Mr. Sean Cota …

                                    Mr. Sean Cota
                       Co-Owner & President, Cota & Cota, Inc.
             Northeast Chair, Petroleum Marketers Association of America
                        President, New England Fuel Institute

                              Testimony before the
              Committee on Homeland Security & Governmental Affairs
                    Permanent Subcommittee on Investigations

                                  United States Senate
                                   Washington, DC
                                     June 25, 2007


Honorable Chairman Levin, Ranking Member Coleman and distinguished members of

the committee, thank you for the invitation to testify before you today. I appreciate the

opportunity to provide some insight on the way that excessive speculation and volatility

on the energy commodity markets has impacted small business fuel dealers and the

American energy consumer. I trust that my many years of experience in the industry will

help shed light on this issue and assist you in your policy-making and oversight

endeavors.



I currently serve the Petroleum Marketers Association of America (PMAA) as its

Northeast Regional Chair. PMAA is a national federation of 45 states and regional

associations representing some 8,000 independent fuel marketers that collectively

account for approximately half of the gasoline and 80 percent of the heating oil sold in

the United States.



I am also President of the New England Fuel Institute (NEFI), a 60-year-old regional

trade association located just outside Boston, and as such, I am here representing well
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over 1,000 fuel dealers and related services companies located throughout Maine, New

Hampshire, Vermont, Massachusetts, Connecticut and Rhode Island. NEFI member

companies deliver 40 percent of the nation's home heating oil, and many also market

bioheat, biodiesel, propane, kerosene, jet fuel, diesel fuel and gasoline.



I am Co-Owner and President of one of those companies, Cota &Cota, Inc. of Bellows

Falls, Vermont. Cota & Cota is a third generation family-owned and operated home

heating fuel provider in southern Vermont and western New Hampshire and has helped to

keep New Englanders warm for over 60 years. Unlike larger energy companies, heating

fuels dealers like me are mostly small, second and third generation family-run businesses.

Also unlike larger energy companies, we deliver heating fuel directly to American homes

and small businesses, and therefore have developed close relationships with our

customers, their families, and our local communities.



Just to give you an idea of the size of heating fuel providers, the average heating fuel

dealer has approximately 4,016 heating oil customers and delivers approximately 3.3

million gallons per year, and those selling propane average about 1,900 customers and

789,000 gallons per year. Most companies are small, many family owned, and most full

service fuel companies average just over thirty employees.1 In a joint NEFI-PMAA

member survey of heating fuel providers earlier this year, excessive volatility and the

need for greater transparency and accountability in the energy commodity markets ranked

as the number one public policy concern for our member companies.



1
    Information courtesy the "2006 Oilheat Survey," Gray Gray & Gray,LLP, Westwood, MA, 2006.
Testimony of Sean Cota ­ Senate Permanent Subcommittee on Investigations           Page 3 of 10


Energy consumers are affected by excessive speculation and price volatility in the energy

commodity markets in profound ways. When excessive speculation and volatility result

in astronomical prices for gasoline and other motor vehicle fuels, Americans can simply

choose not to fuel their car or truck. This may have devastating consequences for our

nation's economy, businesses, and lifestyle. But when heating oil, natural gas and other

heating fuels skyrocket to unprecedented levels, it places at risk the health and welfare of

Americans families ­ especially low income and elderly households ­ who rely on these

products to heat their homes and keep warm. Additionally, unexpected spikes in heating

fuel prices can strain the credit lines of small business fuel dealers (and their lenders), and

make it more difficult for them to buy the fuel they need, when they need it. According

to NEFI estimates, market conditions have increased the credit requirements of heating

oil dealers three-fold in the past ten years as the cost of fuel to the dealers has risen and

consumer ability to pay within terms has declined.



We and our customers need our public officials, including those in Congress and on the

Commodity Futures Trading Commission (CFTC), to look after us and take a stand

against profiteering traders and hedge fund managers that seek to artificially inflate prices

for their own personal gain. We deserve to be made aware ­ in fact we deserve to know -

the truth behind what is driving these prices, especially pertinent market forces that might

be contributing to volatility and price spikes.



In the winter of 2005-2006, much of the country, especially in the Northeast, the National

Oceanic and Atmospheric Administration (NOAA) reported state average temperatures in
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the coldest regions of the nation running significantly higher than normal (figure 1,

below).

                    Figure 1




Additionally, the Energy Information Administration repeatedly reported that national

stocks of distillate fuel oil remained high as a result of the decreased demand due to the

warm weather. However, despite the warm weather, decreased demand and high

inventories of these fuels, heating oil prices remained high, with New York Harbor spot

prices averaging $1.82 per gallon throughout the season.2 In an effort to find the cause of

this anomaly, the New England Fuel Institute commissioned a study to find the root cause

of the market's strange behavior in light of these facts. However they ran up against a

wall because of the inability to gather the data needed on over-the-counter trades, upon

which a majority of price setting activities occur. Without this valuable information, the

report remained incomplete.


2
 "New York Harbor No. 2 Heating Oil Spot Prices History," Department of Energy, Energy Information
Administration.
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The reason, we were surprised to find out, was that the principle regulatory body

responsible for collecting data and policing the energy commodity markets, the CFTC,

was not collecting the data due to a series of legislative and regulatory loopholes

exempting over-the-counter exchanges and foreign boards of trade with U.S. destined

contracts from federal oversight.3 It is upon these "Dark Exchanges" that traders may be

tempted to engage in dubious and manipulative trading practice, free from the reach of

U.S. regulators.



Do not be mistaken. We do not oppose the free exchange of commodity futures on open,

well regulated and transparent exchanges that are subject to the rule of law and

accountability. In my own company, for example, I rely on these markets to hedge my

product for the benefit of my consumers. In an effort to protect my customer against

roller-coaster-like price volatility on the energy commodity exchanges, I engage in

hedging activities.



My Grandparents began our company and serving the community with heating fuels in

1941. We have been offering fixed price programs to our customers for the past two

decades. At first, we filled our fuel storage in the summertime and sold those gallons to

our customers until we ran out of those gallons. However, my storage, although large by

industry standards, is still very limited. We have available six days of January supply in

storage capacity.

3
 These "legislative and regulatory loopholes" were outlined by this committee in last year's extensive and
bipartisan report on excessive speculation in the energy commodity markets, "The Role of Market
Speculation in Rising Oil and Gas Prices: A Need to Put the Cop Back on the Beat," June 27, 2006.
Testimony of Sean Cota ­ Senate Permanent Subcommittee on Investigations         Page 6 of 10




It quickly became apparent, due to customer demand, that we would need a different

method of providing fixed price programs. It was at that time that we began to enter into

New York Mercantile Exchange (NYMEX) based futures contracts with our suppliers so

that we could continue to offer these programs to our customers. These independent

suppliers of wholesale fuels would purchase NYMEX contracts for future delivery and,

in turn, resell these contracts to me after a profit was added. This is the current system in

which we continue to financially hedge heating fuels for our customers. This is typical

for the industry.



Because heating demand is a bell curve where January is much colder than other months,

customers buy a single annual contract from me while I, in turn, purchase ten NYMEX

monthly contracts to match temperature and demand. Because my minimum hedge is ten

contracts, or 420,000 gallons, with the typical customer purchasing 900 gallons per year,

I hedge for approximately 450 customers at a time.



There have been significant changes in the behavior of the market since we first began

purchasing NYMEX based contracts, the largest of which is market volatility.

Traditionally, when we purchased futures contracts the coldest winter month, January,

was more expensive than the warmest summer month of August. The rate of difference

was usually something slightly larger than the interest cost of money. The past few years

we have seen the difference between the summer months and the winter month,

("contango" or "carry") be as high as 23 cents per gallon.
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Up until about four years ago, it would have been abnormal to have a daily move in the

market of larger than one half (1/2) of a cent. Today it is typical to see five cent daily

moves and moves as high as 12 cents. In recent years we have witnessed energy market

moves of more than one dollar per gallon. We use to offer insurance programs as an

alternative to fixed pricing for our customers. These "option-" based programs have had

the highest increase in volatility. Four years ago we were able to purchase an "at the

money," "put" and "call" at a reasonable cost for our customers. This transaction would

enable customers to be protected if prices went up or down from the current price. Four

years ago my cost on this type of transaction for a January contract purchased in the

summer would have been between 4 and 6 cents per gallon. Today that same program

would cost me in the area of 40 cents per gallon. We have seen it as high as 50 cents per

gallon.



Currently, these fixed price programs make up 70 percent of my total sales,

approximately 65 percent of which is heating oil, 30 percent is propane, and five percent

home heating kerosene. In a business that makes profit in cents per gallon, these are

some of the reasons why it is much more difficult to continue to provide these fixed price

programs to our customers. Unlike many players in the market, who make these

commodity investments for pure financial gain, we, as an industry, are hedging directly

for consumers. Consumers are being injured by these huge financial players speculating

on the market.
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The annual heating oil industry volume for U.S. consumption is approximately 8 to 10

billion gallons per year. With ICE, NYMEX, other exchanges and derivative deals, I

would not be surprised if the annual consumption is traded several times per day.

Speculators are important in our market; without them we would not be able to hedge

future demand for our consumers. But with huge hedge funds and other speculators

entering into the market, sometimes it seems to have the effect of an "elephant jumping

into the bathtub."



The collapse of the Amaranth natural gas positions in August of last year is but one piece

of a broader problem. My company and my customers are no longer subject to the

market fundamentals that drove price discovery functions on the commodity markets in

years past. American consumers and small businesses should be put on alert that prices

are now set by greed and fear and manipulation on energy markets that are completely

free of government oversight and accountability. This is the new reality of the world we

live in, and this is real "price gouging" on a global scale.



The Dark Exchanges are increasing in both number and reach. On June 1, 2007, the New

York Mercantile Exchange opened a Dubai-based Mercantile Exchange and launched an

Oman crude oil futures contract. The CFTC was quick to issue a "no-action letter"

exempting the exchange from its oversight rules.4 And just a few weeks ago, the Atlanta-

based (but U.K.-regulated) InterContinental Exchange (ICE) purchased "ChemConnect,"

owner of the "Chalk Board," an electronic trading platform, thus virtually adding an array



4
    http://www.cftc.gov/files/tm/letters/07letters/tm07-06.pdf (Accessed June 20, 2007)
Testimony of Sean Cota ­ Senate Permanent Subcommittee on Investigations              Page 9 of 10


of vital commodities, including propane, butane, and ethanol to its portfolio overnight.5

Members of the Committee will recall that ChemConnect is the platform upon which the

CFTC last year accused BP of manipulating TET propane prices in the winter of 2004.6

A potential increase in futures prices and volatility for propane, as a result of this

transaction, is of concern to me because propane constitutes a significant portion of my

business.



Congress and enforcement authorities need to act now and reign in excessive speculation

and out of control profiteering on the energy commodity markets. They need to show

their constituents that they are serious about shining light on the Dark Exchanges.



We recommend that Congress take the following actions...

    (1) Encourage the CFTC to revisit its use of "no-action" letters, which virtually

        exempt foreign boards of trade that allow electronic U.S. access to their

        platforms.

    (2) Investigate whether or not the Atlanta-based ICE intentionally established its

        operations in London to circumvent U.S. regulation.

    (3) Require that large position data collection requirements for all U.S. destined

        contracts of commodities essential to the health and welfare of American citizens,

        including heating oil, propane, and natural gas.



5
  "ICE Buys Commodity Unit of ChemConnect," by Jeremy Grant, MSNBC, June 4, 2007.
 (Accessed June 20, 2007)
6
  "U.S. Commodity Futures Trading Commission Charges BP Products North America, Inc. with Cornering
the Propane Market and Manipulating the Price of Propane," CFTC Press Release, Washington DC, June
28, 2006.
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   (4) Fully fund the CFTC to levels appropriate to upgrade infrastructure, data

       collecting capabilities and to meet necessary personnel requirements.

   (5) Encourage the CFTC to be more vigilant in its enforcement of its own data

       collection requirements and hold the Dark Exchanges to the same rule of law that

       is expected of Designated Contract Markets such as the NYMEX and the Chicago

       Mercantile Exchange (CME).

   (6) Continue to hold energy exchanges, financial firms, market traders and hedge

       fund managers to account; continue to conduct hearings and collect information in

       the years to come; and moreover, make every effort to educate your constituency

       ­ U.S. public ­ on the truth of this issue.



I thank you again, Mr. Chairman, for this opportunity to share my insight into this issue.

I am open to any questions that you might have.