Hedge fund distorted US natgas prices-Senate panel

By Chris Baltimore

WASHINGTON, June 25 (Reuters) - U.S. regulators were powerless to stop "excessive speculation" by Amaranth Advisors LLC because the giant hedge fund exploited an unregulated electronic exchange to "dominate" and "distort" natural gas markets in 2006, according to a U.S. Senate panel's findings.

Before it folded in September after sustaining $6.4 billion in losses on bad bets on natural gas contracts, Amaranth commanded a massive trading book that at one point included about 40 percent of natural gas futures contracts for delivery in the winter months of 2006-07, the Senate Permanent Subcommittee on Investigations said in a report that details its nine-month probe.

Investigators drew their conclusions from more than 2 million trading records they subpoenaed from the New York Mercantile Exchange (NYM.N) and IntercontinentalExchange Inc. (ICE.N), known to traders as the ICE.

The report will be discussed at a subcommittee hearing on Monday. It gives new ammunition to panel chairman Carl Levin, the Michigan Democrat who wants to give U.S. regulators at the Commodity Futures Trading Commission (CFTC) authority over electronic exchanges like the ICE, which is currently exempt from CFTC oversight.

Levin said Congress should close the "Enron loophole" inserted in the Commodity Futures Modernization Act of 2000 at the behest of lobbying efforts by now-defunct energy trader Enron Corp., which exempts electronic exchanges like the ICE from CFTC oversight.

"We need to put the cop back on the beat in all U.S. energy markets with stronger tools to stop price manipulation, excessive speculation and trading abuses," Levin said.

Representatives of Greenwich, Connecticut-based Amaranth said the fund did not dominate or distort natural gas prices; they pointed to a finding by Republican staff that "at least at times, Amaranth was responding to the market, rather than driving it."

Levin said Amaranth's actions, though not illegal, distorted prices for utilities and other natural gas market participants who rely on exchanges like the NYMEX and ICE to hedge their bets and lock in supply for the winter, when natural gas prices are usually the highest.

Monday's hearing will feature testimony by former Amaranth trader Shane Lee as well as big municipal natural gas buyers and academics. At a second hearing on July 9, the panel will hear from the CFTC, NYMEX and ICE.

In August 2006, with NYMEX enforcement staff bearing down on them for repeatedly violating exchange position limits, Amaranth took its massive natural gas position to the ICE, where no such limits or oversight exist.

The ICE said in a statement on Monday that the changes in natural gas prices could have been caused by other factors than speculative trading, and that steps have been taken to keep a closer eye on trades.

"With great respect for the work of the (committee) staff, we believe that the report does not fully reflect the level of oversight that now exists in the natural gas markets today," said ICE Chairman and Chief Executive Jeffrey Sprecher. (Additional reporting by Tom Doggett in Washington)