The natural gas industry has “turned a corner” in bolstering confidence in the system for reporting prices on gas trades to publishers of price indexes, said the head of FERC’s Office of Market Oversight and Investigations (OMOI) last Tuesday.

“I think that we’ve heard about a lot of very encouraging progress and I think it basically is moving the marketplace away from the problem that we saw, and I hope we can get what the Commission needs to put together some decisions real quickly,” said William Hederman at the end of a day-long technical conference on reforms to price indexes.

In the short run, “I’m hopeful the fixes [taken] by the trade press and enhancements by the exchanges [Nymex and ICE] can provide prices that deserve the confidence of the market,” he noted. “I’m hopeful that these can evolve into a solution.” He signaled that July 1, when both Natural Gas Intelligence (NGI) and Platts will begin providing volumes for published prices, could signal the “resurrection” of the price index operation.

“The one item that we’ve heard… that needs more attention immediately is the safe harbor point,” said Hederman, who called on industry last week to file comments swiftly on the issue. A safe-harbor provision would offer energy companies who report prices legal protection in the event an unintentional error is made. Many believe this protection, if ultimately adopted by FERC, may spur energy companies who stopped reporting prices last year to resume the practice.

FERC has scheduled a three-hour workshop on July 2 to explore “what kind of safe-harbor [proposal] would get people back into reporting price information,” Hederman told NGI. He urged industry and others to propose “draft language around a satisfactory safe harbor provision that the Commission could consider for adoption promptly.”

Right now, energy companies see more downside — being subjected to potential investigations and lawsuits — than upside to reporting gas prices to indexes, said Jane Lewis of the American Gas Association (AGA) at the FERC conference.

John Collins, chief risk officer for Constellation Energy, said his company planned to resume reporting prices, but it was awaiting approval of a “safe harbor” clause and more market certainty.

Energy companies must be assured that they will not be held liable for making “fat finger,” unintentional mistakes, said Laurie Ferber, managing director of power trading for Goldman, Sachs & Co. She urged FERC and the Commodity Futures Trading Commission (CFTC) to refrain from “undermining” the existing reporting system.

“A white paper from each agency issued separately or jointly can address these issues and give comfort that companies which follow industry protocols would benefit from the ‘safe harbor’ or ‘presumption in favor of trades reported according to those procedures,'” Ferber said.

“I believe that many if not most market participants would begin or resume reporting counterparty data over time, including to existing index publishers, if they believe that sufficient guarantees of confidentiality are in place, including when the information is accessible by the government,” she noted.

“It is critical that you as regulators give the market confidence that any counterparty or other sensitive commercial data that comes into the hands of a regulator will be protected from disclosure under the Freedom of Information Act. It also goes without saying that index publishers must provide those supplying data with sufficient guarantees of confidentiality.”

Hederman last Tuesday retracted a comment, which he made during the first technical conference on price indexes in April, that the current system for reporting gas prices was “mortally wounded.”

“We don’t think the patient is dying,” responded Skip Horvath, president of the Natural Gas Supply Association (NGSA), at the follow-up FERC conference.

Dena Wiggins, who represented the Process Gas Consumers Group (PGC) and the Independent Petroleum Association of America (IPAA), said the current system for reporting gas prices to energy newsletters “may be winged a little bit,” but she noted it was far from dead.

The AGA’s Lewis, who spoke on behalf of gas distributors, observed that confidence in published gas price indexes “has been eroded,” but she said it was not “mortally wounded.”

The trade group officials, as well as other association representatives, appeared at the conference to discuss a new comprehensive proposal that outlined a range of price-reporting principles on which they reached a compromise, as well as the issues that still defy agreement. They failed to agree on three issues: whether there should be a single collector/developer of pricing information, whether reporting of prices should be mandatory or voluntary for buyers and sellers of natural gas, and whether energy companies should be required to submit counterparty (buyer and seller identity) information.

The industry consensus proposal represents three to four months of “hard excruciating work” by six trade associations, a broad energy coalition and the Committee of Chief Risk Officers (CCRO), said Horvath. Key parts of it call for “certified audits” to be conducted annually of processes used by companies to report gas prices and by the published indexes to gather trade data, for FERC to do “spot checks” of the indexes, and for index developers to report suspected manipulation to the Commission.

These measures will go a long way toward verifying the accuracy of data submitted to index developers, said AGA’s Lewis. She noted that AGA was “encouraging” its members, which mostly include local distribution companies, to actively report prices for trades to the index publishers, but she said many “[are] waiting for the noise to diminish around this issue.”

The industry-wide proposal will probably do a lot to encourage those companies who are “sitting on the fence” with respect to reporting prices, said former FERC Commissioner Donald Santa Jr.

Noting the consensus document offered “tangible improvements” to the current system of price reporting, he said he believed they could be implemented in the near term without disrupting the gas market, particularly the supply situation. The Commission should wait until after winter to address any long-term changes in the indexes, said Santa, who spoke on behalf of the Interstate Natural Gas Association of America (INGAA).

FERC staff last week sent out mixed signals as to which way it was leaning on the price-reporting issue — whether it favors the rehabilitation of the existing system of published price indexes that have been the target of manipulation by traders, or the creation of an entirely new independent, third-party entity — such as a self-regulatory organization (SRO) — for gathering and compiling gas prices, or both.

Craig Pirrong, energy markets director at the University of Houston’s Global Energy Market Institute (GEMI), favors a “single hub” to collect gas prices, saying it would be an independent, neutral party that could determine whether gas trade data is “truly legitimate.” He believes GEMI can fill the role as hub, which would store trade data, match trades and sell the “sanitized” information to index price publishers.

“We do not see any practical or legal basis for an independent data hub and believe that it would be singularly inappropriate for the Commission to anoint a monopoly,” countered Goldman Sachs’ Ferber.

Several organizations seeking to become SROs told the Commission that they could have a data-collection system up and running within six to seven months if given the go-ahead by the agency.

Meanwhile, current index publishers told FERC that there have been significant improvements in the quality of the price data being submitted. They also warned that any major change to the current system could cause even more gas market turmoil at a time when there is a natural gas supply shortage and record high gas prices.

Price index publishers NGI and Platts signaled that a significant portion of the data being reported to them now was being done on a transactional basis, and that they plan to begin reporting volumes in July. “This is a giant step,” said NGI Publisher Ellen Beswick. And “guess what? You [FERC] didn’t mandate it. You prodded it; you led the way.”

Beswick noted that increased level of trade data being reported appeared to be more pronounced in the West and Rocky Mountains than in the eastern markets.

Platts President Harry Sachinis said the broad-based industry consensus proposal was a “significant step forward,” and provided a “ready platform” for restoring trust in the gas markets. But Beswick had some problems with it, particularly the part requiring data collectors/developers to report suspected manipulation to FERC or other federal agencies.

“I have a little bit of trouble becoming the surveillance arm of the federal government,” she told FERC. “But in the interest of consensus, we will think about how something like that might be achieved.” Also, the proposed annual audits of data collectors raised some concern. NGI could handle a limited audit to ensure that it is conforming to the required protocols for aggregating and processing the data, Beswick said. “But if you’re talking about an audit of all of our data for [an] entire year, that would be a huge expense. If FERC [wants] that type of an audit, it would have to pay for it.”

If the Commission should mandate a new system for collecting prices at this time, Beswick cautioned there may be only a “shell of a market left” by the time the system gets into place.

Goldman Sachs’ Ferber said the quality of data provided by the New York Mercantile Exchange and IntercontinentalExchange was excellent, but she said more needed to be done by index publishers. “Volume as well as other liquidity information is essential to the market. Only with this information will the market receive appropriate signals whether to continue to rely on an index. The industry stakeholders are unanimous in their conviction that this data is necessary and the index should be based on the actual transactions only. There’s no role in index publication for market assessment. This journalistic role should be part of news reporting, not index publication.”

GEMI’s Pirrong believes the reporting of price, volume and other information should be universally mandated. There has to be a “critical mass” of companies providing trade data for the system to work. Notably, he said the reporting of counterparty data was essential, arguing that such data should be “opaque” to the markets. But industry was adamantly opposed to mandatory reporting and the disclosure of counterparty information, with one official saying the “heart of it [the opposition] is this is just commercially sensitive data.”

FERC last Wednesday gave the natural gas market a short window of opportunity — through next winter — to begin voluntarily reporting its trade transactions to indexes or face an agency mandate (see related story).

Trade data will be “more reliable” if reporting is mandated, said Robert Stewart, president of Merchants Exchange. He noted the exchange could publish a price index for gas that was “independent of any taint that might skew” the results.

If the Commission were to maintain voluntary reporting of trade data, there would be “too much opportunity for misreporting,” noted Christopher Taylor, executive director of the Municipal Securities Rulemaking Board.

Ferber, in contrast, said Goldman Sachs believes that imposing mandatory price-reporting requirements on the industry would do more harm than good. The industry has made “considerable progress” toward the consensus approach to index reporting, she said.

“It is critical that FERC and the CFTC not act prematurely to make other changes, changes which have not been widely accepted by the market and the need for which is less than clear, as the very announcement of such changes will be tantamount to a regulatory pronouncement that the existing indices cannot be relied upon until further time-consuming changes are implemented,” Ferber noted.

“For example, a move to require mandatory reporting to an as-yet-to-be-established data hub or via an as-yet-to-be-established SRO would be expected to take six months to a year, and that may be extremely optimistic. [It] could well send the gas market into the winter heating season in a state of price disarray. I would ask FERC and the CFTC to think long and hard before taking any such steps.”

Craig Goodman of the National Energy Marketers Association advocated a voluntary system of reporting as well. “I would urge you [FERC] to not immediately jump to a mandate,” particularly on counterparty information. That data is “sacrosanct in the industry.” Some parties have signaled that FERC would have to “drag us kicking and screaming” to divulge this information, said the PGC’s Wiggins.

“We’re not trying to stop that process” of FERC and the CFTC getting involved if wrongdoing is suspected, she added. “We [just] want to make this system as attractive as possible so people will want to report” prices, intoned the NGSA’s Horvath.

Donald Gelinas, associate director of FERC’s Office of Markets, Tariffs and Rates, said he believed providing counterparty data was key to “policing [the] veracity” of prices, and to “get some sense [of whether] these are real trades.”

Greg Lander, principal of Skipping Stone Inc., sees gas trade data being collected by a “dominant single hub” eventually. FERC “certainly could pick a winner now,” but he believes the Commission first should choose the process for gathering prices. The number of hubs or collectors of gas trade information should be made “later down the road,” possibly six months from now.

Lander estimated it would take Skipping Stone between $1.5-2 million to begin gathering gas trade data, and about $1.5 million a year to operate the system.

This would be a small price to pay to ensure accurate price reporting, said Gerald Ballinger, who represented the Coalition for Energy Market Integrity and Transparency, a broad group of producers, consumer groups and utilities. He called on FERC to establish a single, independent data collector by April 1, 2004.

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