Dianne Feinstein

The debate in the US Senate over the so-called Feinstein amendment might seem like a sideshow in the great drama of Enron's rise and fall, but for derivatives dealers and energy traders, the stakes could not be higher.

Dianne Feinstein, a Democratic Senator from California, has proposed a bill that would permit the Commodity Futures Trading Commission (CFTC), which regulates the futures industry, to set new rules and regulations for over-the-counter trading in energy and metals derivatives.

Ms Feinstein argues that this will close an important gap in the regulatory framework and provide greater transparency in the pricing of electricity and natural gas. Her bill would not normally have much chance of becoming law. In fact, less than two years ago Congress moved in the opposite direction, approving legislation that largely exempted OTC energy and metals derivatives from CFTC regulation as part of the Commodity Futures Modernization Act.

However, in the aftermath of Enron's stunning collapse, the political climate is much changed and Ms Feinstein's proposal has gained a surprising degree of support.

Although Enron is often cited in arguments for the bill, the real inspiration goes back to the California energy crisis of late 2000 and 2001. The huge spike in electricity prices during that period cost consumers millions of dollars, bankrupted the state's largest utility, and fueled suspicion that electricity deregulation had gone too far.

Ms Feinstein also has an important ally in the New York Mercantile Exchange (NYMEX), which would like to see CFTC-style regulations imposed on its competitors in the OTC markets. NYMEX is concerned by electronic trading platforms such as IntercontinentalExchange (ICE) and TradeSpark, which provide a facility for commercial entities to trade a wide range of contracts based on energy, including forwards, swaps, options, collars and spreads.

During 2000, the value of the energy transactions conducted on these online platforms reached $350bn, only one tenth of what was traded on the floor of the traditional futures exchanges in New York and

London, according to Francis Shields, a partner at the consulting firm, Accenture.

However, Mr Shields estimates that in four to five years from now, the value of energy trading will reach $11,000bn and all of it will be traded online.

If the Senate had voted on Ms Feinstein's proposal when she first brought it to the floor during the peak of Enron scandal fever, it might have passed overwhelmingly. However, in recent weeks a coalition of derivatives dealers and energy traders rallied furiously against it and the balance of votes is now too close to call.

Their fear is that an amended law will plunge OTC derivatives once again into a cloud of legal uncertainty, without firm evidence that these products caused either Enron's collapse or California's energy crisis. They argue that it will wreak havoc on the electronic trading platforms that are flourishing in the energy markets.

Their efforts were bolstered by the chairman of the Federal Reserve, Alan Greenspan, and the treasury secretary Paul O'Neill, who strongly advised against re-opening the complex overhaul of US futures laws that Congress approved just 16 months ago.

At the moment, Ms Feinstein's goal is to attach it to the comprehensive energy bill pending in the Senate, but if that tactic fails, she may try again later in the year. Several agencies are investigating Enron's energy trading activities and they could turn up new evidence bolstering the case for government oversight.

Power and gas trading is expected to continue to move to neutral multilateral platforms such as those which are offered by ICE and TradeSpark, and to the regulated exchange environment offered by NYMEX.

ICE is preparing to list futures on its trading platform in about six months, while NYMEX has listed a gas swap contract on its electronic trading system. Both sides also are looking for ways to take credit risk out of energy trading.

ICE has signed a deal with the London Clearing House to clear transactions conducted on its platform, while NYMEX is offering its clearing services to the OTC market at large. There has not been much take-up yet, but the choice is available.

* The author is editor of the Washington-based Futures Industry magazine.