Industrial Energy Consumers of America

*The Voice of the Industrial Energy Consumers*

1155 15^th^ Street, NW, Suite 500 • Washington, D.C. 20005

Telephone 202-223-1661• Fax 202-223-1420 • www.ieca-us.org

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STATEMENT OF PAUL N. CICIO

PRESIDENT

INDUSTRIAL ENERGY CONSUMERS OF AMERICA

ON

EXCESSIVE SPECULATION IN ENERGY COMMODITIES

BEFORE THE

COMMITTEE ON AGRICULTURE

U.S. HOUSE OF REPRESENTATIVES

HEARING ON REVIEW OF LEGISLATION AMENDING THE COMMODITY

EXCHANGE ACT

JULY 10, 2008

Mr. Chairman and Members of the Committee,

My name is Paul N. Cicio. I am president of the Industrial Energy
Consumers of America. Thank you for the opportunity to testify before
you on the important issue of excessive speculation in energy and
commodity markets in general.

IECA is a 501 (C) (6) national non-profit non-partisan cross-industry
trade association whose membership is exclusively from the manufacturing
sector.

IECA promotes the interests of manufacturing companies for which the
availability, use and cost of energy, power or feedstock play a
significant role in their ability to compete in domestic and world
markets. IECA membership represents a diverse set of industries
including: plastics, cement, paper, food processing, aluminum,
chemicals, fertilizer, brick, rubber, insulation, steel, glass,
industrial gases, pharmaceutical, construction products, automotive
products, and brewing.

**Immediate action by Congress is needed to eliminate excessive
speculation in energy and food related futures markets and increase
domestic energy production.**

At the heart of the matter is that every consumer in the country assumes
that the government is protecting their interests and that commodity
markets are operating with the public's interest at heart. Nothing could
be further from the truth. The futures market that is relied upon for
price determination in the spot physical market no longer reflects
underlying supply and demand fundamentals. Existing law and government
institutions that are in place have failed to protect the public
interest. Excessive levels of speculation are un-necessarily raising the
costs of energy for every homeowner, farmer and manufacturer.

We urge the Congress to take action to eliminate excessive speculation
in futures markets and to increase the domestic supply of energy.
Removing excessive speculation will have an immediate short term impact
on commodity prices. The Congress cannot under-estimate the impact this
issue is having on our country through un-necessary high energy costs
and inflationary impacts. Make no mistake that excessive speculation is
occurring and futures markets have become over-run with players that
futures markets never intended as participants.

For energy, taking action to remove the moratorium on the Outer
Continental Shelf and provide access to the Alaskan National Wildlife
Refuge Reserve (ANWR) will increase domestic supply of natural gas and
oil in coming years. The combination of eliminating excessive
speculation, increasing domestic production, implementing cost effective
energy efficiency and responsible conservation will go a long way in
solving our nation's energy crisis.

The manufacturing sector is dependent upon globally competitive energy
to compete in the market place. We are substantial consumers of natural
gas for fuel and feedstock and also use large quantities of electricity.

The high price of natural gas has significantly contributed to the loss
of manufacturing jobs. Since 2000, 3.3 million manufacturing jobs have
been lost which account for 19 percent of all manufacturing jobs.
According to the July 4, 2008 USA Today, manufacturers lost 33,000 jobs
in the month of June alone. It also reports that U.S. manufacturers have
lost 353,000 jobs so far this year despite the weak dollar that has
helped to make exports more cost competitive.

It is also important to note that natural gas prices set the marginal
price of electricity in a growing portion of the country. As natural gas
prices rise, so does the price of electricity. The two are connected and
the increase in the price of electricity is another unintended
consequence of higher natural gas prices because of excessive
speculation. High natural gas and electricity prices are resulting in a
new round of demand destruction that drives high paying manufacturing
jobs offshore.

**The case for natural gas**

US natural gas prices are not linked to crude oil prices and are not
impacted by international supply disruption concerns, yet prices have
surged along side crude prices in recent months.

Unlike crude oil that is priced globally, natural gas is a North
American market and is priced domestically. In most years, we produce
about 82 percent of our natural gas in the US, import about 15 percent
from Canada and import about 3 percent in the form of LNG. If global
demand for crude oil exceeds supply, the price will rise globally. If
demand for natural gas rises or falls in the US, only US consumers will
pay either higher or lower prices. Crude oil and natural gas pricing are
distinct and separate and there is insignificant substitution capacity.
Natural gas prices are disconnected to crude oil prices in the physical
markets.

There is no shortage of US natural gas. Domestic supply is meeting
demand and expanding slowly. National inventories are slightly below
their five year average; LNG import capacity has increased and is
greatly under-utilized. There have not been any hurricanes or production
stoppages. However, despite this fairly stable supply and demand
picture, the price of natural gas has soared.

From one year ago, the price of natural gas has risen from \$5.94 mm Btu
to \$13.58 mm Btu, a 129 percent increase. Why, then, has the price of
natural gas risen so high so quickly? The answer is that larger and
larger quantities of capital have flowed into the futures markets by
means of index funds, institutional investors like pension funds, hedge
funds and sovereign funds.

To illustrate the point we have compiled the following information.
Using EIA 2007 data, the US consumes on average 1,971,357,597 MM Btus of
natural gas per month. On July 3, 2008 50,731 natural gas contracts were
traded on the NYMEX for the August contract. At this rate, the NYMEX
trading activity in the prompt month (August) is 8 times the total US
monthly average consumption volume. But this is only the NYMEX volume.
It is a widely held view that the Over-the-Counter (OTC) markets, the
dark markets, trade three to four times the volume that is traded on
NYMEX. If the OTC market is three times larger, natural gas traded
volume is greater than 24 times the physical consumption. What is
frightening is that the rate of trading volume continues to rise.

**Excessive speculation must be stopped**

There is no question that excessive speculation has increased the price
of energy and commodities in general. Trading volumes are now reportedly
22 times that of the underlying commodity volumes and, as a result,
speculators are trading with other speculators with no regard to the
underlying supply versus demand fundamentals.

According to one estimate, assets allocated to commodity index trading
strategies have risen from \$13 billion from 2003 to about \$260 billion
in early 2008. Futures markets were never intended to be used as an
inflation hedge or an asset class. Futures markets were established to
serve price discovery for sellers and buyers of the commodity.

We strongly encourage you to include provisions that will do the
following.

1\. Ensure only bona fide physical hedgers qualify for hedge exemptions

Direct the CFTC to re-examine the definition of "hedging" to ensure that
hedge exemptions are only available to *bona fide* hedgers and not to
speculators. This will prevent speculators from using this exemption to
avoid position limits.

2\. Prohibit pension funds, index funds funds from speculating in
commodity markets.

Futures were never intended to be used as an asset class for investment
purposes. Using futures as an 'asset class' to hedge against inflation
or to feather the performance of pension funds destroys the underlying
functioning and efficiency of price determination for which we rely on
futures. In the past, gold was used as a hedge against inflation, but
using energy or food commodities directly and negatively damage
families, farmers and manufacturers. The Congress must decide whether it
supports families and American businesses or hedge funds, pension funds
and sovereign funds. It's just that simple.

3\. Fully close the Enron loophole

Require that all energy exchanges be subject to appropriate federal
regulation, including reporting requirements and position limits, by
prohibiting any energy contracts from being traded on exempt commercial
markets. This includes Swaps. Speculative position limits must
"look--through" the swaps transaction to the ultimate counterparty and
hold that counterparty to the speculative limits.

4\. Close the foreign exchange loophole

\(a\) Require all foreign exchanges offering energy commodities through
a U.S.-based terminal to be subject to the same regulatory requirements
applicable to U.S. exchanges, including position limits, margin
requirements, and reporting.

\(b\) Subject U.S. traders trading energy derivatives on non-U.S.
markets to the same reporting and recordkeeping requirements as those
trading on U.S. exchanges. This prevents them from avoiding CFTC
oversight by trading oversees.

4\. Provide greater transparency on energy swaps

Direct the CFTC to impose reasonable recordkeeping and 'large trader'
reporting requirements on all energy swaps made in the U.S. or made by
U.S. traders anywhere in the world, while taking steps to ensure that
participants' information is kept confidential and not disclosed to
competitors.

5\. Enhanced reporting requirements

Direct the CFTC to devise new classifications of trades to break out
speculators or swaps as a separate category, and direct the CFTC to
enhance its Commitments of Traders Report to include trades using the
Intercontinental Exchange (ICE) in Europe and other similar exchanges.

6\. Disclosure requirements

Require companies who promote market positions (such as market analysts)
to disclose their positions if they talk publicly. Or ban conflict of
interest such as analysts' statements that enrich analyst's portfolios.

7\. Lower position limits and margin policies to benefit physical
hedgers.

We believe that individual entities from the hedge funds, index funds,
and sovereign funds can provide more capital for trading then most
energy producers or sellers. It is paramount that we prevent a few
entities from developing market power.

8\. Identify sovereign fund positions

Require the CFTC large trader report to identify sovereign funds and
their positions. The participation of sovereign funds in commodity
markets must be made clear to the CFTC because financial derivative
price movements have a direct impact on the price of the physical
commodity. A cause and effect.

9\. All companies must register and file reports to Security Exchange
Commission

Require all companies who participate in US commodity markets, including
hedge funds, to register and file reports to the Security Exchange
Commission just like all other companies.

10\. Ensure that the banks are not borrowing capital from the Federal
Reserve at low interest rates to speculate in the futures market.

We encourage the Congress to ensure that Federal Reserve monetary policy
is not causing higher energy and food costs by providing cheap money to
banks to speculate on commodities. Attached charts show an almost linear
relationship between lower Federal Reserve interest rates, increased
borrowing by banks and corresponding higher commodity prices. We are
concerned that the timing is not coincidental.

Thank you.

Appendix A.

  ----------------------------------------------------------------------- ----------------- ------------------ -------------------
  **Intended federal funds rate**                                                                              

  **Change and level, 1990 to present**                                                                        

  **Change**                                                                                                   

  [(basis                                                                                                      
  points)](http://www.federalreserve.gov/fomc/fundsrate.htm#basis)                                             

  **Date**                                                                **Increase**      **Decrease**       **Level**

                                                                                                               **(percent)**

  [2008](http://www.federalreserve.gov/monetarypolicy/fomc.htm#2008)                                            

  30-Apr                                                                  \...              25                 2

  18-Mar                                                                  \...              75                 2.25

  30-Jan                                                                  \...              50                 3

  22-Jan                                                                  \...              75                 3.5

  [2007](http://www.federalreserve.gov/monetarypolicy/fomc.htm#2007)                                            

  11-Dec                                                                  \...              25                 4.25

  31-Oct                                                                  \...              25                 4.5

  18-Sep                                                                  \...              50                 4.75

  [2006](http://www.federalreserve.gov/fomc/previouscalendars.htm#2006)                                         

  29-Jun                                                                  25                \...               5.25

  10-May                                                                  25                \...               5

  28-Mar                                                                  25                \...               4.75

  31-Jan                                                                  25                \...               4.5
  ----------------------------------------------------------------------- ----------------- ------------------ -------------------

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