FERC last Thursday disputed the findings of a report that was commissioned by the attorneys general of four midwestern states, which claimed natural gas customers had been overcharged $5 billion a month.
"We found numerous, fairly serious errors in the report, very serious problems in terms of the analytic work that went into it," said Steve Harvey of the Office of Market Oversight and Investigations (OMOI), referring to a six-month report on gas prices and volatility that was released by the attorneys general of Iowa, Wisconsin, Missouri and Illinois earlier this month (see NGI, March 13).
The $5 billion/month estimate for customer overcharges is based on "one of the most interesting and explicit assumptions within that forecast, that oil prices would be between $22 and $28 a barrel," he said. Crude oil futures currently are trading at about $63.58/bbl.
That assumption, which is a year old, "is off by a factor of [more than] two. If you change that estimate by a factor of two...the $5 billion goes away," Harvey told commissioners during the agency's regular meeting. "We feel like it's misleading to attribute that big a difference, [which] seems to be very assumption-driven with regard to oil price differences, to misbehavior on the part of active participants in the gas market."
It is "very disappointing to realize how flawed" the attorneys general report is, said Chairman Joseph Kelliher.
The report concluded that increased trading activity in the over-the-counter market was responsible for the spike in gas prices in February 2003, according to Harvey. He noted that the Federal Energy Regulatory Commission released a "detailed report" at the time that found the gas price run-up "literally had to do with the physical capacity of storage not being adequate" that winter.
Harvey further disputed the report's linking of price spikes to speculative activity. There is "empirical evidence out there that [does] suggest that speculative activity dampens volatility." He noted that the Commodity Futures Trading Commission issued a report a year ago that found "hedge funds don't change positions as often [as is believed], and that they tend to change their position to help out people who are hedging."
The report also suggested that the gas supply situation was not as tight as had been reported. It argued that no more than about 5% of production was shut in following the hurricanes last summer, Harvey said. "In fact, we were close to 10 Bcf/d" of production being offline immediately after the disruptions, which was 20% of total U.S. gas production, he noted.
Moreover, the report argued that gas drilling activity has been fairly constant since the late 1990s. Harvey said an estimated 400-500 rigs were actively drilling for gas in the last 1990s, compared to 1,400-1,500 today.
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