaper 

operating costs for businesses. 

Participants on ICE enter bids and offers electronically and are matched in accordance with an algorithm that executes transactions on the basis of time and price 

priority. Participants executing a transaction on our platform may settle the transaction in one of two ways - on a bilateral basis, settling the transaction directly between the two parties, or on a cleared basis through LCH.Clearnet using the services of a futures commission merchant that is a member of LCH.Clearnet. In addition to providing the clearing house with daily settlement prices, ICE is also responsible for maintaining data connectivity to the clearing house. 

It is important to note that there are substantial differences between ICE’s OTC 

market, other portions of the OTC market, and the NYMEX futures market. These 

differences necessarily inform and guide the appropriate level of oversight and regulation of our markets. First, ICE is only one of many global venues on which market 

participants can execute OTC trades. A significant portion of OTC trading in natural gas is executed through voice brokers or direct bilateral negotiation between 

market counterparties. Of the available forums, only ICE (and any other similarlysituated ECMs) is subject to CFTC jurisdiction and the CFTC’s regulations, or to 

limitations on the nature of its participants. 

Second, participants in the futures markets must either become members of the 

relevant exchange or trade through a futures commission merchant that is a member. In contrast, ICE’s OTC market, by law, is a ′′principals only′′ market in which 

participants must have trades executed in their own names on the system. 

Third, the OTC market offers a substantially wider range of products than the 

futures markets, including, for example, hundreds of niche derivative contracts on 

natural gas and power pricing at over 100 different delivery points in North America. The availability of these niche markets on ICE has improved transparency and 

lowered transaction costs via tighter bid-ask spreads, but volume nonetheless remains very low at most points. The market reality, for most of these illiquid points, 

is that participation is limited to the very small number of marketers, utilities, and 

others that have some intrinsic supply or demand interest. 

Fourth, the most liquid products traded in the OTC market broadly and on the 

ICE OTC market specifically are cash-settled swaps that require one party to pay 

to the other an amount determined by the final settlement price in the corresponding futures contracts but do not, and cannot, result in the physical delivery 

or transfer of energy commodities. These ’lookalike’ swaps have been widely used 

by OTC energy market participants long before the creation of ICE. In fact, these 

swaps are useful and common in any market for which there are benchmark futures 

prices. Our Henry Hub natural gas swap, for example, constitutes an important 

commercial hedging vehicle and has served as an important complement to and a 

hedge for the NYMEX Henry Hub natural gas futures contract. An understanding 

of the ICE markets is critical to any determination of the appropriate regulation of 

these markets. 

ICE and its market participants, including energy producers, distributors and 

users, benefited significantly from the regulatory flexibility embodied in the CFMA 

through the ECM structure established under section 2(h)(3) of the Act. The tanVerDate Nov 24 2008 14:00 Feb 24, 2009 Jkt 037690 PO 00000 Frm 00095 Fmt 6633 Sfmt 6633 C:\DOCUMENTS AND SETTINGS\CWELLS1\110-78 SCOM1 PsN: JIMC
92 

gible benefits to the marketplace included more efficient hedging of energy price risk 

(tighter markets), greater price transparency in all parts of the marketplace, and 

vastly improved liquidity through the introduction of more participants (and thus 

greater price competition) in the markets. These benefits have not been limited to 

those brought about directly by ICE’s business and its product offerings, but include 

those resulting from changes to the business models and product offerings of other 

market participants that responded to the competitive challenge presented by ICE’s 

business. 

As these markets have grown and developed since passage of the CFMA, new regulatory challenges have emerged. ICE advocates a targeted approach to any reform 

of the CEA. Such an approach recognizes the unique characteristics of the many 

customized markets that have evolved and the importance of continuing to encourage market innovation. 

ONE SIZE OF REGULATION DOES NOT FIT ALL MARKETS OR

CONTRACTS

The problem with ′′one size fits all′′ regulation can best be illustrated by contrasting the historic nature of futures markets (limited number of actively traded 

benchmark contracts, all transactions executed through a broker who can trade for 

its own account or that of a retail customer) with the ECM OTC swaps markets 

(large number of niche products, many illiquid and thinly traded, principals only 

trading). Recognizing the importance of futures pricing benchmarks to the general 

public (a DCM is obligated to publish its prices to be used by the broader market), 

and in recognition of the potential for conflicts of interest due to members trading 

for their own accounts alongside business transacted on behalf of customers, some 

of whom were retail customers, DCM core principles were developed to facilitate 

regulation of the markets by the DCM, which acted as a self regulatory organization. The typical high level of liquidity in benchmark contracts make application of 

core principles such as market monitoring and position accountability and limits 

feasible and appropriate. 

Suggesting that these same DCM core principles, which were developed with the 

futures exchange model in mind, should apply to all OTC swap contracts traded on 

an ECM market is attempting to fit the proverbial square peg in a round hole. 

While some level of additional reporting and a system of position accountability limits may be appropriate for certain contracts - specifically, those that settle on a futures market contract price and that are the true economic equivalent of a contract 

actively traded on a regulated futures market - most of the energy swaps available 

on ICE are niche OTC products that trade in illiquid markets that are not amenable 

to the application of DCM core principles. For example, how would an ECM actively 

monitor an illiquid swaps market in an attempt to ′′prevent manipulation′′ where 

price changes can be abrupt due to the limited liquidity in the market? How would 

an ECM swaps market administer accountability limits in a market that has only 

a handful of market participants? Should the ECM question when a single market 

participant holds 50% of the liquidity in an illiquid market when the market participant is one of the only providers of liquidity in the market? 

It is important to analyze these questions not in isolation, but in the context of 

market participants having alternatives such as OTC voice brokers through which 

they can conduct their business. Importantly, such OTC voice brokers can even offer 

their customers the benefits of clearing through use of block clearing facilities offered by NYMEX (and also by ICE). Faced with constant inquiries or regular reporting by the ECM related to legitimate market activity, and facing no such monitoring 

when it transacts through a voice broker, market participants might choose to conduct their business elsewhere. It is for these and other reasons that Congress and 

the Commission have developed the carefully calibrated two-tier regulatory structure applicable to DCMs and ECMs. We believe that the judgments made by Congress and the Commission thus far have been prudent and should generally be 

maintained. 

FERC AND THE CFTC HAVE COMPLEMENTARY JURISDICTION

In 2005, Congress passed the Energy Policy Act, which granted FERC broader authority to police manipulation in energy markets. Although many believe that FERC 

and CFTC’s jurisdictions conflict, ICE believes that they complement each other. As 

noted before, ICE operates a global company across the span of energy markets: 

physical, OTC, and futures. Accordingly, it works closely with FERC and the CFTC 

to help ensure fair, competitive trading. ICE believes that FERC and the CFTC are 

93 

capable regulators in their respective areas in the physical, OTC, and futures markets. 

It is important that this jurisdiction remain complimentary, however. Overlapping 

regulation of the same conduct would likely result in harm to markets. Applying 

dual regulation to energy markets would create uncertainty over compliance with 

two separate, varying and sometimes conflicting legal standards. The only certainty 

would be the increased cost to U.S. businesses from having to comply with two regulators. The possible effect would be that these firms, operating on a global scale, 

would take their business overseas to other trading venues. There is a clear role 

for each regulator to oversee the energy markets, and we believe that FERC and 

the CFTC should be able to coordinate, rather than duplicate, their oversight and 

enforcement responsibilities. 

FUNDING OF THE CFTC 

ICE believes that the CFTC is currently under funded and we support Congress 

increasing the CFTC’s budget. ICE strongly supports increasing the Commission’s 

budget, but urges caution in considering whether to levy a ′′transaction tax′′ or ′′user fee′′ on futures transactions. As an operator of both domestic and foreign futures exchanges, ICE recognizes that the futures industry is highly competitive, on both a 

domestic and global basis. Trading firms often operate on thin margins. A transaction tax could double the trading costs for market makers, who provide important 

liquidity to the market. If these trading participants left all or some markets, that 

would take important market liquidity with them. A recent study of transaction 

taxes on futures markets found that a futures tax would negatively impact volume 

and bid/ask spreads.1 Consumers would feel the brunt of this tax, as businesses 

would be pass on the increased cost of offsetting price risk in less liquid markets 

to them. 

Further, it is questionable whether a transaction tax would raise the revenue 

needed for the Commission. Again, firms operate on thin margins and might choose 

to move their business offshore or to less transparent markets. This would increase 

the Commission’s cost of surveillance, while decreasing taxable transactions. 

CONCLUSION

ICE has always been and continues to be a strong proponent of open and competitive markets in energy commodities and other derivatives, and of appropriate regulatory oversight of those markets. As an operator of global futures and OTC markets, and as a publicly-held company, ICE understands the importance of ensuring 

the utmost confidence in its markets. To that end, we have continuously worked 

with the CFTC and other regulatory agencies in the U.S. and abroad in order to 

ensure that they have access to all relevant information available to ICE regarding 

trading activity on our markets. We have also worked closely with Congress to address the regulatory challenges presented by emerging markets and will continue 

to work cooperatively for solutions that promote the best marketplace possible. 

Mr. Chairman, thank you for the opportunity to share our views with you. I would 

be happy to answer any questions you may have. 

1 Robin K. Chou and George H.K. Wang, Transaction Tax and the Quality of the 

Taiwan Stock Index Futures, Journal of Futures Markets, 1195-1216 (2006). 

Mr. STUPAK. Thank you, and thank you all for your testimony. 

We will begin with questions. Mr. Barton, did you wish to make 

an opening statement? It would be appropriate at this time if you 

would like, before we begin questions. 

Mr. BARTON. Thank you, Chairman. Just very briefly. I will submit my statement for the record, but this is a very important hearing. We have energy prices nearing all-time highs, and this issue 

of jurisdiction, I was chairman of the Energy Conference 2 years 

ago, when we put in some language that was specifically designed 

for what has happened at ICE and what has happened with Amaranth. That wasn’t serendipity. It was conscious. We wanted to do 

more. We weren’t allowed to. So at the appropriate time, especially 

when Chairman Kelliher is here, I will go into that in more detail. 

94 

But I am very supportive of this hearing, Mr. Chairman. I remember explicitly this issue from 2 or 3 years ago, and if we need 

to clarify and put additional statutory authority for the FERC on 

the books, I am very willing to work with the majority to do that. 

Mr. STUPAK. I thank the ranking member, and thank you for 

your statement. We will go 5 minutes. We will start with myself 

and go one or two rounds. Is that all right with you, Mr. Walden? 

All right, I will begin. Professor Greenberger, for some time I 

have been saying if we could regulate these OTC trades, or overthe-counter trades, we could reduce the price of barrel oil by $20 

or $30. People think I am just saying that. You are a professor. 

Maybe they will listen to you. Explain how that would work if we 

could do the regulation. How would it lower the price of a barrel 

of oil $20 to $30, as you indicated? 

Mr. GREENBERGER. Well, just let us take the example of natural 

gas. I will get to barrel of oil. Amaranth, the day before it failed, 

natural gas was about $8.50 per MBTU, million BTU. The day 

after it failed, it went to $4.46. Senator Levin and Senator Coleman, in their bipartisan report, show in detail the way Amaranth 

gobbled up futures contracts to make it appear that there was a 

shortage of natural gas on ICE when there was no shortage. 

In fact, NYMEX went to Amaranth and said, you guys are going 

to kill yourselves. We want you to lower your positions. Not only 

we want, we require it, because we are regulated. 

Mr. STUPAK. Correct. 

Mr. GREENBERGER. The next day they moved to ICE. Senator 

Levin’s June 2006—Senator Levin, Senator Coleman have economists’ statements that the manipulation of the futures prices, 

phony exchanges of contracts, buying up strategically futures contracts, has added $20 to $30 to the barrel of crude oil. 

If ICE tomorrow was regulated like NYMEX and out from under 

this phony foreign board of trade exemption, the price of crude oil 

would start to drop. Just like when Congressman Graves went to 

the floor in December of 2005 and said, enough of this exemption 

on natural gas, it dropped from $14 per million BTU to $9. Just 

the threat of regulation, these traders will think someone is going 

to listen to these telephone calls. 

[Chart shown.] 

Mr. STUPAK. Well, let us go here to—this is chart No. 3 I had 

up earlier. The yellow line represents what we use as a country, 

like 21 trillion cubic, but yet we are trading—and that is 1 year’s 

worth—200 and—what is it? I can’t see here—239 cubic feet, and 

237 trillion cubic feet on ICE. Is all this excess trading, if you will, 

is that what drives up the price? 

Mr. GREENBERGER. Yes, because those guys, you heard their 

phone conversations. They are playing games, and in the same 

breath, they are saying, don’t worry, guys. The CFTC can’t touch 

us. 

Mr. STUPAK. Because we are in the dark market. 

Mr. GREENBERGER. The red with the blue, if you would listen to 

their phone conversations, they would stop doing that instantly. 

And the price of natural gas and crude oil would drop by about a 

third. 

95 

Mr. STUPAK. OK, Mr. Cota, I also mentioned in my opening 

statement that the price of a gallon of gas jumped 45 cents in 1 

day in my district. Have you seen the same thing in the Northeast? 

Mr. COTA. In the Northeast, particularly in heating fuels, we had 

a rapid increase in price. 

Mr. STUPAK. The Northeast is more dependent on home heating 

oil as opposed to natural gas in the rest of the country, correct? 

Mr. COTA. That is correct, but most of the commodities have followed both crude oil and heating oil with energy pricing. The one 

thing that has kept gasoline down a little bit has been actually a 

glut of ethanol and some of that trading. Otherwise, gasoline would 

be much higher than it is right now. 

Mr. STUPAK. OK, thank you. Ms. Campbell, you said in your testimony that public gas utilities like yours have lost confidence, that 

prices for natural gas in the futures and economically linked overthe-counter markets are an accurate reflection of supply and demand. Explain precisely what is needed to remedy the problem of 

artificial prices in the natural gas markets. 

Ms. CAMPBELL. Well, I think that Professor Greenberger has covered that in that what we are seeing is some manipulation, not so 

much the speculation but the manipulation. And so our position is 

that greater transparency in that marketplace, via the large trader 

reporting is really the answer to bring light, as we call the dark 

markets, to bring light to those markets such that we can see what 

is going on in those marketplaces and therefore bring back the consumer confidence in those markets. 

Mr. STUPAK. Well, as a result of Amaranth’s collapse, have you 

or other American Public Gas Association members made an estimate of the cost to your utilities and to consumers from 

Amaranth’s efforts to drive up the price in the winter of 2006–07? 

Ms. CAMPBELL. Memphis Light, Gas, and Water has not, but I 

know that the Municipal Gas Authority of Georgia, MGAG, has, 

and their estimate was about $18 million cost to them due to the 

Amaranth activities. 

Mr. STUPAK. Mr. LaSala, I think you indicated that NYMEX supports CFTC’s legislative proposal to regulate the exempt commercial markets. Is that correct? 

Mr. LASALA. Yes, sir. 

Mr. STUPAK. Are there specific improvements or changes NYMEX 

would suggest to those proposals, ways you would think—— 

Mr. LASALA. Speaking to the proposals or beyond them, we support—— 

Mr. STUPAK. Beyond the proposals. 

Mr. LASALA. We support the proposals so far as the items that 

would trigger. You know, a linked market taking a settlement 

price, the things—the market serving a price discovery roles should 

trigger certain criteria. As we said, large trader reporting, position 

limits, self-regulatory authority and mandate that they have an 

SRO function as well as emergency action powers. 

Mr. STUPAK. OK, you indicated in your testimony that Amaranth, when notified by NYMEX of too large of a whole position 

there, they then went to ICE. Have you seen that with other energy traders where they have informed you they would prefer to 

96 

trade on an unregulated exchange rather than deal with NYMEX 

rules on disclosure and position limits? 

Mr. LASALA. That is a good question, Mr. Chairman. We have 

certainly heard it before anecdotally from traders in the marketplace when we have—we said earlier we administer hard position 

limits on basically all of our contracts, all the physical ones and 

many of the cash settled ones. When we have tried to negotiate 

hedge exemptions where there have been like substitutes, whether 

on Intercontinental, we have heard the comment made, ‘‘I would 

just as soon—you know, you are beginning to tread so hard on me. 

I can easily move this over.’’ We have also heard it in the context 

of WTI insofar as it affects the Foreign Board of Trade issue where, 

in direct conversations, in I will call ‘‘lessons learned from Amaranth’’ where we made some changes, lowered any one-month accountability levels, and also let us focus on them on a futures only 

basis. Where, in a conversation with a trader, the comment was 

made just simply I am being actively courted by the UK entity ICE 

Futures, and basically you are pressing me to want to shift gears. 

Mr. STUPAK. My time is up. Mr. Walden, questions, please. We 

will second round. I have many more questions. 

Mr. WALDEN. Thank you, Mr. Chairman. This is an issue that I 

have been concerned about for some time. And in fact, in May of 

2005, organized a letter to the Government Accountability Office 

now, asking for a full scale investigation signed by 19 of my colleagues because of concerns that had come to me. And so, Mr. 

Chairman, I am glad we are having this hearing today because if 

indeed the market is being manipulated, as it appears it has been, 

then consumers are getting stuck with the bill. And that is not 

right, and it is time for us to step in. 

Professor Greenberger, I want to go to your issue about how 

much you think this market manipulation or potential market manipulation is adding to the price of crude oil because there seems 

to be some dispute, not that we want to spend a lot of time on that. 

But others, including the GAO, say there are other factors involved, too. You really think that that is it, and it is about a third? 

Mr. GREENBERGER. I feel every confidence—now it is my view— that it would drop at least $20. If this afternoon we went home and 

knew that ICE was—those telephone calls on ICE were going to be 

monitored, the phony games that are being played would stop, and 

the price would drop. 

Mr. WALDEN. And do you think just—— 

Mr. GREENBERGER. Not to zero. There are reasons it is up near 

100, but it would drop by about $20. 

Mr. WALDEN. And do you think that just changing the language 

in the CFTC Reauthorization adding energy adequate, or does 

FERC need to have a role here? 

Mr. GREENBERGER. No, FERC has got plenty of power. The 

CFTC, ICE, and NYMEX are fighting that power as Mr. Barton 

made clear. They have plenty of power in natural gas, but that is 

enforcement power after the horse is out of the barn. If you want 

to stop it to begin with, you have to regulate all of these exchanges. 

I would just like to make one quick point. The famous quote is 

‘‘what would Jesus do?’’ In forming this new legislation, the mantra 

has been, to close the Enron loophole, what would ICE do? EveryVerDate Nov 24 2008 14:00 Feb 24, 2009 Jkt 037690 PO 00000 Frm 00100 Fmt 6633 Sfmt 6633 C:\DOCUMENTS AND SETTINGS\CWELLS1\110-78 SCOM1 PsN: JIMC
97 

body is looking to ICE on how to close this loophole. Mr. Vice says 

do not regulate all our contracts, just the ones that ‘‘significantly’’ 

affect price discovery. So who is going to have to prove that? I am 

going to have to prove that. Ms. Campbell is going to have to prove 

what is ‘‘significant.’’ Mr. Cota, the CFTC will have to prove it. You 

are going to have a contract-by-contract contest. Prior to the Enron 

loophole, ICE would be a regulated entity as a whole. 

Just one more point. ICE says to you, my gosh, we have all these 

different contracts. One size doesn’t fit all. Well, first of all, for the 

consumer, one price fits all. 

Mr. WALDEN. Correct. 

Mr. GREENBERGER. Nobody is worried about the consumer. Secondly, if I could just make this one point. 

Mr. WALDEN. Make it quick. I only have 2 minutes. 

Mr. GREENBERGER. OK, the Act allows the Commission to create 

exemptions if ICE proves that they need less regulation. 

Mr. WALDEN. Got it. All right, Mr. LaSala, if I could get your attention for a second. I want to make sure I understood what you 

were saying. Is it when NYMEX begins to put some pressure on 

people in the market that you believe need a little more regulatory 

oversight, they are sort of pushing back, saying, we will just go 

over to ICE? Is that what you are saying? 

Mr. LASALA. I am not saying that is a universal statement. 

Mr. WALDEN. No, but—— 

Mr. LASALA. But that has certainly absolutely come up. It has 

come up in the context of the contracts that are natural-gas oriented, that are offered on Intercontinental. And it has also come 

up in the WTI contract, where there is a look-alike on the FSA-regulated ICE futures. 

Mr. WALDEN. Mr. Vice of ICE. 

Mr. VICE. Sir? 

Mr. WALDEN. What do we do here? 

Mr. VICE. Well, I think, first of all there are—particularly Professor Greenberger there, a number of issues that have all gotten 

rolled up together. So I am trying to pull the strings of that ball 

apart. You are talking about the ECM market specifically and natural gas and Amaranth. ICE is actually in complete agreement for 

the most part and has been working with Congress and the other 

exchanges like NYMEX, the President’s Working Group, for some 

months now on additional regulation for ECMs for contracts that 

are determined to be significant price discovery contracts. And 

those are determinations that the CFTC, for the most part, has 

drafted and feel comfortable with. And it would be their determination on what falls into that category. We—— 

Mr. WALDEN. Do you think adding the word energy into the 

CFTC statute would provide proper regulatory oversight? 

Mr. VICE. I think—I am not an expert. 

Mr. WALDEN. That it would stop manipulation of this market? 

Mr. VICE. I think the ECM category is a critically important category. If you look, ICE came along as a start-up company and competes fiercely with NYMEX today. It is one of the only corners of 

the U.S. futures where you can find that competition. And as a result, it has driven prices down. There has been product innovation. 

A lot of good has come out of that. What we are saying is, yes, that 

98 

we agree there is room for improvement. Let us do something 

thoughtful, deliberate, and centering on the problem and not throw 

the baby out with the bath water. 

Mr. WALDEN. My time is expired, but I just—you know, as we 

watch the sub-prime market implode, there seems to be some correlation here about derivatives and regulatory oversight and what 

went wrong. And I will tell you, a lot of consumers are starting to 

feel that way on the energy side, and it is very disconcerting. So 

I am not saying that is what is happening here, but—— 

Mr. VICE. Well, there is no question all commodities are at alltime highs. Metals, agriculture. 

Mr. WALDEN. And I understand, and I understand demand and 

supply curves and all of that. I also understand that we know that 

there is market manipulation in these if there is a proper regulation. And so we got to find that balance. 

Mr. STUPAK. Mr. Walden, if I could just take 1 second—— 

Mr. WALDEN. Yes. 

Mr. STUPAK. Take a look at this one. This says right here—it is 

No. 7 in the book there. Mr. LaSala, you may want to look at that, 

the book right there in front of you. This is exactly what Mr. Walden is talking about. 

[Chart shown.] 

Mr. STUPAK. This chart shows the volume shift from NYMEX to 

ICE immediately after NYMEX imposed a rule earlier this year 

which required traders of natural gas who want to hold more than 

1,000 positions going into the last day of trading prior to the expiration of futures contract to disclose their bilateral swaps, futures, 

and forward contract positions. So I almost have to ask Mr. LaSala 

the same thing Mr. Walden was asking. Why the shift? Why suddenly from NYMEX to ICE? Isn’t it the case that your new rule is 

really simply putting teeth into existing 1,000-position contract or 

the contract limit there? 

Mr. LASALA. Yes the policy shift again, with the March future 

certainly put an added level of detail, formalized submission on 

anyone who is excess of 1,000 contracts going into the last day. We 

typically would allow that. We could grant exemptions. This was a 

new procedure that came out in discussions with our regulator and 

the FERC, and as far as—— 

Mr. STUPAK. Well, that is your rule there, February 26, 2007, 

when the shift occurred, right? 

Mr. LASALA. That is right. You see the curve shift out. 

Mr. STUPAK. Right. 

Mr. LASALA. We imposed commencing with the March expiration 

the higher standard, and immediately we see a significant drop-off 

in volume on the last trading day, specifically, even the 30-minute 

closing range. And just as a note, some of the concern in that loss 

in the 30-minute closing range is, at some point does loss and volume impact price discovery? I don’t have an absolute metric to say 

at what point does it, but it could. And the shift is obviously a startling one. 

Mr. GREENBERGER. Mr. Stupak, I could fill this hearing room 

with customers who have gone to NYMEX and said, you need to 

regulate more strictly, and NYMEX has said, we really feel sorry 

for you, but if we regulate more strictly we will lose business to 

99 

ICE. Don’t forget ICE’s ownership, Goldman Sachs, Morgan Stanley, British Petroleum, they trade on NYMEX. NYMEX has to pull 

its punches when it criticizes ICE, since it is criticizing its own 

traders. 

And No. 2, you talked about the sub-prime meltdown, 3, 4 

months from now you are going to have a hearing on the sub-prime 

meltdown, and you are going to find that this very same legislation 

deregulated something called collateralized debt obligations, CDOs. 

Those are futures contracts deregulated by the CFMA. CitiBank 

lost $11 billion. That is why Chuck Prince is not the CEO. You are 

going to hear about this CFMA coming and going. 

And the final point is, I will answer the question about whether 

ICE would agree just to add ‘‘or energy.’’ They won’t, because that 

would mean they would be regulated altogether. What they want 

everyone to do is go contract by contract on thousands of contracts 

and prove significant price discovery. 

Mr. VICE. First of all—— 

Mr. STUPAK. Take the mike, though, if you want to comment on 

it. 

Mr. VICE. First of all, we are a publicly-held company so we are 

not owned by those firms Mr. Greenberger just said. And as I stated earlier, we think having that ECM category with ability for, I 

think—the CFTC has referred to it as low-cost on-ramp for competitors to get into this market—has been very good for energy. Energy went from basically probably the back end of the commodity 

market in terms of efficiency and transparency and bid offer 

spreads to probably near the front of the pack there. Yes, there is 

work to be done, but it doesn’t make sense to us to say there are 

only two flavors of trading here: a regulated futures market with 

all the overhead and all of the position limits and market monitoring and emergency authority to order down positions. It is either 

that, or it is an opaque voice broker market. There is nothing in 

between. 

And I think that people that are familiar and close to these markets recognize that energy and quite possibly many other commodity markets, there is an in-between. And it needs some of both 

of those worlds. Otherwise, you are just—the illiquid thousands of 

markets that Professor Greenberger refers to will just go back to 

voice brokers. And you will have no information, no audit trail 

about what anybody is doing in any of those markets. 

Mr. STUPAK. All right, Kyle, could you put up exhibit 27? I think 

Mr. Walden has a follow-up he would like based on the back-andforth we have been going here. 

Mr. WALDEN. Yes, if I could, Mr. Chairman, I would just like to 

get clarification on the difference between the end-of-month data 

we just saw on that chart and sort of the contracts year-to-date or 

annualized, because it looks like the numbers have tracked pretty—— 

Mr. STUPAK. Exhibit 27. 

[Chart shown.] 

Mr. WALDEN. It is Exhibit 27 in that book, and it shows in the 

year 2006 NYMEX traded 23,019,000 contracts, natural gas contracts. ICE did 24,040,000. 2007 year to date NYMEX is at 

25,146,000. ICE is at 25,910,000. These annualized numbers don’t 

100 

seem to show the volatility that the end-of-the-month day numbers 

show, and I am curious if you could explain that to me, why the 

difference and what the significance of the difference is. 

Mr. VICE. I will try to explain the difference, Tom, if you don’t 

mind. You go after me. One thing we haven’t talked about here is 

the NYMEX contract and the ICE swap traded OTC are not the 

same thing. The NYMEX contract is a physically-delivered natural 

gas future. If I want, I can hold that contract. I can go to expiry 

and demand delivery and potentially squeeze a market. 

The ICE swap has no ability to do that. If I hold it until expiration, I receive the NYMEX final settlement price. That is it, and 

so what you find is these swaps were around long before ICE was 

around. And in terms of market size, generally the futures market 

is, generally in any commodity, is several times larger than the underlying physical production. And the OTC market is typically several times larger than the futures exchange on any commodity you 

look at. So these numbers aren’t surprising at all. 

But if you look at how people use the two products differently, 

yes, they are economically linked. And we have acknowledged that 

there should be some regulation recognizing that. But they are 

used differently in that if I am a producer or a consumer like Memphis Gas, I am buying gas out there, and I am buying—in fact, this 

is the crux of FERC’s argument in the Amaranth case of why they 

have jurisdiction—because it affected what is called next month 

physical gas trades, where people buy gas at the NYMEX, plus a 

basis spread. NYMEX settlement, plus a dime, plus 20 cents. And 

so a consumer may buy gas on that basis. 

So now it has locked in the basis price, but it has exposure to 

the NYMEX settlement price. So to get rid of that risk, they could 

go buy a swap for a fixed price and eliminate that variability. But 

to maintain that perfect hedge they need to hold that swap to delivery, not trade out of it, as you would a natural gas future at 

NYMEX. You need to hold it to delivery and actually receive the 

NYMEX settlement price because you are going to pay the producer that same amount, plus 10 cents. So they are used differently, and it is an important point. 

Mr. GREENBERGER. I would just add to that, Mr. Vice says they 

are connected, the physical and non-physical markets. They are 

identical, and anybody trying to tell you that there is a difference 

between the two is blowing smoke. They are identical, and in fact 

Mr. Cota is worried that physical markets may be so unimportant 

that they may end physical delivery, which would hurt the heating 

oil industry. And also, Mr. Vice tells you that Morgan Stanley, 

Goldman Sachs have no stake holding in that ICE company. They 

started that company, and if you look at Senator Levin and Senator 

Coleman’s report on page 47, 48, they list Morgan Stanley, Goldman Sachs, and BP as large stakeholders. They may have reduced 

their positions, but they run—ICE is here for those companies. 

Mr. STUPAK. Mr. LaSala, I think you wanted to comment. 

Mr. LASALA. I want to comment here because this is the crux of 

this hearing and what we are doing. So—— 

Mr. STUPAK. Did you want to say something, Mr. LaSala, and 

then we will go on to Mr. Green for questioning? 

101 

Mr. LASALA. Absolutely. Again, they are different. One is physically settled, one is cash settled, but they are absolutely linked. 

And again I am bound by hard positions limits. I have to manage 

them. Whether you want to say pre- the new procedure or post- the 

new procedure, I have always been bound with SRO responsibilities on that. And parties can—with the ICE contract, there were 

no position limits whatsoever. So someone could load up. And you 

can, since they are linked, and I am asserting that, I think that 

others have done analysis and asserted that. You can drive the 

price up by activity in that market, and Mr. Vice is right. You don’t 

have to get out. It is a financially settled one, so buy it at lower 

increments, drive it up, and get the final settlement price. If we 

agree that the markets are linked, that is absolutely possible. 

Mr. VICE. One quick comment. They are linked. They are financially linked, and they should be looked at jointly in any kind of 

regulatory oversight. Despite what Mr. LaSala has said, though, 

NYMEX itself in early 2006 changed their rulemaking. Previously 

their swap and their natural gas future were counted together in 

administering position limits. They recognized that they were different and broke them out. So I don’t know how they can say they 

are exactly the same, because their actions indicate otherwise. 

Mr. LASALA. If I may. 

Mr. VICE. Sure. 

Mr. LASALA. In connection with that, we also put out a notice 

saying that untoward activity that, if you have position in the cash 

commodity, which we have on our books and we can monitor, if in 

fact there is underlying activity in the physical that the cash is— 

if a settlement derived by, we will prosecute you. 

Mr. STUPAK. Mr. Inslee, for questions. 

Mr. INSLEE. Thank you. Mr. Greenberger, your testimony is astounding in its implications, assuming you are correct. And I just 

want to ask you, tell me others who share your view of the ramifications of these failures. 

Mr. GREENBERGER. Well, Mr. Cota does. Ms. Campbell does. Professor Frank Portnoy, at the University of San Diego, agrees with 

my position. I think every State Attorney General’s office agrees 

with my position. And, by the way, if the CFTC/ICE legislation to 

close the Enron loophole is passed in its present format, the State 

Attorney Generals are going to have to go contract by contract to 

prove what everybody knows. Futures contracts cause significant 

price discovery. 

If you make my change and put ‘‘or energy’’ back, ICE will be 

fully regulated. If they have some reason not to be fully regulated, 

they can apply to the CFTC for less regulation. But it is their lawyers, Goldman Sachs, Morgan Stanley, who would have to pay to 

get the change, not Mr. Cota, Ms. Campbell, and me, who have to 

prove that their contracts under the CFTC cause significant price 

discovery. Put the burden on ICE, not on the public. 

Mr. INSLEE. So, game play for me those two different mechanisms. 

Mr. GREENBERGER. OK, I will game play it exactly. ICE has hundreds of thousands of contracts. Mr. Cota is worried about one contract. He thinks it has significant price discovery. He is going to 

have to go to the CFTC and get engaged in a hearing. The CFTC 

102 

itself is going to have to have a hearing, saying this contract, not 

the exchange, causes significant price discovery. They make a finding after a lengthy hearing. Is ICE or the traders going to challenge that in Court? You bet your life. There will be injunctions. 

There will be Court proceedings. The public and the CFTC will 

carry the burden every step of the way. 

If you add ‘‘or energy’’ back to the definition of commodities that 

aren’t exempt, just those two words, it will be ICE’s burden to show 

that they shouldn’t be regulated like NYMEX. They will have to 

carry the weight, Goldman Sachs, Morgan Stanley, British Petroleum, not the poor heating oil guy from Vermont. ICE will immediately be regulated and then have to prove, if they have the ability 

to prove it, that they should get less regulation, because Mr. Vice 

is worried that there are all these different contracts, and you 

should worry about them but not worry about the person back in 

your home district that is paying 30-percent premium over supply/ 

demand for gas, heating oil, natural gas, and oil. 

We shouldn’t be worried about ICE and Goldman Sachs and Morgan Stanley. We should worry about your constituents. Put ICE 

back under regulation. Let ICE get out of it. ICE can get exemption 

under the Act as it exists. Don’t make your constituents fight that 

battle on a case-by-case basis and then have to go into Court, District Court, Circuit Court, and maybe to the Supreme Court to 

show that one—and by the way, when that one contract is determined for significant price discovery, these traders are going to 

move to other contracts, just the way they moved from NYMEX to 

ICE. 

You will have spent years convincing them that one contract 

causes significant price discovery. These guys will get on the telephone just like you heard them. Mr. Stupak played those recordings. And they will say, guess what, guys. We are moving to a contract that isn’t regulated. 

Mr. INSLEE. So you think those two words are worth 30 percent 

of the value of those products? 

Mr. GREENBERGER. I absolutely do, and Enron had them taken out, and Enron made $2 billion the next year, forcing the California 

consumers to pay $40 billion in extra electricity bills. Is it worth 

$40 billion to put two words in? It certainly is. 

Mr. INSLEE. That is a pretty per-word rate. Mr. Vice, would ICE 

be willing to give up its no-action exemption and register as a designated contract market just as NYMEX has? 

Mr. VICE. Are you referring to the Foreign Board of Trade? 

Mr. INSLEE. Yes. 

Mr. VICE. Well, we—no, I think in the sense that the—I don’t 

know that it is a matter of do it or don’t do it. I think the CFTC 

went through a very deliberate, extensive, thoughtful process with 

all of the associations in the industry, all of the exchanges worldwide to really determine, what is a domestic contract. Is it where 

the computers are? Is it where the customers are? Is it where the 

contract is delivered? If it is cash settled, is it where the index that 

it settles on is delivered? 

And I think what that process showed is that these are global 

markets, and there are no easy answers there. In fact, we have a 

U.S. DCM ourselves. We own the New York Board of Trade. We 

103 

own that in New York. It trades, for example, agricultural products, coffee, cocoa, sugar, other things. None of those products are 

delivered in the U.S. If that were the criteria for deciding where 

regulation should occur, then Brazil would oversee the regulation 

of those markets. 

Many of the financial instruments are traded at the CME, so 

those settle on London Interbank Overnight rates. So there are, 

when you start trying to figure out where, on one of those dimensions, where a market should be regulated, what that conference 

showed that the CFTC went through is, you run into a lot of problems. And I think the more pragmatic, more practical, and more effective approach that they put in place was a recognition of mutually-respected regulators and information-sharing arrangements 

between those regulators. 

So in fact, today what our UK exchange ICE Futures Europe 

does, there is an information sharing—— 

Mr. INSLEE. Could I ask you just a real quick question? I am 

sorry to interrupt, but I want to make sure I understand it. Are 

you trading today U.S. commodities or U.S. terminals without 

being subject to the full panoply of CFTC regulations and transparency requirements? 

Mr. VICE. We are trading futures that settle on delivery points 

to the U.S. and the position information is provided to the regulator in the UK, the Financial Services Authority, which is comparable to the CFTC. All that information is provided to the CFTC. 

Mr. INSLEE. Do you think that is equivalent as full CFTC regulation? 

Mr. VICE. I do. 

Mr. GREENBERGER. Mr. Inslee, if it was equivalent, they would 

go to the CFTC. 

Mr. VICE. Equivalently effective. 

Mr. GREENBERGER. It is not just U.S. terminals and U.S. contracts, he is in Atlanta, Georgia. They just happened to buy a British Exchange. I signed a template for those foreign no-action letters. It was for foreign exchanges trading foreign products in a foreign country. 

Mr. INSLEE. Mr. Chair, I am out of time, but Mr. LaSala wants 

to respond. Do you want to allow him or—— 

Mr. STUPAK. Sure. 

Mr. LASALA. Thank you. 

Mr. STUPAK. Then we will go to Mr. Barton. 

Mr. LASALA. Just a comment. I think that, broadly speaking, the 

Commission’s no-action process has been effective. However, things 

have changed insofar as certain contracts, basically taking to a 

point where it is a similar posture as our posture with the natural 

gas, where certain indicia are hit. For example, taking the WTI settlement price. It is basically a U.S. market that the no-action process should have the ability for the CFTC to prospectively put certain other requirements. I am not saying, make them a DCM. We 

are not saying, make them a DCM, but maybe in the no-action 

process, having a comparable position limit, having an absolutely 

comparable large trader requirement would be appropriate. That 

would be our suggestion. 

Ms. CAMPBELL. Mr. Chairman, may I comment as well? 

104 

Mr. STUPAK. Ms. Campbell. 

Ms. CAMPBELL. As far as APGA, our position is not that if we 

bring light to the dark markets that this is going to bring an immediate percentage change in the price. What we are looking to do is 

increase the confidence in the market, that this is truly the forces 

of supply and demand at work. And we support the risk-based regulatory regime as it is in that we have a tier in which ECMs can 

exist because they have brought a great deal of value to my customers on a physical basis. 

We are able to—where we used to get on the phone—we have 2 

hours to buy gas every morning. We used to get on the phone and 

call as many people as we could. Now we have a screen in front 

of us, and we have this great deal of price discovery on the physical 

side that we didn’t have before. 

But once we cross that line where we now have a natural gas 

contract on ICE that is a look-alike contract to the NYMEX, that 

is where we kind of cross that line, and we need to bring greater 

transparency to that contract, the ICE contract, so that we can see 

the full picture of the full marketplace. And then the CFTC can do 

their job to detect and deter the manipulation. Thank you. 

Mr. STUPAK. Thank you. Thank you, Mr. Inslee. Mr. Barton, for 

questions, please. 

Mr. BARTON. Thank you, Mr. Chairman. I want to start out reading something just—I want to, before I ask questions. Back in 2002 

and 2003, the beginning of 2004, when oil prices started going up, 

and the price at the pump for gasoline started going up, and we 

also had heating oil prices going up, we had natural gas prices 

going up. We had a series of hearings on this committee about 

what caused the price and whether there was price gouging, things 

like this. 

And I called the New York Mercantile executives to testify, and 

I also met with them privately in my office, and they talked about 

something called ICE, that was kind of the new kid on the block. 

And what I was wanting to do was see if we couldn’t raise the margin call on buying these contracts, because on the New York Merc, 

the margin requirement was minimal. 

And I asked, I said, how do you call—set the margin call? And 

basically the answer I got was—they didn’t put it in these terms, 

but it was, like, we are financial bookies. We really don’t care. We 

just want what the price is. We just want to create action, so we 

set the margin to create action. It is almost like an over/under betting line on sporting events. 

And anyway, the Merc said, if you really want to do something, 

you are going to have to regulate this group called ICE down in Atlanta, because they don’t play by even the rules that we play by. 

So in the Energy Policy Act of 2005, we put a paragraph in. And 

the paragraph basically, ‘‘it shall be unlawful for any’’, a-n-y, ‘‘any 

entity, directly or indirectly, to use or employ in connection with 

the purchase or sale of natural gas or the purchase or sale of transportation services subject to the jurisdiction of the commission’’, 

which is the FERC. 

That was not serendipity. It was intentional. In fact, we wanted 

to do more, but that was as much as we could get approved on a 

bipartisan, bicameral basis. So this allegation that somehow we 

105 

didn’t mean what the Law says is silly. And this hearing shows 

that even this may not be enough, that we may need to do more. 

So, my question to the young lady from Memphis Light and Gas, 

what do you get by trading on ICE that you don’t get by trading 

on the Merc, which is at least more transparent and more regulated? What is it that Mr. Vice and his group have that is so much 

better? Is it just a cheaper price to conduct the transaction, or is 

there really some tangible benefit by using ICE as opposed to a 

regulated exchange? 

Ms. CAMPBELL. Sure. Let me be sure I am clear. My comments 

earlier were, we were trading on ICE as a physical commodity as 

opposed to the futures. So every day we are out buying gas, the 

physical gas, we are looking to ICE. 

Mr. BARTON. So you are not talking about these look-alike contracts? 

Ms. CAMPBELL. We are not. I was not, but let me give you an example. Many of our members are very small, and so their volumes 

are very small. The NYMEX is for 10,000 MBTUs, which is much 

more than what they would typically use. So they look to hedge 

their risk through over-the-counter markets or through ICE, which 

has a smaller volume. So there is value there. 

There is value in the credit-worthiness. You mentioned increasing the margins. Well, that may drive us out of the market, because we don’t have the cash position to maintain those positions, 

so—— 

Mr. BARTON. But you are not in the market to speculate. 

Ms. CAMPBELL. No, sir. 

Mr. BARTON. At least I would hope not. You are a regulated—— 

Ms. CAMPBELL. We are completely hedging. 

Mr. BARTON. Yes. 

Ms. CAMPBELL. And so the thing to be careful of, as we start to 

look at what the right thing to do for these markets, is to be sure 

that we don’t price the actual hedgers out of the market or do 

something that would put us out of the market. Because when you 

think about it, the traders can go anywhere and go, as we have 

said, to different markets. We have the natural gas market, the 

NYMEX, the OTC, to depend on so that we can lay off our risk, 

the price risk for the next winter. And remember this market is 

twice as volatile as the stock market, so we must do something to 

protect our customers on the price. 

Mr. BARTON. Well, is it—and I will give Mr. Vice a chance. It is 

not fair to chastise his organization without giving him a chance 

to reply. But when you look at the statistics and the facts, the 

number of contracts that appear to be speculative in the natural 

gas market and the oil and gas and oil markets are skyrocketing 

300 to 400 percent increases. We have the company, the Amaranth, 

which tried to corner the natural gas market. And when the Merc 

finally and the CFTC tried to put the brakes on it, they just moved 

most of their contracts to the ICE Exchange, just switched them 

over. 

Mr. Vice, do you agree that speculators in—and in order to have 

a market, there have to be speculators. So I am not negative on 

speculators. I am somewhat negative when it looks like the speculators dominate the market at the expense of the hedgers that are 

106 

physically trying to buy and sell to actually provide a product and 

provide a service. 

Do you agree that the speculators have affected the price that 

consumers pay on the upside in the last 18 months? 

Mr. VICE. I don’t know that I can answer that question other 

than—I am not going to make a statement like Professor 

Greenberger. It would just be my opinion and nothing more. 

Mr. BARTON. Well, yours is a—— 

Mr. VICE. I think—— 

Mr. BARTON. Technically, you are an informed opinion. I 

mean—— 

Mr. VICE. If I knew the right price for these commodities, I would 

be a trader, not—— 

Mr. BARTON. No, I didn’t say, the right price. I am saying, everybody in the country seems to think that there is a premium, and 

different people disagree about what it is. But $2 to $3 in MCF. 

We have heard as high as $30 a barrel of oil, and you disagree with 

that, apparently. 

Mr. VICE. Well, what I can say is that all commodities, ags, metals, and energies, are all up dramatically. And part of that is the 

demand of China, India, other demand on those commodities, part 

of it is they are all traded in dollar-denominated contracts. And the 

dollar is down 17, 18 percent in the last 2 years. So that directly 

drives the price of those up. 

And all of those markets have gone—they are all essentially electronic now, and there is no question in moving—whether it is 

Eurodollars at the CME or natural gas at NYMEX or anything 

else—moving from a floor-based exchange to an electronic platform, 

you dramatically increase the transparency, the efficiency. The bid/ 

ask spreads tighten, and the volumes go up dramatically. They do. 

And you see that in our numbers, and you see it in futures exchanges across the board. 

Mr. BARTON. Mr. Chairman, may I ask one more question? 

Mr. STUPAK. Sure. 

Mr. BARTON. Well, Mr. Vice, since your contract doesn’t require 

actual delivery, although less than one percent of the futures contracts actually end up in delivery, other than being a smaller contract, what advantages are there to using your market versus the 

mercantile market? Why would people use you if not purely for 

speculative purposes? 

Mr. VICE. Well, I think you need a little history there. We traded 

a contract bilaterally for a number of years on our platform. It was 

the only place you could trade electronically. If you wanted to trade 

the economic equivalent of the physical future at NYMEX, you had 

to call a broker on the floor, and people were not—it was not the 

best execution. The price you were going to get was uncertain. 

So on the screen over time, that became a very popular thing, 

and that grew. And for a number of years, the only place that you 

could hedge or speculate on the price of natural gas electronically 

with all the benefits of trading electronically—I said a minute ago, 

speed of execution, transparency and so forth—was on ICE. 

Mr. BARTON. So you have an efficiency advantage? 

Mr. VICE. We spent millions of dollars on our platform, on the 

functionality and the speed of it and the distribution of it. And that 

107 

is some of the competition that I am referring to in the ECM category. And NYMEX has responded. They have dramatically—— 

Mr. BARTON. So if we changed the Law and explicitly regulate 

your market so you have to comply by the same rules, you will stay 

in business because you have an efficiency edge and you have a 

product differentiation that you think is positive? You are not going 

to go out of business? 

Mr. VICE. I think what we are saying for our major contracts, 

like the Henry Hub contract, which the industry is starting to call 

significant price discovery contracts, yes, that is true. Those contracts, they behave to some extent like a future and therefore are 

amenable to DCM-type core principles being applied to them. We 

support that, and we are working with members of Congress to 

that end. 

We are also saying that there are hundreds, thousands of other 

markets on our platform. One core principle, for example, is coming 

up, is for publishing every day ‘‘What is the open interest? What 

are the settlement prices? What are the opening and closing 

range?’’ Some of those products may trade once a week, and so to 

put the regulatory overhead on us but more importantly the thousand participants that are on ICE to somehow comply with any of 

that, the four or five Memphis Gas or other types of utilities that 

might be trading a very illiquid swap at some very liquid gas pipeline point, are going to say, forget it. I will just, I will go back to 

the voice broker. 

Mr. BARTON. Well, we can handle the exceptions, but when you 

have thousands and thousands of contracts, and you have companies moving between the two exchanges, based on the regulatory 

reporting requirements, when you created a mirror market, it 

would seem to me that the Federal regulators in the Congress 

should make sure that everybody gets a fair shake and it is not 

just used as a way to evade transparency and the very things that 

you created your exchange allegedly to bring to the market. 

And with that, Mr. Chairman, thanks for the courtesy of the 

extra time, and I yield back. 

Mr. STUPAK. You bet you. Mr. Melancon, for questions, please. 

Mr. MELANCON. Thank you, Mr. Chairman. I came in a little 

late, and I am still trying to put together the pieces of this thing. 

I grew up in the shipping industry, and the only people that make 

money trading sugar is the traders. The consumers are the people 

that are selling, usually are the ones that are not beneficiaries, and 

of course, what I found as I grew up was that the slightest rumor 

caused the price to spike up or down. And the reality is, it doesn’t 

matter which way it goes, the traders make money. 

So, I think I am sitting here listening to an argument over who 

is going to make money the easiest or the fastest or the least regulated, I think Professor Greenberger hit the nail on the head. This 

is all about making sure that the American consumer is the person 

that comes out ahead. When Ms. Campbell looks to purchase gas 

for Memphis, it is not about the broker making money. It is a combination of what is the easiest thing for me to do today to get the 

best price as quick as I can, if I understand what you are doing. 

So I guess it brings me to trying to figure out, you know, we are 

looking at doing legislation. I am kind of a different kind of guy. 

108 

I am in the legislature, but I figure that we can solve more problems sometimes without actually legislating. We need to correct the 

problems, but I am more about mediating. 

What I am seeing, I think, is a jurisdictional fight that was started by the Congress. The regulations that became kind of gray and 

the shifting of jurisdiction now had two agencies that are out there 

that are conflicted, and one maybe not talking to the other or both 

not talking to each other. 

The question is: Can we bring some transparency, some regulation that is fair to all, and through a memorandum of understanding and jurisdictional oversight, whether it is joint committee 

or not, to make sure that what is taking place in this market is 

fair; that it doesn’t allow for people to corner the market, as I think 

happened recently. I don’t know what happened with the Hunt 

brothers when they tried to get all the silver in the world, but that 

is probably why they started trying to do some of the things legislatively that maybe brought us to the problem. 

There is probably some need, but is it extensive, or is it minimal? 

And what MOU, with FERC and CFTC, more readily address the 

issue? 

Mr. GREENBERGER. If I can just explain one thing. The fight between FERC and the CFTC only relates to enforcement of natural 

gas. It has nothing to do with what traders have to do from the 

get-go. It is only after the horse is out of the barn. 

And only natural gas. And I hope minority counsel will tell Mr. 

Barton, when you fixed the Energy Policy Act, as I understand it, 

that was just natural gas. He has his consumers coming in and 

saying gasoline, heating oil. Well, what he has to tell his consumers is that ICE has two exemptions. They have the Enron loophole, because they moved ‘‘or energy’’ out of the CEA. And then, if 

you fix that, which is all the present legislative fix is addressed to, 

you have to tell your constituent that ICE, that is located in Atlanta, has Goldman Sachs, Morgan Stanley, BP supporting it. 

Goldman Sachs tells its customers, don’t trade on NYMEX. ICE is 

in Atlanta. 

Mr. VICE. I have to correct that. 

Mr. GREENBERGER. Well, you had your chance, Mr. Vice. Yes, you 

will have your chance. You have to tell your constituents that ICE 

in Atlanta with all these great trading engines in the United 

States, trading United States West Texas Intermediate, we can’t do 

anything about it because the staff of the CFTC said ICE should 

be regulated by the United Kingdom. Try telling people in Louisiana that an Atlanta company trading West Texas crude on the 

United States engines is out of the control of the United States. 

Mr. MELANCON. Isn’t natural gas priced by countries or by regions and not necessarily world price, like oil? 

Mr. GREENBERGER. There are different kinds of gases, but ICE 

is trading gas delivered in the United States. 

Mr. MELANCON. That is where I am—— 

Mr. GREENBERGER. Henry Hub. 

Mr. MELANCON. And I think I am familiar with where—— 

Mr. GREENBERGER. And they are competing with NYMEX, and, 

poor NYMEX, they are suffering because they have to be regulated 

by the CFTC. They are doing fine. NYMEX may be bought by the 

109 

New York Stock Exchange. It is the most profitable exchange in 

the world. ICE says, don’t do this to us. We have all these small 

contracts. We don’t have time to go to the CFTC and use the exemptions in the statute to get these exempt. We want you to regulate around us, because we have a great trading engine, and we are 

great guys. Forget about telling the guy in Louisiana that we are 

in Atlanta with a trading engine in the United States trading 

United States-delivered products. But for crude oil, you got to go 

to the United Kingdom to take care of us. That doesn’t make sense. 

People in Louisiana will not understand that, and there is no legislation addressing that. And the CFTC staff and the CFTC could fix 

that this afternoon under existing legislation. It has nothing to do 

with FERC. 

Mr. COTA. We, as an industry, like speculators. Speculators are 

important. It is the excessive speculation that is the killer. I could 

not offer futures contracts to my consumers without having speculators in the market. The volume of speculation has gone out of 

control. We are figuring that for gasoline and heating oil, approximately 50 cents to a dollar a gallon could be a result of excess speculation. The volumes of trades are huge. 

The contract that I am most familiar with is the heating oil contract. The heating oil contract is about 8 billion gallons in the U.S. 

annually. Well, that amount gets traded amongst NYMEX and 

ICE—I am not sure how much is traded on ICE, because there is 

no data that is reported to the markets unless—— 

Mr. VICE. It is zero percent. 

Mr. COTA. The volume of trades are about four times the annual 

consumption per day. You know, is that too much trades? You 

know, we focus a lot of the time on small contract. The major contracts trade huge volumes daily of what the annual volume is. And 

because you don’t see the data—if it is illegal to do a contract 

under a U.S. law, it is still illegal to do it. Just nobody has any 

of the data. My brother-in-law from New Jersey has often told me, 

he said, there is no body, there is no crime. So these dark markets 

have no light on them. You don’t know what is occurring. Only the 

people that are doing the trades know. What is wrong with oversight? 

Mr. MELANCON. Thank you. I ran out of time a couple of minutes 

ago. Thank you, Mr. Chairman. 

Mr. STUPAK. Thank you, Mr. Melancon. Ms. Blackburn, for questions, please. 

Ms. BLACKBURN. Thank you, Mr. Chairman, and I want to welcome all of our witnesses. I think that anyone who is watching this 

hearing today is probably just spellbound with the amount of debate between all of you. And they probably are sitting there thinking, what is this going to end up costing me? What does market 

manipulation cost me? And what does it mean to my heating bill? 

And, Mr. Chairman, I have a question for Ms. Campbell, but before I ask it, I do want to welcome her. She is a constituent. She 

lives in Fayette County, Tennessee, and does a wonderful job for 

Memphis Light, Gas and Water. And I appreciate the expertise 

that she has brought to the panel today and also the manner in 

which she has presented it. And we welcome you, and I thank you 

for that. 

110 

I do have a question for you in light of my comments. When we 

talk about the market manipulation and in your testimony, you 

talked about the Amaranth activity. What kind of cost increase on 

a percentage basis do you pass on to your customers? How much 

fluctuation do they see? And let us say if natural gas were to go 

up a dollar MBTU—I think that is the unit, correct? So if it went 

up a dollar for an MBTU, then how much would that average customer see as an increase in their bill when they rip that envelope 

open and pull it out and look at it? 

Ms. CAMPBELL. Goodness, the way that our mechanism works— 

and what you will find is that across the country, everyone’s cost 

recovery mechanism works a little differently. The way ours works 

is that we look at what it costs us for gas this month, and we immediately pass that through the next month on our customers. 

Ms. BLACKBURN. So you have a 1-month delay? 

Ms. CAMPBELL. It is a 1-month delay. So if there is a $1 increase 

in the price of natural gas, and it is currently at about $7, so let 

us just say that it is a 20-percent increase, then typically with our 

rate structure, almost all of that will pass through. And it will be 

somewhere in the range of a 15- to 18-percent increase on our customers’ bill because only of our customers’ bill 80 percent of it is 

natural gas, and 20 percent of it is MLGW costs. 

Ms. BLACKBURN. OK, thank you. So many times our constituents 

think that it is due to the weather, and I think that is an important point is that it is due to what the manipulations are in the 

market. Based on that, Mr. Vice, let me come to you. Let us say 

an average investor wants to know what contracts have been sold 

on a certain day, and he wants to know what contracts have been 

made in your market, in ICE’s market. So is that information readily available on a day-by-day basis? 

Mr. VICE. It is available for a fee. 

Mrs. BLACKBURN. For a fee? 

Mr. VICE. Yes. 

Mrs. BLACKBURN. OK, and then what would that fee be? 

Mr. VICE. I don’t know the pricing of all our market data. If you 

want a real-time screen to sit there and watch it—— 

Mrs. BLACKBURN. Why don’t you get that and get it back to me? 

Mr. VICE. Sure, be happy to. 

Mrs. BLACKBURN. OK, I think that that would be interesting to 

know, because we may have investors out there that are listening 

to all of this, and they are saying, my goodness, I am hearing from 

Ms. Campbell that it is all passed through. It is passed through on 

a month delay. There is this market out there. It is called ICE. I 

wonder what these contracts are—who they are being made with 

and what that pricing is every day. Let me ask you this also. Is 

ICE going to implement an electronic system that provides minuteby-minute and up-to-date information for public investors? Do you 

plan to do that? 

Mr. VICE. Well, when you say ICE, we have, as I said earlier, we 

have a number of futures exchanges which already do that. In our 

over-the-counter markets, which is where our natural gas trades, 

we do do that. Keep in mind, our history up to this point has been 

that we are an over-the-counter market, which the point here is, 

means that it is a principals-only. It is a professionals-only market. 

111 

There is no retail access. There are no brokers. I could not personally go into that market and trade. There are $100 million asset 

requirements. So it is utilities, like Memphis Gas. It is banks. It 

is energy companies. 

Mrs. BLACKBURN. OK. 

Mr. VICE. And so until now, it has been a relatively small, it is 

the wholesale market if you think of it that way. 

Mrs. BLACKBURN. So you keep the firewall in place, since it is a 

wholesale market. Mr. Greenberger, any comment to that? 

Mr. GREENBERGER. Yes, you asked about what the price to your 

consumer, and let me just read to you from the bipartisan Senate 

staff report from the Senate Permanent Investigating Committee 

under the auspices of Senator Coleman of Minnesota, Senator 

Levin. The price for natural gas was $8.45 before Amaranth collapsed. NYMEX said, you got to reduce your position. They went 

over and moved all their trading over to ICE. They went bankrupt. 

The day after they went bankrupt, the price went down to $4.80. 

‘‘The Electric Power Research Institute described this price collapse as stunning, one of the steepest declines ever. Throughout 

this period, the market fundamentals of supply and demand were 

largely unchanged.’’ So eliminating that one speculator from ICE 

almost dropped the price of natural gas, which is a component of 

electricity, by one half. Now, that is a school of scandal. Everybody 

saw what Amaranth did. So others went right back into that market. It is back up to $7 now, but if we weren’t talking about deregulating, it would be up to $10, where it was the day before people 

were talking about introducing legislation. That is what your consumers are paying too much. 

Ms. BLACKBURN. Thank you, Mr. Greenberger. I am out of time. 

Again, Ms. Campbell, thank you for being with us today, and I 

yield back. 

Mr. STUPAK. Mr. Burgess, for questions. 

Mr. BURGESS. Thank you, Mr. Chairman. Mr. Vice, we may be 

a lot of things on this subcommittee, but we are unfailingly polite, 

and you were unable to respond to a statement that was made a 

minute ago. And if I have reconstructed the statement properly, I 

think it was that if you are on ICE, you can’t trade on NYMEX. 

You wanted to make a comment about that. So let me give you a 

moment to do that. 

Mr. VICE. Thank you, I appreciate that. Yes, I think Professor 

Greenberger several times has alleged that Morgan Stanley, Goldman Sachs own, control ICE, and he is saying things as outrageous 

as they are telling their people not to use NYMEX. In fact, those 

companies, I don’t know if any of them own any shares of ICE anymore. I am pretty sure some of them don’t. I know they probably 

own seats on the NYMEX, and they are also actively starting up 

new competitors, new businesses that will compete with us in various areas. So that is just patently false. I mean, it doesn’t even 

make sense if you—that Goldman Sachs or anyone like that would 

be doing that type of thing. Thank you for the opportunity. 

Mr. BURGESS. Well, I appreciate the clarification. Now, you have 

talked about the electronic trading platform and the investment 

that your exchange has made in that or, I guess, the multiple exVerDate Nov 24 2008 14:00 Feb 24, 2009 Jkt 037690 PO 00000 Frm 00115 Fmt 6633 Sfmt 6633 C:\DOCUMENTS AND SETTINGS\CWELLS1\110-78 SCOM1 PsN: JIMC
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changes that are involved or that make up ICE. And you have referenced speed and transparency. 

So that should be a good thing just from the perspective of a consumer if the trades can be made more in real time, if there is 

greater transparency. So, if, as Ms. Blackburn said, the price is 

right, you can go and have the real-time screen and know these 

things. That should be of benefit to the people who are purchasing, 

I would think. 

So my previous career was in healthcare, and the more we can 

increase the speed of computing, and the more we can increase 

transparency, these are seen as positive things for the delivery of 

healthcare. And I would think the same could be said for pricing 

in the energy markets. Has NYMEX, for example, made this same, 

similar sort of investments into this electronic trading platform? 

Does that seem to be something that delivers value to the transactional process? 

Mr. LASALA. Thank you. We certainly have transitioned into an 

electronic forum. We are operating on our core contracts on both 

venues, meaning a floor as well as electronic. But we definitely 

have migrated to a point where approximately 80 percent of our futures volume is now electronic. So I think that the marketplace has 

determined that the electronic medium is efficient. And at a point 

in time if the marketplace decides that that is the only form that 

they see as appropriate, we would be responsive to it. But until 

then, there is still a use for the floor. 

Mr. BURGESS. Well, it just seems like, in an era where most 

young people today don’t have any concept of what it means to go 

to the bank and write a check for cash, they go to the ATM and 

make withdrawals, it just seems like moving in a direction of the 

electronic trading makes a lot of sense. And if we create the right 

type of regulatory environment, it seems to me, and I am just a 

casual observer to this process, but it seems to me that the increased transparency could bring problems to light much more 

quickly than we sometimes find things in our current regulatory 

environment. 

And I hate to keep going back to health analogies, but just like 

when we created the database that now the FDA is going to use 

to be able to flag problems with new medications in their post-market surveys, it just seems like the data could be collected on a realtime, ongoing basis by whatever regulatory body, whether it be 

FERC or CFTC or some new entity that is created. It just seems 

like that information would be delivered to them real time. 

Mr. LASALA. Well, just a point on that is that with the electronic 

medium, we also have to, I believe from my perspective, factor in 

is that when the contracts are similar, the electronic medium even 

more moves to the point of linking the markets, meaning that there 

are electronic devices that are going to be on front-end systems 

that are going to treat the NYMEX market and the ICE market as 

effectively one and the same. So the notion of similar markets 

being linked, I think, becomes even more relevant in an electronic 

forum. 

Mr. BURGESS. And is that a good thing or a bad thing? Does it 

increase competition? Does that benefit the consumer or harm the 

consumer? 

113 

Mr. LASALA. I think that, broadly speaking, it is a good thing, 

but with it comes the points that I have made earlier, that it moves 

the argument that, in fact, where one market is unregulated but 

linked, it suggests that regulation that would be good for the consumer would be appropriate. 

Mr. COTA. These systems are very efficient in how they do it, but 

the flows of money are just huge. People think that there is an energy shortage. There is no energy shortage. Inventories are at 5- 

year highs across the board. You take a look 5 years ago, crude oil 

is trading at about $30 a barrel. We are now at $90. The volumes 

of money—we have got a glut of cash. The cash has moved out of 

the sub-prime market into the energy market, and they are just 

driving the price through the roof. It has nothing to do with supply 

and demand. 

Mr. BURGESS. Well, let me interrupt you for a minute, because 

I do have to ask Professor Greenberger a question, because I am 

just dying to hear the answer, and it kind of ties into what you 

are—expensive. Oil is expensive. Starbucks coffee probably costs 

$1,000 a barrel, but we keep buying it. 

But here is the question, Mr. Greenberger, if oil is too expensive, 

if crude is too expensive, why do we keep buying it? 

Mr. GREENBERGER. Well, at some point there will be a stop, but there has not been a stop now. It is almost at $100. Predictions 

are—Mr. Cota was citing statistics—it will be at $105 very shortly. 

Mr. BURGESS. But if we paid the same prices for energy at the 

pump that the Europeans do, what would the cost of oil per barrel 

be? If there weren’t the taxes that the European markets add to 

their finished product, if just gas, because of crude price costs $7 

a gallon in Denton, Texas, what would the price of crude be? 

Mr. GREENBERGER. Probably $150, but are you going to tell your 

constituents, hey, Europeans pay more, and they are OK? Don’t 

worry about it? 

Mr. BURGESS. No, I am just asking the question. How expensive 

does it have to get before we stop buying it? 

Mr. GREENBERGER. There will be movements to move to alternative fuels at some point. 

Mr. BURGESS. Well, and would not we argue that that is something that this committee has spent a good deal of time and other 

subcommittees talking about? 

Mr. GREENBERGER. That is great, but do you want to have that 

done on the backs of the consumer who are paying $30 for a barrel 

that they don’t need to pay? Wouldn’t it be better—— 

Mr. BURGESS. Not the question. The question is, if oil is so expensive, why are we buying it? 

Mr. COTA. We are rapidly approaching demand destruction. Gasoline is relatively inelastic in demand. Heating use, we have seen 

a reduce in heating consumption. I have also seen a huge trend of 

paying with credit cards, because consumers are out of cash. When 

you get to the demand destruction point, you are going to have a 

collapse in this market, because the big players in the markets can 

move money faster than any consumer, more than Memphis Gas 

can. 

Mr. BURGESS. Purely from observational data, and I am not arguing with you, because you guys are the experts, but purely obserVerDate Nov 24 2008 14:00 Feb 24, 2009 Jkt 037690 PO 00000 Frm 00117 Fmt 6633 Sfmt 6633 C:\DOCUMENTS AND SETTINGS\CWELLS1\110-78 SCOM1 PsN: JIMC
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vational data, a year ago, market destruction meant that Republicans lost the majority of the House because oil was $56 a barrel. 

$96 a barrel this year, and there seems to be no penalty for it. And 

as I drive around the metroplex, I don’t see any diminution of the 

number of SUVs with a single occupant on the freeways. 

Mr. GREENBERGER. Mr. Burgess, there will be in February a penalty if heating oil does not drop. 

Mr. BURGESS. But with global warming, there is not going to be 

any need for heating fuel. We have actually obviated that problem. 

Mr. GREENBERGER. May I also take the privilege of responding 

to one point? 

Mr. BURGESS. Sure. 

Mr. GREENBERGER. I am citing—— 

Mr. BURGESS. If it is OK with the chairman. I said, sure, but he 

is running the show here. 

Mr. STUPAK. Go ahead. 

Mr. GREENBERGER. This is the bipartisan June 27, 2006, report 

that was put out by Republicans and Democratic staffers under the 

chairmanship of the Republican Senator from Minnesota, Mr. Coleman. On page 48 of that report, which no one to today has said is 

wrong, says, ‘‘according to one energy trade publication, several of 

the large stakeholders, several of the large ICE stakeholders, BP, 

Total, and Morgan Stanley were ‘‘doing their best to support the 

ICE WTC contract, with Goldman Sachs directing its traders to use 

the ICE platform rather than NYMEX.’’ Now, I may be wrong, but 

if I am wrong, Senator Coleman—— 

Mr. VICE. You are quoting an unnamed energy publication. 

Mr. GREENBERGER. Market forces, big oil increases, market 

reach, Energy Compass, March 24, 2006. 

Mr. BURGESS. Mr. Chairman, I think at this point, I am going 

to yield back my time. 

Mr. STUPAK. What is the date of the report you are quoting from, 

Professor? 

Mr. GREENBERGER. It is June 27, 2006, pages 48 to 49. This is 

the report where Senator Coleman, Senator Levin, through their 

staff, say, when oil was $77, $20 to $30 was being added by speculation. 

Mr. BURGESS. Mr. Chairman, do we have a copy of that? 

Mr. STUPAK. Yes, it is tab 24 in your document binder. 

Mr. BURGESS. I don’t have a document binder. I am on the minority. 

Mr. STUPAK. Jeff has one. Be nice to your staff. 

Mr. GREENBERGER. I would say to any member of this subcommittee that if you read nothing else, read the two bipartisan 

staff reports of the Senate Permanent Investigating Committee on 

speculation and crude oil prices and natural gas. They are dated 

June 27, 2006, and June 25, 2007. The first report says ‘‘$20 to $30 

added to crude oil price’’. The second report says ‘‘Amaranth caused 

a $4 increase in natural gas’’. Both reports say, this has got to stop. 

The first report says, the loophole has to be closed, and an Atlanta 

company with United States trading engines and using United 

States-delivered contracts should not be delivered by the United 

Kingdom. 

115 

Mr. COTA. And the GAO put out a report 3 weeks ago that basically said similar things. That so much of the data is unavailable 

you can’t tell whether there is market manipulation and again recommends that the CFTC regulate these markets. 

Mr. BURGESS. Mr. Chairman, are we going to have time for a second round? 

Mr. STUPAK. If we get there, yes. 

Mr. BURGESS. OK. 

Mr. STUPAK. No one else on this side. Mr. Fossella, who is a 

member of the full committee, but not the subcommittee. It has always been the practice of this subcommittee to allow members of 

the Energy and Commerce Committee, if they sit in, to ask questions. So, without objection, Mr. Fossella, if you would like to ask 

some questions. We will then go to a second round, Mr. Burgess. 

Mr. FOSSELLA. Thank you very much, Mr. Chairman. Thanks for 

the hearing, and thank you to the panel. I find it very illuminating 

and great discussion. And maybe just to follow up, because I am 

curious, I know that the essence is here is not just whether more 

regulation is necessary but also impact on consumers and speculation and in some ways manipulation. And if I could just be clear, 

Professor, you made a pretty strong statement before, under oath, 

that Goldman Sachs tells its clients, I think you said, not to trade 

on NYMEX. You don’t know that for a fact, or do you? 

Mr. GREENBERGER. I know what I have read by the bipartisan 

Senate staff. It is in their report. I read that to you. That is what 

I am basing my testimony on. 

Mr. FOSSELLA. OK. 

Mr. GREENBERGER. That report, which is in an energy publication—— 

Mr. FOSSELLA. I understand. OK, so you are basing—I just want 

to be clear. You cited that report, and based on that, you believe 

that Goldman Sachs tells its traders not to trade on NYMEX. Is 

that what you believe? 

Mr. GREENBERGER. My statement is based on this report. 

Mr. FOSSELLA. Do you believe it to be true? 

Mr. GREENBERGER. And I believe it to be true. I don’t know it 

to be true, but I believe it—— 

Mr. FOSSELLA. OK, you believe that Goldman Sachs tells its traders not to trade on NYMEX? 

Mr. GREENBERGER. Yes, and I will tell you why. 

Mr. FOSSELLA. OK. 

Mr. GREENBERGER. Goldman Sachs doesn’t like NYMEX. They 

didn’t control NYMEX. NYMEX got created before Goldman Sachs 

got in this business. 

Mr. FOSSELLA. OK, I just want to be clear. 

Mr. GREENBERGER. Goldman Sachs—— 

Mr. FOSSELLA. I am not here to defend Goldman Sachs. They are 

a small player in the field. I recognize that, but they can take care 

of themselves. 

Mr. GREENBERGER. Goldman Sachs was not happy with NYMEX. 

They didn’t control NYMEX. They didn’t have power there. They 

helped create the Intercontinental Exchange insofar as it trades 

these products that we are talking about. I base my statement entirely on this staff report. 

116 

Mr. FOSSELLA. Fair enough. 

Mr. STUPAK. And I think it would be appropriate at this time to 

move to put the June 27, 2006, staff report as part of the record. 

It will be made part of record, without objection. 

Mr. BURGESS. Mr. Chairman? 

Mr. STUPAK. Mr. Burgess, you are reserving the right to object. 

Let me just be certain that we have the additional minority staff 

views on the report, because they do take issue with several of the 

points that have just been made by Professor Greenberger. 

Mr. BARTON. Would Mr. Fossella yield for a point of personal 

privilege? 

Mr. FOSSELLA. Sure. 

Mr. STUPAK. OK, well, let us finish with the motion. No objection. Then we will put the June 27 and the minority views in there, 

as Mr. Burgess suggested, in the record. Then it is to Mr. Fossella, 

to Mr. Barton. 

[The information appears at the conclusion of the hearing.] 

Mr. BARTON. I think it is a point of personal disclosure, since we 

are bandying Goldman Sachs around so much, my daughter is a 

trader for Goldman Sachs in New York City. So we need to put 

that on the record, too, if we are going to be investigating Goldman 

Sachs. 

Mr. FOSSELLA. I am just curious. Mr. LaSala, he has made some 

statements about Goldman basing obviously and he clarified his belief. Do you know that to be true, that Goldman Sachs directs its 

trader not to trade on NYMEX? 

Mr. LASALA. I have absolutely no idea as to what Goldman Sachs 

tells their traders. 

Mr. FOSSELLA. Do you believe it? I mean, just trying to get—I 

mean, he is making statements about NYMEX. Have you heard 

that at all? 

Mr. LASALA. I have not heard that, no. 

Mr. FOSSELLA. You have not? OK. 

Mr. LASALA. I have seen that report, but I don’t know exactly 

what they—— 

Mr. FOSSELLA. You want to talk about manipulation of the markets. That is a pretty strong statement and a belief, OK. So you 

don’t believe it to be true. Mr. Cota, you mentioned before, and if 

anybody else has a difference of opinion, I would be curious. What 

is the difference between speculation and excessive speculation? 

Mr. COTA. It is the amount of contracts that are traded and the 

positions of single parties and how much they hold. Amaranth got 

caught, as an example, because they did their trades on NYMEX 

or a portion of their trades on NYMEX. Their February position for 

natural gas was about 70 percent of the total U.S. natural gas production. That was just their position. And they were trading all of 

those trades within the last 15 minutes of the month before the 

contract expires, because if you are not intending to take physical 

on a traded market, you have to close out that position. 

I put it akin to if a trader was going to do an option deal to buy 

70 percent of the single-family houses in the United States in the 

last 15 minutes of the month, would that have an impact? That 

would be excessive, perhaps. It depends what side of the transaction you are on. Certainly I would hate to rent that house afterVerDate Nov 24 2008 14:00 Feb 24, 2009 Jkt 037690 PO 00000 Frm 00120 Fmt 6633 Sfmt 6633 C:\DOCUMENTS AND SETTINGS\CWELLS1\110-78 SCOM1 PsN: JIMC
117 

wards, but that is the kind of excessive speculation, I think, that 

we are talking about. 

And when a single player has too much of a total position, which 

is the large trader reporting, which is required by CFTC for 

NYMEX, and NYMEX discloses, it is not done in the other markets, that that becomes a problem for the whole validity of the futures contract market for that segment of the market. 

Mr. FOSSELLA. But let me be clear, because I want to ask one 

question, and maybe if each of you, because I am curious, is excessive speculation in the eye of the beholder? I mean, is there an objective standard? And would you point to 70 as—and you could all 

just provide this in writing, because I don’t want to abuse my privilege here. And if you can provide that in writing, in your opinion, 

what is the difference between—or words—what is the difference 

between excessive speculation and speculation? 

But finally, it may be just a different perspective. Maybe it is not 

different. In light of the liquidity and the depth of our markets and 

the fact that we do live, as all has been acknowledged, in a more 

global marketplace. And the essence of this is whether greater regulation is necessary to stop price manipulation. There has been 

much talk in the last year, year and a half, about American competitiveness vis-a-vis the rest of the world, taxes, regulation, accounting amortization, many different points of view. 

I think most folks are coming to the consensus that we are not 

alone anymore. We never were, but, you know. Is there an implication of greater or more regulation to the American marketplace? 

And let me ask it a different way. If we go too far in terms of more 

regulation, do we force international players away from the U.S., 

taking capital and jobs with it? Is that a concern or should be a 

concern? And I can go right down the line, please. 

Mr. GREENBERGER. That is an excellent question, because it has 

been raised consistently as an argument against not regulating 

ICE. Of course, ICE bought the UK Petroleum Exchange and 

brought it to the United States. In the futures market, you have 

to be where the action is. You could not control 30 percent of West 

Texas Intermediate Crude Futures contracts trading in London, 

and they don’t. They are in the United States. You have to be near 

the product. 

When I was at the CFTC, I was asked to create the exemption 

to allow foreign boards of trade to bring their terminals in the 

United States. Now, you could say I could voice broker those 

trades. I could call them up in London and say make this trade. 

Or I somehow could by computer transact my trade, but the only 

way these exchanges could successfully sell their foreign products 

was to have terminals in the United States. For this product, 

Eurex, the largest German exchange, tried to open up as a United 

States exchange because they couldn’t make it in the United States 

products trading in Europe. 

Everybody wants to be here. Look at the list of foreign exchanges 

that have asked for permission to have U.S. terminals. They don’t 

want you calling them in Europe. They don’t want you sending 

them in e-mail. They want you to be able to sit down at a terminal 

physically located in the United States to trade, so U.S. customers 

would trade. 

118 

This is a U.S. industry. Henry Hub Natural Gas, West Texas 

Crude, other things, you have got to be in the United States. Everybody wants to be here. 

Mr. FOSSELLA. OK, I am just saying, if we could make it a little—because I don’t want to again abuse my time and privilege. If 

we could just give a sense whether we should be concerned about 

that. 

Ms. CAMPBELL. Well, Memphis Light, Gas and Water is not going 

overseas. So we are depending on this market, and the natural gas 

market is certainly a domestic market. So I am less concerned 

about that, but I do think that you need to be measured in your 

response. And I think that transparency is that measured response 

where your large traders report their positions across the marketplace. And then that way it brings light to the dark markets, and 

then you have the full picture of the marketplace to determine manipulation. 

Mr. FOSSELLA. Thank you. Mr. Cota. 

Mr. COTA. The U.S. energy market is where the action is at. We 

are 20 percent of world demand. I think that if we had more electronic trading disclosure done under a fuller regime by CFTC you 

will actually see an increased flood of trading money into the 

United States because the brokers around the world have traditionally looked at this as a safe market. So you are going to get more 

of the smaller players to play in our market as a trading platform 

than in their other markets. 

Whatever happens in Russia happens in Russia. You know, and 

people in Russia know that. So the U.S. boards of trade have always been a safer way of trading, and I think it would enhance 

their ability to do worldwide trading. And because we are a big 

part of the market. We are 20 percent of the world market. 

Mr. FOSSELLA. Mr. LaSala. 

Mr. LASALA. I think the U.S. boards of trade are robust, and the 

points that I made earlier that you may have missed is just simply 

that where U.S. based products potentially get offered overseas 

under other regimes that our suggestion would be that the CFTC 

could address this—and the no-action process it good. It works, but 

there might be some consideration of additional comparability 

standards or additional hurdles such as position limits if we have 

them here that, if there is a like contract offer in another regime, 

that the regulatory regime, that they might be considered to be appropriate to be imposed in the context of the no-action relief. 

Mr. FOSSELLA. Thank you. Mr. Vice. 

Mr. VICE. I have two quick, specific examples, one on your question about competitiveness, which is close to home. Our second or 

third or maybe fourth of those most liquid contracts on our ECM 

market, for example, is a fuel oil swap based on an index for fuel 

oil delivered into Singapore. I am proud of the fact that American 

ingenuity of this Atlanta company was able, through a lot of hard 

work, to have traders which are primarily—these are not U.S.- 

based traders. 

These are Asian companies for the most part or Asian branches 

of banks that are trading fuel oil delivered in Singapore. Has little 

to nothing to do with the U.S. market, and I think that is an example of if you put a futures-style DCM rule across everything that 

119 

is on our ECM, that market would—we would lose that overnight, 

and it would go elsewhere. So it is important to have that middle 

tier of—— 

Mr. STUPAK. OK, you are going to have to answer his question, 

or I am going to have to cut you off. We are way over. So did you 

want to answer it or not, because you were going to a different—— 

Mr. VICE. He was asking about American competitiveness. 

Mr. STUPAK. OK. 

Mr. VICE. And I think overregulation, that is an example close 

to home, where it would certainly hurt our competitiveness and potentially cost jobs. 

Mr. FOSSELLA. OK, thank you, Mr. Chairman. 

Mr. STUPAK. Thank you, Mr. Fossella. And we have been generous with time on everybody because I know it is a complex issue, 

but I want to keep things moving. Mr. Green, for questions. 

Mr. VICE. One other thing. You asked about excessive speculation. It is defined in the Commodities Act. Section 6A, Commodities 

Act, defines excessive speculation. 

Mr. STUPAK. Mr. Green, your questions. 

Mr. GREEN. And I appreciate on how we can deal with it. I was 

wondering how we could deal with what, I think, our witnesses 

said, deal with the products in the U.S. markets. I say Texas market, because that seems like what we end up with a lot. But how 

can we do that if there is fuel oil for the Northeast? I think we 

shouldn’t really care what is going on in Singapore even though it 

has an effect on world price. But it is not for the U.S. consumers, 

the U.S. market. But how can we do that? Mr. Vice, we say Amaranth moved its trades from NYMEX to ICE, and when they didn’t 

like what NYMEX’s orders were. If only certain contracts on ICE 

are brought under regulation, for example, U.S. contracts, what 

would ICE do if a trader in response to the speculative position 

limit in a regulatory ICE contract, would they simply move to a 

non-regulated? How would that work? 

Mr. VICE. Well, the language being contemplated is not limited 

to U.S. It is up to the discretion on anything that is on our ECM 

including that Singapore example I gave. If said it is a significant 

price discovery contract, and we had to apply these DCM core principles, then we would be responsible for doing that. 

I think one thing that might be helpful to understand, you fall 

off a pretty big cliff in our market when you move from talking 

about our Henry Hub look-alike swap, which is what most of this 

is about. It is about 70 to 75 percent of our OTC revenue, OK. And 

the No. 2 is a far, far distant No. 2. 

Mr. GREEN. OK. 

Mr. VICE. I mention that just because whereas people compare 

what goes on in Henry to the futures contract at NYMEX—and we 

acknowledge and are part of a discussion of how do we—it does 

need some additional future-style regulation—is important to realize that it is a big step to the next contract, and when you move 

to that second contract—it is not a look-alike contract. It may be 

even a Canadian-based contract. I don’t know. You get into a whole 

hodge-podge of much less liquid contracts. 

Mr. GREEN. Well, you satisfied one part that it has to be, because 

I know there are tankers that come in that may go to a refinery 

120 

in Europe, or it could come to a refinery in our area of the United 

States. And so we would need to have oversight for that. 

Ms. Campbell, you mentioned in your testimony the lack of overthe-counter or transparency, and in your response to questions, you 

have talked about that and the extreme price swings surrounding 

the collapse of Amaranth, which has caused some bona fide hedgers to become reluctant to participate in the markets in fear of 

locking in prices that may be artificial. Do you believe this reluctance to hedge will affect your organization or the overall economy, 

that if they don’t have trust in those prices? 

Ms. CAMPBELL. Certainly it will. You know, we entered this winter in trying to decide exactly how we were going to approach it. 

Fortunately the CFTC put in the special call provision, which gave 

us a measure of confidence in the natural gas market. So we did 

put on the hedges that we typically would, going into this winter. 

But certainly, if you go back to the winter of 2 years ago, when 

there were the hurricanes, if we had not had the hedges we had 

in place, our customers would have been devastated. Just last year, 

we had $12.5 million of bad debt. I can’t even imagine what it 

would have been the year before, had we not hedged. So it does 

have a direct impact on the consumer and on the overall economy. 

Mr. GREEN. And should FERC have the authority to pursue the 

market manipulation cases which span both the futures and the 

physical market? 

Ms. CAMPBELL. Yes, sir, I believe they should. We supported 

FERC’s action on that. And I will say that we have a great deal 

of confidence in both FERC and the CFTC, and we are hopeful that 

they are going to work together to find some common ground there 

on addressing that issue. 

Mr. GREEN. OK. Mr. Chairman, I have no other questions. Thank 

you. 

Mr. STUPAK. Thank you, Mr. Green. A couple questions. We will 

go a second round here quickly, and we have been generous with 

time with everybody, because it is a little complex and technical 

area. Mr. LaSala, does NYMEX have what they call mini-contracts 

to accommodate people like Ms. Campbell if they want to do a 

smaller contract. Don’t have something like that? 

Mr. LASALA. We do have some cash-settled mini, half- or quartersized version contracts. That is correct. Cash settled, generally settled not on the last trading day, but they are penultimately settled. 

Mr. STUPAK. Would that solve your issue of having to go to ICE? 

Ms. CAMPBELL. Well, that innovation has come about just in recent times, and so I would hope that that would have come about, 

anyway. But I certainly think that the competition between ICE 

and NYMEX has been healthy. And so, yes, it would address that 

issue. We are glad to see the competition between them, though, 

to make sure that we have those tools at hand. 

Mr. STUPAK. You mentioned 2 years ago, when the hurricanes 

hit. Remember, I mentioned the high-rise in my district that went 

from $5,000 to $7,000 in 1 month? That was that same period, because of the hedge funds, and that cost is directly passed on to consumers and one of the reason for the hearings today. Mr. LaSala, 

let me ask you this. In your testimony, you said, and I am quoting 

now, ‘‘there is potential for systemic financial risk from a market 

121 

crisis involving significant activity occurring on an unregulated 

trading venue, which could arise from a mutualization of risk at 

the clearinghouse level, where large positions on unregulated markets are not monitored.’’ What is your systemic failure, and could 

you describe a credible scenario where unregulated markets could 

trigger a systemic failure? 

Mr. LASALA. Well, the example would be a scenario where a 

party has gotten excessive position in an unregulated market such 

as an ICE look-alike market. Granted, these positions are in fact 

margined by another clearing organization. But they are not regularly—they haven’t been regularly monitored. And in fact, you have 

a scenario where there is active volatility, and no one is looking. 

You know, again when you have this recent occurrence where 

there is a special call in place—and we appreciate that. We would 

like to see permanent regulation around it, but there could also be 

other contracts where the regulator does not see these underlying 

positions. And, in fact, there is a market move, and the clearing 

member or members—remember, gentlemen, many of the clients, 

these markets clear multiple houses. 

So you have exposure being aggregated across multiple firms, 

and not every firm knows what the position is of the party necessarily at the other firms. So market event, in positions that a 

Federal regulator does not see all of them, could, in fact, cause a 

financial collapse of the client and possibly take down the carrying 

firm or firms themselves. 

Mr. STUPAK. Mr. Vice, let me ask you with NYMEX’s statement. 

Do you agree there is a potential for systemic financial risk from 

the market crisis involving significant activity occurring on the unregulated trading venue arising from the mutualization of risk at 

the clearing house level where large positions are not monitored? 

Mr. VICE. I essentially don’t agree with it. I mean, in the energy 

markets, between the NYMEX clearinghouse, and we use the London Clearinghouse—we don’t own that clearinghouse, but they are 

both respected organizations with very strict risk management 

policies in terms of how margin is calculated and how collateral—— 

Mr. STUPAK. Well, London has less restrictions than CFTC or a 

NYMEX, right? 

Mr. VICE. No, not at all. 

Mr. STUPAK. Really? 

Mr. VICE. No, the clearinghouses—I don’t know all the rules, but 

the investment banks that are members of the NYMEX clearinghouse are the same investment banks that are the clearers that are 

members of the London Clearinghouse. And London Clearinghouse 

actually, I think, is the largest clearinghouse in the world. They 

clear the London Stock Exchange, the financial futures in London, 

the London Metals Exchange, and they clear our business as well. 

But putting that aside for a minute, I think that the clearing 

concepts introduced in the OTC markets by ICE and NYMEX have 

made quite a service there in that so much of the business is 

cleared at one of our clearinghouses. The OTC business, whether 

you want to characterize it as unregulated or somewhat regulated, 

the point there is that is far more secure and far less vulnerable 

to systemic risk than the bilateral positions that, say, took down 

122 

Long Term Capital management or that is at work in credit default 

swaps in the sub-prime mess, where these products are not cleared. 

And these bilateral parties don’t know what is on the other party’s 

books. 

So I actually would argue the energy market, probably more so 

than any other commodity, has less systemic risk than any other. 

Mr. STUPAK. Well, that is why my pump-back legislation to prevent unfair manipulation of prices deals with bilaterals. 

Mr. GREENBERGER. I would say any—Refco failed. It was the 

eighth largest FCM. It caused the 14th largest bankruptcy in the 

fall of 2005. When it failed, people were worried about systemic 

risk. I can assure you when Amaranth failed, even though there 

has been a lot of damage, you cannot say there has been systemic 

risk. But when Amaranth lost $6.6 billion in 4 days, I will say from 

my experience working with the President’s Working Group that 

the President’s Working Group was on the phone trying to figure 

out whether there would be a systemic break. There can be a systemic break, and an unregulated entity aggravates that, because 

you can’t get the data you need to see how big the problem is. 

Mr. STUPAK. Mr. Walden, for questions. 

Mr. WALDEN. Thank you, Mr. Chairman. I just have a couple I 

am going to throw your way, folks. This is a question for the entire 

panel. Chairman Lukken, who is behind you there, of the CFTC, 

recently conducted a study of hedge fund speculation in the futures 

market, and that study concluded ‘‘speculative buying as a whole 

does not appear to drive up prices.’’ 

Now, we have heard a lot about speculation of the market driving up prices. Have you read that report? Are you familiar with it? 

What are we missing here? Mr. Vice, will you keep it kind of short, 

too, if possible. 

Mr. VICE. I am vaguely familiar with it, so I don’t know if I can 

comment on the report specifically. But I would say speculators 

speculate on prices going down as much as they speculate on them 

going up. In fact, most of what Amaranth was doing, I believe, was 

betting on the price going down as opposed to the settlement prices 

going up. So to say that all speculation is one way is kind of as 

false as saying that a market can operate with only hedgers and 

no speculation. 

Mr. WALDEN. All right, Mr. LaSala, can you comment on Mr. 

Lukken’s findings? 

Mr. LASALA. Yes, sir. We conducted a similar analysis as the 

Commission, and just broadly speaking, what it showed is the 

hedge funds tended to chase volatility, not necessarily create it. In 

our analysis, I think that most of the arithmetic behind that was 

similar to the Commission’s. 

Mr. WALDEN. OK, now I am going to probably get to you all later 

on that point, but I want to go back to Mr. LaSala. In your testimony, you point out that NYMEX has experienced a 40 percent reduction in trading volume of natural gas futures on the last day 

of each month because, I think you said, traders wanted to avoid 

complying with your February 16, 2007, rule change requiring open 

books. 

Now, the chart I put up earlier today showed that overall, yearto-date, the volumes were staying about the same. Given that you 

123 

think there is this pick-up that occurs the last day of the month, 

or last 30 minutes of trading, or whatever, is the volatility that is 

evidenced there the right index to be setting the next month’s price 

for natural gas in the market? 

Mr. LASALA. Well, I think that the marketplace has found that 

to absolutely be the case. The market has come to rely on the 

NYMEX settlement price. We have seen, as you stated in reference 

to my testimony earlier, there has been an exodus of trading in the 

last 30 minutes. I don’t know. I mean, there is less volume now setting the price. 

The volatility on that last day, you have the data, has come in. 

There are other factors that might have affected. Storage is up 

slightly. I am not sure what caused it, and I am not sure—meaning 

that did the change in the policy create a lower volatility, or is it 

a byproduct? It is a chicken and egg. I am not sure what the cold 

of winter is going to do on those 30-minute closes yet. We haven’t 

seen them. 

Mr. WALDEN. I get back to some of the oversight hearing we did 

in this committee on Enron and the volatility of the electric market, electricity market on the West Coast, where we saw prices 

spike $1,000 or so. I mean, I would hate to have thought that last 

bid, that last set of bids, was going to set the price for the market 

for the next month, because it was totally out of whack with the 

bulk of the market. 

So help me understand that last 30 minutes that is setting the, 

if I am correct, setting the price for the next month. How much volume is there versus overall volume of gas sold? Does that last 30 

minutes represent the bulk of sales contracts, or tell me how that 

part works. 

Mr. LASALA. Just as a note, the 30-minute closing range, to my 

knowledge, for purposes of rendering the final day settlement, like 

some of our other energy contracts, is the longest in the industry. 

There are other contracts that use the median of the last bid or 

offer or the last bid or offer. The volume in the 30-minute closing 

range is certainly less than you would typically see over the course 

of the whole day on the last day. And obviously we trade back 

months significantly more volume. 

I am not sure if I am completely following your question. Forgive 

me. 

Mr. WALDEN. Right, and you got to bear with me because I don’t 

do what you do in the industry. What I am trying to figure out is, 

is that an accurate snapshot of the real price in the market? 

Mr. LASALA. We believe it is. I think the industry—— 

Mr. WALDEN. Ms. Campbell, do you agree with that? Mr. Cota? 

Ms. CAMPBELL. Absent any manipulation, yes. And I am sitting 

here thinking, if not NYMEX, what would we use? And really, the 

other things that we have at our—— 

Mr. WALDEN. I am not arguing whether or not it is NYMEX. I 

am arguing whether or not that last 30 minutes is the right look, 

and I realize—well, I am beginning to fully understand how complex this market situation is and need for proper regulation. But 

is that the right look? 

Ms. CAMPBELL. Well, it is certainly disconcerting to hear that 

there are lower volumes in the last 30 minutes, but I would say 

124 

that so far we have not had an issue, other than what we have 

seen in arrears from the actions that Amaranth was taking in the 

last 30 minutes to try to manipulate the price. 

Mr. COTA. What makes a difference about NYMEX is that when 

you are in the physical market, you actually have to deliver it. In 

the whole futures game and the physical market is a big game of 

chicken, and whoever can hold out the last has the best advantage. 

Amaranth, through its forced reduction in hedges, had to get out 

of its trades early, so it was a blood bath. 

What happens in the heating oil market, which is the one I am 

most familiar with, is that the people that are playing out those 

financial contracts in order to maintain the value as high as possible, the money center banks, they will take physical delivery of 

those markets. So they will take that product, put it into storage, 

deliver it to the wholesale market or to other contracts that they 

need to deliver because they can play the game all the way out. 

And that is good from a supply standpoint. From a pricing standpoint, it all depends on the market. It is how bad is the direction 

going at that particular time, and that is where the large trader 

positions really make the biggest difference in my opinion. 

Mr. WALDEN. All right. Mr. LaSala. 

Mr. LASALA. Just a point of clarity for the record. Number one, 

all the prices that you are having in that 30-minute closing range 

are all transparent. They are disseminated. The other point being 

just by way of history, NYMEX doesn’t determine—I said before, 

we think it is accurate—the marketplaces determine that. It is not 

necessarily my position or NYMEX’s. I am just going back 10 years. 

I recall when the contract was first launched, the industry relied 

upon the average of the last 3 days. It migrated to the last 2 days. 

It migrated to the last day. Nowhere in there did NYMEX take a 

position and say—— 

Mr. WALDEN. I wasn’t alleging that at all. 

Mr. LASALA. I know. I just want to be clear. 

Mr. WALDEN. But as that window narrows, are you going to be 

down to the last 30 seconds here? 

Mr. COTA. Well, that has to do more with the physical delivery 

rather than with the financial transaction. In my segment of the 

business, we get re-priced all the time. I have price changes three 

times a day, and if you are in the wholesale segment of our market, 

what you will do is, you will actually open trades and close trades. 

Whatever you think your volume of storage is, you buy and sell 

that every day. And the only thing you don’t sell is what you think 

you are going to sell that day. 

So from a pricing standpoint, it is always priced in a relationship 

to other futures contracts in the next traded month for the spot 

month. So you are not locked into that price in the last 30 minutes. 

You are locked into that supply. So if you are relying on that supply for the next month, it is very important. But from a pricing 

standpoint, there are a lot of other ways to price the product. 

Mr. WALDEN. OK. All right. Thank you, Mr. Chairman. Thank 

you for your testimony. 

Mr. STUPAK. Mr. Green, for questions. Second round. 

Mr. GREEN. No further questions for the panel. 

125 

Mr. STUPAK. Let me welcome Mr. Shimkus, who is going to be 

the new Ranking Member of O&I. Would you like to ask a few 

questions on this? I know you are up to speed on it. 

Mr. SHIMKUS. Yes, that is right. I can talk about mercury, but, 

no, I just look forward to working with you, Bart, and I look forward to working with those you call before this Committee. And we 

want good government to operate, and we have a great relationship. And I think we can do good things. Yield back. Look forward 

to it. 

Mr. STUPAK. Mr. Barrow is not a member of the subcommittee, 

but he has been here all day, and he is part of the Energy and 

Commerce Committee. If you would like to ask some questions, 

now would be the appropriate time. 

Mr. BARROW. No question, Mr. Chairman. I want to thank you 

for your consideration in allowing me to audit these proceedings, 

and I thank the witnesses for their patience. I have been running 

back and forth between here and markups in other committees. 

Thank you, sir. 

Mr. STUPAK. Thank you. Mr. Burgess, if you have questions, 

please. 

Mr. BURGESS. Let me just, if I could, get a point of clarification 

from Mr. Vice. Does the market need speculators, or do speculators 

bring anything of value to the marketplace? 

Mr. VICE. Absolutely. I mean, the marketplace is all about people 

that have risk and want to get rid of it, giving it to people that are 

willing to take that risk on for a price. That is how a market functions. 

Mr. BURGESS. So speculation in and of itself is not an evil practice? 

Mr. VICE. It is critical that it be part of the market, yes. 

Mr. BURGESS. Does speculation bring any measure of liquidity 

into the market? 

Mr. VICE. Absolutely. It is essential. 

Mr. BURGESS. So it would be more difficult for the market to 

function without some degree of speculation. Is that correct? 

Mr. VICE. That is correct. 

Mr. BURGESS. So it is more collusion between speculators than 

it is the act of speculation itself that may cause a difficulty? 

Mr. VICE. I wouldn’t use the word collusion, but it may be periods of time for whatever reason that there is a majority of opinion, 

speculative opinion, that prices are going up long term or that 

prices are going down. And I am not smart enough to say that is 

where energy is right now, but it is one possible explanation. 

Mr. BURGESS. Well, is it possible that the transparency brought 

by the entirely electronic platform would raise those red flags more 

quickly than the floor activity or the voice systems? 

Mr. VICE. There is no question the electronic—it is fair in the 

sense that everyone gets the same information at the same time as 

opposed to paying for the rights to be on the floor and getting the 

information early. So that, whether you are Memphis Gas or you 

are Goldman Sachs or anybody else, you are getting the same quality of information, the same depth, at the same time, and the ability to act on it. And if you are the first one that hits that bid, you 

get the trade. 

126 

Mr. BURGESS. So the speed of information transfer is actually in 

some ways transforming your business. Is that correct? 

Mr. VICE. That is correct. 

Mr. BURGESS. And again I would just offer the observation that 

we need to be careful that we don’t construct regulations that in 

fact damage that transformation. In Congress, we are inherently 

transactional. In my brief experience, sometimes the transactional 

can become the enemy of the transformational, and again I hope, 

Mr. Chairman, that we are careful about that. 

Let me just take what little time I have left, and I know we have 

had the report, the Excessive Speculation Staff Report from June 

of 2007 placed into the record. I just want to read the paragraph 

from the minority report because it is way at the end of the report, 

and people may not get to that part. It reads, and I am quoting, 

‘‘while we join with the majority in making these recommendations, 

we are unable to reach some of the same factual findings with the 

same degree of certitude. 

For instance, although a number of facts presented in the report 

support the conclusion that Amaranth’s trading activity was the 

primary cause of the large differences between winter and summer 

futures prices that prevailed throughout 2006, other facts seem to 

indicate the opposite, that the market fundamentals and price 

changes influenced Amaranth’s positions. 

These facts suggest that, at least at times, Amaranth was responding to the market rather than driving it. For example, although the price of natural gas declined substantially after 

Amaranth’s demise, this alone does not prove that Amaranth’s ability to elevate prices above supply-and-demand fundamentals, rather that the market may have simply reevaluated those fundamentals in light of the hurricane season ending without a major event 

and the prediction of a warm winter. 

It is clear that different conclusions can be drawn from the same 

set of facts.’’ 

Thank you, Mr. Chairman. I will yield back the balance of my 

time. 

Mr. STUPAK. Thank you. Let me ask one question, Mr. LaSala. 

Regarding NYMEX’s self-regulatory efforts, are they being hamstrung when evaluating questionable activity or assessing whether 

trades have a bona fide for exceeding accountability limits or position limits by ICE, by trades on ICE? Are you being hamstrung by 

their activities? 

Mr. LASALA. By ICE’s activities? 

Mr. STUPAK. Yes. 

Mr. LASALA. The only way to respond to that is that I can’t firsthand see their activity. 

Mr. STUPAK. Correct. 

Mr. LASALA. Can’t see their activity, and I certainly can conduct 

business. But one of the issues is by not having a Federal regulator 

who also looks at it, I mean, I can be misrepresented to by someone. For example, Amaranth. In the Commission’s case against 

Amaranth, there is a clear assertion that they misrepresented to 

NYMEX certain things. Some of it, what their exposure was. So, 

I am taking this back. I don’t know if—— 

127 

Mr. STUPAK. Well, you are the chief regulator and officer. You 

have to look at things that are going on at NYMEX. 

Mr. LASALA. That is right. 

Mr. STUPAK. Some things that may be questionable. You are trying to evaluate it. So I guess, what I am trying to say, when you 

are trying to assess whether traders have a bona fide reason for 

exceeding accountability limits or their positions limits and if they 

can go to ICE, does that hamstring you? Does that hurt your ability to regulate your own market, your own exchange? 

Mr. LASALA. When they can go to an unregulated venue? 

Mr. STUPAK. Yes. 

Mr. LASALA. Absolutely, albeit I do believe that those positions 

on that exchange, which I think should be regulated further, are 

positions that have exposure, meaning that I would prospectively 

give them regard in evaluating some type of a position exemption 

or accountability level. I would regard them because I think that 

they are positions that are relevant. 

Mr. STUPAK. And that was your position rule in, what, February 

26, 2007, hearing in which you need that position rule to better 

evaluate what was happening? 

Mr. LASALA. That was the genesis of what that process was 

about. 

Mr. STUPAK. OK, thank you. Further anyone? 

Mr. GREENBERGER. Mr. Stupak? 

Mr. STUPAK. Yes. 

Mr. GREENBERGER. If I could just add two quick points. 

Mr. STUPAK. Sure, Professor. 

Mr. GREENBERGER. First of all, I think what Mr. LaSala said 

should not be lost. It is not so much NYMEX not having that information as the CFTC not having that information. The CFTC has 

worked out an information sharing agreement, but an information 

sharing agreement alone is not going to solve the problem. With regard to the CFTC report that Mr. Walden referred to, I believe that 

was written before Amaranth collapsed and was only based—Mr. 

Lukken can correct me if I am wrong—was only based on looking 

at NYMEX, not looking at ICE where the speculation was excessive. 

Everybody today agrees the Enron loophole has to be ended. I 

think we are way over at the point of saying that there is not excessive speculation. And with regard to speculation, yes, there 

must be speculation. You can’t have future markets without speculation, and they should be electronic. That is great, but the Act prevents excessive speculation. 

Now, true, that is a fine line, but when NYMEX told Amaranth 

to reduce its positions, it was saying, you are excessively speculating, and you may bring us down, stop. And they went over to 

ICE. 

So CFTC, if it regulates, causes ICE to put position limits in 

place that tell them to stop the excessive speculation. Again, farmers learned this at the turn of the century. They need speculation 

to hedge, but excessive speculation will kill them. 

And finally, with regard to the 2007 report and the minority 

opinion, the 2006 report had no minority opinion in it. And that 

128 

was where the conclusion was reached that at least $20 is being 

added speculative to the price of crude oil. 

And both reports should be read, because the first one deals with 

crude oil. The second one deals with natural gas. 

Mr. BURGESS. Mr. Chairman, I would just add in the final paragraph of the minority views, the recommendation is for a definition 

of what is excessive speculation, and they say without a clear unequivocal definition of that term, the CFTC and regulated exchanges will continue to have difficulty monitoring and preventing 

price distortions. If we extend CFTC oversight and regulation to 

the electronic, over-the-counter exchanges, we must avoid unintended consequences, namely creating incentives for traders to shift 

their business to the far less transparent and unregulated bilateral 

voice brokered markets. I will yield back. 

Mr. STUPAK. With that last sentence, that means you are a cosponsor of my legislation in bilateral trades. Let me thank this 

panel. It was a very good panel. We enjoyed having you here, and, 

as you saw, for the given goal for members and overtime, people 

were very interested in what you had to say. And thank you for 

helping us in this complex, technical world. 

Thank you. I will dismiss this panel. We will call forward our 

second panel. Our second panel will be the Honorable Joseph 

Kelliher, Chairman of the Federal Energy Regulatory Commission, 

and the Honorable Walter Lukken, Acting Chairman of the Commodity Futures Trading Commission. I should also note in the audience is the Honorable Michael Dunne, Commissioner at the Commodity Futures Trading Commission. Commissioner Dunne, thanks 

for being here. 

Now, gentlemen, it is the policy of this subcommittee to take all 

testimony under oath. Please be advised that witnesses have the 

right under the rules of the House to be advised by counsel during 

their testimony. Do any of you wish to be represented by counsel? 

Both indicated they do not. Let the record reflect the two gentlemen have taken the oath and replied in the affirmative, and you 

are now under oath. We will begin with your opening statement. 

Mr. Kelliher, if would you begin, please, sir. 

STATEMENT OF JOSEPH T. KELLIHER, CHAIRMAN, FEDERAL 

ENERGY REGULATORY COMMISSION 

Mr. KELLIHER. Thank you, Mr. Chairman. Mr. Chairman, members of the subcommittee, thank you for the opportunity to speak 

with you today about the Federal Energy Regulatory Commission’s 

role in protecting energy consumers against price manipulation in 

wholesale energy markets. It is good to be back at the committee. 

My comments today will focus primarily on the steps FERC has 

taken to ensure the integrity of wholesale gas markets and prevent 

market manipulation under the new authorities granted to it by 

Congress in the Energy Policy Act of 2005. I thank the committee 

for supporting FERC’s request for this additional authority 2 years 

ago and credit the committee for recognizing that FERC needed 

new regulatory tools to discharge its historic duty to guard the consumer. 

And particularly the Energy Policy Act amended our statutes in 

several significant ways to protect against market manipulation. 

129 

First, it granted us expressed authority to prevent market manipulation. It also gave us authority to issue rules to assure greater 

price transparency and wholesale gas markets as well as jurisdictional power markets. It also gave the committee enhanced civil 

penalty authority. 

At this time, I do not believe that FERC needs any additional 

legal authority to protect consumers from market manipulation. 

You gave us the tools we needed 2 years ago, and we are using 

them. However, it is important that those tools not be taken away 

from us or diminished. 

The Energy Policy Act granted FERC express authority to prevent market manipulation. This provides a strong grounding for 

our efforts to oversee wholesale energy markets. Under our final 

anti-manipulation rules, it is unlawful for any entity, directly or indirectly, in connection with the purchase or sale of electric energy 

or transmission services subject to FERC jurisdiction or the purchase or sale of natural gas or transportation service subject to 

FERC jurisdiction to engage in duplicative or manipulative practices. 

In two recent cases, FERC issued orders to show cause and notices of proposed penalties in the course of market manipulation investigations. Under these orders, FERC made preliminary findings 

that two groups of companies and individual traders, collectively 

Amaranth and Energy Transfer Partners, may have manipulated 

energy markets. These orders do not represent final determinations 

and make no final conclusions. Both groups of respondents have 

been given the opportunity to rebut the preliminary conclusions set 

forth in the orders. However, if the final conclusions reflect the preliminary findings, we propose to impose penalties that approach 

the maximum for certain violations, $291 million for the Amaranth 

entities and $167 million for the Energy Transfer Partners entities 

for total civil penalties of $458 million. 

Before I discuss the Amaranth and Energy Transfer Partners investigation, it is important to recognize that natural gas is traded 

in a wide variety of products. That was made clear in the discussion on the earlier panel. Some of these products are physical products, potentially subject to FERC jurisdiction. Other products are 

futures or financial products subject to CFTC jurisdiction. 

However, month indexes used to price physical gas sales are constructed using transactions with prices set in part by futures 

prices. This is particularly true in the Eastern United States and 

the Gulf Coast, as shown by the map that is attached to my testimony. As a result, futures prices determine, in part, the price of 

physical natural gas purchased by customers and the effects on 

physical markets of changes in futures prices are direct and significant. 

Based on the evidence developed in the investigation, we made 

a preliminary finding that Amaranth may have deliberately obtained and then sold large futures positions in the last half hour 

of trading on the settlement date and number of months in order 

to manipulate prices downward. Thus, Amaranth may have benefited from even larger opposing positions that they held on ICE, 

and they did this full well knowing that their actions would affect 

physical prices as well. 

130 

The Energy Transfer Partners investigation looked at a different 

scenario where we believe, based on preliminary conclusions, that 

Energy Transfer Partners may have manipulated physical prices, 

physical transactions, in order to benefit opposing positions they 

held in other physical products as well as CFTC jurisdictional financial products. 

Now, in both the Amaranth and the Energy Transfer Partners 

cases, FERC began an investigation. We shared our information 

fully with the CFTC, and the CFTC began its own investigations 

of both matters soon thereafter. The two agencies cooperated closely throughout these investigations. I think that is a credit to the 

memorandum of understanding that the two agencies entered into 

in October 2005, as directed by Congress. 

I think the MOU has worked very successfully over the past two 

years. Now, the MOU has worked very well and particularly during 

these investigations, during the 14 months of the Amaranth investigation as well as the 21 months of the Energy Transfer Partners 

investigations, and it continues to operate successfully. The two 

agencies conducted parallel investigations that were very closely 

coordinated. 

Now, this cooperation was significant. Market manipulation can 

cross jurisdictional lines. It can cross product lines, as shown by 

both the Amaranth and the Energy Transfer Partners investigations. In a sense, one of these investigations examined manipulation that may have occurred within CFTC jurisdiction but affected 

FERC jurisdictional sales. The other involved manipulation that 

may have occurred within FERC jurisdictional markets that affected other CFTC jurisdictional transactions. 

Both investigations involved possible manipulation that may 

have crossed the jurisdictional lines between the two agencies, and 

cooperation between FERC and CFTC is essential in order to police 

this kind of manipulation. 

Now the enforcement actions, as I indicated, were coordinated, 

very closely coordinated as were the investigations themselves, and 

both agencies publicly praised the investigations conducted by the 

other agencies when we took coordinated enforcement action in 

July. 

Now, since then Amaranth has raised arguments about whether 

FERC has jurisdiction over manipulation of the monthly futures 

price. Even before we issued our order to show cause in July, 

Amaranth’s lead trader, Brian Hunter, filed in the U.S. District 

Court for the District of Columbia, seeking to enjoin issuance of our 

Order, claiming that FERC lacked jurisdiction. Judge Richard Leon 

denied their request for a temporary restraining order, and just on 

Monday of this week, he also denied the injunction. 

Now, within weeks of the order to show cause, Amaranth also 

filed a motion to stay FERC’s action and civil action filed by the 

CFTC against Amaranth in the U.S. District Court for the Southern District of New York. Amaranth argued, among other things, 

that we lacked jurisdiction, and CFTC has sole jurisdiction over the 

conduct prescribed in our order to show cause. Although CFTC opposed Amaranth’s motion to stay our order, CFTC maintained that 

it had exclusive jurisdiction over all trading and natural gas futures. 

131 

This position would have the effect of preempting FERC’s ongoing enforcement proceeding against Amaranth, and I consider this 

to have been a significant change in the CFTC position. 

Now, at this point, the two agencies, we have a difference of 

opinion about the proper interpretation of the anti-manipulation 

provisions of the Energy Policy Act and how those provisions 

should be interpreted in concert with the Commodity Exchange 

Act, and this agreement will likely be resolved by the Courts. And 

I think that is appropriate. 

But I just want to emphasize that there is a great deal at stake 

in this legal dispute. The key issue, the central issue, is the reach 

of FERC’s anti-manipulation authority, the extent of our ability to 

protect consumers. If the attack on our jurisdiction is successful, 

our ability to guard the consumers from exploitation would be significantly reduced. 

FERC and CFTC are different agencies with different duties. We 

are a consumer protection agency. The CFTC has a different mission. We have greater penalty authority than the CFTC and are 

more likely to order disclosure of profits in a market manipulation 

case, which holds out the promise to consumers that they might be 

made whole. 

It is also much harder for the CFTC to prove manipulation that 

FERC since they operate under a high statutory standard. And I 

think consumers see a difference between the agencies. I think that 

is why the National Association of State Utility Regulators and a 

host of individual state commissions have declared support for 

FERC’s position. They have even gone so far as to enter the litigation, filing briefs in the New York District Court supporting FERC. 

But perhaps the best judge is the consumers themselves. Various 

consumers groups have filed briefs in support of FERC position, including one of the organizations represented on the first panel, 

American Public Gas Association. 

Now, at FERC, we recognize that CFTC has exclusive jurisdiction to regulate aspects of future trading. FERC respects the 

CFTC’s exclusive jurisdiction in these areas, and we do not seek to 

regulate futures or regulate NYMEX. And I do not believe that our 

enforcement actions that we proposed against Amaranth constitute 

regulation. 

Now, FERC stands by our position that Amaranth’s activities fall 

within our jurisdiction insofar as they affect physical sales of natural gas. We believe that the anti-manipulation and the anti-manipulation provisions in the Energy Policy Act 2005 give FERC 

broad authority to sanction manipulative conduct when it significantly affects jurisdictional sales. 

Comments in floor debate on the Energy Policy Act clearly indicate Congress’s intent that FERC implement the broadest possible 

prescriptions necessary to protect energy consumers. 

I believe that the words in the statute mean something, both the 

words that Congress chooses and the words it does not choose. 

Here, the choices are significant. The FERC anti-manipulation authority applies to ‘‘any entity’’ rather than ‘‘a natural gas company’’, a defined term set in Law 7 years ago, meaning a company 

that engages in jurisdictional sales. We are authorized by the statute the sanction manipulation that directly or indirectly affects juVerDate Nov 24 2008 14:00 Feb 24, 2009 Jkt 037690 PO 00000 Frm 00135 Fmt 6633 Sfmt 6633 C:\DOCUMENTS AND SETTINGS\CWELLS1\110-78 SCOM1 PsN: JIMC
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risdictional sales. And we can sanction fraud and deceit in connection with jurisdictional sales. 

In addition, it is noteworthy that Congress included no saving 

clause in the anti-manipulation provision of the Energy Policy Act 

related to CFTC authority. I would be happy to discuss statutory 

interpretation at greater length if that is the will of the subcommittee. 

Now, the question has been posed whether FERC should have 

exercised its anti-manipulation authority. I think one of the lessons 

of the California Western power crisis is that manipulation can 

hurt gas and power consumers. That is why you gave us the antimanipulation authority 2 years ago. You gave us the tools, and we 

have been using them. 

I think FERC has a duty to guard the consumer from exploitation, and exercise of our anti-manipulation authority is necessary 

to discharge that duty. And I respectfully suggest that if FERC had 

declined to use this anti-manipulation authority, the subcommittee 

should have held a hearing today to ask us why not. 

Now, I regret that this disagreement between FERC and CFTC 

has arisen in recent months, but I want to make it clear that this 

disagreement over jurisdiction has not impeded cooperation between the two agencies. We have a respectful disagreement over interpretation of the anti-manipulation provisions of the Energy Policy Act, a disagreement that, in my view, is best resolved by the 

Courts. 

But I also want to make it clear that I do not question CFTC’s 

commitment to prevent market manipulation. They are as committed to preventing market manipulation as FERC. They have 

demonstrated that by continuing to cooperate with FERC on matters of mutual interest, notwithstanding their legal opinion on the 

scope of our jurisdiction. 

So I just want to reassure the subcommittee that this disagreement has not impeded cooperation between the two agencies on ongoing investigations in areas of mutual interest. The MOU continues in place, and we continue to coordinate our information 

gathering, and we continue to coordinate our investigations. 

Staff members from the two agencies continue to meet periodically to discuss more general ides of common interest, and the two 

agencies are discussing other ideas on how to improve cooperation 

investigations going forward. 

Now, in conclusion, the Energy Policy Act gave FERC the tools 

that we need to oversee physical natural gas and electric power 

markets. Over the last 2 years, we have moved both carefully and 

quickly to implement the relevant provisions of the Energy Policy 

Act, especially the anti-manipulation civil penalty and the transparency authorities. 

Our experience so far is that the new authorities gave us the 

tools we needed to penalize and deter price manipulation, and our 

track record shows how effective those authorities can be. But I do 

not anticipate that we would need further authorities. However, I 

do note that there is legislation being considered earlier today that 

would amend the Commodity Exchange Act. I think it is important, 

though, to make sure that FERC authority to look into ICE marVerDate Nov 24 2008 14:00 Feb 24, 2009 Jkt 037690 PO 00000 Frm 00136 Fmt 6633 Sfmt 6633 C:\DOCUMENTS AND SETTINGS\CWELLS1\110-78 SCOM1 PsN: JIMC
133 

kets is not diminished by changes to the Commodity Exchange Act. 

And I ask the committee for your assistance in that. 

However, a legal question has arisen. Yes, sir. 

Mr. STUPAK. I am going to need you to wrap up. 

Mr. KELLIHER. Yes, sir. 

Mr. STUPAK. We are 7 minutes over, and we got votes now. I 

want to get Mr. Lukken in yet before we go. 

Mr. KELLIHER. Can I have 10 seconds? 

Mr. STUPAK. Yes, quickly. 

Mr. KELLIHER. A legal question has arisen regarding one of our 

most important new authorities. We think it is important to clarify 

the extent of FERC authority in this area. We think there is a 

great deal at stake, and we think the Court is the right place to 

settle it. Thank you. 

[The prepared statement of Mr. Kelliher follows:] 

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Mr. STUPAK. Thank you for your testimony. Mr. Lukken, please, 

if you would, your testimony. We have four votes on the floor, but 

we are going to get to this testimony, and then we would recess for 

a bit. And then we will come back for questions. Mr. Lukken, 

please. 

STATEMENT OF WALTER LUKKEN, ACTING CHAIRMAN, U.S. 

COMMODITY FUTURES TRADING COMMISSION. 

Mr. LUKKEN. Thank you, Mr. Chairman, members of the subcommittee. On behalf of the Commodity Futures Trading Commission, I appreciate the opportunity to appear before you today. The 

CFTC’s mission is broadly two-fold: to protect the public and market users from manipulation, fraud, and abusive trading practices, 

and to promote open, competitive, and financially sound markets 

for commodity futures and options. 

Congress created the CFTC in 1974 as an independent agency 

with the mandate to regulate commodity futures and options markets in the United States. With the passage of the Commodity Futures Modernization Act in 2000, the CFTC became the only Federal financial regulator that operates under a principles-based regulatory approach. 

A principles-based system requires markets to meet certain public outcomes in conducting the business operations. For example, 

registered futures exchanges, also known as designated contract 

markets, or DCMs, must comply with a set of core principles in 

order to uphold their good standing as a regulated exchange—ranging from maintaining adequate financial safeguards to conducting 

market surveillance. As technology and market conditions change, 

exchanges may discover more effective ways to meet a mandate 

principle and their self-regulatory responsibilities. 

The CFTC’s regulatory approach is complemented with a strong 

enforcement arm. Robust enforcement is essential to effective market regulation in order to punish and deter abusive activity in our 

markets. I call this ‘‘prudential regulation with a bite’’ and our enforcement record reflects this bookends approach. 

During the past 5 years, the Commission has filed a total of 295 

enforcement actions and obtained more than $1.8 billion in total 

monetary sanctions, including restitution, disgorgement, and civil 

monetary penalties. Protecting the energy markets is vital to our 

national interests because of the direct impact of energy prices on 

consumers and the economy in general. In the energy sector, during the last 5 years, the Commission has filed 39 enforcement actions, charging 64 individuals and companies with manipulation, 

attempted manipulation, and/or false reporting. 

To date, these actions have resulted in civil monetary penalties 

of more than $434 million. Most recently, the CFTC and Department of Justice obtained a record settlement of $303 million with 

BP for manipulating their propane gas market. Indeed, we maintain a zero-tolerance policy toward anyone who attempts to manipulate or disrupt prices in the energy markets. 

On this front, I would also note our continued positive working 

relationship with FERC on many enforcement matters. The CFTC 

and FERC share the common goal of ensuring that the energy markets remain free from manipulation. 

189 

Since the CFTC and FERC entered into a 2005 memorandum of 

understanding on information sharing, our agencies have had a 

good collaborative relationship. I am committed to continuing to develop this cooperative relationship, given the inter-relationship between futures and cash markets in the energy sector. As the MOU 

recognizes, Congress provided the CFTC exclusive jurisdiction over 

the futures markets. The policies that support this jurisdictional 

grant by Congress are as important today as they were when they 

were enacted 35 years ago. 

Exclusive jurisdiction of futures trading ensures that the futures 

markets, where many commodities also have a separate cash market regulator, will not face inconsistent and redundant regulation 

and the uncertainty of differing legal standards. 

But this does not mean that FERC and CFTC’s respective enforcement authorities cannot exist in complement of each other, as 

evidenced by the solid working relationship we share with other 

Federal and State enforcement authorities. I am committed to 

striking this balance with FERC. Already, our staffs have met to 

discuss possible ideas that would further coordinate our missions. 

I am hopeful that these efforts will help to align the implementation of our mandates going forward. 

I would also like to touch on a recent CFTC proposal specifically 

aimed to reduce concern on exempt commercial markets or ECMs. 

Congress created the ECM category in 2000 to allow commercial 

participants to trade energy and certain other products in a lighttouch regulatory environment. This spurred innovation and competition to the ECM platform, provided a low cost on-ramp to 

launch new ideas for contract design and trading methodologies. 

However, the success of this type of trading facility has also led 

policymakers to reexamine whether the regulatory requirements 

for these exchanges remain adequate. In September the CFTC conducted an extensive hearing on ECMs, several of the witnesses in 

the prior panel were part of those hearings. We found that certain 

ECM energy contracts were performing as virtual substitutes for 

regulated futures contract and may be serving a significant price 

discovery role. 

The Commission concluded that changes to our Act were necessary in order to detect and prevent manipulation involving ECM 

futures contracts that serve a significant price discovery function. 

To that end, the Commission recommended legislative changes in 

a report delivered to Congress that would require, one, large trader 

position reporting of non-significant price discovery contracts on 

ECMs; two, position limits or accountability levels for these contracts; three, self-regulatory responsibilities for ECMs; and four, 

CFTC emergency authorities over these contracts. 

This proposal, crafted in full consultation with the President’s 

Working Group on Financial Markets, has the support of the entire 

Commission. I am pleased to report that the House and Senate Agriculture Committees are actively considering these recommendations. In fact, the full House Agriculture Committee this morning 

marked up and passed out our recommendations as part of their 

reauthorization mark. 

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190 

tinue to be effective in policing our markets and allowing this industry to continue on its upward path of growth. With that, Mr. 

Chairman, I yield back the rest of my time, and I appreciate the 

opportunity to testify today. 

[The prepared statement of Mr. Lukken follows:] 

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Mr. STUPAK. Thank you, and thank both of you for appearing 

here today. Unfortunately, we have four votes on the floor right 

now. So I think we are going to recess until approximately 1:30, 

1:35. We should be back by then, and hopefully we will have a 

chance to take questions, and more members will be back then. 

[Recess.] 

Mr. STUPAK. We have had the opening statements. We are going 

to go on with questions. Mr. Kelliher, if I may start with you, sir. 

Your testimony says, ‘‘legislative proposals intended to enclose the 

Enron loophole and give the CFTC jurisdiction over ICE and other 

electronic trading venues could affect FERC’s ability to oversee natural gas and electric power markets. Many of the same venues 

trade physical as well as financial contracts, and any limitations on 

FERC’s access to that information could reduce its ability to oversee jurisdictional market.’’ What specific legislative proposals are 

you referring to, and what authorities are at risk in terms of FERC 

jurisdiction over trading in exempt commercial markets? 

Mr. KELLIHER. Well, we do currently have ability to get information from ICE. First of all, we get information as a client. We buy 

information. That was discussed in the first panel. We actually 

think that information is very important to us, but we also occasionally issue a friendly subpoena to ICE. And we get additional information that is non-public from them, and that information is 

very important to us to monitor markets and look for possible market manipulation. If we were not able to get that non-public information, it would impair our ability to understand the market. 

Mr. STUPAK. Well, if it a friendly subpoena, is the contents of the 

subpoena negotiated out before it is issued? 

Mr. KELLIHER. The subpoena, I won’t say they invite, but they— 

the information we get from them is very detailed market information. But the companies that are engaged in transactions, they are 

blind. They are Company X, Company Y. 

Mr. STUPAK. OK. 

Mr. KELLIHER. We sometimes want to know who Company X is, 

and so that—and it is necessary to issue a subpoena. And then 

they will identify the company. The information remains nonpublic, 

but that is what we can do currently. We don’t want to lose that 

ability. 

Mr. STUPAK. Well, is there any language you would suggest to us 

to ensure that there is no limitation on your ability to access information and bring enforcement actions? 

Mr. KELLIHER. We can provide that information to you, sir. 

Mr. STUPAK. OK, in the Energy Transfer Partners case brought 

by FERC, FERC alleged that the company used its market power 

in the Houston Ship Channel to drive down the physical price of 

natural gas and at the same time took a series of short positions 

on ICE which bet that the price of natural gas at that location 

would go down. FERC estimated $67 million in unjust profits in 

just nine trading periods. What is noteworthy is that FERC was 

alerted by a call to the enforcement hotline. 

So would this case of alleged market manipulation have been detected without your call to the hotline, without a call from the hotline? 

200 

Mr. KELLIHER. It might have, and FERC investigations, and 

probably similar with CFTC, begin a number of different ways. In 

the case of Amaranth, that investigation began by FERC staff monitoring transactions at NYMEX, and NYMEX is a very transparent 

market and just seeing some price movements that didn’t seem to 

make sense based on our understanding of market fundamentals. 

But hotline calls also are a source of—can begin an investigation. 

Sometimes it is a FERC audit. Sometimes it is a referral from another Federal agency. There really are about 10 different ways an 

investigation might begin, but in that case, it was a hotline call 

from—— 

Mr. STUPAK. Let me ask this. Has FERC initiated any manipulation cases where prices were manipulated upward? 

Mr. KELLIHER. We have a number of nonpublic investigations 

that I am not at liberty to discuss. 

Mr. STUPAK. Do you have a number of investigations going now 

on the upward—— 

Mr. KELLIHER. We have a good number of current investigations. 

Some of them may involve upward manipulation. Some of them 

may involve downward manipulation, but I actually legally cannot 

discuss them without authorization from the Commission. But I 

can offer a private briefing. I would be happy to provide a private 

briefing to you after getting that authorization. 

Mr. STUPAK. I am sure some members would be interested. Mr. 

Kelliher, in the Amaranth case involving manipulation of futures 

and derivatives markets during the months of February, March, 

and April of 2006, which then drove down the prices paid in FERC 

jurisdiction markets, has FERC investigated price increases for 

2006 and 2007 winter season that impacted prices in the spring 

and summer of 2006, which was connected to Amaranth trading 

standard strategies? 

Mr. KELLIHER. We did look at Amaranth trading activity in other 

months, not just in those months. 

Mr. STUPAK. OK. 

Mr. KELLIHER. But we are not looking at manipulation of futures. We are looking at manipulation of futures products that affect physical gas consumers. It is entirely possible Amaranth might 

have—it is hypothetically possible a company—I want to be careful. 

A company could engage in manipulation of futures that actually 

has no effect on physical gas consumers, and we would have no interest in that manipulation. 

Mr. STUPAK. OK, has FERC given thought to expanding its jurisdiction to cover enforcement of market manipulation outside its 

current jurisdictional markets involving pipes and wires such as 

heating oil, crude oil, propane, ethanol, or other? 

Mr. KELLIHER. We have not requested that authority. 

Mr. STUPAK. Have you given thought to it? Have you discussed 

it? 

Mr. KELLIHER. I think the question has been raised about propane, and I think we have respectfully declined the request. We 

have not sought that authority over propane and other petroleum 

products in part because of the nature of our agency. Our authority, with respect to oil, is we set rates for oil pipelines. That is it, 

201 

and so we have a fairly modest role in oil pipelines that goes back 

100 years actually. And the idea of a dramatic expansion is—— 

Mr. STUPAK. Well, that is why I asked involving pipes and wires 

so the heating oil goes through pipes, crude oil, propane, ethanol. 

It is all going to be going through pipes. So I mean and if you are 

the agency that is there to protect the consumer, think the consumer would expect that protection to be extended. 

Mr. KELLIHER. We do comprehensively regulate natural gas pipelines, and we do look for undo discrimination preference by natural 

gas pipelines as they provide transportation service. 

Mr. STUPAK. Well, I am going to stop questions here. I will have 

questions for Mr. Lukken. We will probably go a second round, so 

I will turn to Mr. Barton for questions, please. 

Mr. BARTON. Thank you. Mr. Lukken, do you know who the 

chairman of the Energy and Commerce Committee was in the last 

Congress? 

Mr. LUKKEN. I believe it was you, sir. 

Mr. BARTON. OK, do you know who the chairman of the Energy 

Conference was that passed the Energy Policy Act of 2005 in the 

last Congress? 

Mr. LUKKEN. The same. 

Mr. BARTON. OK, do you know who put in section 315 of the Energy Policy Act? What Member specifically wanted that language 

included in the Law? 

Mr. LUKKEN. I don’t know. 

Mr. BARTON. Well, it was the chairman of the committee and the 

chairman of the conference. Do you think that when it says, ‘‘shall 

be unlawful for any entity, directly or indirectly, to use or employ 

in connection with the purchase or sale of natural gas or the purchase or sale of transportation services, subject to the jurisdiction 

of the Commission, which is the FERC, any manipulative deceptive 

device or contrivance, as those terms are used in section 10B of the 

Security Exchange Act of 1934, 15 U.S. Code, 78J/B in contravision 

of such rules and regulations as the Commission may prescribe as 

necessary in the public interest or for the protection of natural gas 

rate payers’’, do you think that any entity doesn’t mean any entity? 

Mr. LUKKEN. We certainly support the broad grant of jurisdictional authority given to FERC in the EPACT of 2005. However, 

our mandate is to uphold the Commodity Exchange Act, which also 

has an exclusive jurisdiction provision enacted by Congress in 1974 

to protect against duplicative regulation and differing legal standards in those markets. 

So we have to read those two statutes in context. 

Mr. BARTON. Now, you are basically, if I understand your agency’s position, is that the Congress didn’t know what it was talking 

about here. I mean, you have no reason to know this, but this was 

put in specifically because of my concerns about this new exchange, 

the ICE exchange, and what they were doing. I mean, I wanted to 

go a lot further, but because of concerns from other committees and 

some of the stakeholders, we agreed in a bipartisan, bicameral 

basis on this language. 

So we have the FERC who gets this authority. They go out and 

try to use it, and your agency says they can’t do it. I mean, do you 

202 

think that Amaranth was—don’t you believe that Amaranth was 

trying to manipulate markets? 

Mr. LUKKEN. Absolutely. That is why we have brought an action 

against Amaranth for manipulating the futures markets, and we 

have worked cooperatively with FERC to bring those actions. And 

indeed, in our Court order, where the Judge has asked our opinion 

on exclusive jurisdiction, we supported FERC’s ability to go forward 

with the proceeding, but we felt compelled—it was the opinion of 

our general counsel and the Commission that we have exclusive jurisdiction over these contracts. 

Mr. BARTON. Well, then, there is no way you can have exclusive 

jurisdiction with this statutory authority on the books, and what I 

want to inform you of, as the acting Chairman, is that this wasn’t 

something serendipitous or inadvertent. It was put in directly because of what since has transpired, and Mr. Kelliher and his 

compadres at the FERC are doing exactly or at least attempting to 

do exactly what we hoped they would do, which is work with your 

agency but use their own authorities to ferret out the bad actors 

and try to make our markets more open and transparent and accessible in a non-biased way to any willing participant. 

So I don’t see how your Agency or the Courts can rule, unless 

they assume that the members of Congress who passed this didn’t 

know what we were talking about and didn’t understand the 

English language. But I want to put on the record at this oversight 

hearing that this particular section was done at my express request, because of concerns I had at the time about speculation in 

the oil and gas markets, so that we could give the FERC some authority, which was ambiguous at that time. 

This is not ambiguous, and it is my understanding that the lower 

Court has ruled that because it is a Federal statute, it has to be 

decided at the Appellate Court. But I can’t imagine the Appellate 

Court reading this language and saying that FERC can’t do what 

they have been attempting to do. So I would encourage you to work 

with the FERC, and you all decide how to cooperate together instead of arguing on who should be doing it in the first place. 

There is more than enough work to go around. This is not an 

area that we have too many regulators and too many overseers. 

One could argue, given the budget problems that both of your agencies have had and the cutbacks, that you should be working much 

more closely together if the Law allows it to share resources. 

With that, Mr. Chairman, I am going to yield back. But thank 

you again for holding this hearing. And thank both of you gentlemen for participating. 

Mr. STUPAK. Thank you. Mr. Whitfield, questions, please. 

Mr. WHITFIELD. Thank you, Mr. Chairman. Mr. Lukken, one 

question I would like to ask you. The American Public Gas Association has called for legislation that would require broad market 

transparency for larger trading positions throughout the exempt 

markets, including all over-the-counter and bilateral trading. And 

your recent legislative proposal does not really quite go that far, I 

believe. 

Do you think that the CFTC should implement a broad market 

transparency requirement throughout these exempt markets and 

bilateral trading and over-the-counter as well? 

203 

Mr. LUKKEN. Well, what our proposal suggested to Congress was 

that in these exempt commercial markets, when a contract becomes 

a price discovery contract, a benchmark that others are utilizing in 

interstate commerce, that additional regulatory authority should 

occur in those areas. And we have recommended four things. 

One, large trader reporting system reports from that exchange 

regarding those contracts so that we, as a surveillance agency, can 

monitor the markets, make sure the positions can’t be manipulated 

by certain positions of traders. 

Two, accountability and position limits, meaning that NYMEX, 

which is a regulated market, now has position limits on trading 

going into the closing of a contract. ICE will also have to put position limits on those products. They will also have to self-regulate 

themselves. They have to become their own watchdog with responsibilities to the Commission as well as give us emergency authority 

of those markets. 

Now, you talk about in addition the bilateral markets outside. It 

is our intention that our section 18.05 rule, 18.05 authority, gives 

us the ability to go into those bilateral markets on a need-to-know 

basis to ask for that information. Anything that is traded on an 

ECM or a DCM are regulated markets and we are recommending 

those markets would also have to keep records on any things related to those bilateral transactions. So if you are holding a bilateral swap that may affect the futures position, you have to keep 

those records for 5 years, and we would have the ability to go in 

and ask for them if we see an anomaly in pricing on the marketplace. 

Mr. WHITFIELD. Right, I came in as Joe Barton was asking some 

questions, and I think he touched on this a little bit. But on this 

Amaranth case, my impression is that FERC and your agency have 

worked closely on that case. Is that correct? 

Mr. LUKKEN. Correct. 

Mr. WHITFIELD. You have shared information, but it is still your 

agency’s position that FERC really does not have legal jurisdiction. 

Is that true? 

Mr. LUKKEN. That is correct. 

Mr. WHITFIELD. OK, and now my understanding, Mr. Kelliher, 

that there has been some initial Court rulings on that very point. 

Is that correct? 

Mr. KELLIHER. Yes, we have had at least three or perhaps four 

decisions by the Courts. There have been attempts to impose temporary restraining orders, stays, and injunctions on our enforcement action. All of which have been rejected, one as recently as 

Monday of this week. 

Mr. WHITFIELD. Right. 

Mr. KELLIHER. And the decision Monday was interesting, because 

it actually did discuss the statutory interpretation of the anti-manipulation provision. 

Mr. WHITFIELD. But the decision on Monday—give me a synopsis 

of that Decision. 

Mr. KELLIHER. It was rejecting a request for an injunction, and 

it was arguing that, I think in this case, I think it was Amaranth 

or Mr. Hunter. Was this Amaranth? Hunter was the lead trader at 

Amaranth, and he was seeking an injunction, and it rejected his 

204 

petition because it argued that he had failed by quite a lot to demonstrate that there be any kind of irreparable harm. 

Mr. WHITFIELD. Right. 

Mr. KELLIHER. But they also went a little bit further, and for 

them to grant an injunction, he would have to prove the likelihood 

of success on the merits. The Court actually discussed that to some 

extent and said, that would mean he would have to prove that 

FERC has no authority under the anti-manipulation provision of 

the Energy Policy Act. Now, the Court had a brief discussion of 

that, suggesting that they thought that he had no basis for that argument. 

Mr. WHITFIELD. Well, I mean, I certainly agree with the Court, 

and I think it has been very clear that this committee feels like 

FERC does have jurisdiction. And certainly want to commend 

FERC for the aggressive action they took in this case and with 

that, Mr. Chairman, I will yield back the balance of my time. 

Mr. STUPAK. Thank you. Mr. Lukken, let me follow up with 

something Mr. Whitfield asked you. You were talking about the 

bilaterals in rule 1805. That is sort of after the fact though, isn’t 

it? I mean, you can’t look at it while these things are going on. You 

get the information after the fact, correct? 

Mr. LUKKEN. Well, we would be able to find out—in order for a 

manipulation to occur, you need the means to manipulate but also 

the profit motive. 

Mr. STUPAK. Right. 

Mr. LUKKEN. So you need the means being the benchmark, the 

pricing benchmark that we are looking at, and the profit center 

being maybe these bilateral trades that are occurring. And so what 

we have said is, if you are involved in the benchmark markets, if 

you are looking at significant price discovery markets and there is 

a pricing concern of ours, we have the ability to go ask for that information in the bilateral marketplace. 

Mr. STUPAK. Well, let me ask you this, do bilateral markets, 

using standardized contracts, have an impact on the discovery or 

the price discovery process for energy commodities? 

Mr. LUKKEN. We did not find a strong correlation in the bilateral 

market as far as becoming a price discovery mechanism in the exempt commercial markets. I would say, though, that it is in our 

rule or the proposal we sent up to Congress, it does not limit these 

potential price discovery contracts to only clear trades. These could 

potentially go into bilateral contracts as well that are traded on 

ECM. 

Mr. STUPAK. Yes, but our last panel, Mr. Cota, Professor 

Greenberger, and Ms. Campbell of the American Gas, they all 

thought that they do, in fact, have an impact, and they do have an 

impact on the price discovery process. 

Mr. LUKKEN. I believe they were referring to the ECM product, 

bilateral products being traded on the ECMs. I was not here for 

their entire testimony, but there are certainly bilateral contracts 

trading on an exempt commercial market that we will begin to see 

if those contracts become significant price discovery contracts. 

Mr. STUPAK. In the book right there, go to tab No. 18, if you 

would, please. Let me ask you a question. Tab 18 should be the 

NYMEX large trader disclosure form. ‘‘A NYMEX rule requires 

205 

traders who want to hold more than 1,000 contracts in a final day 

of a trading of the prompt month to disclose all over-the-counter 

and forward contract positions including those executed through bilateral trades.’’ Since disclosure is required in this instance, is 

there a reason that large positions executed in bilateral markets 

cannot be routinely reported to the CFTC? 

Mr. LUKKEN. So this is them opening up their books? Well, I 

think—— 

Mr. STUPAK. Right, couldn’t they do the same thing to you so you 

could really look at it? Do you have real-time numbers or at least 

a prompt month? 

Mr. LUKKEN. I think the focus of our report was to really look 

at where price discovery was occurring, which is on the electronic 

marketplace. You know, this would be a lot of information coming 

into our markets, and our surveillance economists. You know, the 

marginal beneficial nature of these bilateral contracts, we would be 

overwhelmed as far as an agency in trying to monitor and put 

them into systems that would be relevant for us. So I think for us 

the tailored focus concern was going to be the ECMs and making 

sure we got that information on an ad hoc basis to go into the bilateral markets and ask for that information. But certainly we would 

be overwhelmed if we were asked to receive information from the 

entire bilateral market. 

Mr. STUPAK. Well, what is the size of the bilateral market? 

Mr. LUKKEN. It dwarfs the exchange rated market. It is very 

large. 

Mr. STUPAK. Well, isn’t that room for more speculation and more 

profit taking in the larger market as opposed to a small one, which 

you are looking at? 

Mr. LUKKEN. Well, again, if it starts to bleed into the price discovery contracts, that is when the public interests arise in our concerns and regulations. 

Mr. STUPAK. But you wouldn’t know that until after the fact. 

Wouldn’t you have more current information if they were required 

to disclose this form as they do at NYMEX? 

Mr. LUKKEN. Well, they would be on our market’s trading that 

we would see. It wouldn’t be after the fact. We would see pricing 

anomalies on our marketplace. 

Mr. STUPAK. Let me ask you this question. Has the CFTC assessed the risk of whether traders will move from ICE to bilateral 

trading on overseas markets once a discovery regime is imposed on 

trading of price discovery contracts? Do you think they will move 

to foreign bilaterals? 

Mr. LUKKEN. Well, in testimony at our hearing in September, 

this was one of the listed points we asked witnesses to address— 

the U.S. competitiveness issue, where the markets would move. It 

seemed to be the consensus that this tailored approach to regulation would be a way to get at the information, make sure that manipulation was not occurring on these ECM markets, but also ensure that markets didn’t move overseas. So that was the balance 

that we tried to strike. 

Mr. STUPAK. We heard concerns from the previous panel about 

foreign boards of trade. Do you consider the UK Financial Service 

206 

Authority to have equivalent market rules as those imposed by the 

CFTC in its designated contract markets? 

Mr. LUKKEN. Equivalent may be too strong of a word, but comparable. Certainly, in the international regulatory community, they 

are one of the strongest regulators around, the Financial Services 

Authority. In fact, they are quoted by many in our Government and 

in the private sector as the model we should be going towards. 

Mr. STUPAK. Does FSA, the Financial Services Authority in the 

UK, do they require position limits on financially settled contracts 

to prevent excessive speculation? 

Mr. LUKKEN. They do not, but they also have different requirements that our agency does not require. So again, this is how these 

regulatory authorities have grown up and the history of all with 

that. 

Mr. STUPAK. Then why would the CFTC then approve no-action 

letters allowing foreign boards of trade to operate in the U.S.? You 

said they are not equivalent. They are comparable. I guess that is 

sort of a subjective standard. If they don’t require position limits 

on financially settled contracts, then why would we give them these 

no-action letters, as you call it? 

Mr. LUKKEN. The no-action letter, this is something we debated 

at length at the Commission last year—we held hearings on this. 

We looked into this, and no action, you must understand, is almost 

the registration of these exchanges. They have to come in, show us 

how these rules are comparable in the UK to our rule books here 

at the exchanges. We go through a broad analysis of the regulatory 

system in the United Kingdom in making our—— 

Mr. STUPAK. But isn’t it sort of like, hold us to what we say, not 

what we do? 

Mr. LUKKEN. No, we condition the no-action arrangement with 

receiving large trader information from these markets. So it is not 

that these are outside of our view. In fact, one could argue they 

have two regulators looking at these markets, both the United 

Kingdom and our surveillance staff because we are getting large 

trader reporting on a weekly basis, leading up to the final week of 

expiration, and then on a daily basis. 

Mr. STUPAK. Well, you have a memorandum of agreement, don’t 

you, with the financial services in England? 

Mr. LUKKEN. Yes. 

Mr. STUPAK. So what information is specifically shared between 

you and the CFTC and FSA? 

Mr. LUKKEN. It is large trader reporting information, similar to 

what we get from market participants and exchanges here in the 

United States. We also hold quarterly meetings with them to discuss enforcement cases. Our surveillance economists talk to them 

all the time on these issues. 

Mr. STUPAK. Let me ask you this, because Professor Greenberger 

brought it up—has the CFTC assessed whether trading on ICE futures for financial energy commodities, such as the New York Harbor Reformulated Gasoline, New York Harbor Heating Oil, or West 

Texas Intermediate Crude Oil, has an impact on the price discovery 

on the NYMEX? 

Mr. LUKKEN. ICE futures in Atlanta or ICE futures—— 

Mr. STUPAK. In Atlanta. 

207 

Mr. LUKKEN. In Atlanta. What we looked at, and this is what our 

rulemaking will go to and what the House Agriculture Committee 

today marked up, is that if any of these products become a significant price discovery contract traded on ICE on the exempt market, 

we would be able to get this information from them, once that occurs. So certainly we understand that there can be an influence 

from these exempt markets on regulated markets. And once that 

price discovery threshold is met, regulation would occur. 

Mr. STUPAK. Would that same answer hold true if it was the futures in the UK, ICE futures in UK, being closed out in UK? 

Mr. LUKKEN. Well, they are a fully regulated exchange, so they 

are being regulated by the United Kingdom. 

Mr. STUPAK. Can trading on ICE futures be used as part of a 

strategy to manipulate energy prices? 

Mr. LUKKEN. Sure, and we have brought cases on that. 

Mr. STUPAK. And why is the CFTC’s approving no-action letters, 

which allow U.S. traders to trade financial energy commodities 

such as New York Harbor Gasoline, Heating Oil, or West Texas Intermediate Crude Oil without requiring the trading platform to become a designated contract market and subject to your jurisdiction, 

the CFTC’s jurisdiction? 

Mr. LUKKEN. Well, it is a very good question, but these are global 

commodities. Even though West Texas is in the name, the oil is 

traded as a global commodity. It is relied on around the world, and 

so we want to make sure that, as a world product, that other nations around the world are also being open to our markets. So by 

allowing access to the UK of our traders, with conditions and full 

review by our staff, we also ensure that our markets have access 

to other overseas so that our markets here in the United States can 

grow. 

Mr. STUPAK. And without requiring the trading platform to become a designated contract market, aren’t you sort of only hurting 

the integrity of the market? 

Mr. LUKKEN. Well, this is the mutual recognition concept that is 

currently being debated on the securities side right now. In fact, 

the Securities and Exchange Commission is looking into whether to 

adopt a similar, comparable, but not identical, type of mutual recognition system that would most likely recognize the UK FSA. So 

this is something that is the global standard of how regulators talk 

to each other around the world and interact. And we are certainly 

a leader in this area. 

Mr. STUPAK. My time has expired. Mr. Walden, for questions, 

please. 

Mr. WALDEN. Thank you, Mr. Chairman. Appreciate that. I wanted to follow up with Mr. Lukken, with you. You heard me ask Professor Greenberger about your report, and he said that your report 

really was done before the collapse of Amaranth. Is that accurate, 

and do you still stand by the conclusions of your report that this 

speculative market isn’t substantively driving up the price of oil 

gas? 

Mr. LUKKEN. Our report was done on crude oil. It was not done 

on natural gas, which is the subject matter of the Amaranth investigation. But it was dealing with a similar commodity and how 

hedge funds and other speculative interests behave in those marVerDate Nov 24 2008 14:00 Feb 24, 2009 Jkt 037690 PO 00000 Frm 00211 Fmt 6633 Sfmt 6633 C:\DOCUMENTS AND SETTINGS\CWELLS1\110-78 SCOM1 PsN: JIMC
208 

kets. And it was the conclusion of our chief economist and his staff 

that published the paper, that these were really price followers 

more than price makers in those markets. It has been updated. We 

have updated it up until most recently, I think, through November 

I believe. Is that correct? So it is updated to even account for the 

recent run-up in oil prices as well. 

Mr. WALDEN. And the conclusion remains the same? 

Mr. LUKKEN. I think the conclusions have remained exactly the 

same. Is that correct? 

Mr. WALDEN. All right, Mr. Kelliher. 

Mr. LUKKEN. Having said that, we do have controls in place on 

speculation. We recognize it can be excessive, and we do have certain things that we put into place to control against that excessive 

speculation. 

Mr. WALDEN. So I just want to clarify. You don’t think it is a $20 

to $30 a barrel part of the margin in oil right now then, speculation? 

Mr. LUKKEN. I could only speculate. Sorry. 

Mr. WALDEN. Have you had experience, or that is what I want 

to know. And is there somebody making money through a derivative through the—never mind. Go ahead. 

Mr. LUKKEN. But we have looked into that claim that there is a 

$30 premium. We don’t know any economic basis on which we are 

trying to figure out who said that. I think some of this might be 

sort of gut feels of traders involved and analysts. And those are 

real feelings that should be brought to light, but we have based our 

findings on economic data that we have through the positions of 

traders. And we feel more comfortable talking about those positions. 

Mr. WALDEN. All right. Yes, it is Professor Greenberger who said 

in his testimony $20 to $30 a barrel. Mr. Kelliher, do you have any 

comment on that? 

Mr. KELLIHER. No, I am not familiar with the CFTC analysis, 

but I don’t have any reason to dispute Chairman Lukken. 

Mr. WALDEN. But from your own agency’s perspective? 

Mr. KELLIHER. No, our authority in oil is just limited to oil pipeline rates. 

Mr. WALDEN. What about natural gas? 

Mr. KELLIHER. Natural gas, we have jurisdiction over wholesale 

gas markets, pipelines, LNG projects. 

Mr. WALDEN. But do you see speculation in that market as described by some of the other witnesses today? 

Mr. KELLIHER. There is speculation, and there is risk management. And I think similar to CFTC we view use speculation by 

itself as harmful. 

Mr. WALDEN. Right. 

Mr. KELLIHER. It is a necessary part of markets. 

Mr. WALDEN. And so you don’t see evidence of harmful speculation then? Is that what you are saying? 

Mr. KELLIHER. We look for manipulation. Manipulation is what 

we look for. We look for undo discrimination and preference. Those 

are the evils that we are focused on. So we are not looking for excessive speculation per se. 

209 

Mr. WALDEN. OK, so let me get the term right then. Let us use 

manipulation of the market. You do see some of that happening, 

has happened? 

Mr. KELLIHER. Yes. 

Mr. WALDEN. And that more regulation is needed over ICE? 

Mr. KELLIHER. I will defer to CFTC on regulation of futures. We 

think we have the authority we need at FERC to regulate in our 

jurisdiction. We think you gave us the right tools 2 years ago, and 

I defer to CFTC on what authority they need. 

Mr. WALDEN. And you think, Mr. Lukken, that the legislation 

that came out of the Ag Committee today while we were holding 

this hearing just coincidentally gave you the authority you need? 

Mr. LUKKEN. We believe, yes. 

Mr. WALDEN. OK, I don’t think I have any other questions, Mr. 

Chairman. I again want to thank you for holding this hearing. It 

is a very important issue. Thank you. 

Mr. STUPAK. Thank you. Mr. Green, for questions. 

Mr. GREEN. Thank you, Mr. Chairman. Mr. Kelliher, the CFTC 

has said it is exclusive regulator over futures markets. Frankly, 

this is for both of you because our interest on the committee is to 

see—we want the regulation, and we just happen to have jurisdiction over FERC and obviously the Agriculture Committee, I guess, 

has it over CFTC. 

But the exclusive regulator of the futures market, do you believe 

FERC’s exercise of the anti-manipulation authority weakens the 

CFTC’s role? And adding into that, I have a question about the 

memorandum of understanding. Is there some way that—because 

energy is easier understood in FERC whereas CFTC has so many 

other commodities they deal with other than energy? And just appreciate an answer from both of you. 

Mr. KELLIHER. Go ahead. 

Mr. LUKKEN. OK. 

Mr. GREEN. Has it weakened CFTC’s role if FERC exercises the 

anti-manipulation authority under EPACT 2005? 

Mr. LUKKEN. You know, one of our mandates is to make sure 

that the markets are open, competitive, and transparent to ensure 

the integrity of the market. And any time there is confusion on differing legal standards, duplicative regulators in the space, I think 

there is cause for concern that these markets may choose other alternatives that they may have to trade. So that is what we try to 

minimize. 

I completely agree with Joe. We share the goal of preventing manipulation no matter where it occurs. We hope that there are no 

gaps, try to minimize duplication when we can. But we think that 

these markets deserve legal certainty, and certainly the exclusive 

jurisdiction provides that for these markets. 

Mr. KELLIHER. And we don’t think that our enforcement action 

interferes with CFTC regulation. We don’t think there is a dual 

regulation here because there is one regulator. It is the CFTC. 

There are two investigations that really have been announced in 

recent months that are—they are not joint investigations strictly 

speaking, but they are coordinated and parallel investigations. 

The other one, as I mentioned in my testimony, was the Energy 

Transfer Partners investigation. In that case, that involved, we beVerDate Nov 24 2008 14:00 Feb 24, 2009 Jkt 037690 PO 00000 Frm 00213 Fmt 6633 Sfmt 6633 C:\DOCUMENTS AND SETTINGS\CWELLS1\110-78 SCOM1 PsN: JIMC
210 

lieve, involved manipulation in FERC jurisdictional markets, physical gas sales that affected other physical gas products as well as 

financial products. So manipulation occurred in our space, if you 

will, we think and then extended to CFTC space. 

Now they are conducting enforcement action of their own that involves an area where FERC has exclusive jurisdiction. We don’t 

view that their enforcement action undermines or threatens or impairs FERC’s exclusive jurisdiction over physical natural gas because they are not regulating in the sense that we regulate that 

market. They are not setting a rate. They are not revoking a blanket certificate. They are not doing the things that are regulation 

under the Natural Gas Act. So we don’t see that their enforcement 

action undermines our authority, and we similarly don’t see why 

our enforcement action undermines their authority. But it is an 

honest disagreement. 

Mr. GREEN. Well, how does MOU working if we can, we ought 

to have the two agencies who complement each other really in the 

energy markets that there can be—can there be a joint effort? I 

mean I have never heard of agencies, Federal agencies doing that. 

But it would seem like it would be needed in this, particularly the 

sensitivity of the price fluctuations for my industrial consumers but 

also for my constituents. 

Mr. LUKKEN. Well, I think the original intent of the MOU was 

on information sharing, making sure each of us could uphold the 

mandate of their act. We have different legal interpretations of 

what our acts require of us, so it is difficult for an MOU to try to 

change what we believe the Law to be, each of us respectively. So 

it is something, I think, we are looking at. Our staff have talked 

about ideas of trying to approach this to coordinate better, going 

forward to try to avoid, as best we can, these situations in the future. But again this is an honest legal dispute between the two 

agencies that the Courts are currently and actively considering. 

Mr. GREEN. Well, and that is my next question. Energy Transfer 

Partners, CFTC is prosecuting alleged manipulation of physical 

markets which was under FERC’s jurisdiction because of their effect on the futures market, which are under CFTC’s. How is that 

going to balance out? Because I guess I have an interest because 

Energy Transfer Partners is doing things in my area. I mean sure, 

nationwide, but at home. 

Mr. LUKKEN. Our statutory mandate on manipulation covers the 

futures markets, but Congress granted us also cash market action. 

And up until 2005, we were the only people in that space, so we 

brought lots of cash market authorities in light of the western energy crisis and Enron debacle. So this is something we are still trying to work out, how to best divide the authority between the two 

agencies. But you raise a good point, that maybe we should think 

about where the expertise of each regulator lies and how that 

might help us to guide where we divide jurisdiction. 

Mr. KELLIHER. And I would just like to comment. I really don’t 

think it is unusual that more than one Federal agency might prosecute the same underlying offense. I mean it happened a few years 

ago where CFTC was prosecuting false reporting with respect to 

natural gas sales, and the Justice Department also was taking 

fraud actions against the same companies and individuals. So I 

211 

don’t think it is unusual that the same activity might violate two 

different Laws that are administered by two different agencies. 

And we are not, for example, charging anyone with violating the 

Commodity Exchange Act. CFTC is not charging anyone with violating the Natural Gas Act. We both are given these different duties by Congress, different responsibilities. Sometimes the same behavior violates more than one Federal Law. 

Mr. GREEN. Mr. Chairman, I know my time is up, but I don’t 

know what the bill is doing that has come out. It was just was reported out today in Ag Committee, but I would hope it would foster 

that relationship so, again, the beneficiary are the citizens and 

whether it be corporate citizens or individuals ones. And I know we 

don’t have jurisdiction over that, but we definitely have it on the 

floor and to be able to have an interest in it, particularly when you 

come from energy-producing areas or chemical-producing areas. So 

thank you, Mr. Chairman. 

Mr. STUPAK. Thank you. Mr. Lukken, you indicate that, besides 

Professor Greenberger, you don’t know of anyone else who agreed 

with the idea it is $20 to $30 more per barrel of oil in the price 

that we are paying right now. Do you know a Mr. Gatt of 

Oppenheimer and Company? Are you familiar with him? 

Mr. LUKKEN. I understood he testified yesterday before the Senate. 

Mr. STUPAK. He has indicated in a couple of articles, LA Times, 

New York Times, it is $20 to $30 excess speculation brings to the 

price of a barrel of oil. Are you familiar with Ms. Foss, the chief 

energy economist at the Center for Energy Economics at the University of Texas? 

Mr. LUKKEN. I am not. I am sorry. 

Mr. STUPAK. OK, in the ENE News, Energy Environment News, 

she also indicates $20 to $30. So there is a lot of support out there. 

Kyle Cooper from the IAAF advisor out of Houston, Texas, and 

Miami Herald they report the same things. So there is a lot of authority besides Professor Greenberger. But let me ask you this. Do 

you agree with Professor Greenberger’s testimony that the CFTC 

proposal will lead to further regulatory arbitrage because once subject to CFTC regulation traders will simply move their trading to 

other contracts which are exempt from regulation? 

Mr. LUKKEN. I don’t agree with that. I think our proposal is trying to get at the electronic exchange like facility, which is the exempt markets. Now, people go to those markets because of the benefits that these type of multilateral trading facilities provide. Clearing, creditworthiness that those markets provide, transparency of 

what the pricing might be provided in the bilateral marketplace. 

Mr. STUPAK. Yes, but didn’t NYMEX provide the same thing? 

Mr. LUKKEN. Correct. 

Mr. STUPAK. So why did people move to ICE? 

Mr. LUKKEN. Well, I am talking once our proposal is put into 

place. Then we will have the ability to see these markets to get the 

information—— 

Mr. STUPAK. So you don’t think they will move to bilaterals either, through the phone or electronics? 

212 

Mr. LUKKEN. It is a different trading environment in the multilateral space. I think those markets are beneficial, and people come 

to them for a reason not purely regulation. 

Mr. STUPAK. Well, they go there to avoid regulation. 

Mr. LUKKEN. Again, this is something we discussed as part of 

our hearing in September, and these are the recommendations we 

made. 

Mr. STUPAK. Mr. Kelliher, let me ask you this. In your testimony, 

and we are talking about the exclusive jurisdiction on future markets and your testimony, CFTC contends that FERC lacks legal authority to prosecute Amaranth, you know, been all through that. 

But in your testimony, you state, and I am quoting now, ‘‘it is 

much harder for CFTC to prove manipulation than FERC.’’ Why is 

this the case? Could you explain that a little bit further? The way 

I look at it, why would the futures industry rather have CFTC 

prosecuting their case as opposed to FERC other than fines? 

Mr. KELLIHER. Well, there is a difference in penalty authority, 

which you—— 

Mr. STUPAK. Right. 

Mr. KELLIHER. I think our penalty authority is something like 

eight times larger than CFTC. The one proposed change in the 

Commodity Exchange Act, I will express an opinion, is in the penalty provisions, and CFTC has proposed to have the same kind of 

penalty authority we have, and I think that is completely appropriate. 

Mr. LUKKEN. And that was passed this morning. 

Mr. STUPAK. Congratulations. 

Mr. KELLIHER. So I think that is one reason why some participants in the futures industry might prefer that FERC not have any 

authority to pursue manipulation, the difference in penalty authority, which may soon be eliminated. But we each have an intent 

standard on manipulation. They have a specific intent standard, 

which is my understanding. We have a lower intent standard, and 

reckless disregard can constitute intent for purposes of a FERC 

manipulation. 

Mr. STUPAK. So you have a broader standard? 

Mr. KELLIHER. Excuse me? 

Mr. STUPAK. A broader standard? 

Mr. KELLIHER. We have, I think it is fair to say, a lower standard, where reckless disregard is sufficient to constitute intent for 

a FERC manipulation case. That is because Congress 2 years ago 

gave us securities Laws to model, not commodities Law. 

Mr. STUPAK. OK. Mr. Walden, anything further? 

Mr. WALDEN. I do, Mr. Chairman. I think we are all trying to 

figure out how much speculators may or may not—manipulation. 

I will get the term correct here. How much manipulation may or 

may add to the price of natural gas or oil. And these Energy Information Administration testified recently, I guess it was yesterday, 

and said they believe supply and demand fundamentals, including 

strong world economic growth driving and increasing consumption, 

moderate non-organization of petroleum-exporting countries, OPEC 

supply growth, OPEC members’ production decisions, low OPEC 

spare production capacity, tightness in global commercial inventories, worldwide refining bottlenecks, and ongoing geopolitical 

213 

risk, and concerns about supply availability have been the main 

drivers of oil price movements over the past several years. Do you 

concur with that statement? 

Mr. LUKKEN. Well, our staff that look at these markets agree 

that fundamentals are very tight right now in these markets. You 

look at supply, storage, geopolitical risk where those production facilities are, demand from India and China. There are lots of reasons fundamentally why those markets are tight and why prices 

are high. Having said that, we still make sure that controls are in 

place to look for excessive speculation by any individual that tries 

to take advantage of this tightness and move the markets, try to 

manipulate them. 

That is why we have position limits. That is why we get position 

trader data on a daily, real-time basis from these folks, to see if 

this is occurring. So, yes, the fundamentals are tight. We follow 

speculation closely, and we have controls in place to make sure manipulation does not occur. 

Mr. WALDEN. Let me ask you this, because I believe it was Mr. 

Cota, is that right, who testified earlier, said that we were at 5- 

year highs in supply. Is that accurate, and is it that demand is also 

still exceeding even that 5-year estimate? I may have gotten the 

data wrong. Maybe it is 5-year supply in storage. 

Mr. LUKKEN. I have just been informed by our chief surveillance 

economist that crude oil storage is actually going down. I think 

Mr.—was it Kato? 

Mr. WALDEN. Cota. 

Mr. LUKKEN. Cota, I am sorry. 

Mr. WALDEN. I am sorry. My apologies. 

Mr. LUKKEN. I should know that. I think he was talking about 

heating oil. But as far as crude oil, storage has been going down. 

Mr. WALDEN. And natural gas? Where are we in terms of the 

supply/demand curve on that? 

Mr. LUKKEN. We actually have lots of natural gas right now. We 

are at record highs, predictions of a warmer winter, no hurricanes 

activity coming into last year has allowed supplies to increase. So, 

it’s a much more comfortable situation on the natural gas. 

Mr. WALDEN. So is the price going down then? 

Mr. LUKKEN. Prices are at a lower level than historically for natural gas. 

Mr. WALDEN. Do you know what they are at right now in the 

U.S.? 

Mr. KELLIHER. Seven-dollar range. 

Mr. WALDEN. That is still a lot higher than it used to be, right? 

I mean it seemed to me we ran a $2 to $3 natural gas for a long 

time. I mean, I am glad it is down, but I hate to think we are 

cheering at $7. 

Mr. KELLIHER. It is lower than what it was before the hurricanes. Before Hurricanes Katrina and Rita, natural gas prices had 

climbed significantly, and then they went very high after the hurricanes. But they haven’t quite retreated to where they were a number of months before the hurricanes. 

Mr. WALDEN. And when do we think that might happen, if even? 

Mr. KELLIHER. It may not happen. 

Mr. WALDEN. And the reason for that? 

214 

Mr. KELLIHER. North American natural gas supply is no longer 

sufficient to meet North American gas demand. 

Mr. WALDEN. And what happens if Congress enacts some sort of 

cap and trade system on especially coal? Do you see a shift then 

to natural gas as a replacement source of power for coal? I read a 

story recently that the number of coal plants that have been put 

on hold that were planned to be constructed. Are you seeing that 

trend? 

Mr. KELLIHER. We are seeing that as well. Some coal plants are 

still being considered. Some are being approved, but there has been 

very wide scale cancellation of coal plants. And the Commission 

looked at this actually fairly recently, and we have looked at under 

any scenario, any climate change scenario. Well, under any climate 

change scenario, natural gas use will go up in the United States. 

And it—— 

Mr. WALDEN. And that is because the pressure will be to reduce 

coal as a fuel source for electricity? 

Mr. KELLIHER. For a number of reasons. First of all, if you look 

at nuclear plants, they have a long lead time, for example. Coal 

plants, some of the technology is not yet available. Some of, you 

know, the sequestration. 

Mr. WALDEN. Compression. 

Mr. KELLIHER. Some of the technologies are not available now. 

Mr. WALDEN. Right. 

Mr. KELLIHER. Wind, a lot of the wind potential is tied to transmission expansions. 

Mr. WALDEN. Right. 

Mr. KELLIHER. If you want to see wind expansion in this country, 

we need to build a lot more transmission. 

Mr. WALDEN. Thank you. 

Mr. KELLIHER. And transmission has a long lead time. So if you 

add it all up, it really means we are placing a very big bet on natural gas prices for the next 10 years, the availability of supply as 

well as the price of supply, and that is something that is important 

to understand as Congress—— 

Mr. WALDEN. And have your economists projected, given us some 

models about what we can anticipate natural gas prices to be based 

on different scenarios of cap-and-trade. 

Mr. KELLIHER. We have not. I think there probably are other estimates, but we have not estimated that. 

Mr. WALDEN. OK, I think that is something eventually we are 

going to need, especially if Congress is going to mark up some sort 

of cap and trade climate change legislation, whether it is the 

straight carbon tax like Mr. Dingell, our Chairman, proposed at 50 

cents per gallon of gasoline, or whether it is some other shift. 

And then I think we have to remember—I understand that electricity produced from natural gas still emits about two-thirds the 

amount of carbon that coal-produced electricity emits. So I mean 

you are reducing a third, but you are really shifting the market to 

a commodity that is in great demand now. And its resource is far 

more limited than coal, correct? 

Mr. KELLIHER. Yes, sir, I think that is true. 

Mr. WALDEN. All right, are you starting to see in the market any 

speculation, the good speculation—I won’t go to manipulation—but 

215 

using your terms, to begin to hedge for what may happen either 

globally or nationally when it comes to carbon and carbon emissions and some sort of restrictions on them? 

Mr. LUKKEN. Well, I think part of the carbon gets to the energy 

question, which is what you are referring to. And we are seeing 

greater liquidity in out months of exchanges so that people are now 

trading further into the future to hedge that risk, which is beneficial for the marketplace. They can lock down prices in order to 

manage their risk. 

We also regulate an exempt market in this space, the Chicago 

Climate Exchange, which is a voluntary exchange organization. It 

gets participants who produce carbon to sign up and to trade that 

carbon on a volunteer contractual basis. And certainly that is a 

working example going forward that Congress should study when 

they are looking at these type of cap-and-trade systems. 

Mr. WALDEN. All right. Thank you, Mr. Chairman. You have 

been most generous with the excess time. 

Mr. STUPAK. One more, if I may. Mr. Lukken, CFTC’s principles 

include position limits for look-alike contracts on ICE, such as natural gas swaps. And that is what was marked up today, you said, 

in the Ag Committee? 

Mr. LUKKEN. It is product neutral, so whatever the contract 

might be. 

Mr. STUPAK. OK, explain the economic rationale for including position limits then on financially settled contracts. Is that so you 

don’t have excess speculation? 

Mr. LUKKEN. Well, because they can influence the physical contract, they are based somewhat on the price of the physical contract, that is why we require accountability limits, I think, on the 

financials actually and position limits on the physical contracts in 

New York. So this would treat these contracts comparable to how 

they are treated on a regulated exchange currently. 

Mr. STUPAK. OK. Go to tab 16 there in the book there. So we 

talked about ICE, and it is basically a UK trading there. It is foreign boards of trade receiving staff no-action letters permitting direct access from the U.S. And there is a number of them. Like the 

first one, Montreal. Do they have position limits? 

Mr. LUKKEN. I might have the wrong tab here. 

Mr. STUPAK. 16. 

Mr. LUKKEN. I have the—— 

Mr. STUPAK. You got the wrong one. 

Mr. LUKKEN. Report on enforcement. I will double check here. 

Mr. STUPAK. Hang on. We may have the wrong one for you. We 

will have someone bring it down to you. We will have Kyle bring 

it down to you, Mr. Lukken. 

Mr. LUKKEN. OK. 

Mr. STUPAK. I am not sure you have the right one. We have two 

binders up here, investigative binder and exhibit binder. So all 

these have no-action letters. So I think we pretty much established 

that ICE, probably about the eighth one down, ICE Futures Europe, they have—that is UK—they have similar as us. 

But what about the other ones, like Montreal here, Dubai, 

Frankfort, Zurich, Amsterdam, Paris, Leipzig, Hong Kong. You go 

216 

to the next page. You go Sydney, Australia, Singapore, Tokyo, Alberta, Mexico City, Barcelona. Do they have position limits? 

Mr. LUKKEN. I think some do, some don’t. This is again, these 

have been issued over a series of over 10 years since 1996, I think 

was the first one. Again, we go through a full-blown analysis by 

our staff looking at the regulatory regime that is requesting this 

as well as the exchange itself, whether it has rules in place to prevent manipulation and look for this type of activity. Many of these 

are conditioned on certain authorities that we receive, most recently the FSA document. We require them to give us large trader 

information. 

So we can tailor these to make sure that they are based on risk 

that we are getting the information we need to conduct our mandate. 

Mr. STUPAK. Well, I started to say that if they are large traders 

and there is no position limits, it opens it up for possibly more 

speculation, correct? 

Mr. LUKKEN. Well, even though there are no position limits, we 

still see the positions. So we have the ability, if we see a large position that concerns us—it may not be a per se violation, more than 

500 contracts, but if it is above a level that may draw concern by 

our economists, we are willing to call these people up, talk to the 

UK authorities about it. We are looking at this. It is just that the 

position limits, the hard limits that some of our exchanges have in 

place aren’t in place in the UK. 

Mr. STUPAK. Well, how do you set that? How do you determine 

under section 6A that we talked about earlier in the first panel, 

speculation if you don’t have the jurisdiction over them? You see 

what I am trying to say? If they have the letters, then you really 

don’t have a lot of jurisdiction over it. Then how do you know if 

you get to that excessive speculation? 

Mr. LUKKEN. We do have jurisdiction over these entities. We are 

able to go in and take enforcement action against a U.S. trader, 

performing a manipulation on a different market that may affect 

our markets. That is within the reach of our jurisdiction. 

Mr. STUPAK. Even on the foreign boards of trade? 

Mr. LUKKEN. Yes. 

Mr. STUPAK. But they have to have some kind of action in the 

U.S., do they not? 

Mr. LUKKEN. Well, normally that is when our interests arise, yes. 

If there is a U.S. customer trader—— 

Mr. STUPAK. Or use a computer terminal in United States? 

Mr. LUKKEN. Well, the computer terminal in this case, I mean 

it is mostly U.S. access so it is U.S. participants. We have not been 

given a situation where it is only a U.S. computer terminal. 

Mr. STUPAK. So the access of the U.S. would be if it was intended 

to reach the U.S. shores, the product? 

Mr. LUKKEN. If it had an impact on our markets, we work closely 

with the United Kingdom to try to go after that activity. 

Mr. STUPAK. Well, I know UK, but I am talking about the other 

ones like Dubai or Singapore. 

Mr. LUKKEN. We just sent a couple of employees from our enforcement staff to Dubai to investigate some dealings there. So it 

217 

certainly is something that we closely correlate with all these jurisdictions. 

Mr. STUPAK. So any trade, future trade, as long as it has some 

nexus to the United States would be subject to your jurisdiction 

and enforcement? 

Mr. LUKKEN. I am not sure legally how far we have tested this. 

But certainly if we have a nexus to our markets or U.S. customers, 

we will try to pursue that. And if not, we will work closely with 

our foreign regulatory counterparts to go after that activity. 

Mr. STUPAK. I was thinking more if this committee wrote something that gave you very, very broad nexus, computer terminal and 

intended shipment started for U.S., to give as much jurisdiction as 

we can to have enforcement action to take the excessive speculation 

out of these prices. 

Mr. LUKKEN. I would be cautious. I mean, you have to understand that many of the products traded here in the United States, 

the largest product traded in the United States is the Chicago Mercantile Exchange Euro Dollar contract, a product that is based on 

the London, the Libor rate of interest rate. Certainly any action 

that we try to impose—jurisdictional authorities over things traded 

elsewhere, there may be the possibility of reciprocal action by foreign authorities limiting access to those products. 

Mr. STUPAK. Understood. Mr. Walden, anything further? 

Mr. WALDEN. No. 

Mr. STUPAK. With that, let me thank both of you for your time 

and your patience today with us. And thank you for your testimony. 

That concludes our questions. I want to thank all of our witnesses for coming today and for your testimony. I ask unanimous 

consent that our hearing record remain open for 30 days for additional questions for the record. 

Without objection the record will remain open. I ask unanimous 

consent that the contents of our document binder be entered into 

the record. Without objection, they will be entered. 

That concludes our hearing. This meeting of the subcommittee is 

adjourned. 

[Whereupon, at 2:38 p.m., the subcommittee was adjourned.] 

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