FERC Staff: Mistake by Dominion Storage Clerk Will Cost U.S. Consumers $200M-$1B
FERC staff said Friday that an incorrect e-mail attachment sent by a "clerk" at Dominion Transmission to weekly storage surveyors at the Energy Information Administration (EIA) led to the erroneous storage report last month and subsequent jump in futures prices. FERC staff estimates the error and price run-up cost U.S. consumers $200 million to $1 billion in their December cost of gas.
"Based on information obtained to date, it appears that Dominion Transmission Inc. (DTI), through a clerical error, submitted the wrong data to the EIA on Nov. 22," FERC's Office of Market Oversight and Investigations (OMOI) said in preliminary findings. "This error made it appear that DTI had made a substantially larger storage withdrawal than had actually been the case."
During a conference call on Friday, OMOI said that DTI had "correctly compiled and filled out Form EIA-912 for the week ending Nov. 19, but when transmitting the report on Nov. 22, the clerk inadvertently attached a different data file."
The false DTI storage information was included in EIA's weekly storage report, which was released to the market at noon on Wednesday Nov. 24, a day earlier than EIA's normal Thursday schedule because of the Thanksgiving holiday. The EIA report showed a 49 Bcf withdrawal, substantially larger than market consensus estimates of 13-25 Bcf.
As a result, December futures prices on the New York Mercantile Exchange immediately jumped 60 cents in the 30 minutes after the EIA report was released. Later in trading that day, December futures spiked again before expiring at $7.976, up $1.183 from the previous day's close.
OMOI staff sidestepped questions regarding EIA's handling of the incorrect storage data. Dominion, in a press release following FERC's announcement, said the file was clearly dated with the wrong date for submissions being accepted that week. The EIA had two days to catch the massive error before it was announced, but somehow missed it.
The worst part about the error was that it came on a futures contract expiration day. The futures settlement price that day determined not only the price of December futures, but also those of all basis contracts. It also strongly influenced the prices at all locations across the North American cash market for the month of December.
"That particular Wednesday was the last day of trading for the December prompt month [on Nymex], and there is clearly a strong influence on monthly index pricing based on that, so we've created a sort of wide range of what we believe might have been the overall shift in value across the market," said OMOI's Steve Harvey. "Our estimate ranges somewhere between $200 million and $1 billion.
"It would be a combination of direct effects for people with futures positions and in addition any kind of look-alike financial products, and then in addition an influence on the monthly index prices that were set going into December," Harvey added. "In particular, the physical monthly index prices, which are the reason that we as the FERC are particularly interested in the incident, clearly [were influenced]."
Harvey noted that many large gas utilities base their purchases on the Nymex contract price on the day of expiration, on basis and on indexes for the month. As a result residential, commercial and industrial customers will be feeling the financial impact the next time their utilities adjust their rates.
As an example, last week PECO Energy informed NGI that it will pass through to its customers about $8 million in costs that are directly related to the EIA/Dominion Transmission storage error. KeySpan, one of the largest gas distribution companies in the Northeast, estimated that the error will cost its customers $7 million.
"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. "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..."
Besides the error itself, one of the issues of particular concern, is EIA's revision policy. The agency waited an entire week before notifying the public of the error despite having knowledge of it on the very day that the original storage report was released.
In its storage report on Dec. 2, EIA explained that the weekly gas storage change it had released Nov. 24 should have been only a 17 Bcf withdrawal rather than a 49 Bcf withdrawal (see NGI, Dec. 6).
Cash and futures prices subsequently fell back to where they were prior to the EIA storage error. But it was too late to correct the market damage that had been done.
OMOI said that after releasing its report and realizing that its numbers were not near consensus estimates, EIA contacted the Dominion clerk on Nov. 24. The clerk then discovered the error and e-mailed the correct data to EIA. But because of the EIA revision policy, the agency was forced to wait until the next regularly scheduled storage report to notify the public of the error.
OMOI staff said that it does not believe there was any intentional wrongdoing behind the false submission by Dominion despite the fact that the company recently settled charges that it provided some of its clients with preferential access to market sensitive storage information (see NGI, Aug. 9).
In August, FERC approved separate settlements with subsidiaries of Dominion Resources Inc., Nicor Inc. and NiSource Inc., which required them to pay a total of $8.1 million in civil penalties and customer refunds to resolve charges that they provided selective access to their storage information in violation of the Commission's standards of conduct.
The three companies conceded that their employees shared information with employees of their affiliates and favored customers with commercially sensitive natural gas storage inventory intelligence, FERC said. This non-public information had commercial value because it helped traders anticipate gas storage transportation volumes, which would affect gas prices and operational decisions, the agency noted.
Under the separate settlements, Dominion Transmission Inc., Dominion Resources and Dominion Energy Clearinghouse agreed to refund $4.5 million to storage customers and pay a $500,000 civil penalty. NiSource's Columbia Gas Transmission Corp. agreed to pay a civil penalty of $2.5 million, while Nicor's Northern Illinois Gas Co. consented to pay a civil penalty of $600,000.
However, this time around, FERC staff said Dominion management was not even aware of the mistake or the resubmission until OMOI called about the matter on Nov. 30. FERC staff said Dominion management at the time of the EIA submission thought that the correct file had been sent to EIA by the clerk. The file had been closely reviewed.
"Dominion management discovered this in responding to OMOI's data request on Nov. 30 and informed OMOI on Dec. 1," FERC staff said. "Dominion has been cooperating with OMOI in investigating this event. We are continuing to investigate the matter particularly with respect to market reaction to the report...and the price changes that occurred that day."
Dominion said in a statement on Friday that it has "added safeguards to the procedures for personnel responsible for submitting the company's weekly storage reports to EIA."
The company said that its own internal investigation found that it was simple human error that led to the wrong file being sent to EIA. That incorrect report that was sent (for the week ending Sept. 24) showed storage levels that were about 30 Bcf less than was actually in the company's system for the week ending Nov. 19. "The erroneous weekly report submitted to EIA was clearly dated," Dominion said.
Among the new procedural safeguards, Dominion said that management-level personnel will "execute transmission of the weekly storage data to EIA, and a separate senior-level manager will contact EIA personnel after the data are submitted to verify the report's content.
"While the error occurred with the transmission of the data, Dominion is also strengthening its data verification procedures under a system of redundant review by management," the company said. "The company confirmed that previous natural gas storage data submissions to the EIA have been accurately and properly compiled and submitted."
Dominion also said that it "did not benefit from having information about the inadvertent submission of the September report."
OMOI staff, however, added that it will be examining closely the trading practices and market activity of Dominion and others around the time of the report. "We are looking at various trading activities, but we can't tell you the results of anything at this point," said OMOI's Bob Pease.
Early reports that El Paso's ANR Pipeline had submitted the incorrect storage data clearly were false. OMOI staff said that although ANR had mistakenly posted false storage data on its electronic bulletin board, it did submit correct storage data to EIA. Ironically, Dominion had posted the correct storage balances on its website but submitted incorrect data to EIA.
Since the storage error and revision, EIA has announced that it will put out a request in the Federal Register in January for comments on its revision policy(see NGI, Dec. 13). It admitted that there is room for improvement in its weekly storage data analysis prior to the release of its report. A simple glance at how far off its withdrawal total was from the consensus storage estimated by analysts for the week might have sent up a red flag, signaling a need for further investigation.
An important component of analysts' estimates is degree days computed by the National Weather Service,, and those were only slightly higher than the previous week when only 6 Bcf was withdrawn from storage. The timing of the release also could have been changed so that it did not fall on such an important market day as expiration day of a futures contract.
"We're always trying to do better, but we have to rely on our respondents to accurately submit the data," EIA spokesman Jonathan Cogan told NGI after the revision was made earlier this month. "We don't blindly accept it. We do follow up on any anomalies that appear and we're trying to improve in that area as well. The estimates that we had for that time period were within the normal range for this time of year. Obviously the market expectations were different than our number."
OMOI staff noted that this incident clearly illustrates the need to make more supply and demand information available to the marketplace. "We are concerned that there is such a reaction to this [storage report] number," said Harvey. "Unfortunately there really isn't anything closer in time to give us a sense of the balance of supply and demand."
OMOI Director Bill Hederman noted that the Commission recently held a conference on the possibility of requiring jurisdictional companies, such as Dominion, to report their gas storage levels on a daily basis (see NGI, Sept. 13, Aug. 9). "The Commission has to do the considering on that, [rather than OMOI staff]," Hederman said.
However, Harvey noted that there could be both good and bad effects from daily storage reporting. "It would certainly increase the amount of reporting and that sort of directly increases the possibility of errors that would be material. On the other hand, it makes the volumes at play a lot smaller so the implications would not be as extraordinary. So there are some good reasons to consider that and also some reasons why it might be problematic."
Harvey noted that EIA is working toward starting a new monthly gas production survey, which will be an entirely new source of information on gas supply that will be two months more timely than current production data from EIA, which is gathered from state agencies and the Minerals Management Service. EIA is planning to launch its own survey of producers that will be quite similar to what it does with its weekly gas storage report. However, the frequency for the production survey will be monthly.