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Law Professor Testifies on Energy Speculation Before House Subcommittee

As outcry over high gas prices comes to a fever pitch and as the public prepares for the high cost of heating their homes this winter, the Subcommittee on Oversight and Investigations of the U.S. House Committee on Energy and Commerce, chaired by Bart Stupak (D-MI), met on Dec. 12 for a hearing titled, "Energy Speculation: Is Greater Regulation Necessary to Stop Price Manipulation?"

Michael Greenberger, JD, professor at the School of Law, and a former director of the division of trading and markets at the Commodity Futures Trading Commission (CFTC), was one of five witnesses on the first panel testifying before the subcommittee on this issue.

Greenberger told the subcommittee that a change must be made to the legislation passed in 2000 that created the so-called "Enron loophole," leading to substantial deregulation in the energy futures markets, especially trading conducted on the Intercontinental Exchange, Inc. (ICE), another influential U.S. futures exchange.

Greenberger said that the high cost of energy is not only related to supply and demand in the marketplace, but also to manipulation within the deregulated trading of futures derivatives, the contracts used in financial transactions to either hedge or speculate on energy prices.

The CFTC now regulates the trading of energy derivatives on one major energy exchange, the New York Mercantile Exchange, Inc. (NYMEX), thereby blunting manipulation of energy prices on that contract market. However, ICE is not regulated by the CFTC due to the loophole in legislation that was passed in 2000 at the behest of Enron. Even though Enron ultimately failed, the practices it deployed in the unregulated futures markets are alleged to be continuing by other energy speculators today.

"Since their creation in the agricultural context decades ago, it has been widely known that, unless properly regulated, futures markets are easily subject to distorting the economic fundamentals of price discovery (i.e., cause the paying of unnecessarily higher or lower prices) through excessive speculation, fraud, or manipulation," said Greenberger. "The Enron loophole eliminated much needed regulation for energy futures and virtually all parties now agree that that loophole must now be repealed."

Other participants on the panel with Greenberger included Sean Cota, president and co-owner, Cota & Cota, Inc.; Laura Campbell, assistant manager of energy resources, Memphis Light, Gas and Water; Thomas LaSala, chief regulatory officer, division of compliance and risk management, NYMEX; and Charles Vice, president and chief operating officer, ICE.

A second panel on the subject included testimony from Joseph Kelliher, chairman of the Federal Energy Regulatory Commission and Walter Lukken, acting chairman of the CFTC.

To read more about this hearing, click here.

While working at the CFTC, Greenberger supervised exchange traded futures and derivatives. He also served on the Steering Committee of the President's Working Group on Financial Markets and as a member of the International Organization of Securities Commissions' Hedge Fund Task Force. At the law school, he teaches a course entitled: "Futures, Options and Derivatives." He is a frequent commentator in the media and at academic gatherings about issues pertaining to financial regulation, and he has appeared on ABC World News with Charles Gibson, The NewsHour with Jim Lehrer, and C-SPAN to discuss financial issues arising out of the Enron, Arthur Anderson, WorldCom, Refco, and Amaranth hedge fund failures. In addition, he has also spoken about the adverse effects federal financial deregulation has had in aggravating the impact of the subprime mortgage meltdown.

Posting Date: 12/20/2007
Contact Name: Judy Heiger
Contact Phone: 410-706-0914
Contact Email: jheiger@umaryland.edu