It was all about the numbers for the last -- and most spirited -- witness panel before the Senate Energy Committee conference on natural gas last week. Debate erupted over both the Energy Information Administration's (EIA) weekly storage reports and the volatility and high prices of the natural gas futures market
Leading off the discussion, Keith Barnett of AEP told legislators EIA's recent request for comments for its revisions policy (see NGI, Jan. 10) missed the point, -- the point being to get it right the first time in order not to have to make revisions. Barnett suggested EIA should expand its survey respondents to match the number of respondents in its monthly survey.
AEP noted that the EIA surveys 292 fields weekly as reported by 56 respondents, representing approximately 91% to 96% of the various regions working gas volumes, but not necessarily a comparable amount of injection or withdrawal capability given the rapid response capable by salt dome storage. On the other hand, EIA surveys 100% of the working gas capacity each month comprised of 395 fields and 120 respondents.
"EIA has stated they cannot extend the weekly reporting due to limits imposed by [Office of Management and Budget] that stop intrusive reporting requirements by government agencies," AEP said. "While we agree with this principle, the uncertainty and potential mistrust of the EIA's numbers and the attendant economic cost to the economy merit extending the survey to 100% of respondents each week."
Also, EIA should assign one of its analysts to do the same thing outside analysts do, making a projection of the weekly report, using weather, prior reports, regression analysis and other techniques to project the upcoming weekly value in order to predict what the weekly survey number should be. That could be done on Monday when all the responses for the previous week are in. Then if the actual survey number diverges substantially from the prediction, there would be time to go back and double-check to make sure the numbers submitted and entered are correct before the Thursday announcement is made.
Elizabeth Campbell, director of survey data collection for EIA, said that to more than double the 56 weekly survey respondents to match the 120 who respond to EIA's monthly survey, would increase the possibility of mistakes and the problem with companies not responding. She pointed to the high level of storage inventory covered in the sample survey.
Further, Campbell said, to materially increase the number of survey respondents, EIA would have to seek authorization from the Office of Management and Budget to increase the paperwork burden on the industry. Regarding the suggestion that an EIA analyst track the market, she said the agency does that now, tracking the weather and monitoring the trade press for the estimates of other analysts. Even with those safeguards, there can be errors, she pointed out.
On FERC's part, AEP said the Commission should implement a requirement that all interstate pipelines that operate storage should post an estimate of daily storage inventories during the five day work week. The requirement should have a safe harbor presumption that protects operating employees from liability for incidental posting errors.
Addressing the question of errors, Skip Horvath, president of the Natural Gas Supply Association, suggested that storage survey announcements not be made just before holidays, citing the disastrous EIA storage report the day before the Thanksgiving holiday last year and another error before a July 4th holiday. At those times, it is often the case that the most senior people are on holiday leave and those left in charge are unsupervised, inexperienced and more prone to error. Also, it could be asking for trouble to have the storage announcements on the same day that monthly futures contracts expire -- as happened in the Thanksgiving Day incident in which consumers paid throughout the following month because the erroneous storage report affected the December index.
On the topic of aligning storage with weather, AEP advised that the National Weather Service should produce national level Heating Degree Day (HDD) calculations coincident with the weekly time that storage operators capture their inventory data for reporting to EIA. The NWS publishes these factors for Saturday-to-Saturday temperature experiences.
"Recognizing that the storage data is compiled based upon inventories Friday morning, the NWS now publishes a midnight Thursday temperature report for the prior week," AEP said in its comments. "This more closely corresponds to the weekly storage inventory allowing better analysis to occur of weather related demand. It could be further improved if they had the ability to produce the report on the same time element as the weekly storage operator inventory, which corresponds to 9 a.m. Central Prevailing Time [Friday]."
In addition, AEP said the NWS should conduct a peer review with industry and governmental representatives on the methodology and calculations used to weight temperatures into HDD's for gas heating, oil heating, electric heating and population.
As for the futures market, Congress and the Commodity Futures Trading Commission (CFTC) should investigate daily trading limits, hedge fund activity, and the number of contracts that can be held by a single entity to determine if these elements are increasing volatility and prices, a Dow Chemical company representative testified.
When a Nymex representative responded that the "easy answer" to containing volatility is to hedge, Gary Chapman, senior commodities manager for Dow Chemical, said he was talking about reducing "unnecessary price volatility." There's something wrong "when markets are running so hard that even a large player like Dow can't catch up with some of these other guys," he added.
Chapman, representing the Consumers Alliance for Affordable Natural Gas (CAANG), pointed out that Dow Chemical is the largest industrial buyer of natural gas and is a very large hedger. He said the CFTC should assess the possible negative influence of hedge fund activity and should examine the effectiveness of the current trading limits, saying the $3 limit and five-minute stop were not sufficient to keep the market from wild price swings.
The allowed daily range on natural gas is double that of any other energy commodity and four times that of agricultural commodities. In the five years from 2000 to 2004, the daily range of the natural gas futures market exceeded 50 cents 40 times and 75 cents 20 times and never hit the price limit, Chapman said.
Congress should direct a study of over-the-counter markets' capacity to manage natural gas contracts efficiently and fairly and should require a report from the CFTC on whether the 12,000-contract limit on a single entity "allows such a concentration of contracts that it may distort free movement of the market," the CAANG said in written testimony. The agency should recommend necessary changes to the contract limit. It also should assess whether hedge funds increase volatility and prices to consumers and recommend statutory changes to require oversight of hedge fund traders, the group said.
Rick Schultz, director of market oversight for the CFTC, told the Senate Energy and Natural Resources Committee conference his agency does not require price movement limits, although it has looked at the question of limits "many times over the years." He pointed out "there are very real costs involved in stopping the [futures] market while the cash market is going on." Traders "may want to get out of positions or establish new positions and they wouldn't be able to do that."
Robert Levin, speaking for Nymex, characterized Chapman's complaints as a "flat earth mentality," saying "the cash market goes on whether we do or not."
CAANG also said the CFTC should be required to determine whether there is adequate transparency, revealing who actually holds the positions and what their obligations are to disclose their interests in any public statements. Congress should also assess the adequacy of the budgets for the CFTC and other oversight and enforcement groups, it said.
On another subject, Bob Anderson, head of the Committee of Chief Risk Officers (CCRO), again raised the possibility of creating a data hub, which he said would broaden the transaction data captured and increase market transparency. While "existing storage and market information are probably adequate to ensure well functioning natural gas markets in the short term," he urged the Senate to instruct the CFTC and FERC to foster industry development of the data hub as a long-term improvement.
However, NGSA's Horvath said that "if an energy hub has merit, the market will produce it." Ranking committee minority member Sen. Jeff Bingaman, D-NM, agreed, saying "this is not something Congress should legislate."
Earlier in the day numerous witnesses explored natural gas supply and demand issues. Committee Chairman Pete Domenici, R-NM, said the best proposals would be incorporated in a new energy bill expected to emerge from the Senate committee in March (see related story).
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