I mostly agree with the subject article. What remains unsaid however, is the TREMENDOUS cost increase in electricity prices due to hedge fund participation in transferring generating capacity from 'regulated' to 'unregulated' entities. Vast sums of money were spent in constructing the facilities--paid for by customers through PUC authorized capital recovery charges in the monthly bills. Then the magic of 'deregulation' said generation and distribution need to be separate. Along come 'hedge funds' and other 'buy-out' firms that purchase these costly generating facilities for pennies on the dollar. The utilities in some cases are trying to collect twice for the same 'debt' incurred to build them--once from ratepayers, and again from the buy-out firms that took on the facility+debt.

In many cases, the 'buy-out' firm quickly turns around (in weeks or months) and refloats (IPO's etc.) the generation assets for several times the acquisition cost. A perfect example exists in Houston Texas. HL&P sold generating capacity for $850 MM. In 5 months, the buy-out' firm re-sold for over $5 BILLION! That $4.1Billion was taken from the 'beneficial ownership' of HL&P customers and transferred to the 'buy-out' firm owners. This is but one of MANY such asset transfers that have happened recently. (Business Week has a great article about this and other 'excesses' going on)

The 'Consumer" is usually unaware of this pillaging and 'robbery'--until they see the much higher electric bills. Here in Houston we are paying 100-150% MORE per KWH than adjacent provider areas just because of this hedge-fund activity in generation facilities. A true 'expose' is needed and some 'unwinding' of deals forced by the courts seems appropriate. Never before has there been such a rapid and enormous transfer of wealth from 'the people' to 'a few' legally.

Keith E Bowers

The argument could go on forever if Hedge Funds are distorting the market. Of course, the NYMEX says they do not. As you know, the NYMEX is not regulated. The Hedge Funds are a major customer of the NYMEX. What for profit business is going to say, "My customers have the market all fouled up". If one observes the violent moves in prices after EIA inventories miss the "expected number" by 10 BCF someone predicts "cooler" weather for the next week and say the Funds don't increase volatility, then I would say the spokesman for NYMEX who says the Funds don't increase volatility were probably able to pass the Red Face test as a child when they told Mom with one hand in the cookie jar, "No, Mom I haven't been eating cookies before dinner."

But, no matter. The Funds are here and probably will be for a while. So as a buyer what to do? Use them to your advantage. At the end of the day, fundamentals will price the commodity. In the interim prices will gyrate all over the place. For commodity purchases, ignore the head fakes. Don't whine about it; use it to your advantage. When the price of natural gas spikes up for no apparent reason, guess what? The basis declines. Buy the basis on the commodity prices spikes and buy the commodity on the commodity dips. Between the two, you may likely achieve a lower price than had you bought the commodity and basis at the lowest commodity price of the year. Yes, you can effectively buy lower that the lowest. See, the Funds really are your friend, even if they are a pain. As for electricity. Ask your supplier to let you lock a heat rate and buy gas to price your electricity. Then apply the same formula. The Funds can be your friend, if you recognize and capitalize on their apparent bip olar behavior.

John Keller

The sad commentary on the government's involvement in trying to manage oil and gas prices since 1985 creating the current domestic natural gas and worldwide oil shortages is twofold; I.E., first, by manipulating the inflation formula to mask steadily rising production costs and by holding oil and gas prices at far below the inflation adjusted levels to encourage investments needed to maintain existing and expand future productive capacities, it succeeded in destroying the domestic and international oil industries' infrastructure consisting of experienced technicians and well servicing equipment and supplies leaving the industries unable to deal effectively and immediately with the current shortage problems; and secondly, by granting the commodity exchanges the right to trade oil and gas futures, it has placed oil and gas pricing in times of supply shortages in hands of traders whose primary aim is to maximize profits which come from wildly gyrating price movements having no relati onship to the prices needed to stimulate the long term looking investments needed to instigate the exploration and development projects having the potential to eliminate the current supply shortages and satisfy future demand growth.

As any oilman will tell you, the last thing they need is some clown in New York making oil and gas prices jump all over the place. What any oilman will tell you is that he would prefer flat, annually inflation adjusted, oil and gas prices that will tell him what prices he'll can expect to receive for oil and gas produced at end of the three to five years it will take for him to initiate and complete a production increasing project.

Frank Horgos

I enjoy your columns with regularity and appreciate the knowledge and insight you bring to a vast of array of energy subjects. That's why I was taken by surprise on the comedy piece you put together on Hedging Bets. The article contained all the buzzwords and phrases I've seen ad nauseum from the financial side including the NYMEX for the past 5 years. The last two paragraphs were the only ones your readers need pay attention to, because they go straight to the heart of the problem. And you're right; the oil companies aren't making all the money.

Lehman Brothers: Second quarter profits up 48% on revenues of $4.41 billion.

Goldman Sachs: Second quarter profits more than double on revenues of $10.1 billion.

Bear Stearns: Second quarter profits up by 83% on a record $2.5 billion in revenues.

Morgan Stanley: Second quarter profits more than double on revenues of $8.94 billion.

What do all of these companies have in common in addition to being involved in investment banking, securities, brokerage, as well as other traditional banking business? They are all major players in the commodity markets. To what degree, how, and to what extent may never be publicly known because they don't have to disclose this specific information. But each one of these firms readily acknowledge that their commodity trading hedge fund business has seen huge gains and they are planning on increasing the business by promoting to individual investors as a way to diversify their investment portfolios.

As for the NYMEX... jeez, surprise surprise... record volume in all contracts... why wouldn't they want that?

Other sources bolster Mr. Fusaro's point. On Sept. 20th of this year Citigroup released a report authored by its analyst Doug Leggate. The report cited research that said investors, funds, and other financial players account for more than half of energy futures contracts traded at the NYMEX, and the volume is up from 25% in 2000. Since 2003, the average number of crude oil futures and options contracts open on the exchange ballooned from 600,000 to 2 million. Mr. Leggate found that the rising price of oil correlated 94% with the increase in trading volume. He stated, "We found a mathematical way of explaining the movement in energy prices," He further stated that the funds and open interest have been a very large driver.

Finally, provide liquidity?? For who?? On the natural gas side my clients have not seen any good liquidity since the fall of Enron. As an small to medium sized industrial, just try and find some liquidity 3 years out on basis and NYMEX that you aren't taken to the cleaners on because of the wide bid/ask spread. Down in the trenches, it's quite obvious who controls this market and the where the benefits are flowing.

Dave Gruber

For far more extensive news on the energy/power visit:  http://www.energycentral.com .

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