The National Association of State Utility Consumer Advocates

Resolution 2007-08

Urging Congress to Close the “Enron Loophole” in the Commodities Exchange Act to Permit the Commodities Futures Trading Commission to Have Regulatory Authority Over All Natural Gas Exchanges

WHEREAS, The Commodities Futures Modernization Act of 2000 (CFMA) exempted electronic exchanges in which market participation is limited to large financial institutions from regulatory oversight by the Commodities Futures Trading Commission (CFTC),

WHEREAS, The exemption for these types of exchanges was inserted into the CFMA at the urging of Enron, and has been dubbed the “Enron loophole”,

WHEREAS, Regulated exchanges such as the New York Mercantile Exchange (NYMEX) must engage in market monitoring to prevent any trader from achieving a large position in any natural gas futures contract such that the trader may be able to influence the price of the contract,

WHEREAS, If a regulated exchange fails to adequately monitor trading on its exchange, the CFTC has the authority to order traders to reduce their positions in any natural gas futures contract,

WHEREAS, Unregulated exchanges, such as the Intercontinental Exchange (ICE) are not required to monitor their exchanges and the CFTC does not have authority over the exchange’s activities,

WHEREAS, On June 25, 2007 the Senate Permanent Subcommittee on Investigations published a report entitled; “Excessive Speculation in the Natural Gas Market” which examined the impact of trading activity by a large hedge fund, Amaranth Advisors, LLC on both regulated and unregulated natural gas exchanges,

WHEREAS, The Senate Subcommittee’s report shows that Amaranth was able to accumulate extraordinarily large positions in the natural gas futures markets using both regulated and unregulated exchanges,

WHEREAS, The Senate Subcommittee’s report also shows that when Amaranth was ordered by NYMEX to reduce the size of its positions for certain natural gas futures contracts, Amaranth simply purchased the same volume of contracts on ICE,

WHEREAS, Amaranth’s ability to influence natural gas prices was aided by its ability to amass huge market positions on the unregulated exchange operated by ICE,

WHEREAS, When Amaranth collapsed in the fall of 2006, NYMEX futures prices dropped precipitously ,

WHEREAS, just as Amaranth’s collapse appears likely to have contributed to the drop in NYMEX futures prices, Amaranth’s acquisition of its large positions appear likely to have put upward pressure on prices on NYMEX,

WHEREAS, Both the CFTC and the Federal Energy Regulatory Commission (FERC) have initiated investigations of Amaranth’s trading activities,

WHEREAS, While the after-the-fact investigations by the CFTC and the FERC are worthwhile, such investigations are poor substitutes for active real-time oversight of natural gas trading activity,

WHEREAS, The ability of Amaranth or any other trader to influence natural gas prices has a direct impact upon the price on natural gas purchased by utilities on behalf of their customers,

THEREFORE BE IT RESOLVED that the National Association of State Utility Consumer Advocates (NASUCA) urges the United States Congress to close the Enron Loophole in the Commodities Exchange Act to permit the CFTC to have regulatory authority over all natural gas exchanges,

BE IT FURTHER RESOLVED, that NASUCA authorizes the Executive Committee to develop positions and take further actions consistent with the contents of this resolution. The Executive Committee shall inform the membership of such positions and actions prior to proceeding with them, if at all possible. In any event, the Executive Committee will advise the membership of any actions taken consistent with the recommendations contained herein.

Approved by NASUCA:
Submitted by:
NASUCA Gas Committee