The Federal Energy Regulatory Commission should require “all sellers of natural gas” to adhere to the agency’s proposed code of conduct for reporting prices on natural gas trades to published price indexes, the American Gas Association (AGA) said Tuesday.

If the Commission does not subject a broad universe of sellers to the proposed code of conduct, “not only will the proposed code of conduct have little effective impact on the marketplace for natural gas sales, but it will also produce anomalous results because part of the market will be impacted by the rule’s provisions and part will not,” the AGA told FERC.

AGA maintains the proposed rule on the code of conduct contains conflicting statements as to which companies would be subject to the code requirements. On one page FERC says the rule would apply to any person making natural gas sales for resale in interstate commerce. On another page it interprets the Natural Gas Wellhead Decontrol Act of 1989 and the Natural Gas Policy Act, as leaving it with jurisdiction over sales for resale only by pipelines, local distribution companies or their affiliates, so long as they do not produce the gas they sell. The proposed rule does not require anyone to report to pricing publications, but if they do, they must follow the code of conduct. Companies in the market also must tell FERC whether they are reporting or not.

“If the proposed code of conduct applies only to affiliates of pipelines, LDCs and their affiliates, then most interstate transactions [carried out by holders of blanket marketing certificates] would be outside of the proposed conduct…Very little of the overall volume of sales in the natural gas market will be under the proposed code of conduct. This does not further the Commission’s interest in ensuring that published price indices represent a fair and accurate measure of actual prices and trading volumes.”

AGA’s comments were in response to a notice of proposed rulemaking (NOPR) issued in late June in which the Commission spelled out a code of conduct that energy companies would be required to follow in reporting prices on gas trades [RM03-10].

AGA said it fears that by limiting the scope of the proposed code of conduct to only pipes, LDCs and their affiliates — with its potential penalties and disgorgement of unjust profits — this could create an “adverse regulatory risk associated with investing in local distribution companies.”

In the current financial climate, the proposed rule “could tilt the capital markets against those subject to the code of conduct because they would be viewed as a riskier proposition than those entities selling gas that do not have the same regulatory risk,” said the trade group, which represents LDCs.

“Unless the Commission can ensure that the proposed regulations would apply to substantially all sellers of gas in this market, it should forego issuing a final rule that would disadvantage certain market participants and undermine the Commission’s stated objective to restore confidence in the nation’s energy markets.”

Moreover, the NOPR’s prohibition on gas trading transactions “without a legitimate business purpose” is “far too vague,” the AGA said. FERC instead should tie its proposed code of conduct to a standard of legality, it noted.

“That is, the prohibition should be against engaging in actions or transactions that are anti-competitive or illegal or serve an illegal purpose, as already proscribed by statute or by regulations.”

AGA said it expects Congress to pass an energy bill that bans round-trip trading and wash transactions. But if lawmakers should fail on this score, “the Commission should then prohibit those very specific types of transactions by uniform regulation equally applicable to all entities selling natural gas in interstate commerce.”

The trade group further noted that it supports the idea of penalties for violators, but it said it was concerned about FERC sanctioning companies for activities that weren’t clearly identified as prohibited in the NOPR.

AGA also believes the Commission should move to limit the disgorgement of unjust profits to illegal activities and not impose penalties for violations of regulatory provisions associated with reporting activities. As “the regulations are now drafted, the potential for disgorgement exists not only for transactions lacking a legitimate business purpose, but also for a failure to report to indices completely, accurately and factually…The Commission should correct this application of the regulations in a final rule so that it is clear that disgorgement of unjust profits is a penalty only where there is a transaction-based violation of the rules.”

In addition, the LDC group called on FERC to include a “safe harbor” provision in the proposed rule, which would protect companies from prosecution and/or penalties in the event they make “inadvertent errors” when reporting prices.

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