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 NGI, June 30).

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 safe harbor provision is available to companies which conform to the voluntary reporting practices described below.

The policy statement calls on index developers — mostly trade press publishers — to follow these guidelines:

(1) Code of Conduct and Confidentiality — adopt and make available a written code of conduct that discloses how the developer will obtain, treat and maintain price data; specify calculation methodology, treatment of aberrant data, and use of assessments; allow only staff specifically working on the data access to the data; sign agreements pledging confidentiality except to allow for Commission access necessary for performance of statutory duties such as a specific administrative investigation of price reporting.

(2) Completeness — ensure that price reporting systems maximize the amount of useful and appropriate information that they collect and disseminate — collect on an individual transaction basis, price, volume, buy/sell indicator, delivery/receipt location, date/time, and term. Publishers should provide for each pricing location for the day-ahead or month-ahead market total volume, number of transactions, number of companies, price range and volume-weighted average. Classify trading points by liquidity.

(3) Data verification, error correction, and monitoring — verify data by matching buy/sells and contacting data providers immediately about discrepancies, asking for counterparties if necessary; publish significant corrections if necessary; have systems in place to identify in a timely manner activity that may reflect an attempt to manipulate price indices, and if unable to resolve the accuracy of the data, notify FERC or other relevant federal agency;

(4) Verifiability — annual audit of processes, reviewing data systems, quality control measures and data; results should be made public.

(5) Accessibility — reasonable access of published reports to all on a timely basis; access to raw data for FERC on a confidential basis (a) to conduct an investigation of suspected bad faith price reporting or potential market manipulation or (b) to otherwise carry out its statutory duties.

The statement also said data providers should meet the following standards:

(1) Code of Conduct — 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) Source of Data — 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; have process for verifying accuracy before submitting data. The statement notes that “even in small companies there are individuals who have accounting, bookkeeping and other responsibilities separate from trading activities…”

(3) Data Reported — under a confidentiality agreement report all bilateral, arms-length transactions with non-affiliated companies at all locations in the physical cash markets on an individual transaction basis. Data reported should include for each transaction: price, volume, buy/sell indicator, delivery/receipt location, date/time and term (next day or month). Any errors should be corrected as soon as possible, even if they don’t make the publication deadline to help in the internal surveillance process.

(4) Error Resolution Process — data provider should cooperate with the error resolution process and timeline adopted by the index developer, with the process carried out by other than trading employees.

(5) Data Retention and Review — data provider will retain all relevant data for a minimum of three years, have an independent auditor review implementation of an adherence to data gathering and submission process annually with the results of the audit made available to any index developer to whom the provider submits data; developer may recommend changes.

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.

©Copyright 2003 Intelligence Press Inc. Allrights reserved. The preceding news report may not be republishedor redistributed, in whole or in part, in any form, without priorwritten consent of Intelligence Press, Inc.