FERC last Thursday reaffirmed and clarified a final rule that will provide regulators with additional information regarding natural gas prices and physical gas volumes, allowing them to evaluate the composition and effectiveness of the index pricing regime that governs the domestic wholesale market.
The final rule, which was issued in December 2007, requires market participants to file a new form No. 552 detailing the aggregate volumes of annual natural gas purchases and sales to help the Commission and others in the market understand how price indexes are formed and used, as well as give the agency an idea of the volume of gas sales transacted in the physical market (see NGI, Dec. 24, 2007).
The reporting requirement applies to all market participants with annual gas sales and annual purchases of 2.2 MMBtu or more. In cases where annual gas sales are above the threshold but gas purchases are below it (or vice verse), entities still would have to file form No. 552, according to the Federal Energy Regulatory Commission (FERC). Moreover, blanket certificate holders, even if their annual sales and purchases are below the threshold, are required to file the form.
Parties must report the following information about their physical gas transactions for the previous year: 1) total volume of sales and purchases; 2) the volume of transactions that were priced at fixed prices; and 3) the volume of transactions that were reported to price index publishers. Market participants also must report whether they sell gas under a blanket sales certificate.
The reporting requirement takes effect May 1, 2009 for calendar year 2008, and market participants will be required to submit reports by May 1 of each year thereafter. Given that the rehearing order comes as companies have already begun to collect information, FERC said it will provide a one-time only safe harbor for calendar year 2008 data. FERC said the safe harbor will offer entities a rebuttable presumption that the data to be provided will be accurate and submitted in good faith.
"Further, we do not intend to penalize respondents for errors in reporting from No. 552 provided that respondents use reasonable efforts to comply with the regulations," the FERC order said [RM07-10].
In response to requests for rehearing/clarification, the agency clarified that gas market participants must report all data on FERC form No. 552 for transactions that use, contribute to or could contribute to a price index. This should include data on transactions involving volumes that use next-day or next-month price indexes, volumes that are reported to any price index publisher, and all volumes that could be reported to an index publisher, even if the respondent has chosen not to report to a publisher, FERC said.
Gas volumes that could be reported to an index publisher include bilateral, arms-length, fixed price, physical natural gas transactions between nonaffiliated companies at all trading locations, according to the Commission.
Market participants also must report gas transactions that do not occur at specific locations currently designated by an index developer as a reporting location. In addition, the final rule clarifies that balancing, cash-out, operational and other similar transactions must be reported on FERC form No. 552 to the same extent as other types of transactions.
In a further clarification, the Commission said end-use transactions are not categorically exempt from the reporting rule, although traditional retail service is not included in the data required for FERC Form No. 552.
"End-use transactions, specifically transactions involving large consumers of natural gas that compete directly with wholesale market participants, are very relevant to the Commission's transparency mission," and should be reported, the FERC order said. "While a large industrial end-user may not be a customer 'at wholesale,' it is doubtless a 'market participant' in the interstate wholesale energy market and its actions may have a direct impact on the wholesale market or market [indexes]."
This is FERC's first exercise of its transparency authority that was provided by Congress under the Energy Policy Act of 2005. "The rehearing order improves the transparency of wholesale natural gas price formation by requiring the reporting of certain physical natural gas transactions that are important to the formation of index prices," said Chairman Joseph Kelliher.
Index prices "have become increasingly important in wholesale natural gas markets as their use has become more widespread," he noted. Index prices are commonly used to establish the price for wholesale gas transactions. Basis differentials in indexes are used to hedge natural gas transportation costs; they are used in many gas pipeline tariffs to settle imbalances or determine penalties; and state regulators often use indexes as benchmarks in reviewing the prudence of gas purchases. Market participants rely upon indexes at more than 70 North American trading points in structuring both next-day and next-month transactions, according to FERC.
The final rule will allow FERC to assess the physical size of the wholesale gas market, assess the relative importance of fixed price index transactions, as well as the relative size of traders.
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