**TESTIMONY OF ARTHUR CORBIN**

**PRESIDENT & CEO,**

**MUNICIPAL GAS AUTHORITY OF GEORGIA**

**ON BEHALF OF THE AMERICAN PUBLIC GAS ASSOCIATION**

**BEFORE THE HOUSE AGRICULTURE SUBCOMMITTEE ON GENERAL FARM COMMODITIES
AND RISK MANAGEMENT**

**JULY 12, 2007**

Chairman Etheridge, Ranking Member Moran and Members of the Committee, I
appreciate this opportunity to testify before you today and I thank the
Committee for calling this hearing on the important subject of energy
derivatives. My name is Arthur Corbin and I am the President & CEO of
the Municipal Gas Authority of Georgia. The Municipal Gas Authority of
Georgia is the largest non-profit natural gas joint action agency in the
United States. Our agency is made up of 76 publicly-owned natural gas
distribution system members in five states: Georgia; Alabama; Florida;
Pennsylvania; and Tennessee. Our principal role is to supply all the
natural gas requirements of these systems. Together, our members meet
the gas needs of approximately 243,000 customers.

I testify today on behalf of the American Public Gas Association (APGA).
APGA is the national association for publicly-owned natural gas
distribution systems. There are approximately 1,000 public gas systems
in 36 states and almost 700 of these systems are APGA members.
Publicly-owned gas systems are not-for-profit, retail distribution
entities owned by, and accountable to, the citizens they serve. They
include municipal gas distribution systems, public utility districts,
county districts, and other public agencies that have natural gas
distribution facilities.

APGA's number one priority is the safe and reliable delivery of
affordable natural gas. To bring natural gas prices back to a long-term
affordable level, we ultimately need to increase the supply of natural
gas. However, equally critical is to restore public confidence in the
pricing of natural gas. This requires a level of transparency in natural
gas markets which assures consumers that market prices are a result of
fundamental supply and demand forces and not the result of manipulation
or other abusive market conduct. APGA strongly believes that this level
of transparency currently does not exist, and this has directly led to a
lack of confidence in the natural gas marketplace.

The economic links between the natural gas futures contracts traded on
the New York Mercantile Exchange ("NYMEX") and those contracts,
agreements and transactions in natural gas traded in the
over-the-counter ("OTC") markets are beyond dispute. Without question, a
participant's trading conduct in one venue can affect, and has affected,
the price of natural gas contracts in the other.[^1] Today, the
Commodity Futures Trading Commission ("CFTC") has effective oversight of
NYMEX, and the CFTC and NYMEX provide a significant level of
transparency with respect to NYMEX's price discovery function. But, the
OTC markets lack such price transparency.

This lack of transparency in a very large and rapidly growing segment of
the natural gas market leaves open the potential for a participant to
engage in manipulative or other abusive trading strategies with little
risk of early detection; and for problems of potential market congestion
to go undetected by the CFTC until after the damage has been done to the
market. It simply makes no sense to have transparency over one segment
of the market and none over a much larger segment, especially when the
OTC markets are the fastest growing sectors of the natural gas
marketplace. APGA strongly believes that it is in the best interest of
consumers for Congress to rectify this situation by passing legislation
that would ensure an adequate level of transparency with respect to OTC
contracts, agreements and transactions in natural gas.

*The Market in Natural Gas Contracts*

The market for natural gas financial contracts is composed of a number
of segments. Contracts for the future delivery of natural gas are traded
on NYMEX, a designated contract market regulated by the CFTC. Contracts
for natural gas are also traded in the OTC markets. OTC contracts may be
traded on multi-lateral electronic trading facilities which are exempt
from regulation as exchanges. They may also be traded in direct,
bi-lateral transactions between counterparties, through voice brokers or
on electronic platforms. OTC contracts may be settled financially or
through physical delivery. Financially-settled OTC contracts often are
settled based upon NYMEX settlement prices and physically delivered OTC
contracts may draw upon the same deliverable supplies as NYMEX
contracts, thus linking the various financial natural gas market
segments economically.

Increasingly, the price of natural gas in many supply contracts between
suppliers and local distribution companies ("LDC"), including APGA
members, is determined based upon monthly price indexes closely tied to
the monthly settlement of the NYMEX futures contract. Accordingly, the
futures market serves as the centralized price discovery mechanism used
in pricing these natural gas supply contracts.

Generally, futures markets are recognized as providing an efficient and
transparent means for discovering commodity prices.[^2] However, any
failure of the futures price to reflect fundamental supply and demand
conditions results in prices for natural gas that are distorted and
which do not reflect its true value. This has a direct affect on
consumers all over the U.S., who as a result of such price distortions,
will not pay a price for the natural gas that reflects bona fide demand
and supply conditions. If the futures price is manipulated or distorted,
then the price a consumer pays for the fuel needed to heat their home
and cook their meals will be similarly manipulated or distorted.

*Regulatory Oversight*

NYMEX, as a designated contract market, is subject to oversight by the
CFTC. The primary tool used by the CFTC to detect and deter possible
manipulative activity in the regulated futures markets is its large
trader reporting system. Using that regulatory framework, the CFTC
collects information regarding the positions of large traders who buy,
sell or clear natural gas contracts on NYMEX. The CFTC in turn makes
available to the public aggregate information concerning the size of the
market, the number of reportable positions, the composition of traders
(commercial/non-commercial) and their concentration in the market,
including the percentage of the total positions held by each category of
trader (commercial/non-commercial).

The CFTC also relies on the information from its large trader reporting
system in its surveillance of the NYMEX market. In conducting
surveillance of the NYMEX natural gas market, the CFTC considers whether
the size of positions held by the largest contract purchasers are
greater than deliverable supplies not already owned by the trader, the
likelihood of long traders demanding delivery, the extent to which
contract sellers are able to make delivery, whether the futures price is
reflective of the cash market value of the commodity and whether the
relationship between the expiring future and the next delivery month is
reflective of the underlying supply and demand conditions in the cash
market.[^3]

Although the CFTC has issued "special calls" to one electronic trading
platform, and that platform has determined to voluntarily provide the
CFTC with information on traders' large positions,[^4] the CFTC's large
trader reporting surveillance system does not routinely reach traders'
large OTC positions.[^5] Despite the links between prices for the NYMEX
futures contract and the OTC markets in natural gas contracts, this lack
of transparency in a very large and rapidly growing segment of the
natural gas market leaves open the potential for participants to engage
in manipulative or other abusive trading strategies with little risk of
early detection and for problems of potential market congestion to go
undetected by the CFTC until after the damage has been done to the
market, ultimately costing the consumers or producers of natural gas.

*Amaranth Advisors LLC*

Last year's blow-up of the Amaranth Advisors LLC and the impact it had
upon prices exemplifies these linkages and the impact they can have on
natural gas supply contracts for LDCs. Amaranth Advisors LLC was a hedge
fund based in Greenwich, Connecticut, with over \$9.2 billion under
management. Although Amaranth classified itself as a diversified
multi-strategy fund, the majority of its market exposure and risk was
held by a single Amaranth trader in the OTC derivatives market for
natural gas.

Amaranth reportedly accumulated excessively large long positions and
complex spread strategies far into the future. Amaranth's speculative
trading wagered that the relative relationship in the price of natural
gas between summer and winter months would change as a result of
shortages which might develop in the future and a limited amount of
storage capacity. Because natural gas cannot be readily transported
about the globe to offset local shortages, the way for example oil can
be, the market for natural gas is particularly susceptible to localized
supply and demand imbalances. Amaranth's strategy was reportedly based
upon a presumption that hurricanes during the summer of 2006 would make
natural gas more expensive in 2007, similar to the impact that
hurricanes Katrina and Rita had had on prices the previous year. As
reported in the press, Amaranth held open positions to buy or sell tens
of billions of dollars of natural gas.

As the hurricane season proceeded with very little activity, the price
of natural gas declined, and Amaranth lost approximately \$6 billion,
most of it during a single week in September 2006. The unwinding of
these excessively large positions and that of another previously failed
\$430 million hedge fund---MotherRock--- further contributed to the
extreme volatility in the price of natural gas. The Report by the Senate
Permanent Subcommittee on Investigations affirmed that "Amaranth's
massive trading distorted natural gas prices and increased price
volatility."[^6]

Many natural gas distributors locked-in prices prior to the period
Amaranth collapsed at prices that were elevated due to the accumulation
of Amaranth's positions. In the case of the Municipal Gas Authority of
Georgia, Amaranth's activities had a significant impact on the price we,
and ultimately our members' customers, paid for natural gas. To reduce
volatility and mitigate additional price spikes on supplies of natural
gas, the Gas Authority's hedging procedures required that we hedge part
of our 2006-2007 winter natural gas in the spring and summer of 2006. 
In the spring of 2006 we knew natural gas prices were still extremely
high, but it would have been irresponsible if we were to gamble and not
hedge a portion of our winter gas in the hope that prices would
eventually drop. As a result, we hedged half of our winter gas prior to
September 2006.  By hedging earlier in 2006 when natural gas prices were
high as a result of Amaranth's market activities, our members incurred
hedging losses of \$18 million over the actual market prices during the
winter of 2006-07. The Gas Authority's members were forced to pay an
\$18 million premium and pass it through to their customers on their gas
bills as a result of the excess speculation in the market by Amaranth
and others. 

The lack of OTC transparency and extreme price swings surrounding the
collapse of Amaranth have caused bona fide hedgers to become reluctant
to participate in the markets for fear of locking-in prices that may be
artificial.

*Greater Transparency Needed*

Our members, and the customers served by them, do not believe there is
an adequate level of market transparency under the current system. This
lack of transparency leads to a growing lack of confidence in the
natural gas marketplace. Although the CFTC operates a large trader
reporting system to enable it to conduct surveillance of the futures
markets, it cannot effectively monitor trading if it receives
information concerning positions taken in only one segment of the total
market. Without comprehensive large trader position reporting, the
government is currently handicapped in its ability to detect and deter
market misconduct. If a large trader acting alone, or in concert with
others, amasses a position in excess of deliverable supplies and demands
delivery on its position and/or is in a position to control a high
percentage of the deliverable supplies, the potential for market
congestion and price manipulation exists. Unless Congress moves forward
to enable the CFTC to increase transparency with respect to OTC
financial contracts, agreements or transactions in natural gas, the
government will continue to be woefully unprepared to: (1) detect a
problem until it is too late; (2) protect the public interest; and (3)
ensure the price integrity of the markets, thus impairing our ability as
a nation to maintain the flow and deliverability of a fundamental fuel.

Over the last several years, APGA has pushed for a level of market
transparency in financial contracts in natural gas that would routinely,
and prospectively, permit the CFTC to assemble a complete picture of the
overall size and potential impact of a trader's position irrespective of
whether the positions are entered into on NYMEX, on an OTC multi-lateral
electronic trading facility which is exempt from regulation or through
bi-lateral OTC transactions, which can be conducted over the telephone,
through voice-brokers or via electronic platforms.

*Bi-lateral trading*

Because Amaranth's trading was largely conducted on both a regulated
futures exchange and on an unregulated electronic trading facility, the
immediate focus has been confined to the relative inequality of
transparency between those two multi-lateral trading venues. Moreover,
because the volume of transactions in bi-lateral markets may not be as
apparent as the volume of transactions on exchanges or electronic
trading facilities there may be a tendency to discount the impact that
the bi-lateral markets have upon the price discovery process. APGA
believes that, to be comprehensive, a large trader reporting system must
include large positions amassed through the OTC bi-lateral markets in
addition to those accumulated on futures exchanges or on OTC electronic
trading facilities.

Bi-lateral trading can also take place on an electronic trading venue
that may be as attractive to traders as multi-lateral trading
facilities. Enron On-line, for example, was an all-electronic,
bi-lateral trading platform. Using this platform, Enron offered to buy
or sell contracts as the universal counterparty to all other traders. On
the Enron On-line trading platform, only one participant\--Enron\--had
the ability to accept bids and offers of the multiple participants\--its
customers\-- on the trading platform. This one-to-many model constitutes
a dealer\'s market and is a form of bi-lateral trading.[^7]

Section1a(33) of the Act further defines bi-lateral trading by providing
that, \"the term \'trading facility\' does not include (i) a person or
group of persons solely because the person or group of persons
constitutes, maintains, or provides an electronic facility or system
that enables participants to negotiate the terms of and enter into
bilateral transactions as a result of communications exchanged by the
parties and not from interaction of multiple bids and multiple offers
within a predetermined, nondiscretionary automated trade matching and
execution algorithm. . . . .\" This means that it is also possible to
design an electronic platform for bi-lateral trading whereby multiple
parties display their bids and offers which are open to acceptance by
multiple parties, so long as the consummation of the transaction is not
made automatically by a matching engine.

Both of these examples of bi-lateral electronic trading platforms might
very well qualify for exemption under the current language of sections
2(g) and 2(h)(1) of the Commodity Exchange Act. It is entirely
foreseeable that if a CFTC large-trader reporting regime were expanded
to require the reporting of positions entered into only on multi-lateral
electronic trading facilities and does not include bi-lateral electronic
trading platforms too, traders who wish to evade the new reporting
requirement would simply be able to move their trading activities from
an electronic trading facility to a bi-lateral electronic trading
platform, just as Amaranth moved its trading from NYMEX to ICE.

Moreover, even in the absence of electronic trading, the ability of
traders to affect prices in the natural gas markets through direct or
voice-brokered bi-lateral trading should not be underestimated. For
example, a large hedge fund may trade bi-laterally with a number of
counterparty/dealers using standard ISDA documentation. By using
multiple counterparties over an extended period of time, it would be
possible for the hedge fund to establish very large positions with each
of the dealer/counterparties. Each dealer in turn would enter into
transactions on NYMEX to offset the risk arising from the bi-lateral
transactions into which it has entered with the hedge fund. In this way,
the hedge fund's total position would come to be reflected in the
futures market.

Thus, a prolonged wave of buying by a hedge fund, even through
bi-lateral direct or voice-brokered OTC transactions, can be translated
into upward price pressure on the futures exchange. As futures
settlement approaches, the hedge fund's bi-lateral purchases with
multiple dealer/counterparties would maintain or increase upward
pressure on prices. By spreading its trading through multiple
counterparties, the hedge fund's purchases would attract little
attention and escape detection by either NYMEX or the CFTC. In the
absence of routine large-trader reporting of bi-lateral transactions,
the CFTC will only see the various dealers' exchange positions and have
no way of tying them back to purchases by a single hedge fund.

Legislation is needed to remedy this critical lack of transparency. The
CFTC recently proposed an amendment to its Rule 18.05 "special call"
provision to make explicit that its special call authority to traders
applies to OTC positions, including bi-lateral transactions and
transactions executed on the unregulated electronic trading facilities
where the trader has a reportable position on a designated contract
market in the same commodity.[^8] This amendment, however, merely makes
explicit authority that the CFTC has previously exercised under Rule
18.05.[^9] Moreover, special calls are extraordinary in nature and will
not be used until a problem has been detected by some other means. Thus,
this special call requirement is not an effective tool for conducting
routine market surveillance. Moreover, the provision, even as it is
proposed to be amended, only applies when a trader has a reportable
position on a regulated futures market. Thus, by maintaining positions
in the regulated futures market below the reporting level, a trader can
avoid being required to report, even on a special call basis. This is
exactly the path that Amaranth took when ordered to reduce its NYMEX
position.

Only a comprehensive large trader reporting system that includes all
segments of the market would have enabled the CFTC to spot the relative
size of Amaranth's OTC position prior to its collapse. A comprehensive
large trader reporting system would enable the CFTC, while a scheme is
unfolding, to determine whether a trader is using the OTC natural gas
markets to corner deliverable supplies and manipulate the price in the
futures market.[^10] A comprehensive large trader reporting system would
also enable the CFTC to better detect and deter other types of market
abuses, including for example, a company making misleading statements to
the public or providing false price reporting information designed to
advantage its natural gas trading positions, or a company engaging in
wash trading by taking large offsetting positions with the intent to
send misleading signals of supply or demand to the market. Such
activities are more likely to be detected or deterred when the
government is receiving information with respect to a large trader's
overall positions, and not just those taken in the regulated futures
market.

The need to provide the CFTC with additional surveillance tools is not
meant to imply that the CFTC has not been vigilant in pursuing
wrongdoers. Experience tells us that there is never a shortage of
individuals or interests who believe they can, and will attempt to,
affect the market or manipulate price movements to favor their market
position. The fact that the CFTC has assessed over \$300 million in
penalties, and has assessed over \$2 billion overall in government
settlements relating to abuse of these markets affirms this. These
efforts to punish those that manipulate or otherwise abuse markets are
important. But it must be borne in mind that catching and punishing
those that manipulate markets after a manipulation has occurred is not
an indication that the system is working. To the contrary, by the time
these cases are discovered using the tools currently available to
government regulators, our members, and their customers, have already
suffered the consequences of those abuses in terms of higher natural gas
prices. Greater transparency with respect to traders' large positions,
whether entered into on a regulated exchange or in the OTC markets in
natural gas will provide the CFTC with the tools to detect and deter
potential manipulative activity before our members and their customers
suffer harm.

Accordingly, APGA has petitioned Congress to pass legislation that would
expand the large trader reporting system to mandate the reporting of
positions held in financial contracts for natural gas in all segments of
the market. Specifically, we believe that large traders should report
their positions regardless of whether they are entered into on
designated contract markets, on electronic trading facilities, on OTC
bi-lateral electronic trading platforms, in the voice-brokered OTC
markets or in direct bilateral OTC markets. This would treat all trading
positions in financial natural gas contracts equally in terms of
reporting requirements. Extending large trader reporting to OTC natural
gas positions and to positions entered into on electronic trading
facilities will provide the CFTC with a complete picture of the natural
gas marketplace and ensure that the cop on the beat has the tools
necessary to be effective.

*Greater Transparency is a Reasonable Response to Conditions in the
Natural Gas Market*.

It is important to note that APGA's proposal is narrow in scope. First,
APGA is requesting a comprehensive large trader reporting system only
with respect to financial contracts, agreements and transactions in
natural gas. The legislation that APGA is seeking is not intended to,
and would in no way effect financial swaps. Natural gas contracts are
more susceptible to manipulation than other commodities or instruments
because the deliverable supply of natural gas is often small relative to
the size of the derivatives positions held by large traders and, as
mentioned previously, natural gas is constrained by the manner in which
it can be delivered. These conditions do not necessarily pertain to
other commodities or instruments which are "exempt commodities" under
the Act[^11] and they most certainly do not pertain to contracts,
agreements or transactions in the "excluded commodities" under the Act.
[^12] Accordingly, it must be emphasized that APGA's proposal is limited
to contracts in natural gas. It would have no effect with respect to the
OTC markets in financial swaps or in any other contracts, agreements or
transactions on an "excluded commodity" or in any "exempt commodity"
other than natural gas. Moreover, APGA's proposal with respect to
financial contracts, agreements or transactions in natural gas is merely
a reporting requirement and would not impose any regulatory requirements
with respect to such transactions.

Second, the CFTC's large trader reporting system would not in any way
result in the public release of information relating to an individual
entity's trading positions. Information collected through the CFTC's
large trader reporting system is used for the government's market
surveillance purposes only and is kept confidential by the CFTC in
accordance with Section 8 of the Act. Any information which is made
publicly available by the CFTC, as described above, is on an aggregated
basis and does not disclose individual trading positions. APGA is not
advocating a change in this practice.

Finally, although some have raised concerns about the costs of expanding
the large trader reporting system, we believe the costs would be
reasonable. Insofar as the CFTC's large trader reporting system is
already operational, the CFTC will not be creating an entirely new
program to collect this information. In addition, large traders, such as
those which would be required to report to the CFTC, will likely have
automated recordkeeping systems for their own internal risk management
purposes that could be adapted for the purpose of reporting positions to
the CFTC. Finally, as discussed above, certain trading facilities have
already taken steps to make information available to the CFTC.
Accordingly, APGA believes that the costs of a comprehensive large
trader reporting system for natural gas would be reasonable and are far
outweighed by the benefits in terms of helping assure consumers that the
market price is a reflection of appropriate market forces.

\* \* \* \* \*

Natural gas is a lifeblood of our economy and millions of consumers
depend on natural gas every day to meet their daily needs. It is
critical that the price those consumers are paying for natural gas comes
about through the operation of fair and orderly markets and through
appropriate market mechanisms that establish a fair and transparent
marketplace. Without giving the government the tools to detect and deter
manipulation, market users and consumers of natural gas who depend on
the integrity of the natural gas market cannot have the confidence in
those markets that the public deserves. The current situation is not
irreversible. Congress can provide American consumers with the
protection they deserve by passing legislation that would expand the
CFTC's large trader reporting requirements to include financial
contracts for natural gas that are currently exempt from reporting. APGA
and its approximately 700 public gas system members stand ready to work
with you towards accomplishing that goal.

  

[^1]: *See "Excessive Speculation in the Natural Gas Market,"* Report of
    the U.S. Senate Permanent Subcommittee on Investigations (June 25,
    2007) ("PSI Report"). The PSI Report on page 3 concluded that
    "Traders use the natural gas contract on NYMEX, called a futures
    contract, in the same way they use the natural gas contract on ICE,
    called a swap. . . . The data show that prices on one exchange
    affect the prices on the other."

[^2]: *See* the Congressional findings in Section 3 of the Commodity
    Exchange Act, 7 U.S.C. §1 et seq. ("Act"). Section 3 of the Act
    provides that, "The transactions that are subject to this Act are
    entered into regularly in interstate and international commerce and
    are affected with a national public interest by providing a means
    for . . . discovering prices, or disseminating pricing information
    through trading in liquid, fair and financially secure trading
    facilities."

[^3]: *See* letter to the Honorable Jeff Bingaman from the Honorable
    Reuben Jeffery III, dated February 22, 2007.

[^4]: *Id*, at 7. The CFTC presumably issued this call for information
    under Section 2(h)(5) of the Act.

[^5]: As explained in greater detail below, special calls are generally
    considered to be extraordinary, rather than routine, requirements.
    Although special calls may be an important complement to routine
    reporting requirements in conducting market surveillance, they are
    not a substitute for a comprehensive large trader reporting system.

[^6]: *See* PSI Report at p. 119

[^7]: This stands in contrast to a many-to-many model which is
    recognized as a multi-lateral trading venue. This understanding is
    reflected in section 1a(33) of the Act, which defines \"Trading
    Facility\" as a \"group of persons that . . . provides a physical or
    electronic facility or system in which multiple participants have
    the ability to execute or trade agreements, contracts or
    transactions by accepting bids and offers made by other participants
    that are open to multiple participants in the facility or system.\"

[^8]: "Maintenance of Books, Records and Reports by Traders, 72 *Fed*.
    *Reg*. 34413 (June 22, 2007).

[^9]: The CFTC stated in its *Federal Register* release that,
    "Commission staff has interpreted Regulation 18.05 to include
    position and transaction data for non-reporting transactions
    \[transactions executed over-the-counter and or pursuant to Sections
    2(d), 2(g) or 2(h)(1)-(2) of the Act\] and has received such
    information in response to requests made pursuant to the
    Regulation." *Id*. at 34415.

[^10]: *See e.g*. *U.S. Commodity Futures Trading Commission* v. *BP
    Products North America, Inc.*, Civil Action No. 06C 3503 (N.D. Ill.)
    filed June 28, 2006.

[^11]: "Exempt commodities" are defined in Section 1a (14) of the Act
    as, "a commodity that is not an excluded commodity or an
    agricultural commodity." Thus, for example, exempt commodities
    include other energy commodities and base and precious metals.

[^12]: "Excluded commodities" are defined in Section 1a(13) of the Act
    and include interest rates, currency, indexes and various other
    types of financial instruments or interests.