Advocate Summary

Issue:  Derivatives
Advocate:  Senator Feinstein’s Office – Warren Weinstein
Date of Interview: 6/10/02

Basic Background
What happened in 2000, was that they created a third category of commodities, there was agriculture, there was financial and they carved out a third category that was sort of everything else, everything that wasn’t a financial or agricultural commodity. And for the most part that includes energy, includes broadband, weather derivates, pulp and paper but the majority of that, the lion’s share is energy. What we tried to do is role back that exemption, so it would cover essentially everything. You know, there would be a regulatory agency that could oversee if there were problem in all those other markets as well. Our big concern though is energy and in particularly in trading that happened in natural gas and electricity in the western energy markets in the past couple of years. That’s where we’re coming from on that. From a policy standpoint it probably makes sense to cover everything because who could foresee the problems you might have in those sectors a few years from now? But our big concern is what happened in energy. 

[what were Senator Feinstein’s reactions to Reid’s amendment?]
Well from a policy standpoint she believes that it makes sense for there to be regulation on all these things, but it’s not a big issue for us. You know, if we could get this passed without minerals as part of it we’d probably be fine with that. 

Prior Activity on the Issue 
We failed to get it attached to the energy bill because it became a very partisan vote which is unfortunate. 

Advocacy Activities Undertaken
We got involved on this based on what happened in California and the west with the energy crisis, that lasted from roughly May 2000 to June 2001. There were a lot of fundamental problems with the California energy market, there were a lot of price spikes and blackouts that couldn’t be explained by fluctuations in the market, and the further we looked into it, the further we looked into trading and the exchanging of energy multiple times, you know from one state to another state through different marketers and different distributors. We realized there wasn’t a lot of transparency and there wasn’t a lot of data available on those transactions. When we looked further we realized that that lack of transparency resulted from the 2000 Commodities Futures Modernization Act which essentially created a loop-hole by which if you were trading electricity on online exchanges you wouldn’t have to report that information, you wouldn’t have to report the trades, you wouldn’t have to report the capitol, and for the most part you would be somewhat protected from oversight by the Commodities Futures Trading Commission. So we looked at that and saw a big loophole on that. Subsequent to our efforts to get this changed, it’s turned out that a lot of energy companies have admitted to engaging in wash trades and other unethical transactions that we believe, had our amendment been in place at the point these trades were made, there wouldn’t have been the opportunity to do that. There would have been a regulatory agency that had the political authority and the authority to investigate and there would have been the opportunity for someone, you know, to file a complaint. 

Future Advocacy Activities Planned
She’s committed to trying to get it passed this year. 
We are planning on having a markup in the Agricultural Committee, they gave us a tentative date of July 10, and then we , I’m sorry a hearing, and we hope to have a mark up soon after that. And get it passed as stand alone. If that doesn’t work, we are looking at other pieces of legislation that will pass this year 

Key Congressional Contact(s)/Champions
None mentioned.

Targets of Direct Lobbying
None mentioned.

Targets of Grassroots Lobbying
Not applicable.

Coalition Partners: Names/Participants
The groups that have supported this, you have the Public Power the Public Gas people you have all the consumer groups, the Federal Regulatory Commission and the Commissioners there, all the groups that are touting transparency, some of the energy companies have realized that without this transparency and oversight we aren’t going to have deregulated energy markets so you have companies like PG&E and Calpine to come out in strong support of our amendment. Other companies have come along slowly, at this point I think you can divide up the energy companies into two camps, one camp says this will blow over we don’t have to worry about it, the other camp says you know what we’re in real trouble, stocks are real low, the perception of our company, of the whole sector is that we’re a bunch of crooks, and we are trying to operate legally and ethically so if we want to be able to continue to do so the market, the consumers need to be able to have faith in us, so therefore we need to push something that demonstrates our willingness to be regulated and overseen, and our willingness to allow bad apples to be pulled out of the bunch. So I think you have those two camps right now, and hopefully people are starting to come to that latter camp and move away from that former camp. I’m sure there are a lot of people that will stick to that argument that it will all pass. 

Other Participants in the Issue Debate
The Derivative Study center would probably be the best to talk to, Randal Dodd, they’re not neutral they believe that these things need to be regulated. Then you have the consumer groups, Consumer Federation of America, Public Citizen, US Pirg, Sierra Club is involved in it.  

It’s the whole issue of transparency, consumers get ripped off when there’s not transparency and you can manipulate prices. So it’s a partnership between consumer groups and environmentalists, because it’s good for people, it’s good for consumers, opposed to it’s good for business which sort of rips off people. That’s why they’re involved, but the bigger groups are the Consumer Federation of America, Consumer’s Union, US Pirg, Public Citizen. 

[Opposition]
We see opposition by the swap dealers, Morgan Stanley, JP Morgan, and groups with a lot of money, as well as some of the energy companies. 

Ubiquitous Argument(s) and Evidence
The main argument for this is that if you take advantage of these exchanges and trade this way, there’s no transparency, nobody knows what you are doing it is easy to manipulate, which it turns out, is what subsequently occurred. 

Secondary Argument(s) and Evidence
None mentioned.

Targeted Arguments, Targets, and Evidence
None mentioned.

Nature of the Opposition
We see opposition by the swap dealers, Morgan Stanley, JP Morgan, and groups with a lot of money, as well as some of the energy companies. 

They [J.P. Morgan and others were involved because] they own some of these exchanges particularly they own shares in the Intercontinental Exchange and this trading business is actually quite profitable for them and you know why would they want more regulation on it – it just makes it more difficult for them. 

[But  this wouldn’t include financial derivatives?]
No, not financial, many are trading a lot of energy derivatives, Goldman Sachs, JP Morgan and few other brokerage houses, have invested pretty heavily in energy trading businesses which are quite profitable for them, so their not concerned about the financial side of it, their concerned about those trading exchanges – trading energy and metals.

Ubiquitous Argument(s) and Evidence Articulated by the Opposition 
They [J.P. Morgan and others were involved because] they own some of these exchanges particularly they own shares in the Intercontinental Exchange and this trading business is actually quite profitable for them and you know why would they want more regulation on it – it just makes it more difficult for them. 

Secondary Argument(s) and Evidence Articulated by the Opposition
Now, on the other hand there’s also the camel’s nose under the tent argument, you know, if Congress is going to regulate energy derivates maybe five years from now they’ll decide to regulate financial derivatives. I think that’s a smaller concern for them but that probably is something they mention. 

Targeted Argument(s) and Evidence Articulated by the Opposition (and Targets)
None mentioned.

Described as a Partisan Issue
[Yes, mentioned that they were unable to pass the amendment attached to the energy bill because it was a partisan vote. ]

Venue(s) of Activity
Senate 
Senate Agriculture Committee

Action Pending or Taken by Relevant Decision Makers
We are planning on having a markup in the Agricultural Committee, they gave us a tentative date of July 10, and then we , I’m sorry a hearing, and we hope to have a mark up soon after that. And get it passed as stand alone. If that doesn’t work, we are looking at other pieces of legislation that will pass this year 

Policy Objective(s) and Support for/Opposition to the Status Quo
[Oppose the status quo, attempting to get energy derivative transactions overseen by the Commodities Futures Exchange Commission, which does not currently oversee the transactions as a result of the 2000 Commodity Futures Modernization Act.]

Advocate’s Experience: Tenure in Current Job/Previous Experience
Not obtained.

Reliance on Research: In-House/External (Code for Organizational Advocates Only)
There’s some research involved, but Senator Feinstein is well versed in what’s happened in the energy field in the past few years we’ve lived it every day. So it’s easy to see without having the proper oversight and authority, there are loopholes that people could squeeze through. The energy sector as a whole has certainly taken advantage of these different loopholes to figure out a way to make money, you know and part of it is legitimate and part of it’s not. The best analogy for it is you know you go out to the store and leave your door open and the energy companies go in to the house and stole everything they could, you know and it’s your fault for leaving your door open but it doesn’t excuse people from going in a stealing from you particularly when there isn’t a regulatory agency or a police officer on the beat to take care of it. So if the energy companies find out your door’s open they’re going to go in and take everything they can. 

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Advocate’s Outstanding Skills/Assets (Code for Organizational Advocates Only)

Type of Membership: None, Institutions, Individuals, Both (Code for Organizational Advocates Only)

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