Natural gas price manipulation

[Mr. Laz]

Posted on Wed, Mar. 08, 2006

Report alleges manipulation

Natural gas prices attacked

By STEVE EVERLY and DAVID GOLDSTEIN

The Kansas City Star

WASHINGTON — Consumers nationwide are being overcharged about $5 billion a month for natural gas because the price is vulnerable to manipulation and speculation, according to a report released Tuesday.

The report, issued by the attorneys general of Missouri, Iowa, Illinois and Wisconsin, said a dramatic increase in gas trading in loosely regulated financial markets was behind much of the increase in prices. And that has cost families who heat with gas hundreds of dollars this winter, though it has been warmer than normal.

The gas industry contends that supply and demand — especially disruptions caused by hurricanes and an early cold snap — accounted for the rising prices.

But that is “at best a half truth,” the report said.

Gas consumption was actually down 5 percent, the report noted, and there was sufficient gas already stored to ride out the supply disruptions.

“It’s stunningly annoying to sit here and have to literally say the moon is not made of green cheese,” Missouri Attorney General Jay Nixon said at a news conference in Washington. “Supply and demand did not cause the spikes.

”Regulation of energy trading is lax and often nonexistent, the report said. Iowa Attorney General Tom Miller is scheduled to testify at a Senate hearing next week on oil and gas prices. He and his colleagues, all Democrats, seek legislation to tighten oversight of the natural gas markets.

The report resulted from a six-month study involving the attorneys general aided by Washington energy analyst Mark Cooper, who is also director of research for the Consumer Federation of America.

Despite a warm winter, heating bills in the Midwest are expected to be up roughly $250 per household — 28 percent. And that’s on top of increases in recent years. Heating bills this winter are more than $600 higher than five years ago.

Without changes, the report said, consumers are likely to continue to pay more than they should.

“Hundreds of billions of dollars are at stake,” the report said.

The scrutiny comes at the end of a winter in which even seasoned observers were stunned by the volatility in gas prices. Wholesale gas prices closed Tuesday at $6.52 per thousand cubic feet. But they soared above $15 in December before beginning their decline.

Sandy Crockett, a spokeswoman for the Natural Gas Supply Association, attributed the recent prices to “unprecedented and massive supply disruptions” in the Gulf of Mexico during Hurricanes Katrina and Rita.

“Both the Federal Energy Regulatory Commission and the Commodity Futures Trading Commission have, in fact, concluded that this winter’s price fluctuations were entirely consistent with market fundamentals at that time,” she said in a written statement.

Separately, the Government Accountability Office issued a preliminary report last month and attributed much of the problem to gas production that was near capacity and the inability to increase imports. The federal agency, however, hedged its bets by saying there could have been other reasons, including manipulation of the markets. It expects to make a final report later this year.

The report Tuesday by the attorneys general said that supply and demand could not account for the record high prices. Though demand for natural gas used by electric utilities is up, overall U.S. demand for natural gas has been nearly flat, the report said.The report also noted that gas supplies had been steady and that the amount of gas in storage was higher than last winter.The report said that the perception that there was a big problem, coupled with a flood of speculative investors, drove natural gas prices up, causing consumers’ energy bills to soar.

“It’s something like the wild, wild West in terms of trading,” said Miller, the Iowa attorney general.

The Commodity Futures Trading Commission, an independent agency, has regulatory oversight over gas-contract trading on the New York Mercantile Exchange. But it has no authority over over-the-counter trading in natural gas contracts unless fraud is involved, a commission spokesman said, and reporting of over-the-counter transactions is not required.

In some cases, the report said, natural gas is traded as much as 30 times before it is consumed, and the influx of traders into energy trading is making the volatility worse. The latest players going into energy trading are hedge funds, which are private investment groups.

Such trading is expected to grow.

Even some who think gas prices were too high this winter say that doesn’t necessarily mean prices were manipulated. The hurricanes did disrupt production, and in December, when prices soared, the weather was much colder than normal. So there were fears that supplies would be insufficient. Warmer weather caused those worries to dissipate, and prices began to decline, said James Williams, an analyst for WTRG Economics.

Some doubted Tuesday that any of the changes would happen. But in some quarters the report resonated.

Jeff Davis, chairman of the Missouri Public Service Commission, said there was no question that in the past there had been instances when energy prices were manipulated. It’s not something he can prove happened this winter, but it’s not something he would bet against either.

“Do I suspect it?” Davis said. “Yes, it’s entirely possible, and it’s something that needs to be looked at.”