June 25 (Bloomberg) -- Amaranth Advisors LLC controlled more than half the U.S. natural gas market in 2006 and evaded regulators trying to restrict its purchases in the biggest-ever hedge fund collapse, a Senate investigation found.

Greenwich, Connecticut-based Amaranth exploited the so- called Enron loophole, which needs to be closed, according to the report by the Senate Permanent Subcommittee on Investigations. The Enron provision limits regulation of electronic exchanges.

The victims, along with Amaranth investors, who lost $6.6 billion when the fund failed last year, were gas users who needed to hedge costs by buying futures contracts for the fuel at inflated prices, said Senator Carl Levin. The gas trades held by Amaranth were worth more than $18 billion.

``Congress needs to do much more to safeguard U.S. energy markets from price manipulation and excessive speculation,'' Levin, the Michigan Democrat who chairs the investigations committee, said today at a hearing on gas markets in Washington. ``The first step is to close the Enron loophole.''

The natural gas market had become a favorite with speculators by the time Amaranth blew up last year. Price swings, more extreme in gas than in any other commodity market, had helped make Dallas hedge fund manager Boone Pickens a billionaire and give Enron Corp. trader John Arnold a second career as founder of Centaurus Advisors LLC.

Moving Markets

While the report concluded that Amaranth did not manipulate natural gas markets, it found that its trades influenced prices. The report calls for more funds for the Commodity Futures Trading Commission, the top regulator of derivatives exchanges.

Wide swings in gas prices caused by speculative trading resulted in hedging losses of $18 million for customers of the Municipal Gas Authority of Georgia, which buys supplies for utilities serving 240,000 homes and businesses in Georgia, Florida, Tennessee and Pennsylvania, the report said.

``The Gas Authority's members were forced to pay an $18 million premium and pass it through to their customers on their gas bills as a result of the excess speculation in the market by Amaranth and others,'' Arthur Corbin, the Georgia utility's chief executive officer, said in prepared testimony ahead of today's Senate hearing in Washington.

Enron Loophole

The report also calls for closing the so-called Enron loophole, which allowed Amaranth to do more business on electronic trading systems such as Intercontinental Exchange Inc. after being forced to reduce its positions on the New York Mercantile Exchange, where benchmark gas futures trade.

``Amaranth did not manipulate the market, and nothing in the subcommittee's report concludes otherwise,'' Dan Webb, an attorney representing Amaranth, said in an e-mailed statement. Webb said the firm agreed with a minority staff opinion in the report that Amaranth was responding to market changes rather than influencing prices.

Amaranth was making huge bets on a decline in the price of gas for delivery in the summer and fall of 2006 and a rise in January 2007, according to the Senate report, which is based on trading records subpoenaed from the Nymex and from Atlanta-based Intercontinental.

This spread trade, as it is known, was so big that on most days between February and July of 2006, Amaranth traders controlled more than half of the open Nymex futures contracts for November 2006 and January 2007 delivery, according to the report, which provides the most detailed picture to date of what got Amaranth in trouble.

Spread Trades

Futures are an obligation to deliver a commodity or security on a particular date. In spread trades, purchases of futures in one month are balanced against sales in another. Natural gas for July delivery fell 1.5 percent to $7.02 per million British thermal units at 11:35 a.m. on the New York Mercantile Exchange.

On July 24, Amaranth held 205,661 contracts on Nymex across different months, according to the report. Based on the closing prices of those various months on that date, they were worth $17.9 billion. Amaranth also held another 70,871 contracts on Intercontinental's system on that date worth billions more.

Amaranth at various times controlled more than 100,000 contracts for a single month, a bet so large that a price swing of one cent would cause a profit or loss of $10 million, the report said. The January 2007 contract moved an average of almost 16 cents a day in August of 2006, as Amaranth's strategy unraveled.

`Ineffective' Regulators

``The current regulatory regime proved ineffective in limiting Amaranth's excessive speculation,'' the report concluded.

Amaranth was told by Nymex officials on Aug. 8 to reduce its positions because they were too large and conflicted with the exchange's position limits. The fund moved its trading to Intercontinental in response, according to the report.

Nymex has an obligation under federal law to track the positions of all traders doing significant business on the exchange and to report trader data to the Commodity Futures Trading Commission. Intercontinental Exchange, operator of an all-electronic energy trading system, is not regulated as an exchange and is not subject to the same requirements.

The Enron loophole, which got its name because it was inserted into the 2000 Commodity Exchange Act after requests from Enron and others, limits the reach of the commission in how it regulates electronic exchanges such as Intercontinental, which is also known as ICE.

The report found that ``neither the CFTC nor Nymex had a full view of Amaranth's trades, positions or overall market presence.''

Market Confidence

Since the Amaranth debacle, Intercontinental has begun to supply the federal regulators with daily reports on the trading that occurs on its system.

``Because confidence in our markets is at the cornerstone of our business,'' Intercontinental spokeswoman Kelly Loeffler said in an e-mail, ``ICE's technology team worked closely with CFTC staff to design and implement an innovative system for electronic delivery of daily position reports to the CFTC.''

Loeffler also objected to the conclusion of the report that Amaranth's trading activities swayed prices. Fundamentals of supply and demand, based on changes in such things as weather and production levels, ``are the primary drivers of pricing,'' she said in the e-mail.

The minority of the staff who worked on the report said that while they agreed with the recommendations of further oversight and funding of the CFTC, they did not agree with the conclusions that Amaranth was able to influence prices.

``These facts suggest that, at least at times, Amaranth was responding to the market, rather than driving it,'' the minority staff said.

Levin and Senator Norm Coleman, Republican of Minnesota and the ranking minority member on the subcommittee, are conducting a hearing on the gas markets today in Washington. Former Amaranth trader Shane Lee is expected to testify, along with gas consumers, among others.

To contact the reporter on this story: Matthew Leising in New York at mleising@bloomberg.net.

Last Updated: June 25, 2007 11:47 EDT