The natural gas market is more actively traded than ever could have been imagined at its early stages in the mid-1980s, and FERC’s oversight has to change to accommodate that market, said a top agency official.

“From an oversight perspective, the traditional boundaries of Commission jurisdiction don’t apply,” said Stephen Harvey, director of the division of energy market oversight at FERC’s “State of the Natural Gas Industry Conference” in Washington, DC.

“To be comfortable about natural gas prices, we have to track those particular markets that are most crucial in forming prices, those that transmit price information and those that make use of price information created elsewhere,” he noted. “Relevant markets can fall [into] a number of categories — physical, financial and futures — because the overall market is using and transmitting information across those boundaries constantly.”

Harvey appeared to be defending the right of the Federal Energy Regulatory Commission to oversee activities in the futures markets that would impact prices in the physical gas market, where FERC’s jurisdiction traditionally has been confined. That issue — the extent of FERC’s authority in the futures market — was thrashed out in a New York federal court, which decided earlier this month to let an appeals court settle the hot-potato matter (see NGI, Nov. 5).

The natural gas market has changed significantly in the past two decades, Harvey said. “The natural gas spot market that emerged in the mid- and late 1980s consisted of traders calling each other and agreeing on prices for gas delivered monthly in many locations across the country. The trade press polled traders about fixed prices and published the results,” he noted.

The New York Mercantile Exchange (Nymex) then introduced its gas futures contract in the early 1990s, which was tied to the monthly spot market centered at Henry Hub in Louisiana. “Today the natural gas futures contract is the second most successful energy contract that Nymex trades, behind only crude oil.” While the Energy Information Administration reported that the United States consumed 21.7 Tcf of gas in 2006, Nymex reported futures trading of more than 10 times that volume, Harvey said.

The physical and futures markets have blurred over the years, he noted. “The Henry Hub monthly spot market — the one the futures market was based on — now prices off the futures market itself. Monthly prices don’t come from the underlying physical market anymore; they come from the futures market instead,” Harvey said.

“The physical natural gas markets of interest to the Commission today are complex and highly interactive, with influences drawn from constant communication with both futures and financially settled markets. In the end, effective oversight of jurisdictional U.S. natural gas markets requires a comprehensive understanding of the complex and changing nature of a whole complex of energy and related markets.”

©Copyright 2007Intelligence Press Inc. All rights reserved. The preceding news reportmay not be republished or redistributed, in whole or in part, in anyform, without prior written consent of Intelligence Press, Inc.