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Graves-Barrow Bill (HR 1638)

Gelber & Associates Opinion Paper

HR 1638, known as the Graves-Barrow Bill is designed to treat natural gas as an agricultural commodity and to impart market controls commensurate with the agricultural designation.

In a press release issued by the bills sponsors, US Congressmen Sam Graves (R) of Missouri and John Barrow (D) of Georgia, the author Graves states “Right now natural gas prices are less reliable than the weather. It is manufacturers, seniors and farmers who are being burned by artificially high natural gas prices”. Additionally, the press release notes that despite record high gas inventories and near record gas production…prices continue to be extremely volatile and are prone to huge spikes as a result of increased speculative trading.

The Bill would amend the Commodity Exchange Act of 1934 and the Commodity Futures Modernization Act of 2000. The Bill amends the CEA section 1a (4) by making natural gas an agricultural commodity. Although not cited in the Bill, the authors rely on the fact that natural gas is the primary fuel and feedstock for nitrogen based fertilizer products and is therefore primarily an agricultural commodity similar to wheat, livestock, etc.

The Bill also makes illegal wash trades, fictitious trades and accommodation sales of natural gas. Of great interest to natural gas producers and end-users, the clarified rulemaking for natural gas commensurate with this Bill, will limit the Exchange based trading limits to 8% of the prior day’s closing price. Under the proposed legislation and assuming $6.00 gas, the daily limit for Exchange traded natural gas will be 48 cents from the prior day’s settlement price. Currently, the NYMEX has unlimited daily trading limits, although they do have a cooling off requirement as follows:

• $3.00 for any month contract if bid or offered for five minutes.
• Trading is halted for 5 minutes
• Trading restarts with an additional $3.00 limit in either direction
• Procedure repeats continuously as frequently as necessary until the Exchange closes at the normal time

Penalties for market manipulation are amended under the proposed legislation. Especially noteworthy are a 10 times increase in the maximum civil penalty from $100,000 or triple the monetary gain to $1,000,000 or triple the monetary gain. Jail time as a result of criminal acts double from 5 years to 10 years.

Gelber has been actively involved in the study and strategic activities associated with concern about high natural gas price volatility. In 2001, a number of fertilizer companies convened with Art Gelber to discuss extreme natural gas price volatility and escalating prices. At that time, Gelber prepared a white paper to discuss market manipulation and helped formulate a course of action involving members of Congress and the US Department of Justice. Gelber was also a resource to the Missouri Public Service Commission as well as the Missouri Office of Public Counsel to discuss mitigation techniques for upward natural gas price volatility as a member of a roundtable discussion as well as working sessions with Commission staff.

Gelber has been actively engaged in addressing the concerns of natural gas price volatility and the impact on utility ratepayers in the States of New Jersey, Missouri, Texas, Arizona, Alabama and Louisiana.

Gelber is also active in the judicial activities involving criminal and civil actions stemming from natural gas Index misreporting allegations.

Gelber believes the health of the overall US economy can be improved by investigating and modifying the market rulemaking involving natural gas. Intense price volatility certainly causes problems for the manufacturing sector in planning and managing their energy spend and consumption patterns. Gelber has witnessed the NYMEX daily price trading limits change over the past 15 years. The general pattern has been to create ever widening daily limits in a seemingly trial and error method of finding the “correct” limit at any point in time. It is possible the current method and degree of daily trading limits and other related mechanisms of assuring vibrant market function are in need of re-evaluation and modification to provide for an unprejudiced marketplace.

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