WASHINGTON WEEKLY
Keeping the Markets Informed from the Capital
June 13, 2008
Lawmakers in Washington continued to focus on the increased price of oil this week. The Senate failed to receive the necessary votes to move forward with debate on energy legislation, which would have increased penalties for price gouging and imposed additional reporting requirements for offshore oil futures trading. The bill would also have increased margin requirements for crude oil futures trading. In addition, a number of bills were introduced this week in both the House and Senate that would increase the authority of the Commodity Futures Trading Commission (CFTC) over the oil futures markets.
A procedural motion to move forward on the House-approved tax extender bill also failed in the Senate this week. Senate Finance Chairman Max Baucus (D-MT) introduced the Energy Independence and Tax Relief Act (S.3125), which he plans to offer as a substitute to the House-approved bill. Unlike the House-approved extender bill, S.3125 includes a one-year alternative minimum tax (AMT) patch.
During the CFTC’s Energy Markets Advisory Committee inaugural meeting, energy market participants discussed the current trends in the energy commodity markets, as well as the CFTC’s current no action letter process for foreign boards of trade.
Senate Banking Committee Chairman Chris Dodd (D-CT) said he hopes to markup the National Infrastructure Bank Act of 2007 (S.1926) in July.
Also this week, the Senate Foreign Relations Committee examined the foreign policy implications of sovereign wealth funds (SWFs).
Procedural Motion on Energy Bill Fails in Senate
The Senate this week fell nine votes short of the 60 votes needed to move forward on energy legislation. The Consumer-First Energy Act of 2008 (S.3044) would repeal a number of tax benefits for oil and gas companies; require the Secretary of Energy to suspend acquisition of petroleum for the Strategic Petroleum Reserve (SPR) and allow the Attorney General to bring enforcement actions against any country or company that is colluding in setting the price of oil, natural gas or any petroleum product. S.3044 would also amend the Commodity Exchange Act to prevent traders of U.S. crude oil from routing their transactions through offshore markets in order to evade speculation limits and would impose additional reporting requirements. The bill would increase the margin requirements for crude oil future trades, contracts or transactions. A Statement of Administration Policy released this week said the president’s senior advisers would recommend he veto S.3044 in its current form. The administration also said any further action by the Congress to regulate the energy markets should only be taken as advised by the Commodity Futures Trading Commission (CFTC), the Federal Trade Commission (FTC), and the Department of Justice.
Senate Fails to Move Forward on House Tax-Extender Bill
A procedural motion to move forward on the House-approved tax extender bill (H.R.6049) failed this week. The Senate voted 50-44 to move forward on the Renewable Energy and Jobs Creation Act of 2008 (H.R.6049), which would extend a number of expired or expiring tax provisions for one year, including the active financing exception under Subpart F. H.R.6049 would also authorize $2 billion in clean renewable energy bonds (CREBs); authorize $3 million in tax-credit Qualified Energy Conservation Bonds; extend the authority for qualified green building and sustainable design project bonds and authorize an additional $400 million in qualified zone academy bonds (QZABs). The bill imposes Davis-Bacon prevailing wage requirements on projects financed with CREBs. The Renewable Energy and Jobs Creation Act of 2008 is fully offset with three provisions: a provision that would delay for ten years the effective date of the worldwide interest allocation election that would otherwise take effect next year; a provision that would impose current taxation on deferred compensation plans in countries in which the U.S. does not have a tax treaty and an extension of coal excise taxes.
The Senate is expected to vote again on the procedural motion to move forward on the House-passed tax extender legislation next week. Senate Finance Committee Chairman Max Baucus (D-MT) said this week, once the Senate has enough votes to move forward on the House bill, he plans to offer his legislation, the Energy Independence and Tax Relief Act (S.3125) as a substitute. The most significant difference is S. 3125 includes provisions to extend the alternative minimum tax (AMT) patch for one year, while the House-passed extenders bill does not have a similar provision. House Ways and Means Chairman Charles Rangel (D-NY) has indicated that his committee could markup an AMT patch bill as early as next week, but the bill will likely have provisions to offset the cost of the AMT patch. The Energy Independence and Tax Relief Act also includes a number of provisions not included in the House bill and extends the solar investment tax credit for eight years, compared to the six years in the House-approved bill.
CFTC EMAC Holds First Meeting
During its first meeting this week, members of the CFTC’s Energy Markets Advisory Committee (EMAC) expressed concern with: 1) conflicts of interest within investment banks that report price targets on a commodity while simultaneously investing in the commodity; 2) coordination between the CFTC, Federal Energy Regulatory Commission (FERC) and the Federal Trade Commission (FTC) on energy market oversight; 3) no action letters for foreign boards of trade and 4) the impact of unreported bilateral contracts on price discovery. The EMAC, which includes the different energy market participants, was established to facilitate public discussion surrounding the regulation and policies in the energy markets. John Fenton, Deputy Director for Market Surveillance, Division of Market Oversight, CFTC, told members of the EMAC, in order to learn more about the growing number of institutional investors in the commodities markets, the CFTC will use its special call authority to ask swaps dealers to: 1) report the notional value of all outstanding OTC commodity index transactions; 2) report the futures equivalent positions for each commodity resulting from commodity index transactions and single commodity swaps and 3) report OTC counterparty positions meeting threshold reporting levels. Fenton said the CFTC intends to use the information for internal purposes, but may work on a way to disseminate the information externally. CFTC Acting Commissioner Walter Lukken said he hopes the EMAC will meet again before the year’s end to discuss other issues, possibly including emissions trading and best practices. Also this week, the CFTC announced the formation of a CFTC-led interagency task force--including the Federal Reserve, the Treasury Department, the Securities and Exchange Commission (SEC), the Department of Energy and the Department of Agriculture--to evaluate developments in the commodity markets.
Banking Committee Could Markup Infrastructure Bank Bill in July
Senate Banking Committee Chairman Chris Dodd (D-CT) said this week he hopes to markup the National Infrastructure Bank Act of 2007 (S.1926) in July and move the bill to the Senate floor by the end of the session, but said he was not making any promises. The National Infrastructure Bank Act would establish an independent national infrastructure bank that could issue up to $60 billion of tax credit bonds to help finance public infrastructure projects. The National Infrastructure Bank would use a sliding scale method to determine the level of Federal investment. During a hearing this week on the condition of the nation’s infrastructure, Atlanta Mayor Shirley Franklin suggested S.1926 be modified to correct for reduced allocations in selected infrastructure areas. She said any infrastructure legislation should consider broader concerns which impact funding requirements, such as energy consumption and energy dependency. New York City Mayor Michael Bloomberg said three principles should guide any infrastructure debate: 1) establishing clear short-term and long-term goals with clear metrics for measuring success; 2) dramatically increasing funding to achieve goals; and 3) funding projects based on merit rather than politics. Dodd applauded the state and local governments for raising awareness about their infrastructure needs and exploring alternative forms of project financing. Witnesses at a House Transportation Committee hearing this week also suggested the proposed National Infrastructure Bank could be one way to help prioritize national spending on transportation and other infrastructure.
Senate Foreign Relations Committee Examines Sovereign Wealth Funds
Senate Foreign Relations Committee Chairman Joe Biden (D-DE) said sovereign wealth funds (SWFs) can be an important source of capital in the global economy. During a hearing this week on the foreign policy implications of SWFs, Biden said he believes to better facilitate the oversight of SWFs, policymakers should: 1) develop a strategy to identify and to punish SWFs which base their investments on political decisions; 2) strike a balance between protecting the U.S. against threats, while remaining open to economic opportunity; and 3) address the underlying cause of increased foreign investment by adopting a national energy policy and a coherent trade policy. Dr. Jagdish Behagwati, professor, law and economics, Columbia University, said increased transparency would not ensure SWF investments are based on commercial and economic objectives. He suggested U.S. policymakers could mitigate public anxiety regarding SWFs by developing a short list of sensitive sectors where enhanced security should be exercised. Dr. Daniel Drezner, professor of international politics, Tufts University, said the effects of SWF investment in the U.S. have been benign and are unlikely to disrupt the functioning of the U.S. economy.
Bills Introduced This Week
The Credit Rating Agency Transparency and Disclosure Act (H.R.6230), introduced by Rep. Patrick McHenry (R-NC), would require credit rating agencies to provide additional disclosures regarding the ratings of structured securities. The bill also requires issuers and originators to provide credit rating agencies with information on the assets underlying a structured security and requires credit rating agencies to disclose in a central database the historical default rates of all classes of financial products they have rated.
Rep. John Larson (D-CT) introduced legislation (H.R.6264) that would limit participation in certain energy commodities markets to persons capable of producing, manufacturing or taking physical delivery of the commodity.
Legislation introduced by Sen. Dick Durbin (D-IL) would fund 100 new positions at the Commodity Futures Trading Commission (CFTC). S.3130 would also require traders of oil futures—including in the over-the-counter markets—to report data. The bill would also authorize the CFTC to investigate the impact of trades on the price of oil.
The Close the London Loophole Act (S.3129), introduced by Sen. Carl Levin (D-MI), would provide the CFTC with the authority to obtain trading data from foreign exchanges operating in the U.S. through direct trading terminals. S.3129 would authorize the CFTC to act on its own authority to prevent manipulation or excessive speculation by U.S. traders directing trades through foreign exchanges. The bill would also require the CFTC to obtain an agreement from a foreign exchange that it will impose speculation limits and reporting requirements on traders of U.S. energy commodities comparable to the requirements imposed by the CFTC on U.S. exchanges prior to allowing the foreign exchange to establish direct trading terminals in the U.S.
The Week Ahead
- On Monday, June 16, the House Financial Services Subcommittee on Housing and Community Opportunity will hold a field hearing in Cleveland, Ohio on the Ohio foreclosure crisis.
- The Senate Finance Committee will examine the future of the U.S. economy on Tuesday, June 17.
- The Senate Appropriations Subcommittee on Financial Services and General Government and the Senate Agriculture, Nutrition and Forestry Committee will hold a joint hearing on the role and responsibilities of the Commodity Futures Trading Commission (CFTC) on Tuesday, June 17.
- On Wednesday, June 18, the Senate Homeland Security and Governmental Affairs Committee will hold a hearing on protecting personal information.
- The House Ways and Means Subcommittee on Oversight will hold a hearing on the economic stimulus payments on Thursday, June 19.
- Also on Thursday, June 19, the Senate Banking Subcommittee on Securities, Insurance and Investment will hold a hearing entitled “Risk Management and its Implications for Systemic Risk.”