FERC’s Office of Market Oversight and Investigations (OMOI) called the storage recovery this year nothing short of “remarkable” and told the full Commission in a new Winter Energy Market Assessment last week that the “system is reset” and prepared to handle whatever winter delivers.

But winter preparation has come at a cost — about 22 cents/MMBtu based on current estimates. Gas in storage cost the industry an average of $5.25/MMBtu this year, while the winter futures strip is about $5.03 (prices on Nov. 5), FERC OMOI’s Steve Harvey told the full Commission.

“By bringing storage back to above average five-year levels, the system in effect has reset itself so that it can handle the uncertainty with regard to winter weather going forward,” he said. “In a real sense, this is the insurance…and that insurance allows us to go into this winter with much higher confidence that prices and supply availability will be more manageable, depending again on the weather going forward.”

However, there still is a potential for price spikes. There is about 5 Bcf/d of additional power generation demand this winter, and there also appears to be relatively little industrial demand elasticity; fuel switching capabilities for feed-stock users are relatively low, Harvey said. Electric generation fuel switching also seems to be more constrained.

Meanwhile, forward spark spreads indicate that markets in California and New England show the greatest likelihood that power demand will be strong and in competition with heating demand, resulting in possible high peaking prices, he added.

The Commission, however, shouldn’t jump to conclusions about market manipulation when prices spike and basis differentials widen, he said in response to a question from Commissioner Nora Brownell. Rather, it should look for the fundamental factors behind the price spikes.

In looking back at the February 2003 price spikes, OMOI staff found no market manipulation. Market fundamentals, and in particular, equipment failures caused the spikes. “The encouraging thing is that those price signals do get picked up, and there are investment responses to that,” Harvey said.

There have been improvements this year in the gas delivery system, including 1 Bcf/d of new capacity from the Rockies to California, 1.5 Bcf/d of new capacity to Florida, new LNG capacity at Cove Point in Maryland and in the LNG terminal in Massachusetts, and new deliverability into Wisconsin. “Whether they are adequate enough is something we will look at in the State of Markets report that we will be delivering by the end of the year,” he told the Commission.

Slow Progress on Price Reporting

Harvey also touched on a variety of other topics in his presentation and had mixed comments on the progress of the industry in gas price reporting to index publishers. The OMOI staff basically gave the industry a below-average grade on its progress in price reporting so far.

OMOI said it got mixed responses to the survey it conducted of 300 natural gas and electric wholesale suppliers about their price reporting practices. The survey was part of its monitoring efforts to gauge the level of reporting to index developers and the adherence to FERC’s July policy statement, which introduced new industry standards for the reporting of prices on energy trades.

Companies “seem to have shrunk from reporting prices, which is unfortunate and needs to change,” Harvey said. Some companies are attempting to put into place the appropriate processes to deliver price information to publishers and that’s “heartening.”

“Unfortunately, we also have other companies that are looking at uncertainty, and even a company or two that reported that they hadn’t quite understood the issues until they got our questionnaire and then decided to stop [price reporting] right [away], which is not what we want to have happen.

“There has been progress, but it continues to be a work in progress,” Harvey said.

Commissioner William Massey noted that the Commission’s policy statement on price reporting was “fairly clear that this Commission sees great value to the marketplace from everyone reporting.”

Chairman Patrick Wood, who said following the meeting Thursday that he was very disappointed in the decline in price reporting information by large and small companies, asked Harvey what issues still remain unclear.

There continues to be disagreement regarding a few price reporting specifics, Harvey responded. One is the need for a time stamp on individual transactions that are reported. Another is on the need to include the names of counterparties to transactions, and the last is on whether companies need to report all of their transactions at each location and across all locations in the entire marketplace.

OMOI intends to present a follow-up report in the spring on the status of price reporting, at which time it will provide the Commission with recommendations on whether to add more “muscle” to its policy, Harvey said.

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