No more secret trading

The energy crisis that threw California into darkness last year was not the result of a shortage of electrical power; it came as a consequence of market manipulation on the part of Enron and other energy traders, and this state—along with much of the rest of the Western U.S.—will be feeling the effects for decades.

Billions were lost as energy prices shot through the roof, blackouts rolled across the state and the economy was thrown into chaos. Tens of thousands of jobs were sacrificed. And worst of all, there’s no reason to think it couldn’t happen all over again—unless Congress acts now to close the loophole that allowed Enron to do its energy trading in secret. That’s why we’re urging support for Senator Dianne Feinstein’s proposal to shine a light of public disclosure on energy derivatives trading.

Unless you’re in the energy business, chances are you don’t know much about derivatives trading or how its deregulation less than two years ago led directly to the energy crisis. Yet about 90 percent of all energy trading takes this form and therefore escapes government oversight, and the lack of any regulation of Enron’s wheeling and dealing was perhaps the key factor in the crisis.

Here’s how it works: If one company sells natural gas to another and delivers that gas in a tanker truck, the government has the power to make sure the buyer isn’t being gouged. But in today’s energy market, transactions are rarely so simple. More often, one company signs a contract to deliver gas or electricity to another, and before that product is delivered, it is sold to another company, which then sells it to yet another, and so on. These transactions, in which the energy product is not actually delivered, are referred to as derivatives trading.

Until recently, such trading was subject to the same laws that govern wheat, pork bellies or any other commodity. But thanks to all-out lobbying by Enron and other companies hoping to make a killing in the deregulated energy market, Congress passed legislation in 2000 making energy derivatives exempt from government oversight.

The results speak for themselves. By controlling a large percentage of energy transactions and operating under a cloak of secrecy, Enron was able to manipulate prices and gouge consumers in California and throughout the West. The company used the derivatives market to generate shortages and drive prices through the roof, creating a situation in which natural gas was traded in Southern California at six times the going price in New Mexico, and California’s energy costs went from $7 billion in 1999 to $27 billion in 2000.

All of this can happen again—and probably will—unless some oversight is regained over energy derivatives. Feinstein’s proposal, which faces bitter opposition from the banking industry, would close this important loophole, and mark a big step toward stabilizing California’s energy picture. We urge its passage as part of the energy reforms currently before Congress.