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Industrials Call for Position Limits Across All Exchanges

Industry energy consumers called on the House last Wednesday to direct the Commodity Futures Trading Commission (CFTC) to provide aggregate position limits across all exchanges to control excessive speculation in energy commodities, particularly natural gas.

"Unless there is an umbrella which covers all of the [exchange] venues with respect to commodities for U.S. delivery, such as natural gas, speculators will circumvent the regulated venues in favor [of the] unregulated venues," said Paul N. Cicio, president of Industrial Energy Consumers of America (IECA), during a House Agriculture Committee hearing. The hearing focused on draft legislation that seeks to expand the authority of the CFTC and increase the transparency and oversight of all commodity futures markets (see NGI, Feb. 2).

"During the first half of 2008 excessive speculation drove the Nymex price of natural gas from $7.17/MMBtu in January to a high of $13.60/MMBtu in July before prices began to recede. During that same time period, the Energy Information Administration [reported] that domestic production increased by 8.6%; demand was essentially unchanged from the previous year and that national inventories were in the normal five-year average range for that time of the year. These facts prove that the price spike was not driven by supply versus demand fundamentals," he told the committee.

The net increase in the price of natural gas cost consumers more than $40.4 billion between January and August 2008 when compared to the same period in the previous year, according to Cicio.

"We do not support requiring bona fide commercial hedgers, such as ourselves, to clear [their transactions]. The problem of excessive market speculation is not caused by commercial hedgers. Our volumes are too small to manipulate the market. For example, in natural gas [alone], our volumes are well under 5% of the market," Cicio said.

He said only speculators of bilateral over-the-counter (OTC) transactions should be required under the draft legislation, sponsored by House Agriculture Committee Chairman Collin Peterson (D-MN), to clear their transactions. "We believe that requiring commercial hedgers to clear their transactions will potentially decrease our competitiveness through increased complexity and cost, creating a disincentive for industrial users to manage risk."

Moreover, "consumers need assurances that this legislation deals appropriately with index funds -- passive, long-only, short-only investment instruments that have had a significant negative impact on the market and will do so again unless these instruments are limited in volume...The draft legislation only requires reporting, which is not sufficient," Cicio said.

He further noted that industrial consumers have "deep concerns" about a provision in the Peterson bill that would treat carbon emissions as a tradable commodity. "The Congress has not decided how it will regulate greenhouse gas emissions and we are concerned that this legislation would preempt that decision."

Cicio warned that "U.S. manufacturing companies that have been studying cap and trade and our colleagues in Europe believe that carbon trading will be the next subprime crisis."

The Peterson legislation also should "reflect a change in culture at CFTC to one that has more transparency and public input into their decision-making processes," said Cicio. "We prefer the Federal Energy Regulatory Commission (FERC) model. The FERC frequently [has] rulemaking processes that allow for public comment and...sessions that are similar to your Congressional hearings in which entities are solicited for comment. At FERC, there are ample opportunities for written public input as well."

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