In the harshest criticism yet of FERC staff’s final report on Price Manipulation in the Western Markets, Cambridge Energy Research Associates (CERA) said the report “fails to substantiate and support its major premises, conclusions and recommendations,” and could lead the nation “into scarcities and disruptions” (see Daily GPI, March 27).

The action that FERC took to reset market prices two years after the fact and call for refunds based on the faulty report “sets a precedent of market intervention with low standards of market analysis,” CERA said.

The report by FERC staff noted in passing that there were fundamental shortage factors at work but it was impossible to quantify them. Nor could it quantify the impact of attempted market manipulation that it found. Nevertheless, it relied on anecdotal instances of attempts at market manipulation to nullify transactions based on market prices and to set lower prices.

“The methodology supporting the overriding of market prices appears to establish a view that a fair price is the lower of cost or market,” CERA said in its decision brief: “Price Revision in Western Energy Markets, What Standard for Market Intervention?” CERA said the staff report and the Commission’s action based on the report were examples of the “strong temptation for regulation to try to have it both ways: that is, supporting competitive market prices when market forces drive gas and power prices down in periods of oversupply, but overruling competitive market prices during periods of undersupply, when prices rise and reflect a value for capacity.”

Scarcity builds the additional needed infrastructure and supply. Failing to allow prices to rise in response to scarcity negates a primary market element that attracts new investment in additional generation, transmission, pipeline and production capacity, the CERA brief said. It also strands companies which have suffered losses during low price periods with the expectation of balancing those losses in higher priced periods.

“Over time, markets could become increasingly undersupplied with capacity, creating scarcity, another shortage causing either price fly-ups or curtailments, and, if the cycle is allowed to reach its conclusion, market failure,” the CERA report said.

FERC’s action failed in that it:

The scarcity evidence that FERC chose to ignore included a shortage of hydroelectric power and new generation capacity in the West, a major pipeline explosion which restricted gas deliveries and storage fill, high power demand growth, a record-breaking hot summer, and price cap distortions.

By choosing to replace California border prices with producer basin prices, which FERC deemed more in line with overall market prices, FERC negated the effect of basis, or the additional premium required to deliver the gas to California. Besides taking away the signal for investment in new capacity, this rewards consumers who have not locked in firm capacity and penalizes those who paid the extra premium for the firm capacity, the CERA report said, making comparisons with basis differences in other markets.

Finally, FERC’s report assumed that all market manipulation was directed at raising prices. This ignores the fact that market manipulators may take opposing hedge positions and have an interest in driving prices down to make their hedges more valuable. CERA said the FERC staff had sufficient actual trade information to determine if published prices were systematically different than actual trade averages would indicate.

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