FEDERAL LEGISLATIVE UPDATE ON 110TH CONGRESS

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FEDERAL LEGISLATIVE UPDATE ON 110TH CONGRESS RE
ENERGY AND ENVIRONMENT ISSUES GLOBAL ENERGY
MANAGEMENT INSTITUTES ENERGY TRADING
CONFERENCE JANUARY 25, 2007 PRESENTED BY
GEORGE D. BAKER PRINCIPAL WILLIAMS
JENSEN PLLC SUITE 300 1155 21ST STREET,
NW WASHINGTON, DC 20036 202-659-8201 gdb
aker_at_wms-jen.com
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For those who have been in a cave for the past
several months here is the big political news
Democrats Take Control on Capital Hill!
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• So what does the Democratic takeover of Congress
  mean?
• Energy and environment are at the very top of
  the new Democratic-controlled Congress
• So how should you feel about that?
• Depends on who you are.

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If you are a Democrat, or are in the
environmental, ethanol, renewable fuels
community, you may feel like this kid
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(No Transcript)
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If you are a Republican, or in the coal, utility,
or oil and gas community, (or pharmaceutical,
tobacco, or health care) you might feel like this
kid
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(No Transcript)
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• Neither perception is completely accurate, and
  outcomes of the 2007 energy and environment
  debate on the Hill remain subject to a range of
  uncertainties.
• But several overarching realities will influence
  the outcome

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• House Democrats are empowered by the traditional
  House rules that allow the majority to largely
  control what gets to the floor and how it is
  considered.
• You can pass a ham sandwich in the House!!
• Speaker Pelosi wants to have energy and global
  climate legislation through the House Committees
  by June and on the House floor by July 4
  Energy Independence Day.

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2. Senate rules still empower the minority to
block and obstruct action of the majority, which
gives them leverage and political
relevance. Under Constitution, Senate is the
place where the hot tea of the House of
Representatives cools To break a
filibuster/invoke cloture, 60 votes needed to
move anything controversial Democrats have
narrow majority (51-49)
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3. Although his popularity is low and he may
increasingly be viewed as a Lame Duck, the
President still is very relevant with his veto
power Congress needs two-thirds vote of each
body to override vetoes Bush will also make
his compromises - Has already said some oil
gas subsidies are unnecessary. - Specula
tion about a compromise on global warming?
(Bodman, Paulson)
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4. Stabilization of energy prices vs 2006 allows
Congress to consider whatever it may do in a
calmer atmosphere than during crisis of 2005-2006
price spikes. Traditionally, you need either a
consensus or a crisis to move energy
legislation. In energy, consensus is difficult
without a crisis and legislative response in a
crisis too often is premised on perpetual
continuation of the crisis itself rather than a
return to normal supply/demand
equilibrium. Fuel Use Act, SynFuels
Corporations, Oil and Gas Price Controls.
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• However, there is a sense that nations political
  perceptions on energy and environment may have
  changed based on several factors including
• Democrats certainly believe they are correct in
  elevating the priority of energy and environment.
  
• Domestic manufacturing hit hard by sustained
  high energy costs
• Domestic job flight overseas
• Iraq War
• Note passage of Gulf of Mexico OCS bill in
  06
• Wider acceptance of Global Warming threat
• Listing of polar bears as endangered species
• Melting ice caps
• Greater acceptance of nuclear power

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So what should you expect from the 110th Congress?
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Lets start with what NOT to expect ANWR More
favorable tax benefits for major oil and gas
companies The repeal of oil and gas tax
provisions has already begun Expansive
OCS drilling on Atlantic and Pacific coasts
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House Democrats Energy and Environment
priorities/themes Energy Taxes Energy
Oversight Renewable Energy Development Price
Gouging/Anti-Manipulation Global Climate
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I. Repeal Oil and Gas Industry Tax
Benefits One of the top Democratic priorities
already passed by the House was energy related
The Creating Long-term Energy Alternatives
for the Nation (CLEAN) Act (HR 6) - Gulf
of Mexico OCS Royalty reform - Rollback GG
depreciation from 5 to 7 years for Majors -
Section 199 repeal - Creation of new 8
billion Strategic Energy Efficiency and
Renewables Reserve
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Note HR 6 could have been a lot worse for the
Oil and Gas Industry. Thanks to the Oil
Patch Blue Dog Democrats the bill was
significantly modified to EXCLUDE various big
ticket items such as Repeal of
last-in-first-out (LIFO) accounting Repeal
of expensing of intangible drilling
costs Repeal of accelerated depreciation for
natural gas distribution lines Repeal of
refinery expansion expensing Repeal of
foreign tax credit Imposition of a windfall
profit tax
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Note ALL OF THESE TAX ITEMS, AND MORE, REMAIN
AT RISK FOR FUTURE ENERGY TAX BILLS! Oil and
Gas Industry hopes that HR 6 is its only tax hit
in 110th Congress
Wishful thinking?
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Note Senate will likely not consider HR 6
immediately But expect a broader energy tax
package in Senate and in House which will create
exposure for all energy sectors -
Significant Pay-Go Risk
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II. Heavy Dose of Oversight - Both Chairman
John Dingell at Energy and Commerce and
Chairman Henry Waxman of Government Oversight
will conduct substantial oversight of Bush
Administrations energy policy Stupak
Subcommittee hearings on energy market
manipulation and price gauging. - Senate
Energy and Senate Homeland Security/Government
Affairs Oversight
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III. Renewable Energy Development HR 6
provided for a new Renewable Energy Fund (8
billion) that can pay for renewables. More
ethanol, bio-fuel subsidies? 25 in 2025
goal? Farm Bill in 07
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Renewable Portfolio Standard for electric
utilities? - Senate likely has majority in
favor - Previous Republican Majority prevented
this from coming to House floor in Energy
Policy Act of 2005 - New Democratic House
majority might favor an RPS
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• Price Gouging/Anti-Manipulation
• Senate Cantwell and Stevens Bill
• - Empower FTC to monitor for unconscionable
  price increases for gasoline or petroleum
  distillates.
• - Unconscionable means substantially
  exceeds the suppliers average price during
  prior 30 days and suppliers competitors
  average prices, and cannot be justified by
  increased costs of the sold product,
  operational costs or local, regional,
  national, or international market conditions.

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House Stupak Bill (H.R. 594) - Gives CFTC
regulatory authority to investigate OTC energy
contract trading subjects OTC energy trading to
CFTCs anti-fraud and anti-manipulation,
reporting, and recordkeeping provisions and
penalties.
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• Energy Tax Risks
• Repeal of last-in-first-out (LIFO) accounting
• Repeal of expensing of intangible drilling costs
• Repeal of accelerated depreciation for natural
  gas distribution lines
• Repeal of refinery expansion expensing
• Repeal of foreign tax credit
• Imposition of a windfall profit tax
• Reimpose long-expired Superfund taxes?

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VI. Global Climate RED HOT issue House
Speaker Pelosi appointed Select Committee on
Energy Independence and Global
Warming Select Committee lacks legislative
authority but is designed to develop research
and inform public on the issues Chaired
by Representative Ed Markey of
Massachusetts Underscores priority Democratic
leadership gives issue Dingell These
select committees are as useful as feathers on
a fish.
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Viewed as strong signal to more
cautious/deliberate Energy Committee Chairman
Dingell Dingell vowed to hold hearings and
carefully consider all views to create a
consensus Dingells concern for constituent
auto industry Energy and Environment
Subcommittee Leadership Democratic
Chairman Boucher of Virginia Republican
former Speaker Denny Hastert of Illinois
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Senate Senate Environment and Public Works
Boxer vs. Inhofe Generally Major
change in philosophy here. Boxer to conduct
aggressive oversight into EPA clean air, clean
water, global climate, children's health,
chemical safety issues
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Global Climate Major difference between
Boxer and Inhofe Boxer Views
Californias new global climate regime as
gold standard California provisions
Rollback GHG emissions to 2000 levels by 2010
to 1990 levels by 2020, and 80 below 1990
levels by 2050. Inhofe Global warming
is the greatest hoax ever perpetrated on the
American people.
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A Range of Global Climate proposal to
consider Boxer will start hearings on January
30 to hear from sponsors of competing
proposals McCain, Lieberman, Obama -
Reduce GHG by 2 per year after 2012 until
one-third below current levels by
2050. - Embraces nuclear power as a
solution. - Earlier version defeated in 2005
(36-60). Leahy Sanders Feinstein Carper
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Bingaman Viewed as more moderate proposal,
designed to garner industry support as a
compromise - Goal Reduce emissions 14 by
2030. - Contains offsets and safety valves.
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These proposals vary in terms of aggressiveness
of emissions reductions targets, timetables,
scope of industries affected, conceptual
approaches. But all allow some form of
emissions trading. They all would affect US
industry sectors substantially. Query Is
America ready to accept the changes required
by any of the global climate bills? - Democr
ats believe yes and believe they will be
credited for their leadership.
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Note McCain, Lieberman, Obama Presidential
Politics anyone? Note criticism of Obama from
enviros for supporting coal to oil
program Note Global Climate solution may mean
increased nuclear power
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VII. Renewable Energy Another Huge
priority Agriculture Committees Farm Bill
will dominate agenda of two Congressional Ag
Committees Increased ethanol and other
bio-fuel production will drive the Farm
Bill Chairman Harkin Targets getting
Food, Fiber and Fuel bill through
Senate Ag Committee before July Chairman
Peterson Targets getting bill to President
by September 30.
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Expect significant increase in current 12 billion
gallons of ethanol Perhaps new
production target in 30-60 billion
gallons? Concerns Impact on cost of corn for
animal feed and for human consumption Cellulos
ic bio-fuels supports?
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Other Energy Issues - Increase in CAFÉ
standards? - Coal to liquids coal
gasification - Renewable Portfolio Standard
(RPS) for electric utilities Expect
Chairman Bingaman to move a Renewable Portfolio
Standard mandate for electric utilities Bingam
an RPS passed the Senate in prior Congresses
Start at 3 and graduate percentage to
15 in 2020
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Query Greater support now with Democratic
majority in Senate? Query Will Democratic
House support an RPS?
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Other Legislative Policy Issues of Interest to
Energy Trading CFTC Reauthorization Hedge
Fund oversight/regulation Capital Markets Reform
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VIII. Commodity Futures Trading Commission
(CFTC) Reauthorization
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Congress failed to complete reauthorization in
109th Congress House passed its version (HR
4473) Senate negotiated floor consideration but
failed to get bill on the floor - Opposition
from OTC and Energy Sectors over various
concerns from perceived expansion of CFTCs
jurisdiction.
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Bills in House and Senate were largely similar
increasing fines and penalties for violations,
especially manipulation clarifying CFTC
jurisdiction over fraud and retail FX abuse.
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But controversy arose energy related
issues House-passed bill contained a compromise
requiring CFTC to create rules compelling any
entity with an interest in natural gas futures to
maintain records for 5 years regarding its
natural gas futures position and any related
contract in natural gas to which that entity is a
party.
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Senate leaders prepared for fight over four
amendments Conrad would create a rebuttable
presumption that CFTC has anti-fraud
jurisdiction over any contract with a retail
customer that is leveraged or margined if
that customer lacks a commercial use for the
underlying commodity or lacks the financial
and physical capacity to take/make delivery
or to effect a cash settlement - Would
apply to any commodity Fx, energy, ag.
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Cantwell and Stevens Gasoline and
distillates price gouging
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Feinstein Expand CFTC jurisdiction to require
record keeping and reporting of OTC
energy trading in any energy commodity Bro
ader than just natural gas (includes
electricity, coal, oil, petroleum and
natural gas products) Covers trading of
any energy commodity contract on any
domestic electronic trading facility OR any
contract involving an underlying energy
commodity that has a physical delivery
point in the US and is executed through any
US terminal of a foreign board of trade
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These Senate amendments may appear again if and
when CFTC bill is taken up in Senate.
Additional amendments possible? Query will
Senate Democrats hold upper-hand on their
amendments? Query will House Democrats
entertain the Conrad, Feinstein, Cantwell
amendments as well?
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Complications and Prospects in 07 - CFTC
bill is within Ag Committees jurisdiction
- House and Senate Ag Committees top priority
is the Farm Bill - Big incentive to avoid
political controversy that will demand time,
resources and political capital and divert
attention from Farm Bill. House Chairman
might report out 06 bill Senate Feinstein,
Conrad, Cantwell might want their amendments
adopted in Ag Committee.
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OTC Energy industry would prefer to avoid fight
over Feinstein and Cantwell/Stevens amendments,
or having to deal with House natural gas
provision. Cantwell/Stevens gouging amendments
could be re-directed to any Senate Energy bill
OTC would prefer to avoid fight over Conrad
amendment
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IX. Capital Markets Reform
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Substantial concerns raised that US financial
market competitiveness is at risk due to heavy or
antiquated US regulatory scheme Sarbanes
Oxley Multiple regulators at federal and state
levels for banking, securities, insurance
industries Calls for federal preemption of
aggressive state regulation Principle-based
(FSA) regulation vs. proscriptive/detailed/microm
anaged regulation SEC enforcement first
culture/antagonistic relationship to industry
mentality
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Some calls for reform have already brought
change Merger of NYSE and NASD regulatory
apparatus. Sarbanes Oxley issues being
reconsidered
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Rest of US financial services industry seems to
want what the futures industry has under the
Commodity Futures Modernization Act of
2005 Principle Based Regulation Cooperativ
e regulator/industry relationships Regulatory
incentive to innovate to meet global
competition
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Watch for Secretary Paulsons financial industry
conference in Spring 07 for discussion of the
range of suggestions for changes.
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No merger of CFTC and SEC likely any time
soon Congressional Ag Committees have done a
great job and appreciate their jurisdiction over
futures industry with CFMA Until and unless
there is serious reform of equities regulation,
dont expect futures industry to be interested in
discussing a merger of agencies
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X. Hedge Funds Have come under increasing
scrutiny by regulators and lawmakers on both
sides of the aisle. Factors contributing to this
interest Recent rapid growth of hedge funds
and especially the increased pension fund
investment in hedge funds. Constant media
attention of hedge funds and activities,
including references to the lightly regulated
and secretive nature of the industry. Lack of
knowledge about hedge funds and the nature of
their activities and their regulation.
High-profile failures of several hedge funds,
including Amaranth, Bayou, and the poster-child
Long Term Capital Management (systemic risk
concerns). Note that several pension funds lost
money in the Amaranth collapse, although it does
not appear to have caused funding or other
problems with those pension funds.
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Congressional Concerns Degree of
regulation vs. size/scope of funds in market
Systemic risk? Impact on pension
funds? Impact on energy trading
markets? Coleman/Levin Oversight Report in
06 Query Is there a hedging or speculative
premium in markets? Query Who are
appropriate market participants?
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Will Congress Increase Regulation of Hedge
Funds? The new Democratic leadership is not
calling for increased regulation of hedge funds,
but they do expect to hold hearings, with one
focus to revolve around pension fund investments
in hedge funds.
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House Financial Services Committee Chairman
Barney Frank December 19, 2006, Franks
spokesman said, His view is that if rich people
are losing a lot of money, there is not a lot
government should do about it. But, when it
comes to the investment of pension fund money
into hedge funds, Franks committee will hold
hearings to examine whether there may be any
concerns to such investments.
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Administrative Activity Re Hedge funds The
Treasury Department has been conducting a review
of hedge funds and their activities. The review
is not expected to result in the production of a
written report, but it has been part of a process
of determining if there are concerns with the
existing regulatory framework over hedge funds.
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The SEC recently published its proposal to
increase the accredited investor standard
(Regulation D) for certain hedge funds (3(c)(1)
hedge funds). Currently, the term accredited
investor includes those with net worth exceeding
1 million or whose individual income exceeds
200,000 (300,000 joint income with spouse) for
3(c)(1) funds.1 The proposal would create a
new standard (a) the investor must meet the 1
million net worth and income test as described
above and (b) the investor must own at least
2.5 million in investments (excluding the value
of their house). 1 Investors must own 5
million in investments at the time of their
investment in a 3(c)(7) hedge fund. The proposed
rule does not change the investment threshold
standard for 3(c)(7) funds, since it is a higher
investment threshold and such funds must limit
the sale of their securities to qualified
purchasers who also meet the definition of
accredited investor.
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The SECs action seems to have blunted calls by
some advocates for registration of hedge fund
advisers (in Goldstein decision, the courts
struck down the SECs rule to require hedge fund
advisers to register with the SEC).
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