TESTIMONY OF LAURA CAMPBELL 

ASSISTANT MANAGER OF ENERGY RESOURCES, 

MEMPHIS LIGHT, GAS & WATER 

ON BEHALF OF THE AMERICAN PUBLIC GAS ASSOCIATION 

BEFORE THE COMMODITY FUTURES TRADING COMMISSION

JULY 28, 2009

 Chairman Gensler and Commissioners of the Commodity Futures Trading 

Commission (“Commission”), I appreciate this opportunity to testify before you today 

and I thank the Commission for calling this hearing to examine the critically important 

issues of position limits in energy contracts. My name is Laura Campbell and I am the 

Assistant Manager of Energy Resources for Memphis Light Gas & Water (MLGW). 

MLGW is the nation’s largest three-service municipal utility and currently provides 

service to more than 420,000 customers. Since 1939, MLGW has met the utility needs of 

Memphis, Tennessee and Shelby County residents by delivering reliable and affordable 

electricity, natural gas and water service. Natural gas is the most popular means of 

residential heating in the MLGW service area and we currently provide natural gas to 

more than 313,000 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 over 720 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 (like MLGW), public utility districts, county districts, and other 

public agencies that have natural gas distribution facilities. 

 The market for natural gas financial contracts is composed of a number of 

segments. Among APGA’s members are active participants in all segments of the 

market for natural gas. For example, public gas systems depend upon the physical 

commodity markets in natural gas to source their supplies. Often, these contracts are 

long-term natural gas supply contracts at prevailing market prices. Many members are 

also market participants in the exchange-traded or over-the-counter (“OTC”) derivatives 

markets. Together, these markets play a critical role in these utilities securing natural gas 

supplies at stable prices for their communities. 

 

 In order to hedge their price exposure, our members may be active in any (or all) 

of the exchange-traded or OTC market segments. Contracts for the future delivery of 

natural gas are traded on the New York Mercantile Exchange (“NYMEX”), a designated 
contract market regulated by the Commission. 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 (“exempt commercial markets” 

or “ECMs”). They may also be traded in direct, bi-lateral transactions between 

counterparties, through voice brokers or on electronic platforms. 

 Financially-settled OTC contracts in natural gas often are settled based upon 

NYMEX settlement prices and physically delivered OTC contracts may draw upon the 

same deliverable supplies as NYMEX contracts, thus economically linking the various 

financial natural gas market segments, including regulated futures markets, ECMs and 

bilateral trading, whether conducted on an electronic trading platform or otherwise. 

 

 For this reason, APGA has pushed for the passage of legislation and regulations 

that increase transparency and help ensure that the OTC markets are an accurate 

reflection of supply and demand conditions for natural gas. Specifically, APGA 

supported enactment of the CFTC Reauthorization Act of 2008 (“Reauthorization Act”) 

and, in particular, the provisions of the Reauthorization Act which significantly expanded 

the Commission’s oversight authority with respect to exempt commercial markets having 

Significant Price Discovery Contracts (“SPDC”).1

 APGA has also supported increases in 

funding for the Commission to ensure that it has the resources needed to provide an 

appropriate level of protection for consumers. 

Speculators’ Effect on the Natural Gas Market 

As hedgers that use both the regulated futures markets and the OTC energy 

markets, our members value the role of speculators in the markets. We also value the 

different needs served by the regulated futures markets and the more tailored OTC 

markets. As hedgers, public gas systems depend upon liquid and deep markets in which 

to lay off our risk. Speculators are the grease that provides liquidity and depth to the 

markets. 

 However, speculative trading strategies may not always have a benign effect on 

the markets. For example, the dramatic blow-up of Amaranth Advisors LLC and the 

impact it had upon prices exemplifies the adverse impact that speculative trading interests 

can have on natural gas supply contracts for local distribution companies (“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. 

 

1

 The Commission recently published in the Federal Register its “Notice of Intent to Undertake a 

Determination Whether the Henry Financial LD1 Fixed Price Contract Traded on the Intercontinental 

Exchange, Inc., Performs a Significant Price Discovery Function,” 74 Fed. Reg. 28028 (June 12, 2009). 

This notice requested commenters to provide written views, data and analysis that would address whether 

the Intercontinental Commodity Exchange Henry Financial LD1 Fixed Price Contract for natural gas (“ICE 

Henry Hub Contract”) is a Significant Price Discovery Contract (“SPDC”). APGA submitted its views and 

analysis supporting a determination that the ICE Henry Hub Contract is a SPDC. 

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 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.2

 The Report by the 

Senate Permanent Committee on Investigations affirmed that “Amaranth’s massive 

trading distorted natural gas prices and increased price volatility.”3

 APGA believes that 

these price distortions directly increased the cost of natural gas for many of our member’s 

customer rate payers.4

 

 Recently, additional concerns have been raised with respect to the size of 

positions related to, and the role of, passively managed long-only index funds. In this 

instance, the concern is not whether the positions are being taken in order to intentionally 

drive the price higher, but rather whether the unintended effect of the cumulative size of 

these positions has been to push market prices higher than the fundamental supply and 

demand situation would justify. Similarly, investment instruments which overlie 

contracts on natural gas may also be traded on securities exchanges through Exchange 

Traded Funds or issues of Exchange Traded Notes. 

 The additional concern has been raised that recent increased amounts of 

speculative investment in the futures markets generally have resulted in excessively large 

speculative positions being taken that due merely to their size, and not based on any 

intent of the traders, are putting upward pressure on prices. The argument made is that 

these additional inflows of speculative capital are creating greater demand then the 

market can absorb, thereby increasing buy-side pressure which results in advancing 

prices. 

 

2

 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. 

3 See “Excessive Speculation in the Natural Gas Market,” Report of the U.S. Senate Permanent 

Subcommittee on Investigations (June 25, 2007) (“PSI Report”) at p. 119 

4

 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. They did so because of their hedging 

procedures which require that they hedge part of their winter natural gas in the spring and summer. 

Accordingly, even though natural gas prices were high at that time, it would have been irresponsible (and 

contrary to their hedging policies) to not hedge a portion of their winter gas in the hope that prices would 

eventually drop. Thus, the elevated prices which were a result of the excess speculation in the market by 

Amaranth and others had a significant impact on the price these APGA members, and ultimately their 

customers, paid for natural gas. The lack of transparency with respect to this trading activity, much of 

which took place in the OTC markets, and the 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. 

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 APGA commends the Commission for its focus on the possible impact 

speculative investment has on the price of natural gas and other energy commodities, for 

asking these tough questions, and for holding these hearings to gather views on whether 

speculative position limits should be applied to energy contracts. APGA notes that in 

considering the issue of the application of speculative position limits to energy contracts, 

policy makers should not lose sight of the significant history and experience that 

surrounds the use of speculative position limits as a regulatory tool. 

History of Regulation Under the Commodity Exchange Act 

Systemized trading in contracts for the future delivery of agricultural commodities 

developed in the United States in the mid to late 1800s from an economic need for risk 

shifting. Glaring abuses were attendant with the advantages of trading, these included 

price manipulations, market corners and extreme and sudden price fluctuations on the 

organized exchanges. These abuses stirred repeated demands for legislative action to 

prohibit or comprehensively regulate futures trading. Although the first regulation of the 

grain futures markets dates from the 1920’s,5

 the Commodity Exchange Act of 19366

was the first statute to comprehensively regulate the futures markets. 

 

 Section 3 of the Act as it existed before the 2000 amendments explained the 

statute’s purpose in relevant part as follows: 

Transactions in commodities involving the sale thereof for future delivery as 

commonly conducted on boards of trade and known as “futures” are affected with 

a national public interest. Such futures transactions are carried on in large volume 

by the public generally and by persons engaged in the business of buying and 

selling commodities and the products and byproducts thereof. . . . The prices 

involved in such transactions are generally quoted and disseminated through the 

United States and in foreign countries as a basis for determining the prices to the 

producer and the consumer. . . .The transactions and prices of commodities on 

such boards of trade are susceptible to excessive speculation and can be 

manipulated, controlled, cornered or squeezed, to the detriment of the producer or 

the consumer. . . . 

 Section 4a(a) of the Act echoes the Congressional finding of former section 3, 

providing that, “Excessive speculation in any commodity under contracts of sale of such 

commodity for future delivery made on or subject to the rules of contract markets . . . 

causing sudden or unreasonable fluctuations or unwarranted changes in the price of such 

commodity, is an undue and unnecessary burden on interstate commerce in such 

commodity.” 7 U.S.C. §6a. 

 The CFTC in 1981 adopted a rule requiring all futures exchanges to impose 

speculative position limits for all commodities that were not subject to a Federal 

5

 See, Grain Futures Act of 1922, Publ. L. No. 6-331, 42 Stat. 998 (1922). 

6

 Act of June 15, 1936, ch 545 §5, 49 Stat 1494. 

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speculative position limit.7

 In so doing, the Commission explained the danger that 

unchecked speculative positions can pose to the markets, saying: 

It appears that the capacity of any contract market to absorb the establishment and 

liquidation of large speculative positions in an orderly manner is related to the 

relative size of such positions, i.e., the capacity of the market is not unlimited. 

Recent events in the silver market would support a finding that the capacity of a 

liquid futures market to absorb large speculative positions is not unlimited, 

notwithstanding mitigating characteristics of the underlying cash market. 

“Establishment of Speculative Position Limits,” 46 Fed Reg. 50938, 509040 (October 16, 

1981). 

 

 Subsequently, the Commission permitted a number of contracts to be exempt 

from the requirement that the exchange impose a speculative position limit, permitting 

instead that the exchange impose a “position accountability rule.”8

 These exemptions 

were based on the liquidity of the futures and cash markets for such commodities. 

Tangible commodities, such as energy, were permitted to have a position accountability 

rule only for the back months; spot month speculative position limits were still required. 

The position accountability exemptions were codified by the Commission at 17 C.F.R. 

§150.5(e). 

 Finally, Section 13201 of the Reauthorization Act provides that various core 

principles shall apply to exempt commercial markets on which SPDCs are traded. Core 

Principle IV requires such an electronic trading facility to adopt position limitations or 

position accountability for speculators in SPDCs, taking into account positions in other 

agreements, contacts, and transactions that are treated by a derivatives clearing 

organization as fungible with such SPDCs. 

 With that history in mind, APGA is pleased to offer its views on the following 

specific issues raised by the Commission in its announcement of this hearing.9

 

Issues Under Consideration by the Commission 

 

 Applying position limits consistently across all markets and participants. 

 The determination of whether to apply position limits consistently across all 

markets and participants is perhaps the single most important issue for the energy market. 

As we noted above, the various market segments for energy contracts are economically 

linked, and actions in one market segment can affect prices in the other segments. Recent 

 

7

 The Commission subsequently modified this requirement, permitting contract markets to impose “position 

accountability rules” in lieu of speculative position limits for certain contracts, including the energy 

contracts. 

8

 See “Revision of Federal Speculative Position Limits and Associated Rules,” 63 Fed. Reg. 38525 (July 

17, 1998) for an explanation of the position accountability exemptions. 9

 See CFTC Release: 5681-09 (July 21, 2009). 

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events in the economically linked markets for natural gas have shown the danger of 

traders being able to move positions from one market to another in order to evade 

application of a market’s position accountability rule or position limit.10 A unified limit 

administered by the Commission across all markets, in addition to the limits adopted and 

administered by each separate market would effectively address this issue and provide an 

effective and meaningful limitation on the total size of positions that a trader could amass 

in the delivery month. 

 

 APGA strongly supports the use of spot month speculative position limits as a 

proven and effective tool for addressing markets with constrained deliverable supplies, 

which is typical of the markets for natural gas. The Commission recently promulgated 

rules implementing the Reauthorization Act’s provisions with respect to the oversight of 

SPDCs.11 APGA believes that the final rules are a very good foundation for addressing 

the issue, but recommends that the Commission consider taking additional steps to 

strengthen the effectiveness of this important regulatory tool. 

 In this regard, APGA notes that the Commission deferred action to make spot 

month speculative position limits or back month position accountability rules apply to 

both cleared and non-cleared transactions on a market that operates as a SPDC. Despite 

recognition of the important role that non-cleared transactions play in price formation, the 

speculative position limits that the Commission’s rules require apply only to cleared 

transactions and do not require that non-cleared transactions be included in calculating 

whether a trader has violated a spot month speculative position limit. This clearly and 

inexplicably weakens the prophylactic protection that spot month speculative position 

limits are intended to provide. Accordingly, APGA suggests that the Commission take 

this opportunity to include linked, non-cleared SPDCs within the speculative position 

limit requirement. 

 

 APGA also recommends that the Commission reconsider its recent rulemaking 

and require an exempt commercial market in setting and enforcing spot month limits to 

account for a trader’s positions that may be held on another registered entity in 

economically-related SPDCs. Unless such an approach is taken, speculative position 

limits will be far less effective than they otherwise could be, enabling a trader to amass a 

far larger speculative position in the spot month by dividing its position among several 

markets or market segments for SPDCs. 

 APGA also recommended in its comments on the Commission’s recent 

rulemaking, and renews its recommendation to the Commission at this Hearing, for the 

Commission to adopt its own speculative position limits, particularly in the spot-month, 

for economically-related SPDCs that are traded on more than one registered entity. By 

adopting Commission-set speculative position limits, the Commission would be able to 

aggregate positions across markets and enforce unified position limits, thus preventing a 

 

10 See “Excessive Speculation in the Natural Gas Market,” Report of the U.S. Senate Permanent 

Subcommittee on Investigations (June 25, 2007) (“PSI Report”). 

11 “Significant Price Discovery Contracts on Exempt Commercial Markets; Final Rule,” 74 Fed. Reg. 

12178 (March 23, 3009). 

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trader from amassing unduly large positions in the spot month by entering positions in 

economically equivalent SPDCs on different markets or by trading a combination of 

cleared and uncleared transactions on the same market. 

 APGA also considers it vitally important that the Commission consider including 

within such unified speculative positions limits contracts that are traded and maintained 

OTC. Where such contracts are economically linked to contracts traded on exchange 

traded or exempt commercial markets, such OTC contracts may have an important 

influence on pricing and on the performance of other market segments. 

 In light of the interconnectedness of SPDC contracts traded on different registered 

entities (and those related contracts traded OTC), a dual system of Commission and 

market speculative position limits would be a far more effective regulatory tool than 

reliance only upon market-imposed speculative position limits. Such a dual system is not 

new; it has existed as part of the regulatory landscape since enactment of the Commodity 

Exchange Act in 1936.12 The Commission traditionally has established its own 

speculative position limits for agricultural commodities, which like natural gas, have 

limited deliverable supplies. Moreover, the Reauthorization Act specifically provides the 

Commission with authority to establish Commission set-speculative position limits for 

SPDCs.13 

 Nor would Commission-set speculative position limits for SPDCs impose undue 

hardship for traders. Each trader would be free to trade up to the limit at a single market 

or to break up its position among, or net its position across, markets listing economically 

linked SPDC contracts.14 

 Recent events in the economically linked markets for natural gas have shown the 

danger of traders being able to move positions from one market to another in order to 

evade application of a market’s position accountability rule or position limit.15 A unified 

limit administered by the Commission across all markets (including OTC transactions), in 

addition to the limits adopted and administered by each separate market would effectively 

address this issue and provide an effective and meaningful limitation on the total size of 

positions that a trader could amass in the delivery month. 

 

 However, it should also be noted that position limits should apply to speculative 

traders and not hedgers. By virtue of being hedgers, such traders tend to have an over-all 

market-neutral position—that is, the size of their derivatives positions is off-set by their 

 

12 See 17 C.F.R. Part 150 for the Commission’s rules which establish a dual system of Commission and 

exchange-set speculative position limits for certain commodities. 

13 See, section 13203 (g) of the Reauthorization Act. 14 This in essence would operate the same as the single month, all months combined limit which enables a 

trader at the limit to concentrate all positions in one month or break them up across months. A trader could 

be at the limit at a single market and also hold off-setting positions at another market without violating the 

limit. No, or minimal, changes in reporting systems would be required; the Commission could rely for the 

most part on reports that are currently required to be filed by the markets or by their clearing members. 15 See “Excessive Speculation in the Natural Gas Market,” Report of the U.S. Senate Permanent 

Subcommittee on Investigations (June 25, 2007) . 

- 7 -
cash market positions. Moreover, the overall size of their derivatives positions is 

naturally bounded by their cash market position and hence not subject to the type of overleveraging displayed by Amaranth and other speculative traders. 

 With regard to the classification of traders as hedgers or speculators, APGA 

believes that the ultimate characterization of the position should reflect the nature of the 

counterparty, (i.e., commercial market end-user (“hedger”) and speculative market enduser (“speculator”). Accordingly, contracts that are entered into by a swaps dealer as 

counterparty to a commercial market end-user would be denominated as “hedging” 

contracts because the swaps dealer is facilitating the commercial market end-user’s 

hedging transactions. In this way, those of our members who choose to trade OTC will 

be able to enter into hedging transactions regardless of whether the transaction is OTC or 

on-exchange. As a corollary, transactions by a swaps dealer with a speculative market 

end-user in support of a speculative investment , would be categorized as speculative and 

would be subject to speculative position limits. This would prevent a single speculative 

end user from transforming speculative positions into hedge positions through the use of 

an OTC counterparty. 

Whether the CFTC needs additional authority to implement such limits 

 The Commission has the authority and ability to promulgate rules that would 

provide more effective speculative position limits than it has exercised. As noted above, 

the Commission has left open the issue of requiring exempt commercial markets to apply 

a unified speculative position limit to both cleared and non-cleared SPDCs. Moreover, 

the Commission has authority to establish a dual system of Commission and marketbased speculative position limits as has been the model for the enumerated agricultural 

commodities. Finally, APGA supports the inclusion within a unified speculative position 

limit of all transactions in economically linked contracts regardless of whether they are 

conducted on an electronic trading facility, through voice brokerage or bi-laterally. To 

the extent that the Commission concludes that clarification of its authority to apply a 

unified limit to all such transactions is necessary, APGA would support the Commission 

in any request to the Congress for such legislative clarification. 

 What methodology the Commission should use to determine position limit levels 

for each market. 

 The Commission has a long history of, and experience in, establishing speculative 

position limits. These guidelines are set forth in 17 C.F.R. §150.5. The inclusion of bilateral OTC transactions within Commission speculative position limits may present new 

issues; however, the basic approach developed by the Commission over the years should 

nevertheless provide guidance in setting such limits. Establishing a dynamic limit based 

upon percentage of open interest would not be efficacious. The problem with a dynamic 

level based on open interest is that during the period leading up to contract expiration, a 

trader might find him or herself going into and out of compliance depending on the 

relative speed with which others liquidate positions from day to day. Such a trader would 

- 8 -
have no way of knowing in advance if it would be in compliance with a dynamic position 

limit. This uncertainty might cause liquidations to be less, rather than more, orderly. 

 APGA believes that the same methodology for setting speculative positions limits 

may not be appropriate for every commodity. For example, because deliverable supplies 

for natural gas are subject to unique constraints, APGA believes that the Commission and 

stakeholders should explore whether both the spot month and back month speculative 

position limits should be set with reference to a reasonable percentage of deliverable 

natural gas supply. We believe that this type of technical analysis should be a focus of 

the Commission’s Energy Advisory Committee. 

 Should exemptions from position limits be permitted for anyone other than bona 

fide hedgers for the conduct and management of a commercial enterprise? 

 

APGA believes that certain types of risk management and risk reducing 

transactions should be treated as though they constitute hedging positions for purposes of 

speculative position limits. The Commission previously examined this issue and 

proposed additional exemptions which it permitted exchanges to adopt for risk 

management, spread and arbitrage transactions. These exemptions appear to be equally 

sound today and should be permitted. 

 However, the Commission should be cautious in redefining “bona fide hedging.” 

Although “bona fide hedging” as defined under 17 C.RF.R. §1.3(z) only has applicability 

for the Commission with respect to its rules relating to speculative position limits, there 

may be a number of instances where regulators or others rely on the definition for 

various purposes. For example, certain corporations or municipal government entities 

may be authorized to trade only for the purpose of “bona fide hedging.” Some APGA 

members operate under such a limitation. The meaning of “bona fide hedging” is well 

established and conveys a type of use of the markets which is well understood in 

economic literature. Accordingly, amending the meaning of “bona fide hedging” might 

have significant unintended consequences by creating uncertainty where none now exists. 

To the extent that additional trading strategies are determined by the Commission to 

merit exemption from speculative position limits, the Commission should seek to permit 

such strategies without obfuscating the defined meaning of “bona fide hedging 

transaction.” 

APGA Supports the Continued Availability of Individually Negotiated, Non-cleared OTC 

Transactions

 APGA applauds the Commission for holding these hearings and asking these farreaching questions, which may have significant ramifications on how well the markets in 

natural gas operate in the future. APGA has for many years supported greater 

transparency and oversight with respect to all segments of the market for natural gas, 

including all segments of the markets for financially-settled OTC derivatives on natural 

gas. However, APGA’s members also believe that the continued availability of bi-lateral, 

- 9 -
non-cleared OTC derivatives transactions is vital to their being able to provide natural 

gas to their customers at stable prices and at the lowest possible cost. 

 Although APGA has been a strong supporter of increasing transparency and 

market oversight, proposals that would require public gas systems to clear their OTC 

derivatives transactions would have a significant detrimental impact upon the financial 

operations of these systems, ultimately increasing the cost to the consumer. 

 As discussed above, public gas systems depend upon both the physical 

commodity markets as well as the markets in OTC derivatives to meet the natural gas 

needs of their consumers. Together, these markets play a critical role in these utilities 

securing natural gas supplies at stable prices for their communities. Specifically, natural 

gas distributors purchase firm supplies in the physical delivery market at prevailing 

market prices, and enter into OTC derivative agreements customized to meet their 

specific needs, thus reducing their consumers’ exposure to future market price 

fluctuations and stabilizing rates. By using both markets, these public gas systems are 

able to purchase firm deliveries of natural gas from a diverse set of suppliers while 

hedging the risk of future market price fluctuations. 

 However, proposals within the administration and Congress that would require all 

standardized OTC derivatives transactions to be cleared would significantly impair the 

financial ability of public gas systems to engage in these gas supply strategies. The 

mandated clearing of all OTC transactions would require public gas systems to post 

initial margin and to meet potential margin calls whenever required on little notice. This 

would constitute a significant financial and operational burden on these systems, their 

communities and their consumers. 

 Because many of our members under an OTC Credit Support Annex may have 

sizable thresholds before collateral on their OTC contracts is required to be posted, 

requiring the posting of initial margin associated with clearing the same contracts, would 

significantly increase the cost of carrying such positions to a public gas system. Utilities, 

such as our members, enjoy these high credit thresholds before collateral is required to be 

posted based on the strength of their credit ratings and because their counterparties 

recognize that the hedges executed by public gas systems through OTC swaps are part of 

the gas systems’ cost of gas, which is recoverable from their customers through existing 

rates. For the public gas system that holds 5,000 contracts, the cost of posting margin on 

cleared contracts might be as high as requiring the posting of $25 million in margin when 

no collateral would have been required under their bi-lateral Credit Support Annex. 

Further postings of maintenance and variation margins are also required for exchange 

traded clearing and, depending on market moves and timing, can be multiples of the 

initial margin requirement. Because of their non-profit structure, posting such large 

amounts of collateral would pose a significant challenge and cost to our members and 

their consumers. 

 Another result of mandatory clearing on public gas systems would be the de facto 

elimination of the use of tax-exempt financing for the prepayment of long-term natural 

- 10 -
gas contracts, also known as “prepays.” Prepays were endorsed by Congress as part of 

the Energy Policy Act of 2005 and have been a key tool that many public gas systems 

have used to secure long-term, firm supplies of natural gas for terms up to 30 years. One 

critical component of the prepay is an OTC swap transaction that enables the public gas 

system to ultimately pay a price discounted below the prevailing spot market price. 

Importantly, the OTC derivatives utilized in prepays are “tear up” agreements, that is, 

they terminate at no cost in the event the prepay terminates. Because of their size and 

long-range nature, requiring clearing of the prepay swap would be cost prohibitive. 

 Gas consumers need a strong, stable supply of natural gas and we need producers 

to continue to explore, find and produce America’s plentiful supplies of natural 

gas. Based on letters submitted by producer groups to Congress and to the Commission, it 

is our understanding that similar in its importance to public gas systems, the OTC market 

is also significant to producers. Many natural gas producers use OTC derivatives to 

customize their hedging transactions and thereby stabilize their cash flows in support of 

new exploration, production and other operating requirements (including labor costs). 

 The credit requirements in the OTC market for producers is already addressed within 

existing agreements as it is for gas distributors, such as APGA’s members. Adding 

undue costs to the supply side of our industry will cause costly burdens to the producing 

and consuming community alike. 

 

 APGA notes that Congressman McMahon recently proposed “The Derivatives 

Trading Accountability and Disclosure Act.” This bill, among other provisions, would 

require the Commission and the Securities and Exchange Commission, in coordination 

with a new Office of Derivatives Supervision to be established within the Department of 

the Treasury, to determine which derivatives should be traded on exchanges, which 

derivatives should be traded through clearinghouses and which derivatives should be 

allowed to be traded on the OTC market though an OTC trade depository. Thus, the 

Derivatives Trading Accountability and Disclosure Act would permit non-standardized 

derivatives to continue to be traded OTC and not be subject to mandatory clearing. The 

decision about whether a particular derivative instrument is standardized or customized 

would be determined by the Commission or the SEC, taking into consideration: the 

volume of transactions; similarity of terms between the instrument and other more 

standardized instruments; whether the differences between the terms of the instrument 

and standardized instruments are of an economic significance; and the extent to which the 

terms are distributed to third parties. 

 APGA will be studying this proposed legislation more closely in the coming 

weeks and offering its views on it. However, even at this early stage, APGA and its 

members appreciate and support the bill’s recognition that the continued availability of 

individually negotiated, non-cleared OTC transactions is in the public interest. From our 

perspective, the continued availability of such transactions will provide our members the 

widest range of tools to continue to offer natural gas at the best possible prices to their 

customers. For this reason, APGA looks forward to working together with Chairman 

Gensler, the Commissioners and the Congress in finding the best possible market 

structure which protects American consumers of natural gas from manipulated or 

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- 12 -

distorted prices but which also protects our ability to make wise use of sound and proven 

market tools for delivering gas to consumers at the best possible price. 

Conclusion 

 

 APGA commends the Commission for its focus on the possible impact 

speculative investment has on the price of natural gas and other energy commodities and 

for asking these tough questions. 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. As noted above, as hedgers, public gas systems rely on 

speculative traders to provide liquidity and depth to the markets. Thus, APGA does not 

wish to see steps taken that would discourage speculators from participating in these 

markets using bona fide trading strategies. But more importantly, APGA’s members rely 

upon the prices generated by the futures to accurately reflect the true value of natural gas. 

 The CFTC’s conclusion in 1981 was that the ability of liquid markets to absorb 

excessively large speculative positions without suffering from artificial upward pressure 

on prices is not unlimited, and based on that reasoning, required exchanges to adopt 

speculative position limits for all contracts. That question, whether liquid markets have 

the ability to absorb excessively large speculative positions without suffering from 

artificial upward price pressure is the same question that is before the Commission today. 

 Accordingly, APGA believes that the Commission’s conclusion reached in 1981 

remains equally true today. For this reason, APGA would support additional regulatory 

controls, such as stronger speculative position limits, if a reasoned judgment can be made 

based on currently available, or additional forthcoming market data and facts, that such 

controls are necessary to address the unintended consequences arising from certain 

speculative trading strategies and/or to reign in excessively large speculative positions. 

However, APGA also recognizes that limits that cover only some of the variety of linked 

markets will not solve the problem, it would likely only push trading activity onto the less 

regulated market segments. Accordingly, to the extent that speculative investment may 

be increasing the price of natural gas or causing pricing aberrations, APGA strongly 

encourages the Commission to take strong remedial action. However, in doing so, the 

Commission and the Congress should take care that at the same time they do not decrease 

the utility that these markets so clearly provide. It will take wisdom and a carefully 

nuanced approach to erect additional regulatory controls that improve the manner in 

which these markets operate while at the same time preserving the benefits that they 

provide to consumers.