Panel III of a Hearing of The Subcommittee on Oversight and Investigations of The House Energy and Commerce Committee - Energy Speculation and Regulation Part II


Date: June 23, 2008
Location: Washington, DC
Issues: Energy

REP. BURGESS: Thank you, Mr. Chairman.

Mr. Lukken, I assume you were here when the first panel testified this morning?

MR. LUKKEN: I was.

REP. BURGESS: Mr. Masters talked about his four step plan to immediately bring prices of crude down to its marginal cost of 60 (dollars) to $70 that could happen within a period of hours, minutes, days. Well, step one was establish limits that apply to every market participant, and you heard testimony from other individuals on that first panel that this was probably the most -- for the most bang for the buck occurred in these four proposals and this was the step of establishing position limits. Do you have currently the authority to do what is outlined by Mr. Masters in step one of his testimony?

MR. LUKKEN: Putting position limits on speculators?


MR. LUKKEN: Currently, I think our act requires exchanges to put position limits on it, but I think through emergency authority we could put position limits on any type of participant.

REP. BURGESS: Well, again, the testimony we heard this morning was pretty powerful that using this type of authority within a very brief period of time we could bring the cost of crude oil to well under $100 a barrel, we see how the economy is suffering, we see how other commodity prices are affected, we heard the testimony from the truckers, the airline industry and on. Wouldn't that kind of classify as an emergency to take this step?

MR. LUKKEN: Well, I think that the big -- we currently have controls and position limits on speculators, accountability levels outside the spot month for speculators. I think what was in that chart -- the 70 percent chart that was shown -- are the swap dealers, those people who are aggregating lots of clients and putting them into the futures market, the net risk of those with positions.

We're going to try to get better information from them, but we can't put limits on or think about limits until we get better data and information from those types of participants. Again, we want to also make sure that, you know, if they're purposely evading limits, well, that's something I think we should go after. But it could be that some -- you know, a lot of these are below limits or commercial participants coming to the market. So we just need better data before making any hard and fast decisions about that.

REP. BURGESS: Okay. Well, we had a hearing and it probably wasn't as involved as this morning's has been last December -- I mean, how much more time, how much more data, what could we reasonably expect as a timeline from CFTC before you feel that you have the data you need to invoke those emergency provisions to bring the price of crude oil down by 50 percent?

MR. LUKKEN: Well, certainly these are complex books that we're going through from swap dealers to try to unravel. These are not futures contracts, they are tailored contracts between customers and these swap dealers. So we're trying to put them in equivalent terms for the futures market -- these billion dollar books of these organizations. So, again, we're a small staff trying to do this while we at the same time regulate the markets. So we're doing as fast as we can to get to Congress the information they need to make decisions.

REP. BURGESS: And I appreciate the conditions under which you're working, it's just when you hear people talk about opening the strategic petroleum reserves the president has the executive authority to do that in times of emergency and that maybe this is one of those times. And I would just submit if you have that authority under emergency provisions that the step of limiting the spot market might be, or the speculators in the spot market may be a less drastic step than to drawing down the strategic petroleum reserve.

We probably have a great reserve of speculators but we got into trouble after drawing down the strategic petroleum reserve we have nowhere else to go but ANWR and we've heard it takes 10 years to get that oil.

Now on the issue of the -- just the -- your ability to do your job, how do we stand currently with -- you said you needed -- what was the figure you need, an additional $150 million this year, is that -- did I see that in your testimony?

MR. LUKKEN: No, actually, it was $30 million.

REP. BURGESS: Thirty million dollars, okay. We'll give you 150 (million dollars). (Laughs.) But what realistically, what is the practical effect of the fact that we're just now starting our appropriations work in Congress, and no one will tell you with a straight face that we're going to finish any appropriations bill by September 30, and anything that happens will be done after the next president's sworn in. We're asking you to move with all due dispatch on this, and yet at the same time we're probably not going to fund you any additional money for at least six or seven months and maybe even longer than that. Is that going to be a problem?

MR. LUKKEN: A huge problem, sure. I mean, this is something that -- you know, we've been straining under the pressure to oversee the markets, all the initiatives that we're going through, the FARM Bill with its authorities to go through. Just the growth in the market itself requires us to get more staffing. So, yeah, this is something I know we're not going to be able to bring up to speed with staffing immediately, but we have to be thinking, and as a steward of this agency, its long term health to insure that it has the proper staffing to do its job so it can report to Congress with certainty that it's overseeing these markets.

REP. BURGESS: Well, I appreciate your attention to the long term details.

Can you -- and I don't have much time left, or any time left -- but can you in very simple terms, simple declarative sentences, give us the difference between the Enron loophole, the London loophole and the swap stealers loophole?

MR. LUKKEN: Well, the Enron loophole, as it is called, was meant to, over time, exempt commercial markets developed which are ways of putting swap positions onto an electronic format. These positions became more and more price discovery vehicles, and we needed authorities to go along with that. You know, hat's occurring in London and what we've announced with FSA in London, these are fully regulated markets, and so we were trying to work with the British authorities to get the proper information from them and to harmonize the information and the position accountability and the position limits on those markets. So that's what we've already taken steps to address that, and I think those will be helpful in the future.

As far as the swaps exemption, that is something that's been in place for -- again, since 1991. As a policy, it's something when the CFTC was reauthorized in 1986 the legislative history from Congress urged us strongly to consider exempting these types of transactions out of using hedge exemptions. So this is something -- I wasn't around at the time, but I'm sure the commission took Congress' words to bear and decided to do this. So this is something we're readdressing, we're trying to get better information to understand whether this still makes sense. And if it doesn't, we'll make proper recommendations.

REP. BURGESS: Let me ask you a question just on technical grounds as what the language is called the Enron loophole, that was actually passed in the Commodity Futures Modernization Act by the House of Representatives in October of 2002 and then picked up and put into a large appropriations bill. Did the language change between the time the House voted on its bill in October of 2002 and the time that the Omnibus Bill was passed later in December?

MR. LUKKEN: Section H did not -- or Section 2H did not change at all.

REP. BURGESS: Did it change from May of 2002 when this committee marked up that legislation to the time it was voted on on the House floor? Was the language the same from what this committee submitted from Mr. Ewing's bill to the House floor to be voted on in October?

MR. LUKKEN: I believe it was the same.

REP. BURGESS: So this was not language that was just thought up at the last moment?

MR. LUKKEN: No, this was I believe put into the bill and I think it went through both this committee, the Ag Committee and the Banking Committee at the time to -- and then came to the House floor with a statement of administrative policy and support of it.

REP. BURGESS: So this would've been language that was voted on by Mr. Stupak and Mr. Dingell and Mr. Inslee who all voted aye. Mr. Green I think was not present at the time?

MR. LUKKEN: In October of 2002.

REP. BURGESS: October 2002.

I'll yield back my time Mr. Chairman.