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74–855 2012

IMPACTS OF H.R. 3795, ‘‘THE OVER-THE-COUNTER 

DERIVATIVES MARKET ACT OF 2009,’’ ON 

ENERGY MARKETS 

HEARING 

BEFORE THE

SUBCOMMITTEE ON ENERGY AND ENVIRONMENT 

OF THE

COMMITTEE ON ENERGY AND 

COMMERCE 

HOUSE OF REPRESENTATIVES 

ONE HUNDRED ELEVENTH CONGRESS 

FIRST SESSION 

DECEMBER 2, 2009 

Serial No. 111–84 

( 

Printed for the use of the Committee on Energy and Commerce 

energycommerce.house.gov 


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COMMITTEE ON ENERGY AND COMMERCE 

HENRY A. WAXMAN, California, Chairman 

JOHN D. DINGELL, Michigan 

Chairman Emeritus 

EDWARD J. MARKEY, Massachusetts 

RICK BOUCHER, Virginia 

FRANK PALLONE, JR., New Jersey 

BART GORDON, Tennessee 

BOBBY L. RUSH, Illinois 

ANNA G. ESHOO, California 

BART STUPAK, Michigan 

ELIOT ENGEL, New York 

GENE GREEN, Texas 

DIANA DEGETTE, Colorado 

Vice Chairman 

LOIS CAPPS, California 

MICHAEL F. DOYLE, Pennsylvania 

JANE HARMAN, California 

TOM ALLEN, Maine 

JANICE D. SCHAKOWSKY, Illinois 

CHARLES A. GONZALEZ, Texas 

JAY INSLEE, Washington 

TAMMY BALDWIN, Wisconsin 

MIKE ROSS, Arkansas 

ANTHONY D. WEINER, New York 

JIM MATHESON, Utah 

G.K. BUTTERFIELD, North Carolina 

CHARLIE MELANCON, Louisiana 

JOHN BARROW, Georgia 

BARON P. HILL, Indiana 

DORIS O. MATSUI, California 

DONNA M. CHRISTENSEN, Virgin Islands 

KATHY CASTOR, Florida 

JOHN P. SARBANES, Maryland 

CHRISTOPHER S. MURPHY, Connecticut 

ZACHARY T. SPACE, Ohio 

JERRY MCNERNEY, California 

BETTY SUTTON, Ohio 

BRUCE L. BRALEY, Iowa 

PETER WELCH, Vermont 

JOE BARTON, Texas 

Ranking Member 

RALPH M. HALL, Texas 

FRED UPTON, Michigan 

CLIFF STEARNS, Florida 

NATHAN DEAL, Georgia 

ED WHITFIELD, Kentucky 

JOHN SHIMKUS, Illinois 

JOHN B. SHADEGG, Arizona 

ROY BLUNT, Missouri 

STEVE BUYER, Indiana 

GEORGE RADANOVICH, California 

JOSEPH R. PITTS, Pennsylvania 

MARY BONO MACK, California 

GREG WALDEN, Oregon 

LEE TERRY, Nebraska 

MIKE ROGERS, Michigan 

SUE WILKINS MYRICK, North Carolina 

JOHN SULLIVAN, Oklahoma 

TIM MURPHY, Pennsylvania 

MICHAEL C. BURGESS, Texas 

MARSHA BLACKBURN, Tennessee 

PHIL GINGREY, Georgia 

STEVE SCALISE, Louisiana 

(II) 


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(III) 

SUBCOMMITTEE ON ENERGY AND ENVIRONMENT

EDWARD J. MARKEY, Massachusetts, Chairman 

MICHAEL F. DOYLE, Pennsylvania 

G.K. BUTTERFIELD, North Carolina 

CHARLIE MELANCON, Louisiana 

BARON P. HILL, Indiana 

DORIS O. MATSUI, California 

JERRY MCNERNEY, California 

PETER WELCH, Vermont 

JOHN D. DINGELL, Michigan 

RICK BOUCHER, Virginia 

FRANK PALLONE, JR., New Jersey 

ELIOT L. ENGEL, New York 

GENE GREEN, Texas 

LOIS CAPPS, California 

JANE HARMAN, California 

CHARLES A. GONZALEZ, Texas 

TAMMY BALDWIN, Wisconsin 

MIKE ROSS, Arkansas 

JIM MATHESON, Utah 

JOHN BARROW, Georgia 

RALPH M. HALL, Texas 

FRED UPTON, Michigan 

ED WHITFIELD, Kentucky 

JOHN SHIMKUS, Illinois 

JOHN B. SHADEGG, Arizona 

STEVE BUYER, Indiana 

GREG WALDEN, Oregon 

SUE WILKINS MYRICK, North Carolina 

JOHN SULLIVAN, Oklahoma 

MICHAEL C. BURGESS, Texas 


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(V) 

C O N T E N T S 

Page 

Hon. Edward J. Markey, a Representative in Congress from the Commonwealth of Massachussetts, opening statement ................................................... 1 

Hon. Henry A. Waxman, a Representative in Congress from the State of 

California, opening statement ............................................................................. 3 

Hon. Fred Upton, a Representative in Congress from the State of Michigan, 

opening statement ................................................................................................ 4 

Hon. John D. Dingell, a Representative in Congress from the State of Michigan, prepared statement ...................................................................................... 5 

Hon. Cliff Stearns, a Representative in Congress from the State of Florida, 

opening statement ................................................................................................ 6 

Hon. Michael F. Doyle, a Representative in Congress from the Commonwealth 

of Pennsylvania, opening statement ................................................................... 7 

Hon. Steve Scalise, a Representative in Congress from the State of Louisiana, 

opening statement ................................................................................................ 8 

Hon. Doris O. Matsui, a Representative in Congress from the State of California, opening statement .................................................................................... 9 

Hon. G.K. Butterfield, a Representative in Congress from the State of North 

Carolina, opening statement ............................................................................... 9 

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

prepared statement .............................................................................................. 114 

Hon. Joe Barton, a Representative in Congress from the State of Texas, 

prepared statement .............................................................................................. 116 

WITNESSES

Jon Wellinghoff, Chairman, Federal Energy Regulatory Commission ................ 11 

Prepared statement .......................................................................................... 13 

Gary Gensler, Chairman, Commodity Futures Trading Commission ................. 19 

Prepared statement .......................................................................................... 21 

Elizabeth A. Moler, Executive Vice President, Government Affairs and Public 

Policy, Exelon Corporation on behalf of the Edison Electric Institute ............ 48 

Prepared statement .......................................................................................... 50 

Patrick McCullar, President and CEO, Delaware Municipal Electric Corporation, on behalf of the American Public Power Association ............................... 59 

Prepared statement .......................................................................................... 61 

Glenn English, CEO, National Rural Electric Cooperative Association ............. 69 

Prepared statement .......................................................................................... 71 

John Shelk, President and CEO, Electric Power Supply Association ................. 75 

Prepared statement .......................................................................................... 77 

Vincent Duane, Esquire, General Counsel, PJM Interconnection, Inc. .............. 86 

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


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(1) 

IMPACTS OF H.R. 3795, ‘‘THE OVER-THECOUNTER DERIVATIVES MARKET ACT OF 

2009,’’ ON ENERGY MARKETS 

WEDNESDAY, DECEMBER 2, 2009 

SUBCOMMITTEE ON ENERGY AND ENVIRONMENT, 

COMMITTEE ON ENERGY AND COMMERCE, 

HOUSE OF REPRESENTATIVES, 

Washington, DC. 

The Subcommittee met, pursuant to call, at 1:22 p.m., in Room 

2322 of the Rayburn House Office Building, Hon. Edward J. Markey [Chairman of the Subcommittee] presiding. 

Members present: Representatives Markey, Doyle, Inslee, 

Butterfield, Matsui, McNerney, Welch, Dingell, Waxman (ex officio), Stupak, Upton, Stearns, Shimkus, Walden, and Scalise. 

Staff present: Bruce Wolpe, Senior Advisor; Greg Dotson, Chief 

Counsel, Energy and Environment; John Jimison, Senior Counsel; 

Jeff Baran, Counsel; Joel Beauvais, Counsel; Melissa Cheatham, 

Professional Staff Member; Caitlin Haberman, Special Assistant; 

Lindsay Vidal, Special Assistant; Mitchell Smiley, Special Assistant; Andrea Spring, Minority Professional Staff Member; Aaron 

Cutler, Minority Counsel; and Sam Costello, Minority Legislative 

Analyst. 

OPENING STATEMENT OF HON. EDWARD J. MARKEY, A REPRESENTATIVE IN CONGRESS FROM THE COMMONWEALTH 

OF MASSACHUSETTS 

Mr. MARKEY. Welcome to the Subcommittee on Energy and Environment and this very important hearing. 

As early as next week, the House will vote on legislation to 

strengthen the oversight of financial derivatives markets. This legislation provides the Commodities Futures Trading Commission a 

broad new authority to regulate over-the-counter trading in derivatives. This reform is long overdue. 

Over the past 2 years, we have once again learned the hard way 

that deregulation of financial markets is a recipe for robbery and 

ultimately recession. I have long supported tough regulation of derivatives beginning in the late 1980s when I chaired what was then 

the Subcommittee on Telecommunications and Finance. In the 

early 1990s, I chaired the first Congressional hearings on the potential for over-the-counter derivatives to create systemic risk in 

global financial markets, and I warned of the risks that unregulated derivative dealer like AIG and Bear Stearns could pose for 

those markets. 


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I have also worked to strengthen competition and oversight in 

electricity markets. I was the author of the transmission access 

provisions of the Energy Policy Act of 1992, which promoted competition by requiring transmission owners to provide independent 

power providers with access to the grid. In the Energy Policy Act 

of 2005, I was amongst the principal supporters of the provision 

that gave the Federal Energy Regulatory Commission authority to 

protect against fraud and manipulation in electricity and natural 

gas markets. 

So today’s hearing isn’t about whether or not we need strong 

oversight of energy markets; clearly, we do. It is about getting regulation right. We must ensure that financial regulatory reform 

doesn’t disrupt FERC’s ability to properly structure and oversee organized energy markets. Otherwise, we will undermine FERC’s 

ability to ensure reliable and affordable service for American consumers. We must not let this effort to solve one crisis, create yet 

another. 

The derivatives bill reported by the Agriculture Committee 

threatens to do just that. The bill’s definition of swap is so broad 

that it is likely to cover a number of FERC-related products, including but not limited to Financial Transmission Rights that play 

a key role in the functioning of the organized electricity markets. 

These products are inextricably linked to the physical operation of 

the grid and they exist only because FERC has approved their 

terms and conditions. Congress has given FERC strong authority 

to protect against manipulation of these markets and there is 

broad agreement that FERC has exercised that authority thoroughly and competently. Nevertheless, under the pending derivatives bill, anything that falls within the definition of a swap is 

under the exclusive jurisdiction of the CFTC, and CFTC has no authority to exempt any swap from the full set of regulations that 

apply to financial markets. 

What is the upshot of all of this? Well, FERC could be excluded 

from regulating the very markets it has created to ensure a reliable 

and affordable supply of electricity. In FERC’s place would be substituted the CFTC, an agency with no expertise in this area. Such 

an outcome is unacceptable. 

Chairman Waxman and I have proposed a straightforward and 

reasonable solution. First, the derivatives legislation should fully 

preserve FERC’s existing statutory authority. Second, whether 

FERC and CFTC have overlapping authority, the two agencies 

should conclude a Memorandum of Understanding that sets the 

boundaries of their respective authority so as to ensure effective 

regulation. And third, in any area where the two agencies agree 

that FERC should have primacy, CFTC should be allowed to decline to exercise its regulatory authority. 

We will be working in the coming days to ensure that a resolution along these lines can be reached before the derivatives bill is 

brought to the House floor. We expect that the members of the subcommittee and the full committee will play an active role in this 

discussion. This afternoon’s hearing will help us to flesh-out the 

issues and potential solutions. 

I thank the witnesses for their participation, especially the two 

chairmen who are sitting in front of us. They are working hard in 


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trying to find a way of resolving these issues. We appreciate their 

efforts. 

Let me now turn and recognize the ranking member of the subcommittee, the gentleman from Michigan, Mr. Upton. 

Mr. UPTON. Thank you, Mr. Chairman, and just because the 

hearing started late, I want to defer my opening statement and I 

will defer to Mr. Shimkus. 

Mr. MARKEY. The gentleman is recognized for that purpose. 

Mr. SHIMKUS. Thank you and I want to thank my friend, Fred 

Upton. I have got to go over to the Capitol floor meeting on the Illinois Gitmo so that is where I am headed from here. 

Thousands of companies use derivatives to manage risk. There 

are winners and losers in the market. One aspect of this bill is 

transparency and our focus on does this bill achieve this at the cost 

of the marketplace. With this bill that the Ways and Means and 

Ag have both passed, are we making it more difficult for these companies to manage risk? I have talked with many and this will cost 

them more and prices will go up. Will the CFTC and FERC both 

have jurisdiction? Will it be shared? One has in some instances, 

one in others. Does this bill make this clear or is this burdensome 

with the CFTC and the FERC or companies dealing in derivatives? 

Are any of these completely capable of this request and can they 

afford new cost placed upon them? 

This is an important hearing, Mr. Chairman. We need to fix the 

agencies. We don’t need to create new ones and we will be focusing 

on that. 

I yield back my time. I thank Fred for the yielding. 

Mr. MARKEY. The gentleman’s time has expired. 

The chair recognizes the Chairman of the full committee, the 

gentleman from California, Mr. Waxman. 

OPENING STATEMENT OF HON. HENRY A. WAXMAN, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF CALIFORNIA 

Mr. WAXMAN. Thank you very much, Mr. Chairman. 

Today we are examining whether the derivatives reform legislation reported out of the House Agriculture Committee could disrupt 

the Federal Energy Regulatory Commission’s current regulation of 

critical regional electricity markets. The pending legislation is intended to bring greater transparency and accountability to derivative markets. I absolutely support that goal however the bill’s 

broad definition of swaps is so inclusive that it threatens to displace comprehensive FERC regulation over regional electricity market products. The bill could be read to assign exclusive and mandatory authority over those products to the Commodities Futures 

Trading Commission. 

In 2000 and 2001, California experienced a severe energy crisis. 

There were blackouts. There was economic chaos. Energy prices in 

the State skyrocketed. We were being victimized by unscrupulous 

traders in both power and transmission rights. FERC, at the time, 

was soundly asleep and unresponsive to the alarms we raised. But 

in the wake of that California energy crisis, Congress amended and 

Mr. Markey indicated he was the author, changes in the Federal 

Power Act to give FERC authority to prevent and punish fraud in 


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market manipulation. We thought FERC had that authority but 

during that period of time, they claimed they needed clearer statutory authority. Well, if the legislation reported out of the Agriculture Committee is not adjusted to preserve the authority of 

FERC, it could undermine authorities that Congress gave FERC in 

the aftermath of that energy crisis to investigate and penalize market manipulation. 

FERC has strengthened its monitoring and enforcement practices. No one, including the CFTC or sponsors of H.R. 3795, has 

suggested to us that the current regulatory regime to prevent market manipulation or abuse in FERC’s organized regional markets 

is broken, so we need to ensure that efforts to strengthen derivative regulation don’t weaken existing regulation. Before H.R. 3795 

is considered on the House floor, members need to understand how 

it would affect the organized regional markets FERC has created 

and comprehensively regulated pursuant to detailed tariffs. These 

markets not only exist because FERC created them, the products 

traded in these markets are directly linked to the physical limits 

of the transmission system and are not traded on broad exchanges. 

We need to make sure that the legislation doesn’t unintentionally 

displace FERC as the regulator of the markets FERC has created. 

This hearing is an important opportunity for us to find out what 

impact the proposed legislation may have on these critical markets 

and what changes to the legislation may be appropriate. I appreciate the expert witnesses here to help us understand its implications. Our committee has a tradition of acting only on the basis of 

a thorough understanding of the issues before it and I believe we 

can help to improve H.R. 3795 before it is voted upon. And I believe we are going to need changes in that legislation that is reported out of the Agriculture Committee to make sure that we 

don’t have consequences that would be harmful to what the good 

job that FERC is doing in this regard and should continue to be 

able to do. 

Thank you, Mr. Chairman. 

Mr. MARKEY. Gentleman’s time has expired. 

The chair once again recognizes the ranking member, Mr. Upton. 

OPENING STATEMENT OF HON. FRED UPTON, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF MICHIGAN 

Mr. UPTON. Thank you, Mr. Chairman, and I do appreciate having this important hearing today. 

We have two very distinguished panels and we are fortunate to 

be able to hear their thoughts and concerns for the legislation. H.R. 

3795 as reported out of the Ag Committee has some serious flaws 

that would negatively impact the energy sector and I, like many 

members of this subcommittee, oppose the legislation in its current 

form, and it is my understanding that both Mr. Waxman, Mr. Markey, Mr. Barton do share my concerns and I hope that we can work 

together to change the bill before it is brought to the House floor 

as early as next week. 

As written, H.R. 3795 could lead to an increased energy cost for 

all Americans and disrupt our nation’s energy markets. By limiting 

access to certain risk management tools as this legislation does, the 

ability of energy providers to hedge their market risks would be 


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jeopardized and their customers would be vulnerable to increased 

price volatility. I understand that there is an appetite among many 

of my colleagues to create new regulations to curb systemic risk in 

the economy as a whole but this legislation engulfs markets that 

are working properly, and in doing so creates new problems that 

our economy and energy consumers do not need during these very 

difficult times. 

The legislation will undermine authorities that Congress gave 

FERC to investigate and penalize market manipulation. As part of 

the Energy Policy Act of ’05, FERC was given the authority to protect electric and natural gas markets against manipulation or fraud 

by ensuring the transparency of those markets. FERC’s ability to 

exercise these authorities to the full extent Congress intended 

would be in question with the passage of this bill. 

Additionally, under current law, FERC regulates interstate 

transmission and sale of electricity to ensure that electricity prices 

are just and reasonable. However, this legislation would disrupt 

transmissions markets by creating what would amount to contradictory regulation by the CFTC. So this bill, H.R. 3795 in current form I don’t believe is ready for primetime and I would hope 

that in the tough times of double-digit unemployment and a sagging economy as we try to get our businesses back to work and employing folks that this legislation will not move as it is. Let us work 

together to get it right. 

I look forward to the testimony and questions and I yield back. 

Mr. MARKEY. Gentleman’s time has expired. 

The chair now recognizes the gentleman from Michigan, Mr. Dingell. I recall vividly the gentleman from Michigan back in 2005, 

and the energy conference fighting vigorously in that conference 

committee to ensure that the anti-fraud, anti-manipulation language was included in that legislation and to a very large extent, 

that is at the core now of what we are debating. So since I have 

a vivid memory of that battle and it was the gentleman from 

Michigan who was leading the fight, I yield him the time for an 

opening statement. 

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

Mr. DINGELL. Thank you, Mr. Chairman, and I very much appreciate your kind remarks. I will commend you for holding this hearing which I view as very important. If H.R. 3795, the Over-TheCounter Derivatives Act of 2009 is acted upon without significant 

input from the Committee on Energy and Commerce, much of the 

work that has been done by this committee over the years going 

back to before I was in this body to back when Sam Rayburn was 

Speaker, will be undone, and FERC will probably lose significant 

authority to protect electric and natural gas markets against fraud 

and manipulation, and worse then that, consumers will be denied 

protection of a consumer protection agency in favor of an agency 

that has a long tradition of failure in protecting consumers. So 

thank you for doing this hearing today, Mr. Chairman. 

Most recently in the Energy Policy Act of 2005, as you mentioned, the Congress acting on the suggestions of this committee 


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gave broad authorities to FERC to protect against fraud and market manipulation to ensure price transparency in the electricity 

and natural gas markets. That has worked well and I look forward 

to hearing from Chairman Wellinghoff of FERC on the various 

oversight mechanisms that FERC has in place to ensure proper 

functioning of various markets. Collaterally, we will look forward 

to hearing our other witness tell us why it is that he can do better. 

If H.R. 3795 were enacted into law without further amendment, 

there is a serious potential that many of the instruments used and 

organized in regional electric markets and currently regulated by 

FERC would either be displaced by the Commodities Futures Trading Commission or confusing overlaps and conflicts would be created. In the past, such conflicts have led to FTC and a hedge fund 

jointly litigating to strip FERC of its consumer protection authorities. This would not seem to be beneficial then to consumers and 

it has been a matter of bipartisan concern as today’s record will 

show. In fact, one of our witnesses today will testify that consumers would see a rate increase of 5 to 15 percent if these activities are forced into exchanges. 

Following the energy bubble price in natural gas and electricity 

markets during 2008, FERC economists found that this was caused 

in significant part by excessive speculation in futures and derivatives markets for natural gas. We will want to hear from the chairman of CFTC what they did about those matters at that time. 

Likewise, it was FERC that discovered a sharp spike in speculative 

activity in natural gas futures that led to the prosecution of the 

hedge fund, Amaranth Advisors. FERC’s admission is simple, assist 

consumers in obtaining reliable and efficient energy services at a 

reasonable cost through appropriate regulatory and market mechanisms. However, when one considers the complexity of such task, 

it is critically important that the agency with years of experience 

and understanding of energy markets and a fine staff expertise required to carry out such a task, should be allowed to continue its 

successful work. We will also want to inquire as to why we have 

need of new intrusion into these matters by an agency without any 

prior expertise in these matters. 

I thank you, Mr. Chairman. 

Mr. MARKEY. The gentleman’s time has expired. 

The chair recognizes the gentleman from Florida, Mr. Stearns. 

OPENING STATEMENT OF HON. CLIFF STEARNS, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF FLORIDA 

Mr. STEARNS. Thank you very much, Mr. Chairman. 

I think the consensus on both sides is that FERC has done a 

good job of closely regulating and monitoring the regional transmission organizations and independent systems operator through 

the use of tariffs and audits and investigations and they should, I 

think the consensus is at least both parties here that they should 

remain the sole regulatory authority over such markets. However, 

obviously this bill acts in such a way to establish a new and I believe overly expansive definition of swap that would give the Commodity Futures Trading Commission this exclusive authority over 

a number of transactions that are already extensively regulated by 

FERC. 


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Now, the regulation by FERC for 15 years here has been successful and, my colleagues, the products that they regulate did not contribute to the meltdown so it is not clear to me why we are moving 

forward on this. We all agree that transparency is important. Accountability and stability in the nation’s financial market is important to minimize systematic risk and prevent another financial crisis but the organized power in the markets and the FERC regulatory system did not cause this meltdown. Any over-the-counter 

derivative legislation should address problems associated with unregulated financial derivatives and not inadvertently include FERC 

regulated markets that do not involve this type pf risk that this 

legislation is proposing. Continued unhindered operation of our energy markets are vital obviously to meeting our electricity needs of 

millions of Americans and obviously many of us don’t see there is 

a need for a major shift in the oversight of these markets. 

So I think, Mr. Chairman, you and Mr. Waxman and Mr. Upton 

have all voiced this clearly and I think that it is very good that we 

have a hearing and confirm that we all believe. 

Mr. MARKEY. We thank the gentleman very much. 

The chair recognizes the gentleman from Pennsylvania, Mr. 

Doyle. 

OPENING STATEMENT OF HON. MICHAEL F. DOYLE, A REPRESENTATIVE IN CONGRESS FROM THE COMMONWEALTH 

OF PENNSYLVANIA 

Mr. DOYLE. Mr. Chairman, thank you for holding this hearing 

and inviting all of the important stakeholders to provide their testimony today. 

In particular, I am happy to see Vincent Duane from PJM here 

today. As you know, PJM is the regional transmission organization 

that keeps the lights on in my district and I think it is important 

to get their input on how this bill will affect them. 

I am glad we are holding this hearing today to bring attention 

to some potential unintended consequences of reforming our financial regulatory system. It was only a year ago that our financial 

system was on the edge of grinding to a halt. Though there were 

many contributing factors, lack of regulations in our commodities 

market undoubtedly added to the problem. 

I applaud my colleagues, the chairman of the House Financial 

Services and Agriculture Committee, for their work on this legislation to remedy the poor regulation of over-the-counter derivatives 

and force irresponsible speculators out of the market. However, in 

their attempt to be thorough, I am concerned that my colleagues 

have overlooked a duplicative effect that this bill could have on energy markets at the end of the day, rate payers, also. 

Since the creation of regional transmission organizations, FERC 

has had a responsibility to monitor energy markets in each RTO 

and review and report on any hint of manipulation or abuse. In 

fact, with the passage of EPACT 2005, we gave FERC even greater 

authority to protect against fraud and abuse in electricity and natural gas markets. Let me be clear, we need to clean up our financial derivatives markets and I think this bill does a good job of getting us there. The CFTC needs to increase oversight and control of 

these financial products and bring more transparency to the swaps 


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market. We just need to be sure that it doesn’t inadvertently require our RTOs to endure another layer of regulation that would 

keep them from providing electricity to consumers at competitive 

rates. 

I look forward to the testimony from all our distinguished witnesses and hope that we can produce an excellent bill to bring to 

the floor. With that, Mr. Chairman, I will yield back my time. 

Mr. MARKEY. Gentleman’s time has expired. 

The chair recognizes the gentleman from Louisiana. 

OPENING STATEMENT OF HON. STEVE SCALISE, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF LOUISIANA 

Mr. SCALISE. Thank you, Mr. Chairman. 

I am strongly in favor of pursuing policies that prevent another 

financial market collapse from occurring and I strongly support increasing transparency and oversight in our financial markets. However, I have serious concerns about provisions in this bill that will 

raise utility costs on every American family and will ship thousands more American jobs overseas. Derivatives serve many purposes including stabilizing prices and ensuring future deliveries of 

commodities. Market participants also use derivatives to ensure 

that consumers are protected from sudden price hikes and other 

events including natural disaster that can negatively impact costs. 

While I support increasing oversight and transparency to reign in 

the large financial institutions which contributed to the current 

economic crisis, we need to make sure to consider the effects on 

those who play by the rules. 

Mr. Chairman, as with cap and trade and other reckless policies, 

these proposals would kill American jobs and increase costs for 

businesses and families across this country. From the perspective 

of my position on this committee, I have serious concerns about the 

utility rate hikes that will result from provisions in this bill but it 

doesn’t stop there. We are seeing a dangerous trend with this administration and the Democrats running Congress. Provisions in 

this bill will have serious negative impacts on our economy and 

these proposals taken with the cap and trade energy tax and the 

government takeover of healthcare will prohibit our small businesses, those very job creators in our country from getting our 

economy back on track. These reckless policies will result in billions of dollars in new taxes on American families, millions of 

American jobs lost and shipped overseas and the destruction of our 

economy. In this current economic crisis, our focus should be on 

creating new jobs not more reckless policy that run jobs out of our 

country. 

Again, Mr. Chairman, I am strongly in favor of pursuing policies 

to prevent bad players from bringing down our markets in the future and I believe that oversight and transparency are key components to that goal. The American people are asking where are the 

jobs and all they get from this tone-deaf Congress are more radical 

schemes that raise taxes on American families and run more jobs 

out of our country. Enough is enough. 

Thank you and I yield back. 

Mr. MARKEY. Gentleman’s time has expired. 


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The gentlelady from California, Ms. Matsui. 

OPENING STATEMENT OF HON. DORIS O. MATSUI, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF CALIFORNIA 

Ms. MATSUI. Thank you, Mr. Chairman. Thank you for calling today’s hearing. 

I would like to thank today’s panelists for joining us today to discuss legislation that would affect FERC’s jurisdictional markets 

and the transactions and products created for use in these regulated markets. I look forward to hearing all of your expert opinions. 

The expertise you share here will be useful throughout the committee process as we continue to discuss these matters. 

I think all of us here would agree that the recent financial crisis 

revealed serious weaknesses in the U.S. financials regulation. 

While it is critical that we respond to the risky trading strategies 

that nearly brought the American economy to the brink of collapse, 

it is equally crucial that we acknowledge the potential effects that 

legislative efforts to improve transparency and stability in over-thecounter derivatives markets may have on our energy markets, particularly electricity and natural gas. Toward this end, I believe that 

it is important to note that electric utilities and other stakeholders 

have expressed serious concerns about providing the CFTC the authority already possessed by FERC to regulate regional electric 

markets. 

In my district, the Sacramento Municipal Utility District, SMUD, 

enters into natural gas supply contracts and OTC derivative agreements to reduce Sacramento’s exposure to price volatility. Unfortunately, most Californians vividly recall at the beginning of this decade the rationing of electricity which led to an artificial scarcity 

that created opportunities for market manipulation by energy speculators. We cannot allow our best intentions to examine regulatory 

authorities to impair the ability of utilities to employ tools to manage price risk and help keep rates affordable for consumers, and we 

need to continually examine systemic risk and the implications of 

applying certain means of transparency to the derivatives markets. 

I look forward to hearing from the panelists on the bill before us 

today, and working with the committee and stakeholders on these 

important matters. Once again, I thank you, Mr. Chairman, for 

highlighting this important topic and I yield back the balance of 

my time. 

Mr. MARKEY. Thank the gentlelady. 

The chair recognizes the gentleman from North Carolina, Mr. 

Butterfield. 

OPENING STATEMENT OF HON. G.K. BUTTERFIELD, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF NORTH 

CAROLINA 

Mr. BUTTERFIELD. Thank you very much, Mr. Chairman, for convening this important hearing. 

I am not an expert on these matters and I have tried to learn 

as much as I can but from what I can understand, these products 

minimize risk in a capricious system for end users. Unfortunately, 

excessive over-the-counter trading by speculators continues to inVerDate Mar 15 2010 02:37 Sep 19, 2012 Jkt 074855 PO 00000 Frm 00015 Fmt 6633 Sfmt 6633 E:\HR\OC\A855.XXX A855

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crease the risk for system irregularity and unpredictability. I am 

pleased given the number of important domestic priorities vying for 

our attention that Congress is paying close attention to reforming 

the way we regulate derivatives. We simply cannot afford the risk 

of allowing the system to operate like an open casino and I appreciate the work thus far done on this bill by the two committees. 

Still, as the chairman stated it is critical that this subcommittee 

question the imprecise definitions in the bill given the potential 

problems such ambiguity would create for end users. 

Last year, the newspaper in my district reported on the importance of derivative for one of North Carolina’s largest utilities, 

Progress Energy. Manned, round-the-clock progress power traders 

make OTC trades to hedge against risk and find the lowest energy 

prices that are available. These activities are critically important 

to minimize risk. According to our State utility commission officials 

interviewed in the article, electricity rates would be at least double, 

that is double, without the success of Progress’ trading department. 

I mention this to illustrate just how critical these financial instruments are in controlling costs for consumers. I welcome and encourage the transparency this legislation would create and I am 

hopeful that the legislation will be crafted in a way that ensures 

that end users can continue to enjoy these cost-cutting benefits. 

I look forward and thank the witnesses for their testimony today 

and this microphone is not working. 

Mr. MARKEY. Gentleman’s time has expired. 

The chair recognizes the gentleman from Vermont, Mr. Welch. 

Mr. WELCH. I will waive my opening statement. 

Mr. MARKEY. The chair recognizes the gentleman from Washington State, Mr. Inslee. 

I am sorry. I had an obstructed view here. The chair recognizes 

the gentleman from California, Mr. McNerney. 

Mr. MCNERNEY. Thank you, Mr. Chairman, for convening today’s 

important hearing on the potential impacts of H.R. 3795 on energy 

markets. Reforms to our financial regulatory system will affect the 

energy sector and consumers and I appreciate the opportunity to 

hear the perspective provided by our witnesses today. 

As Congress proceeds with financial regulatory reform, it is important that we avoid creating unnecessary bureaucratic or jurisdictional impediments. We should build on the regulatory processes 

that are functioning well, while at the same time fixing flaws in 

the system. I am committed to working with my colleagues, with 

outside experts, with energy stakeholders to ensure that reforms 

increase transparency, protect consumers and allow businesses to 

grow and hire new workers. We should also carefully examine the 

potential consequences that legislative proposals pose for derivatives end users who represent a broad spectrum of businesses 

across America. 

And with that, I will yield back the balance of my time. 

Mr. MARKEY. Gentleman’s time has expired. 

The chair recognizes the gentleman from Washington State, Mr. 

Inslee. 

Mr. INSLEE. I will waive. Thank you, Mr. Chair. 

Mr. MARKEY. And all members of the subcommittee have completed their opening statements and by unanimous consent we will 


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recognize the gentleman from Michigan, Mr. Stupak, to make an 

opening statement. 

Mr. STUPAK. Mr. Chairman, thank you for your courtesy but I 

will waive this opening statement. 

Mr. MARKEY. Great, well, we thank the gentleman for that. 

So we will turn to our very distinguished panel and recognize our 

first witness, Chairman Jon Wellinghoff of the Federal Energy Regulatory Commission. As the head of FERC, Chairman Wellinghoff 

oversees wholesale electricity transactions and interstate electric 

transmission in the United States amongst other matters. He has 

been a member of the Commission since 2006, and was appointed 

chairman by President Obama in March of this year. Thank you for 

joining us this afternoon, sir. Whenever you feel comfortable, 

please begin. 

STATEMENTS OF JON WELLINGHOFF, CHAIRMAN, FEDERAL 

ENERGY REGULATORY COMMISSION; AND HON. GARY 

GENSLER, CHAIRMAN, COMMODITY FUTURES TRADING 

COMMISSION 

STATEMENT OF JON WELLINGHOFF 

Mr. WELLINGHOFF. Good afternoon, Chairman Markey. 

Mr. MARKEY. If you could move that microphone down a little bit 

closer to you. 

Mr. WELLINGHOFF. Will do that. I think it is on. 

Chairman Markey, Chairman Waxman, Ranking Member Upton 

and members of the subcommittee, I would ask that my full testimony be submitted for the record. 

Mr. MARKEY. Without objection, it will be included. 

Mr. WELLINGHOFF. Thank you and I will summarize as follows. 

Organized wholesale electric markets are currently operated by 

independent entities called Regional Transmission Organizations or 

Independent System Operators. They are legally considered to be 

public utilities and fully under the jurisdiction of the Federal Energy Regulatory Commission. FERC fully and comprehensively regulates these wholesale electric markets and all products traded in 

those markets. That regulation extends both to the organization of 

those markets through thousands of pages of market tariffs and 

rules specifically and exclusively approved by FERC, and to their 

operation through FERC’s extensive oversight, monitoring and enforcement. The products in those markets are intentionally linked 

in a structure established by FERC in an integrated market design 

that is intended to ensure that rates and services in those markets 

are just and reasonable. In addition to ensuring that market participants do not engage in market manipulation and fraud, only 

FERC has a Congressional mandate to ensure that rates charged 

and the services provided in these markets are just and reasonable. 

Duplicative oversight and enforcement in the RTO electric markets by the CFTC would create market uncertainty and the potential for disruption of market structure such that rates and services 

could no longer be found by FERC to be just and reasonable. Further, such duplication would result in market inefficiencies and 

higher costs for consumers through higher cost of capital and additional regulatory expense. Interposing a new regulator unfamiliar 


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with the purpose and dynamic structure of these markets would 

not serve the public interest. 

Last month, Chairman Gensler testified that giving the Federal 

Reserve certain authority in financial markets as ‘‘a potential of 

setting up multiple regulators overseeing markets and market 

functions of the United States.’’ He also stated that ‘‘While it is important to enhance the oversight of markets by both the SEC and 

the CFTC, I think Congress would want to closely consider whether 

it is best to set up multiple regulators for some functions.’’ 

The context of today’s hearing is different but the concern is the 

same. Any improvements warranted in the RTO and ISO markets 

can be made by FERC. Interposing a new regulator or having multiple regulators has not been justified, is not needed and would be 

harmful to the consumers that we are all charged to protect. 

That completes my summary. I would be happy to answer any 

questions of the subcommittee. Thank you. 

[The prepared statement of Mr. Wellinghoff follows:] 


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Mr. MARKEY. Thank you, Mr. Chairman, very much. 

Our next witness is Gary Gensler. He is the chairman of the 

Commodity Futures Trading Commission. Chairman Gensler previously served at the United States Department of Treasury as Undersecretary of Domestic Finance during the Clinton Administration and prior to joining Treasury he worked for 18 years at Goldman Sachs where he was a partner and co-head of finance. He was 

sworn in as chairman of the Federal, of the CFTC in May by President Obama. We welcome you back to the committee actually, Mr. 

Chairman. Whenever you feel comfortable, please begin. 

STATEMENT OF GARY GENSLER 

Mr. GENSLER. Mr. Chairman, again if my full statement could be 

in the record, I will just try to summarize. 

Mr. MARKEY. Without objection, it will be included at the appropriate place. 

Mr. GENSLER. Chairman Markey, Ranking Member Upton, 

Chairman Waxman, it is good to be back here. I believe about 10 

years ago I was in front of this committee or the full committee, 

and I thank you for inviting me to testify regarding regulation of 

the over-the-counter derivatives markets, particularly with respect 

to energy markets. 

If I might just before I turn to that discuss a little bit what the 

CFTC is and we do as an agency. We oversee, as you know, risk 

management contracts called futures. We regulate these markets to 

ensure market integrity, protect against fraud and manipulation, 

promote transparency of the price discovery function to help lower 

risk to the American public. We have broad surveillance and enforcement powers and regulate, of course, exchanges, clearinghouses and then the intermediaries that bring transactions there. 

The CFTC’s exclusive jurisdictions over the futures markets coexist 

alongside other agencies’ jurisdiction for underlying commodities. 

For instance, Department of Agriculture regulates marketing 

standards for corn and cash milk prices and the CFTC regulates 

corn and milk futures. The Treasury Department oversees the 

issuance of all Treasury Bills, Notes and Bonds while, of course, 

the CFTC oversees Treasury futures. And the Federal Energy Regulatory Commission oversees many elements of the energy markets 

that this committee is familiar with including natural gas pipelines 

and electricity markets while the CFTC oversees natural gas and 

electricity futures. So we live and coexist along other Federal regulators. 

The CFTC currently oversees futures trading in crude oil, natural gas, electricity and other energy products, gasoline and ore 

and so forth. Just to give an example, so far this year futures 

equivalent to 114 billion barrels of oil have traded with the notional amount of nearly $7 trillion this year on the futures exchanges that we oversee. Natural gas, a similar number would be 

nearly $1.6 trillion of notional amount of natural gas futures. Electricity actually has futures on the NYMEX, on ICE and on a small 

exchange you might not have heard of, the Nodal Exchange, outside of this RTO issue that again we oversee some of these futures 

markets and there, there is about 23 million contracts have traded. 


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It is about 7 percent of the overall energy futures market is actually in electricity markets. 

Now, the over-the-counter derivatives market is that which is 

currently not regulated by FERC, by the CFTC, by any other Federal regulator and we believe that that is certainly part of the crisis last year, not the only part of the crisis but that we need broad 

reform in the over-the-counter derivatives market and it is currently out of sight of Federal regulators. As Congress considers 

this, I believe there are two principal goals, to lower risk to the 

American public and promote transparency to the American public, 

and statutory exemptions can undermine those two principal goals 

as we move forward and as we have seen sometimes in the past 

can lead to unintended consequences. 

In terms of transparency, four quick things, one, the administration has proposed that all standardized derivative transactions be 

moved to under regulated transparent exchanges. This allows for 

every treasurer, every assistant treasurer of a corporation to see 

where the real time trading is happening in standard contracts. 

Customized transactions should still be allowed but the dealers 

would be subject to comprehensive regulation. Two, all non-cleared 

transactions, those too customized to be on those exchanges should 

be in a trade repository and the regulators should be able to see 

those trades. Three, data on that over-the-counter derivatives market should be aggregated and made public as we do weekly in the 

futures market. And fourth, stringent recordkeeping and reporting 

should be established for the swap dealers in these markets. 

To lower risk in the market, to lower risk the administration has 

proposed first that the standard contracts be brought into centralized clearing. There is a very natural debate as to who that covers. 

Do some end users are they out of it or into it but I think that is 

separate from the transparency debate because everybody benefits 

from transparency. Secondly, swap dealers and major swap participants would explicitly have to have capital to back up what they 

are doing in their swap business. And third, the swap dealer 

should be required to post and collect margin for individual transactions. And lastly, the CFTC and SEC should be authorized to 

mandate robust business conduct standards to protect the market 

integrity, to protect against fraud and manipulation. 

Over-the-counter derivatives have traditionally not been something that have any protection against fraud, manipulation and importantly to this committee, position limit authority. We have proposed and the administration has proposed that the over-thecounter energy markets, oil, natural gas and the like, also have extended position limit authority aggregate position limit authority. 

We support that. 

I thank you for inviting me to testify today. I will be happy to 

answer any questions you may have. 

[The prepared statement of Mr. Gensler follows:] 


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Mr. MARKEY. Thank you, Chairman Gensler, very much for being 

here. 

The chair will recognize himself for a round of questions. 

Chairman Wellinghoff, the House Agriculture Committee has 

passed legislation dealing with the subject of derivatives which has 

an impact on the FERC. Could you tell us in your opinion, what 

is the worst case scenario that could result from the passage of the 

House Ag Committee bill without modification? 

Mr. WELLINGHOFF. I think the worst case scenario is one that 

has been discussed some by some of the members in their opening 

remarks. If the swaps in that bill are considered to be the exclusive 

jurisdiction of the CFTC and interpretive to include products in the 

RTO markets to the extent that we in fact can’t regulate and we 

can’t design and develop those markets in ways that ultimately can 

ensure functioning, I think it would be virtually impossible for us 

to ensure that those markets are producing just and reasonable 

rates, and we talked about one set of products there. There has 

been some discussion of something called FTRs, Financial Transmission Rights but that is just one example. There will be a number of other products that are going to be necessary to do things 

like bringing demand response into the markets, to bring in wind 

and other renewables into the markets. All those products are ones 

that will be functioning fully as an integrated whole in the RTO 

markets and if we in fact can’t have authority and jurisdiction over 

them and instead the CFTC has that authority, then I think it is 

likely that those products cannot be fully developed and integrated 

in a way that will allow us to do things like bring in new renewables, bring in the demand side of the markets. 

Mr. MARKEY. So if the FERC lost jurisdiction over these products 

which are created under the authority of the FERC, would the 

FERC then have to consider not allowing for the issuing of those 

products? 

Mr. WELLINGHOFF. Well, certainly ultimately we could close 

down the markets and go back to cost-based regulation but I don’t 

think anybody wants us to do that because I think markets ultimately will produce the efficiencies that we need to move forward 

towards a low-carbon future. So that is what I am looking for, the 

ability to have those markets be flexible, open, transparent and operated in a way that the FERC can ensure that they do produce 

just and reasonable rates. 

Mr. MARKEY. Chairman Gensler, how can we avoid that outcome? 

Mr. GENSLER. Well, Chairman Markey, I believe that the CFTC 

as it coexists with other Federal regulators whether it is the Agriculture Department or FERC today can continue to coexist and we 

have had good productive meetings with you and Chairman Waxman and your staffs and Chairman Peterson on this very issue in 

the last several days. I think that we need to bring broad reform 

to the over-the-counter derivatives market. Neither agency currently oversees the over-the-counter derivatives market. Neither 

agency currently oversees the over-the-counter derivatives for natural gas, electricity, fuel oil or any energy product today. We need 

to bring that into these marketplaces but at the same time as you 

say to work together with FERC and with your committee staff to 


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ensure that the public is best protected and we continue to coexist 

and promote the public interest. 

Mr. MARKEY. Well, analyzing the kind of job that the FERC does 

right now overseeing these markets, do you see any gap in the 

work that they do, any underappreciation of dangers that exist in 

the marketplace that the FERC is not observing? 

Mr. GENSLER. Well, I wouldn’t want to comment on FERC and 

all of its authorities. They, of course, are very important to the 

American public ensuring just and reasonable rates as the chairman said and as a rate regulator. Our domain is more as a market 

regulator to promote market integrity of these derivative marketplaces and so I think each of us right now do not oversee the overthe-counter derivatives marketplace and that is a gap to the American public. 

Mr. MARKEY. Chairman Wellinghoff, much of your testimony focuses on the potential for the bill approved by the House Ag Committee to harm RTO markets and mechanisms used in those markets to ensure just and reasonable prices such as Financial Transmission Rights or Forward Capacity Markets but isn’t there also a 

risk that this bill could also limit your ability to approve these or 

other mechanisms in a non-RTO market as well? 

Mr. WELLINGHOFF. Well, we certainly maintain that we don’t 

have regulatory oversight authority per se of the other markets beyond the RTOs but we do believe that the authority that you gave 

us in 2005 with respect to fraud and manipulation allows us to look 

at those participants in those other markets and to the extent they 

are acting in those other markets in ways that we determine to be 

engaging in fraud and manipulation that can, in fact, affect the 

cash markets and the RTOs that we oversee, we believe we have 

jurisdiction over that. We want to preserve that as well. We think 

that is absolutely essential to ensuring that our ability to stop 

fraud and manipulation in the electric markets and the gas markets we have to have that ability to look into those other areas. 

Mr. MARKEY. Thank you, Chairman Wellinghoff, very much and 

I just want to say to you, Chairman Gensler, your testimony here 

back in 1998 was very instrumental in ensuring that there was 

strong privacy protections in what became known as the GrammLeach-Bliley bill. Almost all of the privacy protections emanated 

from this committee and your testimony helped enormously and for 

us to be able to do that. 

Mr. GENSLER. Well, I thank you. I remember working well with 

you then. I look forward to working with you well to bring reform 

to the over-the-counter markets here as well. 

Mr. MARKEY. We appreciate that, sir, thank you. 

The chair recognizes the ranking member, Mr. Upton. 

Mr. UPTON. Thank you. Thank you very much. 

Chairman Wellinghoff, the Energy Policy Act of ’05 gave FERC 

the anti-manipulation authority over electric and natural gas markets as you know and one of the reasons I had supported the bill 

I thought it was a good provision. Could you give us some examples 

in which FERC has used the authority to protect consumers over 

the last couple of years? 

Mr. WELLINGHOFF. I would be happy to. Thank you. 


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The Commission settled two major manipulation cases in 2009, 

Amaranth and ETP. We also analyze other cases and concluded in 

those that manipulation didn’t occur but we opened over 100 investigations between 2007 and 2009, and an increasing percentage of 

those are for investigations in market manipulation. In fact, 70 

percent of the investigations opened in fiscal year 2009 were for 

market manipulation specifically and in 2009, we recovered $39 

million in penalties and $38 million in disgorgement so we have 

acted extensively under that authority that you gave us in 2005. 

Mr. UPTON. Great. I know this is—a number of us sent a letter 

to the Speaker. I don’t know if you saw this letter. It was dated 

yesterday. I don’t know if you saw it or not. You haven’t seen it. 

That is correct, sir. Have you heard about the letter? 

Mr. WELLINGHOFF. Just now. 

Mr. UPTON. Well, let me, all right, sorry. The Chairman Markey 

outlined in his opening statement what might be a reasonable compromise at least from this committee’s standpoint as you heard the 

opening statements from both sides here as to a process that might 

be able to work. I think it is all of us at least that I have heard 

this afternoon have indicated that I think the underlying bill does 

not provide that at all and something that Chairman Markey outlined where you would actually define responsibilities. FERC would 

in fact take sole responsibility on a number of those issues might 

be something that this committee, subcommittee could support as 

compared to the underlying bill. 

Mr. Gensler, I don’t know if this is the first that you have heard 

of that. It sounds like there have been some discussions. Is that an 

approach that you think the CFTC could accept and support? 

Mr. GENSLER. There have been constructive discussions with the 

chairman directly—both chairs and their staffs and Chairman 

Peterson from the House Agriculture Committee and his staff—so 

I think those have been constructive dialogs. There has been no 

resolution. I did want to comment one thing about the as I understand it on the manipulation standards that were raised by a number of members in their opening statements. I believe you did, as 

well, Representative Upton, but from what I understand there is 

nothing in this swaps bill, the 3795 or as the administration proposed it that would affect FERC’s anti-manipulation authority as 

outlined in the 2005 Act over its markets, the markets that they 

oversee, the natural gas and the electricity markets as you so well 

put into that bill in 2005. I think what we have been talking a lot 

with the committee about is this issue of how we coexist. How the 

CFTC as a market regulator oversees futures and derivatives while 

very important functions that FERC oversees the electricity and 

natural gas market is, you know, for just and reasonable rates in 

the electricity markets is and so forth. How we coexist and bring 

the best to the American public particularly the thing that has 

been at the focus is these Financial Transmission Rights that have 

been raised by a number of members. 

Mr. UPTON. Mr. Wellinghoff, I know that you have not been 

chairman of FERC for all that long but if you look back to when 

we gave FERC the authority in the Energy Policy Act of ’05, are 

there things that FERC might have done differently in terms of the 

role that they have played? 


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Mr. WELLINGHOFF. I am not sure that there are things that we 

could have done differently. Fortunately, you will have another 

FERC chairman before you later on. Betsy Moler will, former 

FERC chairman, so you might want to ask that question to her as 

well but I give Betsy a little question. Certainly I will tell you that 

that authority in 2005 was tremendously helpful to us with respect 

to the ability to go in and investigate fraud and manipulation and 

ensure that it wasn’t ongoing. I think FERC prior to 2005, did have 

some tools in its toolbox. I am not sure that they used them all to 

the extent that they should have but I am not going sit here postjudging a prior Commission or prior chairman but certainly in 

hindsight, there are probably some things that could have been 

done. I can’t give you any specifics though. 

Mr. UPTON. Time has expired. 

Mr. MARKEY. Gentleman’s time has expired. 

The chair recognizes the chairman of the full committee, Mr. 

Waxman. 

Mr. WAXMAN. Thank you, Mr. Chairman. 

In 1999, Californians paid $7.4 billion for wholesale electricity. A 

year later, those costs rose 277 percent to $27.1 billion so it was 

clear these prices were the result of deliberate market manipulation and fraud that gave rise to the legislation that has been referred to a number of times. Now, Chairman Gensler, you just said 

you don’t think that the bill would interfere with FERC enforcing 

that law, is that your position? 

Mr. GENSLER. As I understand it the 2005 Act which granted the 

anti-manipulation authorities that have been referred to by many 

members, I am not aware of something in 3795, nothing in that 

swaps bill that I am reading carefully because the general counsel 

for the CFTC wrote this but that it wouldn’t affect FERC’s antimanipulation authority under that Act over the markets that they 

oversee. As you mentioned the electricity crisis, I do think that one 

of the important lessons out of the Enron crisis and the electricity 

crisis which was then, you know, complemented in a bad way with 

this terrible crisis last year is that we have to bring reform to the 

entire over-the-counter derivatives market and not have an exception for instance for some part of the over-the-counter derivatives 

marketplace. 

Mr. WAXMAN. I don’t disagree that we need regulation in light 

of the experience we have had where there was no cop on the beat 

in these over-the-counter trades but as I read H.R. 3795, I think 

there is a very good chance that RTO products and services regulated under FERC approved rules would fall under the definition 

of a swap and that means that CFTC would have exclusive jurisdiction over these products and services. You don’t think it means 

that. Would you disagree with the idea of a clarification that 

FERC’s jurisdiction is not being intruded upon? 

Mr. GENSLER. Well, I think that is what we are working with you 

and Chairman Markey and Chairman Peterson, hopefully productively on. I do think that the CFTC has an important role to play 

as a market regulator over derivatives products to ensure market 

integrity and market transparency and FERC has a very important 

public role to play. 


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Mr. WAXMAN. If market manipulation or fraud occurred in a 

FERC regulated marketplace under CFTC’s jurisdiction, would the 

exclusivity clause of the Commodities Exchange Act prevent FERC 

from exercising its anti-market manipulation authorities? In other 

words, would FERC regulation be displaced by CFTC regulation? 

You don’t think so but that is what we are concerned about. I think 

it needs to be clarified if you don’t think—if you agree with us. 

Mr. GENSLER. Well, I think that anti-manipulation standard that 

you put in place in the ’05 Act which talked about in connection 

with the physical markets that the natural gas markets and the 

electricity markets. Similar to how we coexist with the Agriculture 

Department that has many authorities in the agricultural markets. 

Mr. WAXMAN. Well, you coexist now with FERC, right? 

Mr. GENSLER. Yes. 

Mr. WAXMAN. OK, so the question is well, let me ask Chairman 

Wellinghoff, what do you think of the possibility given that this 

swap is defined that they may just—some court may come along 

and say well, either you both have the regulation or they have exclusive regulation? 

Mr. WELLINGHOFF. I think it is a definite concern. Not only a 

concern but it is a looming one in that in the Amaranth case that 

we have in part pending, part of that case is still pending. One of 

the parties was not let out of the case and we are moving forward 

with it but in that case the CFTC was arguing in court that FERC 

did not have jurisdiction in the financial markets so it is already 

cloudy and I think all we are doing is moving in the other direction 

here with this legislation of making it more cloudy or more certain 

that the exclusive jurisdiction is on the CFTC side. So we need to 

ensure that FERC has the ability to go in and do the investigation 

and have the jurisdiction over the parties that are engaged in the 

manipulation and fraud, otherwise we can’t do our job. 

Mr. WAXMAN. Well, the financial reform legislation is important 

because the financial meltdown demonstrated that there were significant regulatory gaps but the RTO markets are comprehensively 

regulated by FERC and we need to make sure that we don’t unintentionally roll back important protections against market manipulation and fraud that are already in the law. And as I pointed out 

as a Californian, the reason that law was changed was to plug up 

the gap and we filled that gap very clearly by designating FERC 

as the agency to be responsible. I don’t want us now to plug up another gap in regulatory authority by confusing FERC’s jurisdiction. 

Yes, Chairman Gensler. 

Mr. GENSLER. I was just going to say actually neither agency 

right now have jurisdiction over a transaction between a large financial house and a utility company called an over-the-counter derivative in natural gas, heating oil, electricity. Where FERC has 

very clear jurisdiction on the RTOs and to protect the public, where 

we have very clear jurisdiction on something called a futures market like NYMEX or this Intercontinental Exchange, we do have 

some pretty good authorities and we coexist but there is a whole 

world out there, trillions of dollars notional amount. What I quoted 

big numbers the over-the-counter market is bigger and that is 

where we want to regulate the dealers to lower risk and promote 

transparency to the American public and I think we can continue 


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to coexist and work with your staffs to make sure that the FERC 

doesn’t inadvertently or unintentionally be less able to protect the 

public. 

Mr. WAXMAN. It is not that we are trying to protect FERC. We 

are trying to make sure the regulation makes sense and it makes 

sense for you to regulate futures and but it makes sense for FERC 

to regulate the manipulation of the markets, and there may be 

some ambiguity down the line. What do you think ought to be done 

then? I suppose you two ought to get together and figure it out but 

we ought not to start with a law that is so ambiguous that neither 

of you will regulate or both of you will regulate. And then it seems 

to me, Chairman Wellinghoff, if the chair would permit just one 

last thing. What do you think the impact would be on the energy 

markets if there are two regulators they have to respond to? 

Mr. WELLINGHOFF. Well, uncertainty in the markets creates 

more risk and it creates more cost, and we have seen that over and 

over and that would be the result. 

Mr. WAXMAN. Thank you. Thank you, Mr. Chairman. 

Mr. MARKEY. Gentleman’s time has expired. 

The chair recognizes the gentleman from Louisiana, Mr. Scalise. 

Mr. SCALISE. Thank you, Mr. Chairman. 

Chairman Gensler, if you have done an analysis on the legislation can you talk about any kind of impact that you have assessed 

that it would have on energy prices or on energy products? 

Mr. GENSLER. I think that the legislation if able to pass with 

strong transparency initiatives where utility companies whether 

small or large could clearly see where this market trades on a real 

time basis that helps to lower cost. Right now this market has a 

significant information deficit, where Wall Street benefits and 

Main Street loses out frankly, and that is because that small utility 

company or large utility company can’t see on a real time basis the 

trades in the over-the-counter natural gas marketplace, the overthe-counter coal marketplace, the over-the-counter electricity marketplace. They can see a lot of transparency on a futures market 

or on some of the markets that FERC regulates but not on these 

over-the-counter so I think that helps in a significant way. It would 

also lower the cost to the American public of the crisis that could 

come when large financial institutions concentrate so much risk 

when they keep these trades on their books. 

Mr. SCALISE. All right and we have talked about the large financial institutions and the problem they have and the concern that 

those of us that have opposed this bill have is that it is not necessarily the large folks who actually did the damage. It is the small 

guys who played by the rules that would be hurt by this and with 

that I would ask, Mr. Wellinghoff, you talked about in your testimony you actually used the term harmful to consumers. If you can 

expand on, you know, kind of your take on how this legislation 

would be harmful to consumers. 

Mr. WELLINGHOFF. Harmful in the sense that if we had two regulators in the space and the industry and the participants in that 

market were uncertain as to the clarity of that regulation which 

they certainly could be if you had two regulators with conflicting 

positions. Ultimately you are going to increase cost because you are 

going to do two things. Number one, you are going to increase the 


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cost of equity because risk is going to be increased and number 

two, you are going to increase regulatory costs as well. So both of 

those, all of those costs the consumer pays for everything. All of 

those costs are ultimately going to go to the consumer. Now, I 

haven’t quantified it and I am willing to accept former Chairman 

Moler’s numbers that she has presented in her testimony but we 

haven’t done a specific quantification. 

Mr. SCALISE. OK and then, Chairman Gensler, would there be 

more systemic risk if companies chose not to hedge their risk and, 

you know, they just thought that the cost would be prohibitive? 

Mr. GENSLER. Congressman, hedging is a very important part of 

our economy. We are promoting that in this bill. We are lowering 

risk to the American public allowing utilities and energy companies 

to hedge customized risk but those risks that are standard enough, 

for instance a 2-year risk on natural gas pricing, standard contract, 

we want to move that onto the clearinghouses to lower risk and 

very importantly on the transparent trading venues. And if I might 

note, I don’t think the transparency costs end users. If you didn’t 

know what an apple cost when you walked in the store, does it help 

you if you have to pay an extra nickel or 10 cents for that apple 

because you don’t know what it cost the prior person walking in 

the store? I don’t think so. We bring every securities transaction 

and every futures transaction to transparent markets. Why 

shouldn’t we do that in natural gas and electricity over-the-counter 

markets? 

Mr. SCALISE. Chairman Wellinghoff, you had mentioned that one 

of FERC’s responsibilities is to ensure that consumers have adequate supplies of energy at reasonable prices. 

Mr. WELLINGHOFF. Correct. 

Mr. SCALISE. How important is it to you that the responsibility 

as a core tenet of energy regulatory system is ensuring that reasonable prices exist for consumers? 

Mr. WELLINGHOFF. Well, it is essential and the only way to have 

reasonable prices with these RTO markets is to ensure that they 

are well-designed as a structural package and that is why it is so 

important to have one entity who oversees that structural package 

to make certain that the design is adequate to ultimately get to the 

end result of the reasonable prices. 

Mr. SCALISE. OK and then you had also talked about or I think 

in your testimony, the intensive capital expenditures, just the energy industry as a whole is a capital-intensive industry. Could you 

comment on the role that the FERC regulated financial products 

play in securing capital for the development of new technologies 

and if that capital is limited by new regulations, what that role 

would be on the ability to have newer technologies developed? 

Mr. WELLINGHOFF. Certainly, with respect to recovery of investment like in transmission to the extent that those entities are not 

able to recover their full investments, they are not going to invest 

in new technologies, the newest market that we need to ultimately 

move us into the next phase of where we need to go with respect 

to our energy futures. 

Mr. SCALISE. Thank you and I yield back. 

Mr. MARKEY. Gentleman’s time has expired. 


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The chair recognizes the chairman emeritus of the committee, 

Mr. Dingell. 

Mr. DINGELL. Thank you. 

Mr. MARKEY. Mr. Chairman, could you move the microphone 

over a little? 

Mr. DINGELL. Right, the legislation would make energy hedging 

and trading subject to CFTC’s exclusive jurisdiction and require 

that all of these transactions be cleared and traded on exchanges. 

FERC would lose jurisdiction. First of all, of what would you lose 

jurisdiction? 

Mr. WELLINGHOFF. As I understand it we would lose jurisdiction 

over these markets and their operation ultimately. 

Mr. DINGELL. What would you be able to do with regard to an 

RTO that you wanted or with regard to an RTO that wanted to put 

in some carrying capacity? What would happen with regard to your 

efforts with regard to dealing with fraud or market manipulation? 

If you couldn’t get at the derivative and you couldn’t inquire into 

the derivative, how would you then be able to conduct a meaningful 

and complete investigation in those two instances? 

Mr. WELLINGHOFF. Our hands would be tied. 

Mr. DINGELL. I am sorry. 

Mr. WELLINGHOFF. Our hands would be tied. 

Mr. DINGELL. Your hands would be tied. Now, where else would 

your hands be tied by that provision? 

Mr. WELLINGHOFF. In creating new products for these markets as 

I mentioned by moving forward into things like renewables and energy efficiency demand response we are starting to put the demand 

side into these markets. It has never been done before. It is just 

starting to over the last couple of years. 

Mr. DINGELL. And so the derivatives that would finance this you 

would not be able to go into? 

Mr. WELLINGHOFF. That is correct. 

Mr. DINGELL. And so you would not have any way of knowing 

whether you had a successful investigation or rulemaking or ratemaking procedure, is that right? 

Mr. WELLINGHOFF. That is possible, yes. 

Mr. DINGELL. All right, I would—I am going to submit and ask 

unanimous consent that I be permitted to submit a letter to the 

Commission following up with some of these questions. 

Mr. MARKEY. Without objection, so moved. 

Mr. DINGELL. Now, what is the problem here, Mr. Wellinghoff, 

with regard to the situation which brings about this legislation requiring us to force all of the derivatives into exchanges and what 

authority do you lack to address these questions? 

Mr. WELLINGHOFF. I think the issue as I understand it is again 

to the extent that the definition of swaps in the legislation could 

intrude into the RTO markets it would in fact take away our ability to develop and shape these markets in ways that can ensure 

that rates are just and reasonable. 

Mr. DINGELL. You wouldn’t understand the underlying financing 

and you would have no power whatsoever to go into those questions, is that right? 

Mr. WELLINGHOFF. That is correct. 


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Mr. DINGELL. All right, now, FERC has stated in its State of the 

Markets report that natural gas and related electricity costs in the 

U.S. were driven up in 2008, by flows of funds in the derivatives 

and financial products such as futures and swaps at a time when 

there was adequate inventories of natural gas. Did the CFTC do an 

adequate job of regulating excessive speculation at that time? 

Mr. WELLINGHOFF. I would suggest you ask Chairman Gensler 

that question. 

Mr. DINGELL. The answer is what? 

Mr. WELLINGHOFF. I would suggest you ask Chairman Gensler 

that question. 

Mr. DINGELL. OK now, Mr. Gensler, did you do a good job of regulating those matters at that time? 

Mr. GENSLER. It is good to be back before you, Representative 

Dingell. 

Mr. DINGELL. Let us talk about your agency. Did it do an adequate job? The answer to that question is no is it not? 

Mr. GENSLER. I keep calling you chairman I know because if I 

am allowed to, Chairman Emeritus, I came onto the agency in May 

of this year. 

Mr. DINGELL. I don’t want to do that. Did the agency do an adequate job in 1 minute and 20 seconds? 

Mr. GENSLER. And what I found is the staff in the agency is very 

strong and what we have done is we have taken a serious look at 

bringing back, we have had position limits at the energy space 

until June of 2001, working with the exchanges. We are looking seriously about bringing them back. I also just wanted to comment. 

Mr. DINGELL. So your answer is you did not do an adequate job? 

Now, given FERC’s pervasive regulation of RTO and ISO markets 

is there a regulatory gap in those areas that must be filled by the 

CFTC and if so, what is it? 

Mr. GENSLER. I think there is a significant regulatory gap right 

now in what is called over-the-counter derivatives. Transactions 

that are not on a RTO, they are transactions between. 

Mr. DINGELL. Require you to have legislation that excludes the 

FERC in its entirety from jurisdiction over those kinds? 

Mr. GENSLER. Currently, the CFTC has exclusive jurisdiction 

over futures markets and that is whether it is on NYMEX or and 

so forth and I don’t think there is any dispute here between our 

agencies here on that. 

Mr. DINGELL. But your legislation here would say to it that there 

could be no inquiry into those matters whatsoever by FERC? 

Mr. GENSLER. It is not, with all respect that is not how we read. 

Mr. DINGELL. Let me finish. 

Mr. GENSLER. I am sorry. 

Mr. DINGELL. That benefit by depriving FERC of any authority 

to address those questions which might lie under its concern? 

Mr. GENSLER. Our read of 3795, it does not affect that which you 

put in place in 2005, and in fact there has been an exclusion from 

our statute since the 1930s that we don’t regulate what we call forwards, spot markets or forward markets, what some people call the 

cash market so the day ahead market and the electricity market 

all of these are not. 


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Mr. DINGELL. That is splendid but not responsive. I would like 

to hear what CFTC has done to prosecute the excessive speculation 

that was cited in the FERC State of the Market report regarding 

natural gas and electricity prices be driven up by flows of funds 

into derivatives. What have you done about that? 

Mr. GENSLER. We have a very strong and robust enforcement 

agency that would bring numerous cases. In fact, the Amaranth 

case that was earlier referred to we both brought and settled, and 

Jon and I met on that in a very constructive way. We have had 

their enforcement people working with ours and our enforcement 

people working with FERC I think in a very constructive way and 

have a memorandum on understanding which we can build upon. 

Mr. DINGELL. Now, if you please, Mr. Wellinghoff, please tell us 

how you will be able to carry out your mission with regard to making the RTOs work, deal with the supply problem, deal with all of 

your other responsibilities if you don’t have authority to get into 

the derivatives which are a major part of the financing of all of 

these apparitions? 

Mr. WELLINGHOFF. I won’t with certainly with respect to fraud 

and manipulation. I need that authority, continue to have that authority to ensure that there is no fraud and manipulation. 

Mr. DINGELL. Thank you. Thank you, Mr. Chairman. 

Mr. MARKEY. We thank the chairman. 

The chair now recognizes the gentleman from Oregon, Mr. Walden. 

Mr. WALDEN. Thank you very much, Mr. Chairman, and thank 

you for holding this hearing on this important legislation. 

Mr. Wellinghoff, I want to ask you, I have some concerns regarding the clarity of H.R. 3795 as to whether it would impact the operation and cost of the Federal power marketing administrations and 

customers? As you know, I am from the great northwest, the State 

of Oregon and we do things and we don’t necessarily operate under 

an RTO but Bonneville has its own trading floor and so I am curious from both of you on how this your take on this legislation and 

its effect there and, Mr. Wellinghoff, you can start and then maybe, 

Mr. Gensler, if you could comment, as well. 

Mr. WELLINGHOFF. Congressman Walden, quite honestly I 

haven’t looked at it from that perspective so I don’t really want to 

give you a view, you know, from off the top of my head. I mean 

there may be some collateral affects but I really haven’t analyzed 

it. 

Mr. WALDEN. Mr. Gensler. 

Mr. GENSLER. Again, I am not aware of any but we would be 

glad to work with you and your staff as we are working with Chairman Markey. 

Mr. WALDEN. I think one of the issues that has been raised is 

that this should be clear it doesn’t cover the physical delivery of 

commodities such as electric power and gas, and is that clear? 

Mr. GENSLER. That is right just as in the Commodities and Exchange Act for 70-some years it has not only excluded the physical 

delivery but also the forward markets that is excluded. Similarly 

3795 and the administration would exclude the forward, these dayahead markets and so forth. 


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Mr. WALDEN. And, Mr. Wellinghoff, do you concur with that 

analysis? 

Mr. WELLINGHOFF. Yes. 

Mr. WALDEN. So it is clear that real time day-ahead turn markets for physical delivery power and gas are not included in coverage of this bill? 

Mr. GENSLER. That is as we understand it as well some of the 

other forward markets that are well, you know, regulated elsewhere. Anything that has a forward market and has a physical delivery is out. 

Mr. WALDEN. OK, then I just want to ask about your concern 

again raised to me by folks who operate in these markets about the 

concern about restriction of capital and limited ability to hedge 

under this legislation and from a power perspective, from FERC’s 

perspective maybe first, what sort of concerns are you hearing? 

What sort of concerns do you have about this notion that it could 

restrict capital and limit the ability for some of these concerns to 

hedge? 

Mr. WELLINGHOFF. People that do hedge certain products in 

these markets, utilities primarily, their fuel have expressed concerns to me. 

Mr. WALDEN. Right. 

Mr. WELLINGHOFF. Again, I haven’t quantified the affect. I think 

probably again the testimony of former Chairman Moler goes into 

that in some great detail and actually does some quantification 

there that might be helpful to you. 

Mr. WALDEN. OK. 

Mr. GENSLER. I think, Congressman, commercial hedgers have 

raised two concerns. One is could they enter into commercially 

needed but particular tailored transactions that aren’t standard 

and the answer is an unambiguous yes but that is a legitimate 

question they have raised. Some members of the Senate or the 

House might feel differently but the administration says yes. Two 

is on the standard contracts they have raised the question is how 

is credit priced in there? Will they have to post collateral if it is 

lowering risk to a clearinghouse? 

Mr. WALDEN. Right. 

Mr. GENSLER. There is some like myself, I believe that standard 

transactions should be brought to a clearinghouse to lower risk to 

the American public but there is a legitimate public policy debate 

whether end users, commercial hedgers using these transactions 

are exempted. The 3795 does exempt them. I have called that they 

not be exempted and so that is the public policy debate there. I 

think even if Congress exempts this commercial end users from the 

clearing requirement, we should not inadvertently exempt them 

from the transparency. We can separate that. Congress can write 

the law that the large financial houses have to bring it into a trading venue and then everybody gets the benefit of transparency and 

then you sidestep the clearing issue. 

Mr. WALDEN. All right, thank you, Mr. Chairman, that is all the 

questions I have. 

Mr. MARKEY. Gentleman’s time has expired. 

The chair recognizes the gentleman from Michigan, Mr. Stupak. 

Mr. STUPAK. Thank you, Mr. Chairman. 


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Mr. Wellinghoff, Mr. Dingell indicated that your State of the 

Markets report and that report strongly indicated a lack of physical 

market fundamentals was used in determining the price of natural 

gas and electricity, and the conclusion was that large pools of capital flowed into these various financial instruments that turned the 

commodities like natural gas into investment vehicles as opposed 

to providing a product there. Does that accurately reflect FERC’s 

current position that financial speculation in the natural gas market has increased prices? 

Mr. WELLINGHOFF. We believe it did at that time. That was one 

reason we went after Amaranth. 

Mr. STUPAK. Do you believe that is still going on now and we 

have seen 100 percent increase in the price of natural gas while 

supplies are more than adequate. 

Mr. WELLINGHOFF. Actually, natural gas prices have gone down 

substantially. 

Mr. STUPAK. I meant gasoline. You are right, natural gas. 

Mr. WELLINGHOFF. Natural gas and that is what we focus on is 

natural gas. 

Mr. STUPAK. Right. 

Mr. WELLINGHOFF. So I don’t believe it is occurring now. 

Mr. STUPAK. OK, do you believe that natural gas—so you think 

natural gas has leveled out then? It is not continuing to be distorted at all? 

Mr. WELLINGHOFF. We have a lot of different dynamics going on 

in natural gas right now. There has been a tremendous amount of 

new shale finds in this country and technology to develop those 

shales. Shales, as well, can be more easily shut-in then traditional 

wells and brought back up much quicker so that dynamic is going 

to affect the market, that technological and that resource dynamic 

is going to have a big affect on the market. 

Mr. STUPAK. You mentioned Amaranth a couple times and Mr. 

Gensler has also too, that started what in about 1995 when you 

first, when Amaranth started to break? When did you start really 

getting into Amaranth? 

Mr. WELLINGHOFF. I believe it was 2006–2007, actually. 

Mr. STUPAK. 2006, OK, were you going to bring a cease and desist that stopped the transaction or restraining order? 

Mr. WELLINGHOFF. We do not have cease and desist authority. 

Mr. STUPAK. Is that something you need to? 

Mr. WELLINGHOFF. It would be helpful. 

Mr. STUPAK. I mean on Amaranth that was like $6 billion, wasn’t 

it? 

Mr. WELLINGHOFF. Yes, it would have been extremely helpful in 

that case. 

Mr. STUPAK. And what have you been able to recover? 

Mr. WELLINGHOFF. We have recovered $7 and a half million. 

Mr. STUPAK. $7 and a half million out of $6 billion? 

Mr. WELLINGHOFF. Well, the total fund was that amount yes. 

Mr. STUPAK. All right, if you had cease and desist would that assist you? 

Mr. WELLINGHOFF. That would assist us tremendously, yes. 

Mr. STUPAK. Mr. Gensler, let me ask you this. You made a number of statements for Congress a need to keep any end user exempVerDate Mar 15 2010 02:37 Sep 19, 2012 Jkt 074855 PO 00000 Frm 00050 Fmt 6633 Sfmt 6633 E:\HR\OC\A855.XXX A855

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tion from centrally clearing swaps as narrow as possible. As the 

current bill is written, financial institutions have posed systemic 

risk to the U.S. economy are exempt from clearing swaps if they 

are a counter party to an end user so does CFTC have an estimate 

of how much of the market will be exempt from the clearing requirement because of this exemption? 

Mr. GENSLER. It is a very good question. It is hard to determine 

because there is such a darkness in this market but it is very significant. The standard part of the market in oil and energy products may well be, the standard part of the market over half of the 

market is standard enough to be cleared. 

Mr. STUPAK. Right. 

Mr. GENSLER. But then the question is what portion of that do 

end users have. Now, and that is a very hard number to get but 

it is not in the single digit percents. I mean it is a significant portion and that is why we think at least we should do it to exchanges 

and if possible to clearing. 

Mr. STUPAK. Well, does the CFTC then believe that tier one financial companies that pose systemic risk to the financial services 

industry should be exempt from centralized clearing of swaps? 

Mr. GENSLER. No, I believe strongly that all swaps that are 

standard enough be brought into clearing and that end users be 

able to be allowed to do individual credit arrangements as they do 

now in these marketplaces and again, if Congress thinks to exempt 

them, let us not exempt them from the trading requirement at 

least. 

Mr. STUPAK. Good. Well, we talked a little bit about liquidity too 

here today so if we allow the end users to remain exempt, would 

requiring tier one financial companies to centrally clear swaps on 

exchange regardless of their counterparty providing us liquidity in 

the market for pricing and hedging? 

Mr. GENSLER. I think it does. I think right now these markets 

are internalized and there are five or six large concentrated pools 

of capital. They are sophisticated. Many Americans wonder as they 

go home for the holidays why so much money is being made on 

Wall Street. This is at the core of it. It is not the only reason but 

they internalize dark markets and I understand that but I think 

it is now time I believe working with Congress to bring transparency as this Congress did with President Roosevelt in the ’30s 

to the securities and futures markets. 

Mr. STUPAK. You mentioned OTC, you mentioned ICE and the 

Dubai market, has that been up and running now? 

Mr. GENSLER. It has been very small, sir. 

Mr. STUPAK. Still? 

Mr. GENSLER. Yes. 

Mr. STUPAK. Yet you see? 

Mr. GENSLER. Well, it might develop larger but right now it has 

been very small. I just wanted to mention something on an earlier 

question. 

Mr. STUPAK. Go ahead. 

Mr. GENSLER. Right now these markets base, these Financial 

Transmission Right markets. 

Mr. STUPAK. Yes. 


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Mr. GENSLER. From the statistics right from the PHM market, 

about 74 percent of their transactions are with the large financial 

houses, the houses you are talking about. 

Mr. STUPAK. Tier one. 

Mr. GENSLER. On dollar value it is apparently lower. Its transaction volume is high but over 30 percent is with the large financial houses and so they are very much participating in as speculators in these markets. They provide capital to these markets, important capital but they are part of these markets, as well. 

Mr. STUPAK. Thank you, Mr. Chairman. 

Mr. MARKEY. Thank the gentleman very much. 

I would just like to ask one final question and then we will move 

to the next panel. 

Ask this of Chairman Gensler, if the CFTC is doing an antifraud 

or anti-manipulation investigation of oil futures trading on the 

New York Mercantile Exchange and you believe that part of the 

fraudulent scheme may have involved wrongdoing in the cash market, you have the power under the Commodities Exchange Act to 

extend your investigation to cover that part of the fraud and you 

wouldn’t want the Congress to deny the CFTC the power to look 

at transactions in both the NYMEX futures market and the cash 

market in your own investigation, is that correct? 

Mr. GENSLER. As I understand it, our authorities are in the futures markets and that is where it starts and then if there is other 

attributes to this. 

Mr. MARKEY. It tracks the cash market. 

Mr. GENSLER. But it has got to track into the futures market because that is where our authority is. 

Mr. MARKEY. But you would not want your power to track it to 

be constrained. You would not want your powers to track it from 

the futures market into the cash market to be constrained? 

Mr. GENSLER. Well, I don’t believe that Congress has constrained 

it but it has to start, it has to be in the futures market. Our 

whole—we are a market regulator. We don’t regulate the cash markets. 

Mr. MARKEY. Right, so that is but the opposite from our perspective should also be true. In other words, if the FERC finds activities in the cash market that leads it into the futures market we 

are basically concerned that they could be constrained in heading 

in the opposite direction and that is a problem that is actually 

being created by this legislation that we are concerned about. 

Mr. GENSLER. I understand that concern. With respect, I don’t 

think 3795 does that with the 2005 provisions, the important provisions that you provide FERC. We, of course, would not bring an action solely in the cash market. It always starts—it has got to be 

in the futures market where we are. 

Mr. MARKEY. We would like your comments on this, Chairman 

Wellinghoff. 

Mr. WELLINGHOFF. Well, I think you put your finger exactly on 

it although I am not sure that the 3795—I think 3795 may exacerbate it but the situation already exists as I mentioned. CFTC has, 

you know, gone into Federal court saying we can’t go into the futures market in Amaranth, for example, because we don’t have jurisdiction there yet. We started in the cash market. We started in 


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the cash market. Started our action there and we were tracking it, 

trying to track it through into the futures market and CFTC says 

we don’t belong there. 

Mr. MARKEY. So from your perspective, you don’t have a problem 

if the CFTC tracks it into the cash market? 

Mr. WELLINGHOFF. No, problem coming to us. 

Mr. MARKEY. But the CFTC has filed an amicus brief in the Amaranth case. 

Mr. WELLINGHOFF. Yes, yes. 

Mr. MARKEY. Saying that they don’t want the FERC to be able 

to track from the cash market into the futures? 

Mr. WELLINGHOFF. That is correct. 

Mr. MARKEY. So that is a problem, it seems to me in terms of 

no comity there, creating comity between, you know, sister agencies, Mr. Gensler. 

Mr. GENSLER. You know, I think what was done, an important 

thing in 2005 that you did was that in connection with the purchase or sale of natural gas or electricity are subject to the jurisdiction of FERC that they could pursue fraud and manipulation if it 

was in connection with the purchase or sale of natural gas and 

electricity in the cash markets effectively, but that Congress did 

not expressly in that statute in 2005 expressly say that another 

Federal agency should regulate in the futures market and, of 

course, back in 1974, Congress had adopted exclusive jurisdiction 

for the futures market for the CFTC to ensure uniformity and consistency in the derivatives marketplace we call futures. 

Mr. MARKEY. OK, you have the last word, Mr. Wellinghoff. 

Mr. WELLINGHOFF. Again, I just think there should be parody 

there. If they can come from the futures market into the cash market with respect to investigation, we should be able to do the same 

going from the cash market into the futures market. 

Mr. MARKEY. I agree with you, Mr. Wellinghoff, but we thank 

both of you for being here and we thank both of you for working 

together with the committee to try to find a peaceful resolution of 

these issues and I think if we continue to make the progress that 

we have in the past couple of days that we have a good chance of 

doing so but it requires good faith on all parties in order to accomplish that goal. 

Mr. GENSLER. Thank you, it is good to be back with you. 

Mr. WELLINGHOFF. Thank you, Mr. Chairman. 

Mr. MARKEY. Thank you, I thank both of you. We appreciate it. 

So this panel has completed its testimony. I would ask the next 

panel to please come up and take their seats behind their 

nametags. 

Welcome back to this panel. This is like a hall of fame weekend 

here. We have a lot of, you know, longtime visitors to our committee who are returning for this very important hearing and we 

are going to begin by recognizing Betsy Moler who is the Executive 

Vice President for Governmental Affairs and Public Policy at 

Exelon Corporation. Prior to joining Exelon, Ms. Moler served as 

commissioner on the Federal Energy Regulatory Energy Commission from 1988 to 1998, including as chair from 1993 to 1998. 

Under her leadership, FERC issued order number 888 requiring 

utilities to open up their transmission lines on an equal access 


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basis to their competitor paving the way for the development of 

wholesale competitive electricity marketplaces. She did that pursuant to the Markey amendment in the 1992 Energy Policy Act. We 

welcome you back here again, Ms. Moler. Whenever you are ready, 

please begin. 

STATEMENTS OF ELIZABETH A. MOLER, EXECUTIVE VICE 

PRESIDENT, GOVERNMENT AFFAIRS AND PUBLIC POLICY, 

EXELON CORPORATION ON BEHALF OF THE EDISON ELECTRIC INSTITUTE; PATRICK MCCULLAR, PRESIDENT AND 

CEO, DELAWARE MUNICIPAL ELECTRIC CORPORATION, ON 

BEHALF OF THE AMERICAN PUBLIC POWER ASSOCIATION; 

GLENN ENGLISH, CEO, NATIONAL RURAL ELECTRIC COOPERATIVE ASSOCIATION; JOHN SHELK, PRESIDENT AND CEO, 

ELECTRIC POWER SUPPLY ASSOCIATION; AND VINCENT 

DUANE, ESQUIRE, GENERAL COUNSEL, PJM INTERCONNECTION, INC. 

STATEMENT OF ELIZABETH A. MOLER 

Ms. MOLER. Thank you very much, Mr. Chairman. 

Mr. MARKEY. We are going to hold you to 5 minutes each of you 

in this round so please be aware of that just because of the roll 

calls that are pending out on the House floor and our need to be 

able to telescope this process in order to make sure that all of the 

members get a chance to ask questions so none of that came out 

of your time, Ms. Moler, please begin. 

Ms. MOLER. Thank you very much, Mr. Chairman, Mr. Upton 

and members of the subcommittee. It is, believe it or not, a pleasure to be back. I guess it is like a moth in the flame. 

Exelon is an electric and gas public utility holding company 

headquartered in Chicago. Our subsidiary is Con-Ed in Chicago 

and PECO Energy in Philadelphia, serve 5.4 million customers or 

about 12 million people, more than any other company. Our competitive generation affiliate, Exelon Generation, owns, operates or 

controls about 30,000 megawatts of generation. Our nuclear fleet is 

the largest in the country and the third largest in the world. 

I am testifying today on behalf of Edison Electric Institute. EEI, 

as you know, is the trade association of U.S. shareholder-owned 

electric companies. My testimony today details why utilities use 

over-the-counter derivatives products, examines the costs to consumers of duplicative regulation of OTC derivatives transactions 

and encourages the subcommittee to support amendments to H.R. 

3795 to clarify that FERC has and should remain exclusive, should 

retain, excuse me, exclusive jurisdiction over organized electricity 

markets and transactions. 

We look at H.R. 3795 from the perspective of our customers who 

are electric and natural gas consumers. We support the goal of regulatory reform but do not support the current version of the bill. 

It would result in costly, duplicative and overlapping regulation 

over organized energy markets and higher costs for our customers. 

In our view, subjecting OTC transactions to additional regulations, 

two regulators is simply not warranted because they do not involve 

or cause the type of systemic risk that the legislation is theoretically designed to deal with. 


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EEI, EPSA, American Gas Association and 69 other organizations have sent a letter to the members articulating what we believe would be an effective approach to regulating OTC products. 

In short, the energy industry is united in our belief that this legislation should recognize the clear authority of FERC or the Public 

Utility Commission of Texas in the case of ERCOT and exempt all 

Regional Transmission Organizations or Independent System Operators, products and services from regulation by the CFTC. Why? It 

is simple. Subjecting these types of transactions to additional layers of regulation would be a duplication of effort, impose potential 

conflicts and gender additional litigation where you have two agencies looking at the same types of transactions and both of them trying to assert jurisdiction over them, and most importantly cost our 

customers billions of dollars in higher rates. 

Your invitation asked me to focus on organized energy markets, 

the RTOs. Over 65 percent of Americans, 134 million customers 

live in regions served by RTOs and ISOs. It is not a trivial problem. These independent entities operate the electric road and operate markets. We need to make sure that FERC retains effective authority to regulate RTOs and ISOs. 

I do not believe that the legislation is clear on this subject. It 

gives under the Commodities Exchange Act where the CFTC has 

authority over things they maintain, ‘‘exclusive authority.’’ I don’t 

see how you can have two exclusive bosses in this area. Nor, I 

might add, do I believe that it can be dealt with by a Memorandum 

of Understanding between the two agencies because if CFTC has 

the exclusive authority over these types of transactions, that would 

at least arguably trump the FERC’s jurisdiction. I think that can 

only be sorted out by statute. 

We believe that these transactions such as FTRs, swaps, excuse 

me, and other types of transactions that routinely entered into as 

part of RTOs are important consumer protection mechanisms. They 

reduce electricity costs to our customers and the authority of the 

FERC to regulate them should not be in doubt. We believe that any 

proposed legislation should clarify that FERC is the sole regulatory 

authority governing the organized RTO or ISO markets and the 

transactions entered therein. 

I appreciate very much your offer to have me testify today and 

would be happy to try to answer any questions. 

[The prepared statement of Ms. Moler follows:] 


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Mr. MARKEY. Thank you, Madam Chairman, very much. 

Our next witness is Patrick McCullar, President and CEO of 

Delaware Municipal Electric Corporation. He is today testifying on 

behalf of the American Public Power Association. We welcome you, 

sir. 

STATEMENT OF PATRICK MCCULLAR 

Mr. MCCULLAR. Thank you very much, Mr. Chairman. 

Chairman Markey, Ranking Member Upton and members of the 

subcommittee, I profoundly appreciate the opportunity to testify before you today. 

I am representing the American Public Power Association, as you 

said. We represent the interests of more than 2,000 publicly owned, 

not-for-profit electric utility systems across the country serving approximately 45 million Americans, and the majority of our systems 

are serving communities with populations of 10,000 people or less. 

DMEC, my company, provides generation and other services to 

nine municipal distribution utilities in the State of Delaware and 

is constituted as both a load-serving entity and a generation owner 

in the PJM RTO. I have also served as the chairman of the PJM 

members committee which means I am very familiar with markets 

and processes within the RTO. I also represent and I often remind 

my colleagues at PJM that I represent the folks who at the end of 

the day write the checks to pay for all of these services and our 

mission is to make sure those checks are as reasonable as possible 

for the value received. 

My statement is going to focus on three areas, energy markets 

in general, the regulatory overlap between FERC and the CFTC, 

mandatory clearing of over-the-counter derivative contracts. While 

energy markets suffer from volatility for many reasons including 

storage capacity, weather and economics, in recent years the price 

of energy commodities has not been determined solely by these traditional variables. Manipulation and speculation for profit in energy markets have often caused artificially high prices. 

APPA and DMEC have therefore consistently supported increased transparency in these markets to mitigate market manipulation. For example, APPA passed two resolutions the last few 

years in support of increased transparency in regulation in overthe-counter or OTC natural gas markets, therefore we support the 

provisions of H.R. 3795 that enhance transparency in these markets including reporting by large traders of OTC positions and the 

application of aggregates speculative position limits. Because of 

these strong concerns with market manipulation, APPA and DMEC 

recognize that the CFTC can help to police and prevent manipulation in the energy markets but CFTC and FERC should work together to prevent manipulation in the energy markets that are run 

by RTOs, including PJM. However, we urge Congress to avoid creating duplicative authorities between CFTC and FERC over the 

many other aspects of power supply and transmission markets that 

are run by the RTOs. 

In regions with RTOs, market participants buy and sell a variety 

of electric products and services in the centralized RTO-run markets. One such market is for the purchase and sale of Financial 

Transmission Rights or FTRs which APPA members and other 


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Load Serving Entities use to hedge the cost of transmission congestion created when moving their power from the generation sources 

to their retail customers which is often referred to as load. While 

these Financial Transmission Rights are financial contracts, their 

terms, conditions and rates are comprehensively regulated by 

FERC and they should remain under FERC jurisdiction. LSE’s access to FTRs is absolutely essential to their ability to serve their 

retail loads at reasonable rates and with less price volatility. 

RTO markets are fully regulated by FERC and are set out in 

FERC-approved tariffs. The rates, terms and conditions applicable 

to any RTO product under a FERC tariff should not be subject to 

concurrent jurisdiction by CFTC. Concurrent jurisdiction could result in inconsistent regulations and uncertainty over the enforceability of transactions. Because of this concern, if concurrent jurisdiction is found, CFTC should be required to consult with FERC regarding these markets and should be given statutory authority to 

cede jurisdiction to FERC. However, as I mentioned, we recognize 

CFTC has helped to police and prevent manipulation of prices in 

energy markets. APPA would therefore support concurrent FERC 

and CFTC jurisdiction over market manipulation in RTO administered markets. APPA would urge the two agencies to pool their resources and expertise to provide more comprehensive oversight in 

this specific area. 

I would also like to mention the critical importance of continuing 

to allow LSEs and energy end users to use non-cleared, individually negotiated OTC transactions to hedge the price of energy 

fuels in order to continue to offer the best electric rate possible to 

our customers. APPA supports the clearing language in H.R. 3795 

that provides an exemption from clearing for LSEs and end users. 

Specifically, requiring not-for-profit public power systems to clear 

would pose significant financial hardships to them and the local 

governments that own them without addressing any of the systemic problems that cause the financial crisis in which we now find 

ourselves. Derivatives end users such as Plug Power Systems do 

not pose systemic risks to the market as do the bank-to-bank exchanges for the purposes of profit making, therefore, derivative end 

users should not be subject to the same type of regulation as other 

entities. 

Mr. MARKEY. If you could summarize, sir. 

Mr. MCCULLAR. Thank you. Therefore, APPA and DMEC’s perspective from our perspective a well-drafted bill will include provisions necessary to curb market manipulation while preserving 

FERC’s primary jurisdiction over RTO markets including the FTR 

markets in preserving the ability of energy end users to use noncleared OTC swaps to hedge against energy price volatility. Thank 

you. 

[The prepared statement of Mr. McCullar follows:] 


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Mr. MARKEY. Thank you very much. We appreciate it. 

Our next witness is an old friend and the year is winding down 

and it is great to have another visit from Glenn English, our 

former colleague in the Congress and the CEO of the National 

Rural Electric Cooperative Association. He served 10 terms in Congress representing the great State of Oklahoma and is a great 

friend of our committee, and he spent the whole year tutoring us 

on how rural America interacts with all of the major energy issues 

in our country and we thank you for that, and whenever you feel 

comfortable, please begin. 

STATEMENT OF GLENN ENGLISH 

Mr. ENGLISH. Thank you very much, Mr. Chairman, and being 

very mindful of vote pressures that you are under, the committee 

is under I will move right along. 

I would ask that my entire written testimony be made a part of 

the record. 

Mr. MARKEY. Without objection, so ordered. 

Mr. ENGLISH. And also as the chairman pointed out, electric cooperatives, of course, are very important to rural America. I am the 

CEO of the National Rural Electric Cooperative Association. We 

have 47 States in which we have some 930 co-ops, 42 million consumers. We are not for-profit and consumer-owned, and we are 

very proud of that so as you can imagine has been the case all this 

year, Mr. Chairman, our focus has been on the issue of affordability, and once again, I come to talk to you about the issue of affordability. 

First of all, I would like to commend Chairman Peterson for the 

work that he has done, certainly increasing transparency and reduces systemic risk for end users. I think it is extremely commendable. I think the legislation goes far in achieving these objectives, 

however the subject of this hearing focuses on a very narrow area 

and it is one that we have great concern over and I know that this 

committee does, and I want to commend you, Mr. Chairman, for 

having this hearing and calling attention to this issues. 

We have what I think many of us are very familiar with in which 

you have two Federal agencies here that could potentially have jurisdiction over an area that is very sensitive, and I would point out 

to the committee and I think most members of the committee are 

very aware of the fact that certainly this is a very volatile, sensitive area when you talk about movement of power in this country. 

And it is extremely important, as this committee has discussed 

many times that that power move freely, and that it move in a 

timely fashion, and it move in an affordable way. And in this particular area, I know of no problems that have occurred with regard 

to the Federal Energy Regulatory Commission in helping bring 

that about. I am not familiar with any market manipulation issues 

that have arisen since 2005, and the legislation passed by this committee, and certainly I think that we all are very mindful that it 

is in all of our best interests, whether we be for-profit or consumerowned as part of the electric utility industry that we continue to 

make certain that the power in this country moves in an efficient 

manner. That is important to consumers and it is certainly important to keep the lights on throughout this nation. 


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So we have become very concerned, Mr. Chairman, in that we 

have some questions that have arisen here of exactly how we are 

going to proceed, and this is something that troubles us a great 

deal. We would strongly suggest, Mr. Chairman, that as we talk 

about these transactions, both before the transaction takes place 

and during the period in which the transaction is being carried out 

that we have one agency that focus on meeting those responsibilities and that be the Federal Energy Regulatory Commission. I 

would suggest, Mr. Chairman, a very bright line can be painted 

after the transaction. They should be fair gain for anyone on any 

wrongdoing, any market manipulation that is detected whether it 

be the Federal Energy Regulatory Commission or the Commodity 

Futures Trading Commission Either way we should encourage and 

hope that they root out any wrongdoing, and they take those steps 

that are necessary to deal with it but I think it is very important 

for us to keep in mind, Mr. Chairman, that we need one agency to 

focus on that very sensitive, critical period of time as to when these 

transactions are being carried out. And I know the chairman is 

very sensitive to time in this area as well so I will wind up by simply saying, I hope that you encourage the two Federal agencies to 

come together, work with us and work with the two committees in 

Congress into resolving this difficulty so that we don’t have any interference taking place in this marketplace. 

Thank you, Mr. Chairman. 

[The prepared statement of Mr. English follows:] 


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Mr. MARKEY. Thank you, Mr. Chairman, as well. When did you 

leave, Glenn? 

Mr. ENGLISH. That was 1994, and we did have jurisdiction out 

of my subcommittee at the Commodity Futures Trading Commission back in those days. 

Mr. MARKEY. I remember that yes, long ago. 

Mr. ENGLISH. I am afraid so, very long ago. We are both getting 

older. 

Mr. MARKEY. Our next witness is John Shelk. He is the President and CEO of the Electric Power Supply Association. That is the 

national trade association representing competitive power suppliers, and back when I was the chairman of this subcommittee in 

1985 and 86, John was the chief counsel for the ranking member 

of the committee at the time. We did the Appliance Efficiency Act 

that year, Carlos the refrigerator warhead and that was when, if 

you remember, William ‘‘the Refrigerator’’ Perry couldn’t get a bigger and better nickname than that. But I don’t know if you know 

this but refrigerators now basically consume 50 percent less electricity for the same size device as they did in 1986, and so Mr. 

Shelk has—what John? 

Mr. SHELK. That is a long time ago. 

Mr. MARKEY. It is a long time ago but we welcome you back, 

John. 

STATEMENT OF JOHN SHELK 

Mr. SHELK. Thank you, Mr. Chairman, we appreciate the invitation. 

As you indicated, EPSA represents competitive wholesale suppliers including generators and marketers who do business both in 

the two-thirds of the country with organized markets and in the 

one-third without them. The competitive sector has 40 percent of 

U.S. generating capacity with an even greater role in the organized 

markets. 

As you kindly mentioned, for 10 years I had the honor of working 

for members of this committee including on FERC matters, and 

more recently I have joined the CFTC’s Energy and Environment 

Markets Advisory Committee and fully support the transparency 

goals Chairman Gensler outlined to you this afternoon, the question is how to do so. Our position is that there is no more important issue to be acted upon by the Congress in the near future that 

will impact the electric sector than maintaining cost-effective access to OTC risk management products for all the reasons you have 

heard from the other panelists. We commend the CFTC for listening to our concerns and we also appreciate changes to the original 

version on H.R. 3795 made by the Committees on Financial Services and Agriculture, however for reasons that you have heard, 

three crucial details remain. 

First, definitions should ensure access to OTC risk management 

products by those of us primarily managing commercial risks without imposing mandatory clearing due to how it would constrain our 

capital availability at a time when you rightly expect us to be investing in the energy infrastructure of the future. Second, margin 

requirements should not apply to those who use OTC products to 

manage commercial risks for the same reason and for what you 


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have been focusing on this afternoon, we agree that a clear line 

should be drawn in the statutory language between the important 

responsibilities Congress assigns to the two agencies. Understandably, for those actually implicated in the financial crisis, the bill as 

it stands today defines what is within the CFTC’s exclusive purview very broadly, however as you have heard this raises very serious questions as to FERC’s exclusive regulation of wholesale markets, markets which were not implicated by the financial crisis and 

we share those concerns. 

FERC’s exclusive jurisdiction should be preserved by adding a 

provision to the bill that excludes any products transacted through 

or in reference to the RTOs and ISOs FERC regulates, and most 

importantly for my members who serve many of your constituents, 

these are the markets from which electricity suppliers receive the 

revenues necessary to operate and invest. As a result, electricity 

markets are systems that are physically and financially integrated 

so extensively as this committee is well aware, as to sharply distinguish electricity from the corn and Treasury bill examples you 

heard earlier, thus dual or coexisting regulation while not impossible, is more problematic, hence the recommendation for a statutory bright line because as you know, all these things are interrelated. Physically you cannot pull them apart like you can corn 

and T-bills from the different agencies. 

For all the reasons you have heard that I won’t belabor, RTOs 

and ISOs are subject to multiple layers of oversight. The extent of 

this oversight and the documented competitive market results that 

the organized markets produced to benefit consumers are ample 

evidence of the effectiveness of FERC’s regulation that should be 

preserved. Unfortunately, the bill as it stands, as I mentioned, does 

not yet expressly and fully address this important issue. We 

strongly urge you to do so to preserve FERC’s jurisdiction over the 

organized markets of which a large and growing share of the country depends for its electricity. 

And again, we thank you for the invitation and look forward to 

your questions. 

[The prepared statement of Mr. Shelk follows:] 


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Mr. MARKEY. Thank you, Mr. Shelk, very much. 

Our final witness is Vincent Duane, General Counsel for PJM, 

that is Pennsylvania, Jersey and Maryland. 

Mr. DUANE. Originally, that is correct. 

Mr. MARKEY. Right, the regional transmission organization that 

serves much of the mid-Atlantic and parts of the Midwestern region of the country. So what other States are in now? 

Mr. DUANE. We are, Chairman, in 14 States if you include the 

District of Columbia, 13 States and the District of Columbia, as far 

out west as Illinois up to the New Jersey-New York border down 

into North Carolina and a good part of the country in between. 

Mr. MARKEY. And they wouldn’t want to be run by a group called 

Pennsylvania, Jersey and Maryland so the name change is to protect, you know, the innocence. 

Mr. DUANE. Hence, my reluctance in agreeing with you on the 

original, historical derivation. 

Mr. MARKEY. I see, yes. You probably made a consultant 

$100,000 to make that recommendation so you joined PJM in 2003 

as deputy general counsel and has served as general counsel since 

2007. Have you ever been before this committee before? 

Mr. DUANE. This is my first time, sir. 

Mr. MARKEY. First time so we have a brand new witness. Welcome to our committee and, you know, it is just great to have some 

new faces coming before us so whenever you feel ready, please 

begin. 

STATEMENT OF VINCENT DUANE 

Mr. DUANE. Well again, thank you, Mr. Chairman, Ranking 

Member Upton and the rest of the committee members for the invitation to be here today. 

I am testifying on behalf of PJM and I would request that the 

written testimony be included as part of the record. 

Mr. MARKEY. Without objection, it will be so ordered. 

Mr. DUANE. Thank you very much. 

We are as has been mentioned a RTO, Regional Transmission 

Organization, and a public utility. That means we are regulated by 

the FERC. We perform several functions and the one that is of 

most interest today is our function in administering organized 

wholesale electricity markets. We administer these markets for two 

reasons. 

First, we want to bring competitive forces to the transacting of 

wholesale purchases in the electricity markets and we use them 

and this is very important as a tool to help us discharge our responsibility in managing the grid reliably. It is a tool that incents 

people, be they generators, transmission customers and increasingly consumers and load interests in responding to prices that result in behavior that keeps the grid reliable and basically helps us 

in our mission in keeping the lights on. But the markets are the 

focus today and with particular attention being given to the FTR 

product that we administer in PJM. This product has caught the 

attention of the CFTC. I believe it is part of its overall interest as 

Chairman Gensler mentioned in bringing oversight to the over-thecounter markets. 


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My first point, and probably the most important point I want to 

make is that the public policy and they are very important public 

policy imperatives that are driving financial market reform are 

simply not present when it comes to the RTO markets. Its not that 

we don’t share in the objectives that Chairman Gensler mentioned, 

lowering risk, promoting transparency and bringing integrity to the 

public. Absolutely do we endorse those risks, in fact, we feel we put 

those at the very front of our windshield. We just get them to them 

and we get to those objectives in a slightly different way. 

We are not an OTC environment. We are a centralized marketplace and one that is pervasively, some would say intrusively regulated by the FERC. Our markets are not opaque. It is hard to think 

of a more transparent environment than an RTO. Let us look at 

the FTR with particular reference here. When an FTR is bought 

and sold, the name of the holder of the FTR is publicly available. 

The price they pay for that FTR is publicly available and the identity of the particular FTR pathway is publicly available. It is all 

available to market participants in the FTR markets on the PJM 

Web site and there is no transparency issue. We get to that 

through the centralized markets regulated by the FERC and the 

products are not synthetic financial products. Admittedly they do 

settle financially but they are very closely tied to the physical capability of the transmission system and they are essential to our mission of delivering firm transmission to customers and ensuring that 

those customers have some degree of price certainty in moving 

their electricity from point A and point B, and these are missions 

that this committee and the Congress has squarely entrusted to the 

FERC. 

The second point I would like to make is we are not and we are 

quite distinct from the sort of financial institutions that operate in 

the OTC markets. We are a non-profit entity. We don’t make 

money on FTRs and we don’t have structuring desk that is populated by Ph.D. mathematicians devising exotic instruments, packaging them and marketing them to other financial institutions. 

That is not what an FTR is all about. In fact, we have another 

function that I mention in my testimony where we are a transmission planner and we look at opportunities to expand the transmission system to remove congestion to increase transfer capability 

which is to say the ability to move electricity from one point to another and in doing so reduce the reliance on FTRs. So we are quite 

distinct from a financial institution that might be trying to market 

a product. We are in a sense, trying to eliminate the need for or 

at least lessen the reliance on the FTR product. 

The last point I would like to make is to sort of answer the question I think is at the heart of this which is well what is so wrong 

with having a dual role with the CFTC and the FERC, and why 

is this a matter that needs some statutory attention, and it is not 

just a desirability to bring clarity. It is not just to eliminate duplication and dare I say it is not just to avoid costs. It is really a question that the tools that the CFTC uses just have not been a very 

good fit for the products and markets and environments that we 

operate. We get to those objectives through different mechanisms 

and don’t see the same need to get to the risks that have been 

identified. 


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I would like to close on that point and make myself available for 

questions. 

[The prepared statement of Mr. Duane follows:] 


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Mr. MARKEY. Thank you so much. We appreciate it, Mr. Duane. 

The chair will now recognize himself for some questions. 

Ms. Moler, your position is that FERC should have exclusive authority over RTO products and services. That is a much more aggressive position then Mr. Waxman and I and Mr. Upton and Mr. 

Barton have taken. We basically say lets preserve FERC’s authority and where there is overlapping authority, let the FERC and the 

CFTC work it out. Why is your approach better in your opinion? 

Ms. MOLER. My concern is born of the language in the bills that 

have gone through the two other committees. Under the Commodity Exchange Act, if the CFTC has jurisdiction over a transaction, it supplants other agencies’ jurisdictions. They have exclusive jurisdiction and I do not understand having negotiate a number of Memoranda of Understanding when I was at FERC and 

when I was Deputy Secretary of Energy how one agency that has 

preemptive authority over transactions that are currently regulated 

by another agency, how those two agencies can successfully negotiate a Memorandum of Understanding. 

So if you give the CFTC authority over or if they claim authority 

over things like Financial Transmission Rights, that trumps 

FERC’s authority and FERC’s ability, at least arguably, and 

FERC’s ability to allocate transmission rights and the like, and I 

worry about that. I understand that they have under the Energy 

Policy Act of 2005, authority to look at fraud and manipulation but 

they wouldn’t have anything to do with those transactions. That is 

why I am not as comfortable with the MOU approach. 

Mr. MARKEY. OK, great. 

Mr. English, what would be the practical impacts on consumers 

and your members if FERC’s authority over Financial Transmission Rights and other RTO products were eliminated as a result 

of the pending bill? 

Mr. ENGLISH. I think the problem is we don’t know, Mr. Chairman. We have an agency that really is not equipped to regulate 

these markets and certainly that would raise questions I think 

about as I mentioned earlier a very volatile marketplace and how 

well it would work so I have serious questions whether it would 

work. 

Mr. MARKEY. Great. 

Mr. Shelk. 

Mr. SHELK. As I indicated, these are the markets in which we 

receive the revenue on which we rely to operate and invest so our 

concern would be, depending on what aspects of the RTOs and the 

ISO markets the CFTC might consider under its purview, and as 

Ms. Moler said this is the later enacted statute so if it stands as 

it is today, we would be subsequently basically reaffirming and 

even strengthening the CFTC’s role which would raise concerns in 

our minds about the revenue strengths we depend on. 

Mr. MARKEY. OK, great. 

And, Mr. McCullar. 

Mr. MCCULLAR. We heard the two chairmen discussing the very 

issue and it is our position that FERC should maintain primary jurisdiction in these markets but CFTC can be helpful in an oversight mode and in, frankly, combining resources to deal with these 

problems could only help the markets and the consumers. 


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Mr. MARKEY. Great, thank you. 

Mr. Duane, what changes would be made if PJM had to adhere 

to the principals in place under the Commodities Exchange Act as 

a derivative clearing organization? What effect would those requirements have on the marketplace? 

Mr. DUANE. Let me first state I am not sure we would be able 

to comply with those directives. Again, those directives are designed to promote transparency, to limit lower risk and to preserve 

the integrity of markets. That is well and good and those are objectives that we share that the FERC shares as well and we just use 

different tools to do that. If we were forced somewhat akin to a 

square peg into a round hole, I am very concerned that the products themselves wouldn’t survive. Alternatively, there would be 

sort of qualification given to such a degree that I am not sure anything will have improved or changed. We have got what we have 

got today. It is workable. I think that is the answer to the question. 

Mr. MARKEY. Great, thank you, Mr. Duane, very much. 

My time has expired. The gentleman from Michigan, Mr. Upton, 

if recognized. 

Mr. UPTON. Thank you, Mr. Chairman. I just want to say as I 

listened to the testimony of all five witnesses, it really does seem 

like we are at Fox News, fair and balanced. Everyone was on the 

same page, including Mr. English, former Ag Committee member, 

right, correct? Have you talked to Chairman Peterson about this? 

Has anyone here? 

Mr. MARKEY. The CFTC, by the way, has its own channel one 

floor down that it can turn to. 

Mr. UPTON. Yes, has anyone here, I should ask, has anyone here 

in the audience from the Ag Committee? Going once, no hands, OK. 

Mr. ENGLISH. Well, Mr. Upton, as I pointed out I have high 

praise for Chairman Peterson. 

Mr. UPTON. I know you do. I know you do. 

Mr. ENGLISH. There is just this one little narrow area. It is not 

much, just a little tweaking here and there would take care of the 

problem. 

Mr. UPTON. Yes, you know, Mr. Wellinghoff, Chairman 

Wellinghoff in one of his answers talked about uncertainty creates 

more risk and clearly I think that is what this 3795 really does. 

It does need to be maybe a little more than tweaked but it needs 

to be fixed. There is an old saying if it ain’t broke, don’t fix it but 

in fact, I think this would really send us back and the bottom line 

would be that the extra burden would probably increase rates for 

most America. I know PJM, I thought stood for Michigan in this 

thing but that is all right. But it would, the burden would in fact 

have the potential of increasing rates for all consumers is that— 

does anyone disagree with that? So and, you know, the electric industry is unified, right? Is there anyone else that is not on the 

same page, any major organization that is not with your testimony, 

right? 

Mr. SHELK. And as you know that is a unique development in 

our system, the fact that we are unified. 

Mr. UPTON. We are still working on cap and trade to make sure 

we get people back in the corral but we will see what happens. But 

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ward to working with Chairman Markey and Waxman and Barton 

to fix this problem before it gets to the House floor because it will 

increase rates and that is the last thing that, you know, as I look 

at Michigan’s economy and the nation as well. We don’t need this. 

We really don’t need this. 

Ms. MOLER. Mr. Upton, several earlier participants have mentioned an analysis that Exelon has done by looking at what would 

happen if our types of transaction were required to be cleared and 

our analysis shows a rate increase of between 5 and 15 percent. 

With your permission, I would like to put an example or two in the 

record that shows how we came up with those numbers based on 

some real typical kinds of power transactions. 

Mr. MARKEY. Without objection, so ordered, thank you. 

Mr. UPTON. Thank you and I have no further questions. I yield 

back. 

Mr. MARKEY. The gentleman yields back his time. 

And the chair recognizes the gentleman from Michigan once 

again, Mr. Stupak. 

Mr. STUPAK. Thank you, Mr. Chairman. Sorry I missed the testimony. I had to take another meeting but I have been asking the 

last time I asked about the swap clearing for end users so let me 

ask this question this way. Bona fide hedgers are participating in 

derivatives markets for commercial purposes and really are not the 

cause of our excessive speculation as I call it in the energy markets. Electric utilities are not the cause of our current financial crisis, however in the legislation exemption from a swap clearing for 

end users also allows large financial institutions that serve as your 

counterparties to also remain off the hook for stricter oversight. So 

my question was this and whoever wants to chime in, please do, 

would you support a change in the legislation that allows a bona 

fide hedger, including electric utilities to remain exempt from clearing requirements but mandating that tier one financial companies 

clear their swap transactions on a regulated market? All right, 

Glenn, it looks like you are ready to go. 

Mr. ENGLISH. Our concern still is the fact, you know, we are very 

small and certainly whenever you look at the size of these markets 

you can’t hardly see us with a magnifying glass but these are very 

important markets to us to hedge our risk. We don’t have the kind 

of capital at hand to be able to handle a great deal of risk and it 

really puts us in a bind for this. Anything that would increase 

those costs, I think are going to push our people out of those markets and it increases risk to our members considerably. 

Mr. STUPAK. But if we exempt you out and let your counterpart 

though it would still regulate that. 

Mr. ENGLISH. That the key word here is what kind of impact is 

that going to have on you, yes. 

Mr. SHELK. Mr. Chair, we support Mr. Stupak’s interest in transparency. The question is how do you do it and the concern with the 

tier one provision is as Chairman Gensler indicated most of our 

counterparties are the larger banks so they can be. 

Mr. STUPAK. Counterparts. 

Mr. SHELK. So under the version that you have suggested essentially the tier one bank wouldn’t post the collateral, we would have 

to post the collateral as the counterparty to the tier one institution 


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and as I indicated earlier, the problem with that is it would tieup, and the examples we have come up with about an average a 

quarter of the capital of the end user so we fully agree with your 

comments that the electric utilities and other generators didn’t 

cause the problem. We think the way to get to your transparency 

goal which we share because we are in the market too, is to have 

a data repository so that information on these trades would be 

available to the CFTC and others, and the problem with electricity 

is it is very customized. These products are traded over hundreds 

of different nodes around the country so it doesn’t really lend itself, 

the CFTC doesn’t lend itself to the corn example, and the T-bill example and kinds of commodities that the chairman indicated. 

Mr. STUPAK. You know, we will try to get to these large pools 

coming in and driving up those prices and even if they are your 

counterpart, they still fluctuate. 

Mr. SHELK. That is why we agree with you. You can help us so 

we would like to see the data repository as the way to put on the 

bulletin board to the CFTC so they would know what is happening 

in these markets whereas Chairman Gensler said today, they don’t. 

I think that would get at what you are trying to accomplish. 

Ms. MOLER. Mr. Stupak, there are lots of estimates floating 

around about how much this costs but if you require these transactions to be cleared on exchange, they have margin requirements, 

and we are talking billions of dollars of additional cost to our sector. And you can’t just exempt Exelon, or PECO, or Com-Ed, or 

DTE, or anything but not their counterparty because if their 

counterparty has to go through the clearing process then drags the 

reluctant counterparty with them. Both parts, if one is subject to 

it, then both parts of the transaction get subject to it and that is 

where the costs come from. So yes, I understand it may not be popular to think about exempting some of the large investment houses 

but they are our counterparties and we need these markets to be 

robust. Deep liquid is the phrase that our guys always use but that 

is the way we save our customers money. 

Mr. STUPAK. But also led to our financial meltdown. 

Ms. MOLER. Not with these kinds of products. They, I mean the 

housing derivatives and mortgage securities, et cetera, et cetera, 

but I don’t think that you find that transactions for FERC RTO 

markets and hedging instruments used by our sector have been 

part of that problem. 

Mr. STUPAK. Well, I think Mr. Waxman might disagree with you 

on that after the California electric debacle and again, I am not 

saying you caused it but when you got that much money moving 

around and as quickly as it is moving around that is where your 

excess speculation comes in, and so how do we do it that keeps you, 

a bona fide hedger, you are bona fide. These other folks come in 

with this money, they are not bona fide. They are just in there to 

make money and as long as if they are not cleared anywhere and 

even depositories is the place to look at. I am not quite sure but 

I am still saying making them clear. I am still trying to—I am still 

wrestling with that one. 

Mr. MCCULLAR. If I could have a comment that may give some 

comfort here. 


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Mr. MARKEY. Please do it quickly because our roll calls are about 

to start. 

Mr. MCCULLAR. We work in the light in our industry. It is very 

open and it is very transparent, and when we have these counterparties, we require them to come into the light with us and especially public power systems or community-owned systems. We 

would not participate as a counterparty in something that was not 

in the light and transparent and I think that should give comfort. 

Mr. MARKEY. Gentlemen, the former police officer from Michigan’s time has expired, a former state trooper. He prefers that everything be in the light as a former state trooper. It works better 

for crime prevention and detection. 

The gentleman from Louisiana, Mr. Scalise, is recognized. 

Mr. SCALISE. Thank you, Mr. Chairman. 

I would just ask for the whole panel if, I know a few of you made 

some different remarks about this in your statements but if you 

could each say first if you do think there would be any increases 

to consumers by this legislation and if so, what rough percentage, 

and if you can just go across starting with Ms. Moler. 

Ms. MOLER. Yes, and our best estimate is somewhere between 5 

to 15 percent to have a clearing requirement. 

Mr. SCALISE. Thanks. 

Mr. MCCULLAR. Thank you and from our point of view it would 

be at least a 5 percent increase in cost of operations and those costs 

would have to be passed onto the consumers. 

Mr. ENGLISH. In looking at the issue that we are talking about 

today, we have a major concern over the law of unintended consequences and any time you leave a hole open with this kind of a 

question, you are likely to have increased costs and unintended 

consequences. 

Mr. SHELK. The short answer is yes for all the reasons you have 

heard. 

Mr. DUANE. From the RTO perspective, it would frustrate programs that are essential to the delivery of services to our customers. That would increase cost and perhaps take away the programs altogether. 

Mr. SCALISE. OK and then earlier we talked to you about capital 

and how this may tie-up capital that would make it more difficult 

for companies to become more energy efficient. Can each of you just 

briefly touch on that, as well? 

Ms. MOLER. I agree with Mr. Shelk’s earlier observations on that 

subject. We are like all businesses these days we are very careful 

where we put our capital. If we have to put it all on margin requirements, we won’t be able to do other new projects, transmission 

projects, new generation. We are building a solar project in South 

Chicago. The money there wouldn’t be there. 

Mr. MCCULLAR. I agree with Ms. Moler’s statement. It is a capital-constrained environment now for all the reasons we know. This 

would only aggravate that situation. 

Mr. ENGLISH. And I also agree but I also think that it could have 

the additional complication of the flow of power in this country. 

Mr. SHELK. On the point of the capital it is not only the amount, 

it is the uncertainty because you have to post margin in the beginning and as the transaction continues over time so it is not just the 


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amount which in and of itself is significant but it is also the fact 

that it would change over time. Again, we think unnecessarily so; 

we can accomplish the transparency goals that Mr. Stupak understandably wants to achieve without having to tie-up roughly a 

quarter of each company’s capital in the clearinghouse to get the 

transparency that you should want. 

Mr. DUANE. And again, from the RTO perspective and the FTR, 

the FTR is essential to assist people in long term contracting. Long 

term contracting provides a stream of revenue necessary to support 

capital formation and investment of any technology so yes, again, 

if the program is threatened the whole unintended consequence 

flows through the whole system. 

Mr. SCALISE. Thanks and then I will just throw this one out 

there for anybody that wants to take it. Do you believe that some 

market participants would cease hedging exposure if clearing were 

mandatory due to the increased cost associated with exchange trading and if that were the case would that even bring more risk into 

the market if anybody wants to? 

Mr. ENGLISH. Yes, as far as electric cooperatives are concerned, 

we wouldn’t have a choice. 

Mr. MCCULLAR. Yes, the capital constraint, public power systems 

would basically be priced out of using those tools and it would impact our customers. 

Ms. MOLER. We use hedging to level out the prices we charge our 

customers. If we can’t hedge, we are going to charge them more, 

and we will also be less likely to enter into long term contracts. 

Mr. SHELK. The short answer is yes, it would. 

Mr. DUANE. The only point I will add is to remind everyone here 

that electricity is an extraordinary volatile commodity and the ability to hedge that price volatility is essential. 

Mr. SCALISE. And, of course, benefits consumers too; I appreciate 

all of your candor and I yield back. 

Mr. MARKEY. The gentleman’s time has expired. 

The chair recognizes the gentleman from Michigan, Mr. Dingell. 

You, Mr. Chairman, would be the last member recognized to ask 

questions. I thank the chair for that and I want to thank all of our 

witnesses for their testimony today. The hearing has underscored 

the need for the derivatives bill reported out of the House Agriculture Committee to be modified so it does not interfere with the 

ability of the Federal Energy Regulatory Commission to oversee 

electricity and natural gas markets. We have heard about the potential for the bill to disrupt the RTOs as well as mechanisms used 

by many RTOs. These include Financial Transmission Right used 

to hedge the volatility of transmission prices forward capacity markets use to ensure that there is sufficient generation capacity and 

potentially demand side energy management programs. We have 

also heard about the potential for this legislation to exacerbate an 

existing dispute over the reach of the FERC’s antifraud and antimanipulation authorities. Clearly, we need to correct these problems and work with the members who have come here today on a 

bipartisan basis and with the witnesses who have been gracious 

enough to come here today to testify as expert witnesses so we 

thank you all. 


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And with that and the thanks of this committee, this hearing is 

adjourned. 

[Whereupon, at 3:45 p.m., the Subcommittee was adjourned.] 

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