Results from a FERC staff survey sent to energy companies in March show that industry’s confidence in and use of published natural gas price indexes are relatively high, but the level of participation by companies reporting information about their gas trades to publishers’ price surveys still is an open question.

In order to get a clearer picture, the Federal Energy Regulatory Commission last week called for comments from industry on the statistics and analysis in its 65-page “Report on Natural Gas and Electricity Price Indices” (which includes another 156 pages of statistical appendices) in advance of a public conference discussion of the survey results and other liquidity issues at the Commission on June 25.

Questioned about his confidence level in published indexes, Chairman Pat Wood deferred reaction until after the conference, although he said he was “disappointed…I thought more people would have complied with the [2003] policy statement,” which required both energy firms and index publishers to take steps to improve the quality and reliability of indexes to stave off abuse and price manipulation in the future.

But survey respondents expressed fairly high confidence in the published indexes. FERC said that on a scale of 1 to 10, the confidence level of survey respondents averaged out to 7. Thirty-four percent of the companies surveyed ranked their confidence level at an 8, with 22% registering a 7, with more than 90% registering in the 5-10 range.

The survey results, which were released last Wednesday, reflected a similar pattern in industry usage of the published gas indexes. Respondents overall indicated a range of use between 50% and 75% over the five-month period covered by the survey, with industrials registering the highest use, between 68% and 89%, followed by producers and local distribution companies (LDCs), both using indexed-based transactions between 60% and 72% of the time. Marketers, electric utilities and generators were on the lower end of the scale, collectively basing between 44% and 71% of their transactions on published gas indexes. The survey covered activity from October 2003 through February 2004.

On the reporting side, however, only about 20% of respondents said they reported all of their “reportable” daily and bidweek transactions, but the companies accounted for between 49% and 59% of daily gas volumes and 35% and 44% of bidweek (monthly) volumes.

Wood told a press briefing that the figures were not necessarily representative of the total market, pointing out that the survey was only sent to those companies which have gas sales certificates or market-based rate authority. The 20% reporting for gas and 10% reporting electric prices “may include all of the big ones and none of the little ones,” Wood said. The publishers, Platts and NGI, have said previously that almost all of the companies among the top 20 in natural gas sales are reporting, which would account for the lower percent of reporting companies yet higher volumes.

“I cannot report to you today the total success of the policy statement,” which was designed to encourage more price reporting, Steve Harvey of the Commission’s Office of Market Oversight and Investigations (OMOI), who headed up the survey, told FERC Commissioners last Wednesday.

While the level of reporting is “still well short of ideal,” Harvey said that index providers have shown “material increases” in the levels of price reporting from the lows of late 2002, when a string of marketers and traders exited the business. He noted that more price reporting was in the offing. Nine companies recently notified FERC that they have begun reporting, and 30 more companies said they plan to begin reporting to price indexes in the future. The 30 companies represent another 20% of all the companies that responded to the FERC staff survey.

In addition to the advances in the level of reporting, Harvey told the Commission that a number of “quality improvements” have been made in the price-reporting process, with a greater number of companies reporting trading data to index publishers through departments that are independent of their trading staffs, conducting annual audits of their price-reporting practices, and implementing public codes of conduct for the buying/selling and reporting of natural gas.

As to the confidence level, “I’m not entirely sure how to interpret that number [7]. We’ve chosen to characterize it in the report as confidence…[that] could be stronger. Obviously, it could be much weaker as well,” said Harvey. He noted there was a “slight tendency” for industry players who are most dependent on gas indexes to express the most confidence in them.

Gas utilities expressed the highest level of confidence in the indexes, averaging 7.49 on a scale of 10. Industrial consumers came in at a close second, with an average of 7.43, and were followed by marketers who had a 6.74 confidence level, according to the FERC survey.

“Although [the] ranges were somewhat lower than I’d expected based on anecdotal evidence,” the survey revealed that between 49% and 59% of the relevant day-ahead gas transactions were reported on a volume-weighted average basis, he noted. Industrial consumers reported the highest percentage of their trade volumes to indexes (63% to 87%), but were closely followed by producers (69% to 80%), who represent the largest volume of gas traded in the industry, according to NGI‘s recent rankings. Gas utilities said they reported 57% to 68% of their day-ahead trade volumes to indexes, and were trailed by electric utilities (53% to 63%) and others (51% to 59%). Surprisingly, marketers had the lowest level of reported volumes to indexes (48% to 59%).

The level of reporting activity for bidweek or the month-ahead market was much lower, as FERC staff had expected, Harvey noted. The average overall volume of gas trades reported to indexes was 35% to 44%, according to the survey. Again, the large-volume-trading producer segment reported the highest volume level (73% to 83%), and was followed by others (59% to 66%), industrial consumers (49% to 64%), and power generators (49% to 58%). Gas utilities reported the lowest level of volumes (30% to 36%) during bid-week, along with marketers (37% to 47%).

As for next-day electricity trading transactions, the overall level of volumes reported to published indexes ranged from only 21% to 39%. The largest volume reporting groups were gas utilities (26% to 38%), others (21% to 48%) and marketers (21% to 41%), the survey said. Industrial consumers (3% to 16%) and producers (7% to 25%) were the lowest. The survey revealed that only about one-tenth of the respondents reported their day-ahead electricity transactions to indexes.

“Further improvements to the natural gas and electricity price discovery processes are clearly possible,” Harvey told the Commission. He presented four options for future Commission action:

Harvey said staff “can’t make such a judgement.” FERC Commissioners will make their decision after its June 25 conference, Wood indicated.

The Market Price Reporting Action Committee (MPRAC), the umbrella group of energy companies, customers, trade associations and price index developers, “states that it is committed to advancing the process of price reporting and index development,” FERC said. MPRAC says three price index developers — Platts, Natural Gas Intelligence, and the Intercontinental Exchange — report that the number of natural gas transactions and associated energy volumes have increased substantially since the November 2002 low point, and that nearly 60 companies are now actively reporting natural gas transactions.

With respect to the use of index prices in the tariffs of agency-regulated pipelines, the Commission staff recommended that six publishers of price indexes be designated as in “substantial compliance” with FERC’s 2003 policy statement. They are Argus Media, Energy Intelligence Group, IntercontinentalExchange Inc., Io Energy, Intelligence Press Inc., and Platts.

But staff proposed that a condition be placed on the energy publishers for FERC allowing the use of their indexes in jurisdictional tariffs, namely that they agree to provide the agency access to confidential price data in the event of an investigation of possible false price reporting or manipulation of prices. “In exchange for getting [a] Good Housekeeping seal, you have to pay at the door,” Wood said. This “[was] not an unreasonable condition.”

In addition, it recommended the Commission, beginning Sept. 1 of this year, require any index included in jurisdictional tariffs to regularly publish the volumes and number of transactions used to derive the index value at each location.

Staff also proposed that FERC adopt new minimum levels of activity at every index location used in jurisdictional tariffs. Specifically, it suggested that volume levels for gas be 25,000 MMBtu/d, and the electricity level be 4,000 MWh/d. Acceptable transaction levels at index points would be five trades per daily index, eight trades per weekly index, and 10 trades per monthly index. Industry also has been asked to comment on these levels.

It further called on the Commission to defer action on pending tariff filings involving index prices until the agency can receive industry comments on the series of staff recommendations.

The staff report pointed out that its requirements for indexes used for setting penalties, cash-outs or discounts in a published tariff, would not necessarily be the same as market participants choosing an index. “There could be very different criteria.”

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