Sen. John McCain says he opposes the $307 billion farm bill because it would dole out wasteful subsidies, but his chief economic adviser Phil Gramm also wants to stop its proposed regulation of energy futures trading, a market that was famously abused when Enron Corp. manipulated California’s electricity prices in 2001.

Clearing the way for that California price gouging, Gramm, as a powerful Texas senator in 2000, slipped an Enron-backed provision into the Commodities Futures Modernization Act that exempted from regulation energy trading on electronic platforms.

Then, over the next year, Enron – with Gramm’s wife Wendy serving on its board of directors – worked to create false electricity shortages in California, bilking consumers out of an estimated $40 billion.

Gramm left the Senate in 2002 but now has emerged as what Fortune magazine calls “McCain’s econ brain,” not only filling the Arizona senator’s acknowledged void on economic expertise (“I don’t know as much about the economy as I should”) but recognized as one of McCain’s closest friends in politics. The two men talk daily.

A McCain aide told me that the Arizona senator opposes the farm bill because it “rewards lobbyists” by granting rich farmers lucrative subsidies, although he would support “a reasonable level of assistance and risk management to farmers when they need America's help.”

But the aide, who spoke on condition of anonymity, acknowledged that the presumptive Republican presidential nominee also opposes the farm bill because Gramm advised McCain that he should resist its regulatory language on the energy futures market.

Democrats have dubbed that gap in energy futures regulation the “Enron loophole,” but it played a part, too, in the more recent attempt by the Amaranth Advisers hedge fund to corner the national gas market by shifting trades to the unregulated “dark markets” of the Intercontinental Exchange.

The “Enron loophole” also has become part of the debate over the soaring price of oil. Last week, a study sponsored by Sen. Carl Levin, D-Michigan, concluded that speculative futures markets were partly to blame for the surge in oil prices that have pushed gas at the pump toward $4 a gallon.

At a May 15 news conference, Levin said the skyrocketing price of oil is “not the result of supply and demand. Speculators have taken over most of the futures market."

However, the 673-page farm bill, containing the regulatory provisions on electronic energy trading, still faces obstacles amid overall concerns about the bill’s largesse to farmers at a time of rising food prices.

President George W. Bush has vowed to veto the bill, although it cleared the House and Senate by margins wide enough for an override, assuming Republicans don’t rally behind Bush and McCain, their current and future standard bearers.

Gramm and Enron

The battle over the “Enron loophole” also could draw attention to McCain’s dependence on Gramm as his chief economic adviser and Gramm’s key role in passing legislation that let Enron trade commodities on electronic platforms without federal oversight.

In 2000, with the Republicans in charge of Congress and Gramm chairing the Senate Banking Committee, the exemption on electronic trading was approved without a Senate hearing.

Internal Enron documents, which were released in 2002, revealed that the Houston-based company helped write the legislation, which was signed into law by President Bill Clinton in December 2000.

Freed from regulatory interference, Enron then used manipulative trading practices to game the California electricity market and drive up electricity prices across the state.

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