Report says lack of federal oversight led to high natural gas prices in Midwest

WASHINGTON -- Too little oversight of financial markets -- not supply and demand problems -- are to blame for skyrocketing natural gas prices, a report from top law enforcement officials in four Midwestern states said Tuesday.

Comparing natural gas trading to "the wild, wild West," the attorneys general from Illinois, Iowa, Missouri and Wisconsin urged Congress to increase regulation of markets they say are vulnerable to abuse and manipulation.

The officials -- all Democrats -- said they want to debunk the commonly held view that a lack of supply and surging demand are responsible for sharp price increases, including a 25 to 30 percent rise in winter heating bills in the Midwest and elsewhere.

"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. "Supply and demand did not cause the spikes."

The price surge has affected more than half of all U.S. households that heat with natural gas. Many who rely on electric heat have also seen bills go up because a large number of power plants run on natural gas.

While natural gas prices are up about 28 percent this year, usage is down 5 percent. At the same time, supply has remained steady.

"How can you have demand down, and price up and supply level?" said Iowa Attorney General Tom Miller. "It doesn't make sense. To get to these big increases, you have to look at the financial side, at the trading."

The report, prepared by Mark Cooper, research director for the Consumer Federation of America, concluded that one reason for the upward climb of prices is a huge influx of money into largely unregulated financial markets.

Under current law, Miller said, only about 20 percent of trades are reported. The lack of transparency allows traders to gain huge positions and potentially manipulate the market, he said.

"It's sort of like the wild, wild West in terms of trading," Miller said. "There's very little reporting of trades."

The officials called on Congress to make market trading more transparent by requiring registration of traders and reporting of all trades. They also want stricter limits on positions held by one entity, longer settlement periods for short- and long-term contracts, and restrictions on how much the price of natural gas can fluctuate before trading is temporarily halted.

Sandy Crockett, a spokeswoman for the Natural Gas Supply Association, blamed the recent price spike on "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," Crockett said in a written statement.

"We support their ongoing efforts to police natural gas markets for any evidence of manipulation or abuse," Crockett said. "We remain comfortable with the level of oversight provided by these regulatory agencies," Crockett said.

Wisconsin Attorney General Peg Lautenschlager said the report was commissioned before the hurricanes struck and took them into account. The report found the storms had little impact on supply because natural gas storage was at or near record levels both before and after the hurricanes.

---

On the Net:

Copy of the report: http://www.iowaattorneygeneral.org/latest--news/releases/mar--2006/Nat ural--Gas.html