UPDATE 1-Funds to CFTC: Don't blame us for energy price swings

* Energy funds say they not part of the problem

* CFTC's Gensler reiterates need for position limits

* CFTC may publish proposed rules in the fall (Adds comments from John Arnold, CFTC commissioner)

By Tom Doggett and Ayesha Rascoe

WASHINGTON, Aug 5 (Reuters) - Funds that invest heavily in energy commodities told the U.S. futures market regulator on Wednesday that they were not responsible for wild swings in crude oil and natural gas prices.

The Commodity Futures Trading Commission, which oversees regulated futures exchanges, held its third and final hearing into whether it should limit how many futures contracts hedge funds, investment banks and other speculators can control, to help limit big movements in energy prices.

CFTC Chairman Gary Gensler reiterated his view that the commission should "seriously consider" speculative position limits in energy futures trading. He said the agency would likely publish any proposed rules in the fall.

Speculators have been blamed for pushing up energy prices that hurt consumers at the gasoline pump and raised costs for businesses using large amounts of energy in their operations.

Groups representing industrial and transportation companies at the hearing called on the CFTC to crack down on funds and other speculators that sharply move energy prices.

But two major funds told the CFTC they were not behind the wild price swings and should not be subjected to tough speculative contract position limits.

"We believe that the significant increases in energy prices last summer were wholly unrelated to the activities of our commodity-tracking funds using the commodity futures market to hedge the exposure to investors that results from their obligation to track the price movement of a commodity," said John Hyland, chief investment officer for United States Commodity Funds.

Hyland said his funds provide liquidity by helping buyers and sellers find each other.

"In fact, rather than acting as a source of risk, the funds provide investors with a transparent, highly regulated, unleveraged vehicle through which to hedge their pre-existing price risk in commodities," he said.

John Arnold, managing partner of Houston-based Centaurus Advisors hedge fund, said position limits should not be mandated on energy contracts, particularly natural gas, that are cash-settled and whose owners do not take physical delivery of the underlying commodity.

"We have seen no conclusive evidence of a positive correlation between trading volume and volatility," he said.

Arnold warned that position limits on energy futures where only a cash settlement is required would push trading from exchanges to over-the-counter markets, decrease liquidity and increase costs for companies that need to hedge prices.

He urged the CFTC to suspend or rescind new position limits at the New York Mercantile Exchange that take effect in September for natural gas futures contracts that are cash-settled.

Arnold said the CFTC should instead impose limits on physically settled energy futures as their expiration approaches, because price volatility was greater with contracts that require traders to take delivery of the commodity.

Industrial and transportation groups backed the limits.

"The creation of the futures market was not intended to be a substitute for a gambling casino for Wall Street banks, hedge funds, sovereign funds and index funds," said Paul Cicio, president of the Industrial Energy Consumers of America.

Cicio's trade group represents big energy-using industries, like cement, steel, chemicals and paper. He said passive index funds, such as Arnold's giant United States Natural Gas Fund, "undermine price information."

USNGF invests heavily in natural gas futures but does not take physical delivery of the gas. Instead, it rolls its contract positions into the next month, Cicio pointed out.

Steven Graham, who testified for the American Trucking Association, said excessive speculation was partly to blame for the big spike in crude prices to record levels last year.

A one-cent rise in the price of diesel fuel translates into $397 million a year in additional costs to the trucking industry, he said.

CFTC commissioner Michael Dunn said Congress should grant the agency the authority to set speculative limits in over-the-counter markets.

In addition, Dunn asked the commission's staff to review whether financial firms have adequate firewalls in place between their research, reporting and trading divisions. (Editing by David Gregorio)