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NARUC Urges Congress, Regulators to Target Gas Market Abuses

The National Association of Regulatory Utility Commissioners' (NARUC) board of directors has approved a resolution calling on Congress, FERC and the Commodity Futures Trading Commission (CFTC) to take action to limit excessive speculation and manipulation in the natural gas futures markets (see related story).

"Unlike natural gas utilities who access commodity futures markets for the purpose of mitigating price volatility through hedging, during the past five years other market participants have significantly increased their speculation in natural gas markets, with more than 90% of trades coming from market participants [speculators] who do not intend to take delivery of the commodity," the resolution read.

"Large amounts of money from speculators have entered natural gas futures markets such that the dollar value of open interest in natural gas futures has almost doubled from a level of $45 billion in 2006 to $87 billion in 2008," it said.

NARUC, an association of state utility regulators, cited a report issued by the Senate Permanent Subcommittee on Investigations in mid-2007, which concluded that "excessive speculation can and has distorted natural gas pricing and caused consumers to pay more for the commodity than is justified by market fundamentals" of supply and demand.

"Recent problems in financial markets and comments from the Obama administration will likely lead to comprehensive reform that may improve the ability of regulatory agencies to protect the public in addressing excessive speculation, fraud, manipulation and abusive practices," said the NARUC resolution.

The NARUC board of directors urged Congress to pass legislation adopting all the recommendations in the Senate Permanent Subcommittee report, including imposing a limit on traders' positions, enforcing the statutory prohibition against excessive speculation and giving the CFTC a bigger budget to prevent a replay of the Amaranth hedge fund collapse in 2006. In addition, the subcommittee report proposed eliminating the Enron loophole to the Commodity Exchange Act, which allowed certain electronic energy trading platforms to circumvent the full regulation of the CFTC (see NGI, July 2, 2007).

Moreover NARUC called on Congress to pass legislation that would "address the flow of investment capital into financial markets...that produce commodity price movements that are harmful to consumers, businesses and financial markets." And it said it supported proposals to increase margin requirements for futures contracts on speculators who do not intend to take delivery on essential commodities like natural gas. The commission also wants to require over-the-counter gas derivative contracts to be cleared by exchanges to combat excessive speculation.

The association of state utility regulators called on its Working Group to develop recommendations to address natural gas index speculation and to report back to the Gas and Consumer Affairs Committees. Finally, it said it backed actions of the Federal Energy Regulatory Commission (FERC) and CFTC to increase supply and availability of gas, as well as the agencies' "vigorous enforcement" of fraud, manipulation and abusive practices.

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