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Legislation Would Set Trading Limits on Gas Futures, Impose New Position Reporting

Reps. Sam Graves (R-MO) and John Barrow (D-GA) have introduced legislation to "bring some stability, predictability and reliability" back into the natural gas market by, among other things, imposing tighter daily gas futures trading limits and setting new futures position reporting requirements. The congressmen claim that recent gas price spikes are a result of increased speculative trading that must be reined in.

"Right now natural gas prices are less reliable than the weather," Graves said in a statement Thursday. "It's manufacturers, seniors and farmers who are being burned by artificially high natural gas prices." He noted that fertilizer costs have more than doubled and heating costs have soared in the last few years.

"Congress needs to step up to the plate and take the lead in helping get natural gas prices under control," said Barrow. "Back home in Georgia, farmers all across my district are facing skyrocketing fertilizer prices. They're not only struggling to feed the crops that feed our country, they're fighting just to stay in business."

The bill, which is being referred to the Agriculture Committee, would impose new price limits on natural gas futures trading, something industrial companies, such as Huntsman Chemical, have been desiring for some time.

The statement released by the congressmen blames recent price spikes in large part on implementation of the Commodity Futures Modernization Act of 2000 (CFMA) which "altered the fundamental trading rules for natural gas allowing for greater speculation by an already limited number of traders. Almost immediately, extremes in price volatility began to occur on the [New York Mercantile Exchange] Nymex with price spikes up to $11...," they said.

The statement also notes that numerous trading firms and traders have paid hundreds of millions of dollars to the Commodity Futures Trading Commission (CFTC) and the Federal Energy Regulatory Commission (FERC) to settle charges of gas market manipulation. Despite those efforts to clean up the industry, Graves and Barrow said the CFTC and Nymex continue to allow "harmful levels of speculation" on the exchange with "minimum regulatory oversight."

They say the market is not transparent. "Regulators do not know who is trading or the volume individual trades may hold. One trader (including hedge funds) may easily control a large percentage of the market, significantly increasing prices."

Furthermore, they claim futures prices are ultra volatile because the price limits of the 1990s were removed. "Unlike other commodities, there are no meaningful and effective 'circuit breakers' to prevent extreme price volatility."

As a result, their bill would reform the Commodity Exchange Act (CEA), which is being reauthorized this year, to "restore transparency and address price volatility in the natural gas futures market." The bill would reinstate the regulatory framework that applied to the natural gas markets prior to the CFMA and would make other modifications to the CEA.

Among the changes would be a limit on the maximum daily price fluctuation on any gas futures contract to 8% in either direction from the prior day's settlement price. "This threshold, or circuit breaker, is similar to the limit that was in place on the Nymex in early year 2000 before volatility began to increase..." a summary of the bill states.

Section 3 of the legislation would require the CFTC to review and approve any future changes to rules for natural gas contracts. The CFTC would have to seek public comment on a proposed change.

Section 4 would require the CFTC to prescribe rules requiring any person holding positions in natural gas contracts either on a contract market or in the over-the counter market to file position reports either on call or continuous if the CFTC deems it necessary. The agency would, however, be authorized to grant exemptions to this reporting requirement in certain cases.

The bill also would increase the criminal and civil monetary penalties for violations of the CEA to a maximum of $1 million for each violation and up to 10 years in prison compared to the five years in prison allowed under current law.

Finally, the bill also would bar for one year a CFTC member from becoming an employee of an entity that is regulated by the CFTC. That last provision apparent is in response to several CFTC members, including former Chairman James Newsome, leaving the commission to assume executive positions at Nymex. Newsome currently is Nymex's president (see Daily GPI, July 12, 2004).

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