In an unprecedented show of support for accurate natural gas price indices, the Federal Energy Regulatory Commission last week issued an order requiring 11 major energy companies, many of whom have publicly admitted providing false data to trade publications that publish indices, to prove that they have changed their ways. They must either demonstrate that they have installed controls to prevent any attempt at price index manipulation in the future, or show that they have exited the wholesale gas marketing and trading business entirely.

Acting on a recent FERC staff report on Price Manipulation in Western Markets (Docket No. PA02-2-000), which in some cases revealed “systematic efforts to bias the data” reported to the trade press, FERC gave the 11 companies 45 days to submit written demonstrations that they have fixed their internal processes for reporting data for index calculations (see NGI, March 31). FERC ordered the companies to show the following:

The companies receiving the order included American Electric Power (AEP), Aquila, Coral Energy Services, CMS Marketing Services & Trading, Dynegy Inc., Duke Energy Trading and Marketing, El Paso Merchant Energy, Mirant Americas Energy Marketing, Reliant Resources, Sempra Energy Trading Corp., and Williams Energy Marketing and Trading.

“While five companies (AEP, CMS, Dynegy, El Paso and Williams) admitted to false reporting practices, data gathered by staff revealed conditions conducive to manipulative practices to be pervasive, going beyond those five companies,” FERC said in its order. “There was a system-wide lack of reporting conventions and internal controls to ensure the accuracy of reported data.

“Because natural gas prices both directly and indirectly impact electricity prices, any flaws in the reporting of natural gas prices affects electricity prices as well.”

FERC noted that it has a “statutory obligation to ensure the justness and reasonableness of rates for wholesale electric power, gas transportation and the pricing mechanisms in gas pipeline tariffs (e.g., cashout provisions),” all of which directly or indirectly depend on accurate price reporting and index formation.

“This required demonstration should send notice to the involved companies and the industry that we are intent on ensuring that published price indices are accurate and reliable measures of trading activity,” FERC said. In addition, FERC staff has provided U.S. Attorneys’ offices with any relevant information regarding several ongoing criminal cases and has provided other government agencies, including the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission, with information relevant to their investigations of index price reporting.

In a concurring opinion, Commissioner Nora Brownell noted that the FERC order is “another step toward bringing confidence in the accuracy of the indices to the marketplace.” But she said much more is needed, particularly industry consensus on the best practices required for gas and electric price reporting. She said the participants at FERC’s gas price technical conference two weeks ago, “seemed to coalesce around the best practices…” provided by the Committee of Chief Risk Officers (CCRO), which represents the 11 companies in the FERC order last week and more than 20 other energy trading firms (see NGI, April 28). “I believe this growing consensus, if implemented, will make significant progress toward rebuilding confidence in reported price data. I urge the industry and market participants to quickly come forward with a resolution.”

The companies have made strides in improving their systems for submitting price data to index publishers. At the technical conference, the three main gas price survey publishers, Intelligence Press Inc., Energy Intelligence Group, and Platts informed the Commission that progress is being made (see NGI, April 28). Many companies already are submitting data from back offices or non-commercial departments. Also, much of the data submitted is at the transactional level rather than in aggregated form.

However, many of the companies, hammered by low credit ratings, limited credit, and financial difficulties due to deteriorating market conditions, already have exited the trading business or have severely downsized their trading operations, reducing their activities to trades involving sales or supplies for their own assets. Of the 11 companies in the order, Aquila, CMS, and El Paso are in the process of exiting the energy trading business entirely, and Duke, Dynegy and AEP are exiting speculative or proprietary trading but plan to continue trading around their existing assets.

The departure of so many trading companies has drastically reduced market liquidity and available prices that make up the indexes. Furthermore, some companies that are still in the market simply have ceased submitting prices because of regulatory scrutiny or ongoing investigations.

Williams, which is still trading but on a much smaller scale, said it did not know when it would be able to resume reporting trading data to index publishers. “We do not report to publications and we are still formulating a response to the FERC order,” said spokesman Brad Church. “Whether we plan to resume reporting will be noted in the filing; I just don’t know.”

Williams disclosed last October that it found instances in which several individuals within the company provided inaccurate information to trade publications. An investigation by the CFTC is continuing. “We’re still cooperating fully with the CFTC, and we’re still evaluating and monitoring the situation internally. We can’t talk about specifics,” said Church.

He said Williams sees the FERC order as a “reasonable request, as all market participants want and need more transparency in the commodity markets. Williams will be responding in a timely manner.”

At a press briefing following Wednesday’s meeting, Chairman Pat Wood said the order did not spell out the consequences that the companies could face if they fail to either improve their reporting practices or show they have exited the wholesale trading business by the FERC-imposed deadline.

“Let’s cross that bridge when we get to that…I’m not going into that today,” he told reporters. The companies cited in the order “[are] wiser than that,” said Brownell.

Wood added that the technical conference exploring improvements to the price-reporting system was “one of the better conferences” as far as content and participation, and offered a number of solutions to the current problem. “I honestly hope we don’t have to pick the right answer… It may not require a choice by us.” Brownell expressed hope that the industry would come up with solid guidelines and best practices that can be adopted by all.

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