Before a packed crowd at FERC last Thursday, scores of energy industry and publication executives proposed improvements in the system of collecting and compiling index prices for natural gas. Nearly everybody agreed that the current system is broken, but they were sharply divided over how to reform it. Energy publishers said their price indexes can and are being fixed. Critics, however, weren’t satisfied and said a complete overhaul was in order. The flaws in the system have been magnified by the “bright light being shown on the process” in the wake of charges that traders had manipulated the published indexes for years.

Representatives of major energy publications, which publish the price surveys that many companies inside and outside the energy industry have relied on for years, reported they already are seeing energy companies supply better quality and more reliable data to them — transactional (rather than aggregate) data and some counterparty information, with an increased level of data coming from back offices rather than from traders. They said they also have observed a gradual uptick in the number of trades being reported to them. Reported trades hit bottom last November following the collapse of speculative trading and amid the wash trade scandals.

Speaking at a day-long technical conference exploring index reforms, the publications said they have taken a number of steps to secure their indexes from further manipulation by traders, including demanding more transaction-specific data and enacting stricter internal controls. But they conceded more needs to be done. Larry Foster of Platts, which publishes Gas Daily and Inside FERC’s Gas Market Report, said he anticipated his company would make major headway in implementing the “best practices” recommendations of the Committee of Chief Risk Officers (CCRO) within four to six months.

The CCRO, which is made up of executives from more than 30 top energy companies, has issued a series of recommendations to improve the transparency and accuracy of trading information that is reported to publishers of indexes. It would require traders to submit “raw data” on a transaction-by-transaction basis, as well as individual counterparty data and buy/sell information.

Ellen Beswick, editor and publisher of Natural Gas Intelligence (NGI) and NGI’s Daily Gas Price Index (Daily GPI), estimated it could take her company three months to implement many of the CCRO’s recommendations. “We are requiring a certain level…of transactional data” from traders, but she said she does not expect to “exactly match” all of the CCRO’s recommendations. NGI has published gas price indexes since 1983.

The publications further said they planned to or were considering subjecting their price index processes to the scrutiny of independent, third-party auditors. Chuck Vice of the IntercontinentalExchange (ICE) online trading platform, which has offered daily gas price indexes at major hubs for more than a year, noted that his company’s system already is being audited by Ernst and Young. Beswick said the results of an audit of NGI’s price-reporting process would be published on the newsletter’s web site.

But others questioned whether published energy indexes, no matter how many changes they enact, will be able to provide the verifiable price and volume data that the market needs in the future. Some would prefer that the Federal Energy Regulatory Commission assume the task or at least closely oversee the process, while others believe that an independent third party — such as the University of Houston’s Bauer College of Business — should take up the role of price disseminator or index developer (see related story).

Confidence in the published price indexes waned after several traders, including former El Paso Corp. and Dynegy traders, were arrested on charges that they reported fake gas trades to pricing publications in an attempt to skew prices. Both are awaiting trial in Houston on felony charges. The traders’ alleged illegal activities were uncovered as a result of probes carried out by the Department of Justice, FERC and the Commodity Futures Trading Commission (CFTC).

“The house of cards built by the now disgraced and in some instances dissolved band of speculative traders has burned to the ground. It is now time for this Commission to step forward and sweep away the debris and rebuild the natural gas price indexes,” said Obie O’Brien of Apache Corp., a Houston-based producer. The company wants FERC to collect and publish gas prices.

At the start of the conference William Hederman, director of FERC’s Office of Market Oversight and Investigations, delivered a kind of eulogy for published indexes. Price index systems of the past decade are “mortally wounded and I doubt anyone will mourn their passing,” he said. “I hope this conference will mark the beginning of the next chapter of price index reformation for electricity and natural gas markets.”

Andrew Ware, acting editor of Natural Gas Week (NGW), which also publishes gas price indexes, pointed out that having the government carry out the index creation may not be the panacea proponents expect.

The Department of Energy’s Energy Information Administration (EIA) has gathered information on gas storage, production, marketing and other energy areas for years, but its figures and methodology often have been considered suspect by many experts in the industry, Ware noted. The Interior Department’s Minerals Management Service, which also collects data on gas production and prices, has had glaring errors as well.

Robert Levin of the New York Mercantile Exchange (Nymex) proposed that a self-regulating organization (SRO) be established to “validate and substantiate” the pricing and other data provided by traders prior to its being disseminated to price index publishers. He recommended that the SRO be subject to some oversight by FERC or the CFTC or both. This would provide “the public with the confidence that [the information] is authentic.” FERC staff and others expressed interest in studying the SRO concept further.

But “now is not the time to be changing horses,” said NGI’s Beswick, noting that market liquidity has plummeted but is slowly recovering. “A lot of the experienced traders are gone, but those who are left, along with increased input from utilities and producers and the efforts of state and federal regulators, all can help to keep this market on track.” FERC “should hold off to see if this current system of price surveys by publications…can be improved.”

In fact, she proposed that FERC begin “micro-monitoring” the various price indexes on a regular basis for any wide differences in the prices being published by the energy publications. “If we’re doing our job, our reports should be similar.” The Commission might consider naming one staff member to act as a liaison with the publications, Beswick recommended.

“I’m not suggesting that we turn over [all of our] materials to FERC,” she noted. “It would have to be an informal process” with the energy publications continuing to protect the confidentiality of their price-reporting sources.

Platts’ Foster instead suggested that FERC require gas companies to report quarterly data to the agency on their transactions in the same way they currently submit quarterly power data.

Michael Smith, who represented the CCRO, advocated an independent audit of the price-reporting processes by a certified auditor, but he was cool to the idea of any type of monitoring by FERC. The “bar’s being raised here” for both the providers of trading data and the developers of indexes, he said, but he stressed that confidentiality of reported data must be maintained.

“As a journalist, it would be tantamount to burning your source” if the confidentiality surrounding reported prices was violated, said NGW‘s Ware.

To promote a more liquid market, Beswick also called on FERC to encourage major players in the market — especially utilities and producers — to do more fixed-price trading, rather than index all of their monthly baseload to publications’ indexes. Specifically, she said the Commission should encourage state regulators to create incentives for utilities to do more fixed-price trading. This is critical since many of the marketers, who did the bulk of fixed-price trading in the past, have left the monthly baseload market, according to Beswick. They are still active in the daily market, but many don’t have the credit to trade the 30-day deals.

Under fixed-price trading, a buyer and seller do not rely on published index prices when negotiating a gas deal, but rather they set their own price. These type of deals are used by publishers to calculate indexes. However, indexed deals are based on already-published index prices, and are of no help in determining price direction.

Utilities tend to “index because many state public utility commissions are judging their performance and setting their incentive rate schedules based on how close they come to indexes. Thus, the safest course for a utility that wants to pass through its fuel costs is to contract for a few cents less than the index closest to their receipt point,” Beswick said.

She believes FERC, through its liaison relationship with state regulators, could help take some of the pressure off utilities to do indexing because “they’re scared to do anything else.”

Frank Wolak, a professor at Stanford University and a member of the California Independent Market Oversight Committee, said “a lot of the large buyers aren’t exactly motivated to keep costs down as the index problem suggests.” State commissions should be advised “you’re leaving lots of money on the table with these indexed contracts. If you could provide better incentives for procurement for your utilities, they might do a little bit better and we might solve a lot of the thin market problem.” He also suggested state regulators could encourage near-by storage to counter congestion price spikes during peak periods.

Wolak said the market flaw that allowed the marketer segment to get out of hand was the fact that the retail market is still regulated. Utilities simply had to satisfy state commissions that they were staying near the monthly index, they did not have to offer competitive prices to their customers. If the utilities were subject to price competition, they would have put pressure on their suppliers, the marketers, to keep prices down.

Producers also should brush up their negotiating skills to help fill in the gap left by the downsizing of the marketers. Both utilities and producers should do at least part of their business in fixed price deals instead of being just price takers. Particularly with the price pressures a shortage could bring, the industry can’t afford to have a thinly traded wholesale market.

Laurie Ferber, managing director, U.S. Power Trading, Goldman Sachs, said that buyers and sellers index in other commodity markets, but they only index at a few, very liquid points. A FERC staff member suggested that in the natural evolution of a market participants realize that only the most active points are the ones they can rely on. They then negotiate transportation and basis privately from those main points.

Should all companies reporting price data be required to submit counterparty information? Unless “everybody [is] on the same page” with respect to providing counterparty data, NGW‘s Ware fears the market could still be subject to manipulation. He noted he has encountered “great reluctance” from traders in submitting this data. Traders want “more assurances” — that a “Chinese wall” exists between the price desk and editorial desk of publications.

Mike Stice, president of ConocoPhillips Gas & Power and the representative of the industry’s gas producers and processors, said there currently is no consensus among producers that counterparty information should be provided to index publishers. Some producers remain adamantly against it for competitive reasons. However, Stice also said the producers are actively discussing their options on this matter and intend to find a solution to improve the verifiability of gas price submissions.

“We don’t want to exclude anybody from [our] survey…because they don’t contribute counterparty” information, said NGI’s Beswick, although she conceded it was “valuable information.” She cited the over-riding importance of liquidity in setting average prices.

Like Ware, Platts’ Foster said he believed the counterparty information was key to verifying the accuracy and reliability of the reported pricing data.

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