FERC Bows to Capitol Hill Pressure with Reporting Requirement
FERC's plan to impose a (price and volume) reporting requirement on transporters and sellers into the California natural gas market (RM01-9) has drawn mixed reactions from industry, but most agree that the Commission was pressed by Congress to take this action.
Calling high natural gas prices in California "a matter of serious concern," the Federal Energy Regulatory Commission said on May 18 (RM01-9) that its plan is designed to ascertain if corrective action is warranted. The reporting requirements would target all sellers of natural gas, and interstate pipelines and local distribution companies (LDCs) that serve the California market. FERC is seeking to gauge what percentage of the volumes destined for California is domestically produced gas sold by marketing affiliates of pipelines and LDCs in sale-for-resale transactions. These are the only sales that FERC has jurisdiction to regulate. In the past, the Commission has resisted pleas for border gas price regulation, saying that since it has authority only over some of the sales, such regulation would bifurcate the market.
Although LDCs and other sellers are not directly subject to FERC's Natural Gas Act (NGA) authority, FERC noted that the act does give it "extensive authority" to collect information from all parties to determine whether there has been a violation of the NGA and to serve as a basis for proposing legislation to Congress.
The Commission proposes to collect the data on a quarterly basis (30 days after the end of a quarter) in a "standardized format." It then "[will] aggregate the data submitted and analyze it promptly" to "determine what action, if any, is warranted" with respect to escalating California gas prices, which it notes have been out of synch with the rest of the market. Recent Southern California border prices were reported at more than $9/Mcf, compared to $4/Mcf in other downstream markets and producing basins, the order noted. Although border prices have dropped considerably from their $19/Mcf peak in December 2000, FERC said the price disparity between southern California and other major markets remains a source of concern.
Because it "anticipates requesting the information [from industry] as soon as possible," FERC has asked for industry comments on its proposed action within 30 days, and for "emergency processing" of its proposal by the Office of Management and Budget (OMB).
In addition to getting a handle on the level of gas sales by pipe marketing affiliates and LDCs in California, FERC said it is seeking to obtain "an accurate picture of the overall average gas costs being incurred by all purchasers of natural gas moving into the California market," as well as "the extent to which the cost of interstate transportation...affects the price for the gas commodity at the California border."
Toward this aim, FERC has posed a number of very detailed questions to gas sellers, interstate pipes and LDCs in the appendix of the order. From this, it expects to elicit "data relating to the volumes and prices of sales to the California market, including transportation rates, the daily operational capacity of pipelines to and in the California market, the actual volumes flowing to and in California, and [the] gas sales and the transportation requirements of the LDCs." Parties can ask for confidential treatment of the information.
FERC said its proposed action is in response to complaints seeking to re-impose price caps on short-term releases of capacity for service to the California border and to points of interconnection between interstate pipes and LDCs in the state; require sellers to state separately the transportation and commodity components of bundled sales; and to establish a benchmark price for natural gas in the United States. The complaints blame high gas prices for the out-of-control power prices in the California market, the order noted.
Days after announcing its plans for price reporting requirements, FERC also issued an order seeking industry comments on whether to reimpose its rate cap on short-term capacity release transportation transactions to the state's border (see related story this issue). The price cap order was in response to specific petitions by San Diego Gas and Electric (SDG&E) and the Los Angeles Department of Water and Power (RP01-180, RP01-222). The petitions, which were filed last winter, called on FERC to immediately re-instate the caps for the duration of the heating season (until March 31), and to initiate a proceeding addressing the issue.
FERC's sudden effort to examine the spiking western natural gas market is in response to "increasing pressure" from Congress to deal with the escalating gas prices on the West Coast, said Jerald V. Halvorsen, president of the Interstate Natural Gas Association of America (INGAA), which represents interstate gas pipelines. "Every time they go there [Capitol Hill] they get slapped around. They're all on the firing line right now," he noted, adding that "I would be doing exactly the same thing if I were them."
FERC is going to be "very closely watched and will be pushed all summer by the California delegation" in Congress to do something about high gas prices in Southern California, Halvorsen said. "I think that if they find anything out of line [in the market], they will move very swiftly" to take corrective action.
If they should find some "funny business" in the intrastate pipeline market, "I could even see them going to the California Public Utilities Commission and saying `this doesn't look right.'" FERC "will leave no rock unturned" in its effort to collect information, he believes.
INGAA views FERC's reporting requirement initiative "as part of an overall effort to better understand what's going on in California," Halvorsen said. He believes this will be a serious effort by the Commission to detect anything "fishy" in the California gas market. Others, however, see it as FERC simply going through the motions to appease federal and California lawmakers.
Dynegy's chief attorney Phil Esposito questioned whether FERC's price collection exercise would "result in any intelligible data. Each transaction needs to be viewed in context, along with transportation, hedging and deals with counterparties. We can provide a lot of data, but I doubt it will be very useful." He predicted the proposed order would generate "reams and reams of data," but it would be difficult to recreate the whole picture. "Then what happens if they go ahead on the basis of an incomplete picture?" Meanwhile, Dynegy is "not overly excited about having to do all that paperwork. We've got a dozen ongoing civil suits" relating to California and also are providing information for the California attorney general investigation and FERC's electric price investigation.
Once the Commission has the data, Esposito continued, "what are they going to do with it? Require parties to sell at the end of the pipe at the same price they paid at the beginning of the pipe, plus transportation? Then, who's going to buy firm transportation?"
A San Diego Gas and Electric spokesperson said the price information was something SDG&E had asked for in its case at FERC seeking to re-install price caps on transportation to the border in the secondary market. The utility had also asked for an unbundling of commodity plus transportation transactions, which is also part of the data FERC seeks to collect.
Other market and political sources suggested that the collection of price information was an attempt to pacify California and federal legislators, noting that time required to put the proposal in place plus the collection of data on a quarterly basis, puts any derived solutions off for at least six months. "They're not going to find anything. Each trading company has dozens of guys watching the market full time, buying gas, selling gas, hedging it, pooling it. Gas is going east from San Juan one hour and west the next hour," one source said.
"This is just FERC trying to show they're doing something, trying to cover their ass. We're in a war. The object on the other side is to save Gray Davis' political career," another source commented.
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