Analyst's Report Advocates 'Fixing' Existing Price Reporting System

Fixing the current system of natural gas price reporting by trade publishers "has the greatest potential to restore confidence in the shortest period of time," a report by Charles Schwab's Washington Research Group concluded, but politicians, regulators, and a potential short-supply, high-price crisis could produce more drastic measures.

"We are concerned that volatility in the natural gas markets this summer could degenerate into another round of political finger pointing and investigations. Congress could add mandatory price reporting and possibly other provisions to...energy legislation that would smack of cost-of-service oversight instead of market-driven economics," warned the report by Christine Tezak with Charles Schwab Capital Markets (CSCM).

The Federal Energy Regulatory Commission, whose recent report on the California crisis of 2000-2001 condemned the published price indices as subject to manipulation, so far has offered no opinion as to how well the indices are functioning now. "We feel unable to give investors constructive guidance as to when to expect the regulatory cloud to lift, particularly if Congress begins to meddle in earnest," the Charles Schwab report said.

It suggests it would be helpful if the Commission would issue a final report on its investigation of the February 2003 price spikes. Comments from FERC staff that the spikes appeared to be driven by fundamentals have yet to be backed by a complete report on the situation. The market is concerned that FERC's new oversight office may have a "paranoia" leading it to label continuing market volatility as evidence of market manipulation.

Author Tezak expresses concern "that some staff in OMOI [Office of Market Oversight and Investigations] and other key offices at FERC really are not comfortable with the difference between 'moving' and 'manipulating' a market or index. The former is legal (some would say even necessary or desirable to stimulate investment), the latter is not..."

"Is FERC even looking at today's situation or is it still myopically focused on solving yesterday's problems?" The report notes, "The industry...has coalesced rapidly behind efforts to 'fix' the existing system over the last few months." And both the industry and publications have worked successfully through the Committee of Chief Risk Officers to improve methodologies and standards for the price data.

Today's situation includes a lack of liquidity because of the virtual disappearance of the marketing sector, which did much of the fixed price trading. This situation -- not enough beans -- cannot be fixed by changing bean-counters.

Tezak cited NGI's testimony at FERC's technical conference on the excessive reliance by state regulatory commissions on the published indexes as a means of judging utility gas purchases. This leads wary utilities to index rather than attempt fixed price transactions.

But state commissions could turn on the indexes if prices spike. "We worry that regulators could balk at passing through index-driven cost increases and attempt to seek modification of prices at FERC by using OMOI's concerns about manipulation as justification for investigations if this year's natural gas markets stay tight and expensive," the CSCM report said.

Commenting on presentations at FERC's technical conference, Tezak said it was clear that publishers had a financial stake in continuing their competing price collection systems, while some of the counterproposals offered by others were driven in part by the commercial and financial potential of a government-authorized monopoly price collection system.

Neither FERC nor the Energy Information Administration (EIA) want the job of collecting price information. The report examined the problems that EIA has faced in reporting storage information once a week.

Third party systems delegated by FERC or so-called self-regulating organizations, would not be possible without legislation giving FERC the power to mandate the submission of price data. "Then we'll need policy development and rulemaking at the agency itself, a process likely to take years," the report said. It also questions funding for the third-party systems. Sponsors say it would come from fees collected from publishers and others who would be provided with aggregated data that is "cleansed" of any individual information. "We see no reason why publishers would pay for raw index data that is already published by a third party."

A representative who put the University of Houston's proposal before FERC "would not answer directly the question posed to him -- would the business school use the data for its own proprietary research?" This also is a concern regarding some publishers with research and consulting affiliates. "If the potential for such commercial leveraging also exists in a so-called SRO proposal, why undertake the extensive machinations of setting it up, mandating [that] industry participants feed it data and assessing subscribers with the cost of funding it for the SRO's commercial gain?"

While industry groups on the surface are willing to explore the idea of an SRO, "the breadth and depth of their concerns suggest to us that this idea really is going to have tough sledding philosophically, on top of concerns of about its logistical feasibility."

The Charles Schwab paper concludes that "reinventing the wheel and moving to mandatory reporting has serious legal and logistical issues."

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