The Commodity Futures Trading Commission (CFTC) and the Federal Energy Regulatory Commission (FERC) Wednesday issued a joint safe harbor statement to “make absolutely clear” that neither “has or will bring false-reporting cases against energy market participants where the false report is inadvertent or based solely on human error.

“We issue this joint statement to address the regulatory certainty concerns of market participants and encourage ongoing industry consensus solutions,” the commissions said. “We look forward to increased reporting of transaction data by energy market participants as this will promote price discovery and the efficient operation of these markets. We will continue to monitor progress in this important endeavor,” the agencies’ statement continued.

Both agencies also announced jointly that their separate investigations had found no evidence of market manipulation in the price spike during extreme weather conditions last February. FERC also voted out a policy statement on price discovery procedures.

The “core issue is getting liquidity back into the market” and into price reporting, FERC Chairman Pat Wood said in voting with his fellow commissioners to endorse a policy statement granting a safe harbor presumption to those who comply with consensus standards for reporting of electric and natural gas prices.

The policy statement on price discovery approved by FERC at its regular meeting Wednesday will accept compliance with standards similar to the best practices developed by the industry and presented to FERC at a recent technical conference as a consensus. The Commission is going with the consensus, which does not require counterparty information, in the interest of getting the broadest participation in the voluntary price reporting process.

“There will be a very close follow-up from OMOI [the Office of Market Oversight and Investigation]. We will be examining whether the improved liquidity helps with the integrity of the process or whether there will be a need for additional changes, and we’ll be making recommendations,” OMOI Director William Hederman said.

Wednesday’s statement is an initial step and there will be further interaction with the industry, FERC staff said, “to assure that increased reporting that we are expecting is occurring and to determine whether there are any bars to that or other issues.”

Commissioners and staff stressed several times that the action being taken in the short term is accepting minimum standards because of the need to rebuild the market and the price reporting function. The policy statement essentially followed the lines of statements made at the FERC meeting in June, adding in the safe harbor provision (see Daily GPI, June 26).

Regarding the use of published price indexes in pipeline tariffs, for instance in pipeline cash-out provisions, the Commission said it would examine new proposals individually to see that the publications are in compliance with the standards, and then to make sure there is enough liquidity at the locations chosen. In the interests of avoiding market disruption, FERC is not planning to reopen already approved tariffs at this time.

The policy statement calls on index developers — mostly trade press publishers — to (1) adopt and make available a written code of conduct that discloses how the developer will obtain, treat and maintain price data; (2) ensure that price reporting systems maximize the amount of useful and appropriate information that they collect and disseminate; (3) verify price data through various methods, including matching buys and sells and immediately contacting data providers about any discrepancies — plus undergo independent audits or verification of processes and index production; and (4) provide reasonable access to the price reports on a timely basis to the Commission and the public.

The statement also said data providers should (1) provide a clear code of conduct for employees to follow in buying and selling natural gas and electricity and reporting data to index developers; (2) assign trade data reporting duties to a department that is independent of and not responsible for trading — this will be required for all companies regardless of size; and (3) report their bilateral, arms-length transactions with non-affiliated companies in the physical cash markets on an individual transaction basis and in accordance with confidentiality agreements.

The policy statement advised that “if voluntary reporting does not increase to the point that indices are sufficiently robust to support a healthy market, or if the standards recommended by the Commission herein are not widely adopted, the Commission will consider further action.”

FERC has a vehicle for that action in its proposed rule (RM03-03) offered last month to establish a code of conduct for unbundled sales service and holders of natural gas blanket marketing certificates and a related order (EL01-118) for market behavior rules for market-based electric rates. The proposed rules include requirements that reported information be provided accurately, completely and factually and that companies notify the Commission as to whether they are reporting for all sales.

FERC’s policy statement “is a clear signal that the Commission recognizes the need for the market to resolve these issues to the mutual benefit of all participants. Now, of course, it will be up to all market participants to see these proposals through and implement these enhancements for the benefit of all energy customers,” Bill Transier, chairman of the Natural Gas Supply Association said.

“In many respects, FERC is adopting the consensus recommendations recently put forward by a majority of market participants. Recognized standards for voluntary price reporting, with the support of federal regulators, will certainly serve to enhance the credibility of the published indices. That, in turn, will help to shore up confidence and increase liquidity in the nation’s energy markets, which will contribute to more vibrant competition and, hopefully, greater efficiency for all users,” Transier added.

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