Officials at FERC's Office of Market Oversight and Investigation (OMOI) said last week they found no evidence that Dominion employees had prior knowledge of the erroneous storage data that a Dominion "clerk" mistakenly submitted to the Energy Information Administration (EIA) last November.
The mistake, which was not caught in time by EIA, ended up increasing the net storage withdrawal in EIA's weekly storage report far beyond what the market was expecting and gas costs soared by $200 million-$1 billion across the gas market, according to FERC estimates.
OMOI staff said interviews with nine Dominion employees, written testimony from 22 others and a careful analysis of "thousands" of Dominion emails yielded no evidence of wrongdoing. OMOI also examined Dominion trading from mid November 2004 to after the Dec. 2 EIA storage revision.
"We are closing the investigation, and we have found no evidence that any Dominion employee, including traders working for Dominion Energy Clearinghouse, had any improper or advance knowledge of the mistake that had been made by Dominion Transmission in sending the wrong data to EIA," said Ted Gerarden, managing counsel in FERC's Division of Enforcement.
"We found no indication that any trading strategy was premised on knowing there had been a mistake in the Nov. 24, 2004 EIA weekly storage report," he said. Gerarden also said a review of futures and cash trading by others in the market "did not indicate any pattern of trading activity indicative of someone knowing there had been a mistake and planning their trading strategy accordingly."
Prior knowledge of the mistake might have provided an opportunity for tremendous profits. The incorrect email attachment sent by a Dominion clerk led to an erroneous storage report on Wednesday Nov. 24, which also happened to be the last day of trading in the December 2004 gas futures contract on the New York Mercantile Exchange.
After EIA staffers missed the error, a 49 Bcf weekly withdrawal was reported, which significantly exceeded market expectations for a 13-25 Bcf withdrawal. Near-month futures prices soared 60 cents/MMBtu in the first half hour after the report and then ended the day up $1.183 to $7.976/MMBtu.
Had it not been Thanksgiving holiday week, the storage report would have been released at its normal time on Thursday, a day after the December contract had expired. But because of the scheduling change the sharp increase in prices had a ripple effect across the market. Not only was the December futures price affected, but also were all of the other market contracts tied to it, including monthly cash price indexes. Baseload gas deals for the entire month of December were tainted by the error, with the impact falling heaviest in the Texas-Louisiana production area and in the East, where more deals are tied directly to the futures price.
OMOI estimated that it cost the marketplace $200 million to $1 billion. Not all of that was absorbed by end-use customers, however, said Stephen Harvey, OMOI's deputy director. "It was an effect to basically dollars moving throughout the system. That's not to say there weren't effects on customers. It was a movement in value across the whole system.
"A piece of that clearly is just direct movements on the Nymex. Another piece of that would be sort of other related financial instruments, swaps, over-the-counter kinds of deals. Another piece of that would be related to the important relationship between the Nymex and monthly index prices.
"The degree to which Nymex activity that day affected the levels of monthly index prices is a pretty big effect on many kinds of buyers, but particularly on distribution company buyers," said Harvey. "That's where a lot of the customer effect is from."
As an example of that, PECO Energy informed NGI last December that it would pass through to its customers about $8 million in costs that were directly related to the EIA/Dominion Transmission storage error. "A good portion of our gas is tied to that index," said PECO's Eric Helt, manager of gas acquisition and planning, in an interview with NGI at the time. "That will raise our gas costs somewhat, and it will have to be explained [to regulators] in our [purchased gas cost adjustment] filing in March..."
KeySpan, one of the largest gas distribution companies in the Northeast, estimated that the error would cost its customers $7 million. ConEdison, another major northeastern LDC, said its gas purchases were not significantly exposed to the storage error.
OMOI's Harvey said FERC has not taken a closer look at the total cost impact on LDCs and residential, commercial and industrial customers. The Commission apparently is ready to put this event behind it and move on. Evidently it's not clear what more could be done.
FERC Chairman Pat Wood has said that more information needs to be collected and made available on supply and demand so that the entire gas market is not so closely tied to the EIA storage report. Additional supply information could help diminish the market impact of EIA storage errors.
FERC is considering requiring storage operators to post daily storage levels on their websites to provide the market with some additional information. A problem with that is that a lot of storage operators are not under FERC's jurisdiction, so some would not participate. The postings by jurisdictional companies would provide an incomplete picture of storage levels, which could be misleading.
In the meantime, something should be done to prevent the problem with storage errors from recurring. The EIA in early January posted a notice asking for comments on its storage revision procedure. As was later found out, EIA could have informed the market about the error on the very same day that it was released, but because of its revision policy, it had to wait until its next regularly scheduled storage report a week later on Dec. 2.
After the market was told that the prior week's reported withdrawal was 32 Bcf too high, gas prices tumbled back down to where they had been prior to the error.
Revision Policy Needs Revising
FERC staff has recommended that EIA adopt a procedure for interim storage revisions (between the regularly scheduled weekly posting) to provide information about revisions on a more timely basis. Staff recommended that revisions of 7 Bcf or more be announced as soon as possible during normal business hours. A 15 Bcf proposed trigger for expedited revisions, as EIA suggested, would too high, FERC said.
"In some months, [weekly storage] postings that vary from market expectations by even half this amount can cause significant price movement for the Nymex natural gas futures contract," OMOI said.
The FERC staff also believes EIA's proposal to post a notification of an upcoming revision on its website and send the same notification out to its email list serve would be adequate to warn the market of a change. One of EIA's proposed alternatives would have the agency making a change at any time after sending out a notification two hours in advance.
"Prompt and flexible notice that a material error has occurred, with a correction to follow in due course, could avoid trading based on inaccurate information," FERC staff said in its comments.
The main suggestion coming from two veteran natural gas associations responding to EIA's call for comments on its revision policy was for the agency to improve its procedures for collecting and vetting the data it receives from companies, so that after-the-fact revisions will be unnecessary.
The American Gas Association (AGA) said in its comments last week that it is most important that EIA make sure that everything that could be done to eliminate errors is done, so there would be no corrections. The group suggested that EIA document its verification process to give industry more confidence that the reports are accurate.
The Natural Gas Supply Association (NGSA) went further, offering pre-announcement procedures for checking accuracy, including:
EIA's Bill Trapmann told NGI last week that the agency has made some changes to its pre-release procedures, including "adding new survey review procedures and accountability, using secondary data tools more routinely, reviewing the schedule and staffing around holidays on a case by case basis, and asking for greater attentiveness on the part of data respondents."
One thing the agency has not done is reschedule a storage report if it falls on the same day as the expiration of a Nymex gas futures contract. The agency could have avoided the significant impact on gas costs last November by simply waiting a day or two to release its storage data. It released another storage report on Jan. 28, 2005, the same day that the February 2005 gas futures contract went off the board. Luckily for gas consumers, there was no error in its report that time around.
Trapmann said EIA received comments on its revision policy from more than two dozen entities and is preparing the submissions for posting on the EIA website by Feb. 18. "Once the submissions are posted, EIA will analyze them and assess their implications," he said. "EIA expects to complete its review and publicly announce any changes to the...revision policy early in the spring."
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