CFTC May Tighten Enron Loophole on Natural Gas


"[CFTC] may impose new rules on 17 natural gas and power contracts offered on the Intercontinental Exchange Inc."

The U.S. Commodity Futures Trading Commission may impose new rules on 17 natural gas and power contracts offered on the Intercontinental Exchange Inc., further tightening the so-called Enron loophole that exempted some contracts from regulation.

The commission has issued a notice of intent to determine whether 13 natural gas financial basis contracts and four power contracts perform a "significant price discovery function" and therefore should be regulated.

The basis swaps represent the spread in gas prices between regional gas hubs and Henry Hub, the delivery point for the New York Mercantile Exchange future in Erath, Louisiana, and a benchmark price for U.S. natural gas.

"This is really important because we had largely believed that the scope of regulatory review would be focused on the Henry Hub contract," said Teri Viswanath, director of commodities research with Credit Suisse Securities USA in Houston.

Producers and consumers use the swaps to hedge the costs and risks of transporting gas, Viswanath said. The basis market has traditionally been an over-the-counter market, she said.

The Enron loophole, named for the energy company that collapsed in late 2001, refers to a provision added to the Commodity Futures Modernization Act of 2000 that exempted certain electronic markets from commission oversight.

Closing Loopholes

Last year, Congress moved to restrict energy investment amid concerns that speculators were driving fuel prices to record highs. Congress put a provision in the 2008 Farm Bill that allowed the CFTC to regulate exempt contracts like the ICE natural gas and power contracts if those contracts served a "significant price discovery function."

The commission in July used the rule for the first time to regulate the ICE Henry Hub swap. ICE expects the commission to seek to regulate more gas and power swaps in the future, said Sarah Stashak, an ICE spokeswoman.

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