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FERC Upholds Gas Market Transparency Rule

FERC Thursday upheld its final transparency rule (Order 704-A) that's designed to provide regulators with additional information on natural gas prices and the size of the physical gas market, as well as enable them to assess the effectiveness of the index pricing regime.

The Federal Energy Regulatory Commission (FERC) issued the first transparency final rule (Order 704) in December 2007 and reaffirmed it in September while making some minor adjustments (Order 704-A). The latest order addresses requests for rehearing and clarification of Order 704-A (see NGI, Sept. 22; Dec. 24, 2007).

The rule requires market participants to file annually 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. The reporting requirement applies to all market participants, except those that buy or sell less than 2.2 MMBtu annually and do not hold blanket sales certificates [RM07-10-002].

Qualifying parties will be required to report the information on their physical gas transactions for the previous year, including the total volume of sales and purchases; the volume of transactions that were priced at fixed prices; and 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. Market participants will be required to submit reports by May 1 of each year thereafter. FERC said it will provide a one-time only safe harbor for calendar year 2008 data.

In response to a request by the Interstate Natural Gas Association of America (INGAA), the Commission in its latest order made a clarification with respect to cash-out transactions. "We agree with INGAA and clarify that cash-out, balancing and in-kind transactions are reportable on Form No. 552 if they rely on, contribute to or could contribute to a price index. Form No. 552 is amended to provide that fixed price transactions are reportable only if they are for next-day delivery or next-month delivery. Index-based transactions are reportable even if they are not for next-day delivery or next-month delivery," the FERC order said.

"This clarification is consistent with our determination in Order 704 that one of the goals of Form No. 552 is to allow the Commission to 'not only understand the transactions used to formulate price indices, it is to understand how influential price indices are in the overall transacting of natural gas in U.S. wholesale markets.'"

FERC dismissed a request of Gas South LLC because it was filed after the deadline, and it dismissed a request of National Energy Marketers Association (NEM) for being deficient. Still, the Commission addressed the substance of their arguments -- that state-certificate retail natural gas marketers should be exempted from the requirement to report transactions to FERC.

"Transactions made by marketers under state-sponsored retail access programs may or may not be reportable, depending on the terms of the transactions at issue. If a particular retail marketer transaction does not utilize a price index, is not reported to an index publisher, and could not contribute to a price index even if reported to a publisher, then the transaction would not be reportable on Form No. 552. However, not all retail marketer transactions are structured in such a manner. We therefore decline to modify Form No. 552 to provide a blanket exclusion for all retail marketer transactions to end-users as suggested by NEM and Gas South."

Index prices have become increasingly important in wholesale natural gas markets as their use has become more widespread, said FERC Chairman Joseph Kelliher. 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.

This rule is FERC's first exercise of its transparency authority that was provided by Congress under the Energy Policy Act of 2005. It 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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