Rebecca Clarren

Today, the Senate passed the Farm Bill. Much can and will be written about the benefits and problems this mammoth piece of legislation will inspire. The $307 billion farm bill however does much more than grant subsidies to farmers and provide funds to nutrition programs like food stamps. In a small dark corner of the bill is an important piece of reform legislation that deals, not with food, but with natural gas prices. Let me explain.

If you use natural gas at home, you’ve probably noticed that your bills have been getting bigger. In some parts of the country they’ve almost doubled in the past six years. You might assume that rising gas prices are the stuff of Econ 101: Gas reserves in the Gulf of Mexico are dwindling, the cost of crude oil is sprinting upward, creating demand for other energy sources and hurricanes Katrina and Rita damaged refineries, cutting supply and jacking up prices. But what’s partly behind spikes in your gas bills are the financial traders who capitalize on a dysfunctional regulatory system and an energy market that’s devised to confound consumers.**

All commodities be they natural gas, corn, or cotton, are sold not only for the going price of the day, but additionally in a gambler’s market that rivals the dealings at Las Vegas. With classic wheeling and dealing, financial traders will purchase a commodity for a negotiated future price, betting that within a few months when the deal will actually close, some event may occur to drive up prices and the trader can sell the gas back and make a mint.

Such abuse prospers in part because certain parts of the country have less access to natural gas than others. Take Louisiana, where many pipelines from disparate gas fields intersect and compete for prices, keeping costs low. Yet in many places, particularly the Northeast and the West fewer pipelines intersect, making prices more vulnerable. The Federal Energy Regulatory Commission, which regulates pipelines, says it has no authority to demand increased connectivity between pipelines. Yet in part because of the unevenness of the gas transportation infrastructure, companies like Goldman Sacks or JP Morgan, can buy gas when and where it’s cheap and then sell it to utilities and municipalities when and where it’s more expensive, pocketing the difference.

Yet unlike other commodity markets that are transparent, most energy markets operate without government oversight. This is thanks to a loophole in the 2000 Commodity Futures Modernization Act inserted at the final hour into the appropriations process by an unknown Senator at the behest of Enron.

This means that there are no “cops” to ensure that no one company dominates trading.

Such lack of oversight causes market distortion, according to a Senate Investigation Commission report from last year. Take Amaranth Advisors, a hedge fund, which at one point in 2006 controlled over half of all the natural gas deals being traded. Because of the Enron loophole, neither the government nor other traders could tell that only one company was controlling all of these swaps and so it appeared that market demand had skyrocketed. Prices sprinted to the sky. Though Amaranth ultimately folded after it lost $6 billion in one week from a series of bad bets, the municipalities and public utilities that purchased gas during the months when Amaranth dominated with its high rolling took a major hit.

These prices of course were passed on to those of us who use natural gas. Georgia residents for example, paid on average around $75 more over a five month period —the equivalent of one month’s gas bill, according to the state’s Municipal Gas Authority. Though Amaranth was one of the largest cases of abuse, in the past few years there’s been a steady stream of market manipulation, says Senator Carl Levin.

“Speculation is rampant in the energy markets and prices are skyrocketing,” says the Michigan Democrat.

“American consumers and businesses are getting socked with high bills while gas companies and energy traders are making record profits. We need to close the Enron loophole to protect consumers and business from energy market abuses.”

For the past five years, Levin and California senator Dianne Feinstein have been trying to restore federal oversight of energy trades. They had little luck when the Republicans controlled Congress, as conservatives feared that increased regulation would drive energy trading to London financial exchanges, where there is far less oversight. But change is in the pipeline.

Embedded in today’s Senate-approved Farm Bill is reform legislation that closes the Enron loophole. Gas prices will surely continue to increase, but at least now they should remain less vulnerable to market manipulation and will better reflect the basic economics of supply and demand.

**Much of the information from this post comes from a Senate Investigative Committee Report entitled “Excessive Speculation in the Natural Gas Market,” which appears to now be unavailable on-line.