FERC last week opened “Pandora’s Box” when it suggested revising natural gas storage reporting, possibly into a daily format, as industry witnesses last week produced a full spectrum of variations on the theme, both advocating and opposing daily storage reports, questioning costs/benefit and potential accuracy, calling for availability of other current supply-demand information, and/or changing the timing and method of releasing storage information to confound speculators. Several warned against any more upheavals in the energy market right now.
William Hederman, head of FERC’s Office of Market Oversight & Investigations (OMOI) who chaired the all-day storage conference Tuesday, ended it by saying, “We’ve heard suggestions today that might take us in different directions.”
Elaborating on that statement later, Hederman said there might be “other market-relevant information that the Commission can easily make available to the marketplace; also, if there isn’t a compelling reason to move to daily, there may be intermediate steps that the staff should explore… For example, Dominion mentioned they provide their numbers to [the Energy Information Administration] early in the week and post them as they provide them to EIA,” he told NGI in a phone interview. If that strategy were to be proposed for all the data providers in EIA’s survey, “there’s the issue of who’s under Commission jurisdiction that we would have to think through.”
“We need to flesh out the information about whether the EIA report on Thursday is doing something helpful or harmful to competition in the market, and secondly, is there adequate transparency or is there a need for more transparency. I think the [Thursday EIA] number has taken on an importance that’s out of proportion with the actual significance of the number, and it’s largely because it’s the one thing that happens during the week that lets people kind of check in on the situation. Part of what we were trying to explore were the alternatives, so the question is, are the costs of changing worth the benefits of changing.”
Questioned whether FERC itself might aggregate data, as had been recommended by several witnesses, Hederman said, “There are dangers associated with disaggregate information in terms of revealing people’s positions; we would have to lay out what the pluses and minuses are.” He said the Commission staff will be putting the record together to give the Commissioners some options.
Hederman said he and FERC staff had had discussions with EIA personnel. Quizzed as to whether EIA might change the timing of its announcement to coincide with the closing of the futures market, he said EIA had explored that initially, but had become convinced that would disadvantage smaller players in the market, since the larger speculators could use the after-hours sessions to react.
Several witnesses had advocated faster delivery of other supply information such as production or export/import information, but Hederman said “production data is just hard to get anywhere near real-time and that’s kind of a fundamental problem about any progress on that number. EIA’s the place that’s going to remain responsible for production data. Now, on export/import, at least on the LNG side, there may be some options for FERC.”
At the conference session, an OMOI enforcement official suggested the daily publication of natural gas storage data would deter the “surreptitious disclosures” of storage-related information to market participants and would “aid in the enforcement” of the industry.
The release of the EIA weekly storage report each Thursday is “regularly watched” by the industry, and the high level of volatility surrounding the report suggests how important storage inventories are to traders, said John Kroeger of OMOI’s Division of Enforcement. “Storage information can influence cash prices…Storage information provides a window into pipeline operations, supply and demand that’s difficult to capture elsewhere.”
FERC called for the technical conference in August after reaching settlements with three companies resolving charges that they provided preferential access to market-sensitive storage information in violation of the agency’s standards of conduct. Some at the Commission saw the potential for more problems with storage data as long as the reporting practices continue as they are.
Gas storage operators and customers speaking at the conference were divided over whether FERC should initiate a generic rulemaking to consider requiring interstate gas pipelines and other owners and operators of storage to post their previous day’s aggregate storage data.
“Any incremental changes to the amount of storage information that’s provided, in our view, would have a limited effect on the market,” said Anne Bomar, managing director of rates for Dominion Transmission Inc. DTI believes the weekly release of EIA’s storage numbers “strikes the right balance” between the need for timely data and the importance of accurate information. If companies were to get into the business of releasing daily storage data, the figures would be “less reliable,” and would involve prior period adjustments.
“We engage in a lot of no-notice activity. The no-notice swings against those nominated numbers often reverse themselves in subsequent days and that fluctuation in the daily figures…could introduce volatility rather than smooth out the market’s reaction to storage data,” Bomar said.
While she supports the “weekly cycle” for storage releases, Bomar said there was room for improvement. For one, the EIA could reduce the six-day lag time between when the information is gathered and made available to the public. In addition, she stressed the need for a standard approach to the storage data that is provided.
If the Commission should adopt daily storage reporting, Bomar said the storage data should be aggregated in some fashion — rather than simply having companies post it on their own websites. Moreover, she believes FERC’s approach should be consistent with that of the EIA’s. Specifically, she recommended that the Commission adopt the EIA’s approach for revising errors in storage data. The EIA only revises storage figures when an error exceeds a 7 Bcf threshold.
Jeff Keck, manager of operations control for ANR Pipeline, said the pipeline already posts daily storage numbers to its electronic bulletin board site as a “benefit” for its customers. The figures cover all of ANR’s storage fields in Michigan, as well as the storage fields of its affiliates ANR Storage and Blue Lake. “We felt it was just a customer service thing to do…We had the data available.”
The EIA’s weekly storage report contributes to “unwarranted volatility” on Thursday because the industry has an absence of other “relevant and timely” market data, said Laura Schepis, vice president of regulatory affairs for the American Public Gas Association (APGA). “This has many unfortunate side effects,” one of which is it tempts market participants to “leak market information or use it for undue economic advantage.”
FERC should aggregate storage information in the same way the EIA collects information from the East, West and Producing Regions and makes it available to the public, Schepis noted. This would take the “mystery” and “volatility” out of the weekly storage report.
Witnesses disagreed as to how much volatility EIA’s weekly storage announcement engenders every Thursday. Rebecca Followill, vice president with Howard Weil investment analysts, said her calculations show Mondays — not Thursdays — as being the most volatile day in the gas market, but Arthur Gelber, president of Gelber & Associates, advisers to end users and LDCs, said volatility spiked 40-60% in the hour before and the hour after the storage announcement. Gelber advocated daily storage reports, but wants them with the same consistency and accuracy as the weekly EIA reports.
Followill and Gelber agreed during questioning by FERC staff that the availability of other current supply-demand data would provide much-needed market transparency and take some of the sting out of the weekly storage report.
Current production information and better and more up-to-date consumption data, pipeline information and even more frequent publication of traders reports all would help with market transparency, Gelber said, but conceded, however, that because natural gas is a “warehouse” market, the storage data is the most important.
Gelber argued for daily publication of storage data, but assumed that FERC would collect it. Consistency of the storage information is particularly important, he said, and questioned whether that consistency would hold if each storage company posted data on its own web site. Collecting all that data, particularly for smaller users, would be “cumbersome,” he said, cautioning against “taking a relatively straightforward thing and making it extremely complicated.”
Followill, also responding to questions from FERC staff, said there was a 60-to 90-day lag in the government production and consumption surveys, and export-import data also was “particularly bad.” Overall “production data is a big hole,” Followill said. She warned, however, against upsetting the current system of reporting the only current supply-demand information by introducing a new system while prices are so high, saying it would take several years for models to be developed and the industry to adjust to a new system. In the meantime, the result could be increased uncertainty, ergo more volatility. The reason volatility has increased in recent years is because the supply-demand balance is much tighter, she pointed out.
And meanwhile, there’s a simple solution to getting rid of the gas market volatility occurring around the Thursday EIA storage announcement, and that is to have each of the companies that report to EIA on Monday for the previous week make the same information they submitted publicly available at the same time, said Jay Lukens, president of Lukens Energy Group. This would serve as a “predictor” of the Thursday total, he noted. It’s the “surprise” factor in the EIA announcement that creates extra volatility.
Lukens, whose Houston-based company provides management software used on virtually every major storage system, maintained that the supply-demand information reflected in the week-later storage numbers has already been evaluated by the market and is the basis for the prices being paid. Analysts and traders, plugging publicly available information such as the weather and degree days into models, generally come pretty close to predicting the storage number well in advance of its announcement. Many of these predictions are readily available, so that EIA’s announcement mainly serves “traders trying to make money on speculation” by betting on the exact number and then settling up their bets after it comes out, Lukens said. This is where much of the Thursday volatility comes in.
Making daily data public also would eliminate the surprise factor and confound the speculators, but it might not be cost-effective. It would be less costly simply to allow the same storage information EIA uses to trickle out early in the week from individual companies, Lukens said.
While this could spawn a raft of aggregation services to compile and distribute the data, these would not be official, and since the storage operators in the EIA survey do not all always make the Monday deadline for submission of the information, aggregations couldn’t necessarily be produced at a regular time. Part of the attractiveness of the EIA announcement for speculators is that it provides a centralized focus with unfailing regularity during prime trading time.
The Industrial Energy Consumers of America (IECA) supported daily posting of storage data, backed a more comprehensive storage report, but opposed making storage information too transparent, said Gary Chapman, senior commercial representative for Dow Chemical Co . He warned FERC of the “significant risk” associated with being too transparent in storage data. “Inventory data for individual fields must not be made available to the marketplace on anything other than a voluntary basis.”
Chapman said he was concerned that storage owners, when purchasing gas, could be subject to the market power of gas sellers if the sellers were aware of the inventory of gas in their storage facilities.
Like some others, Chapman believes daily storage reporting would reduce the volatility surrounding the release of the EIA weekly report on Thursday. One measure of volatility is the difference between the high price and low price of the Nymex prompt month date contract, he noted. In a review of the past year, the least volatile days were Friday and Tuesday (high/low spread of 20 cents), next was Monday and Wednesday (high/low spread of 23 cents), and Thursday was the most volatile day with a high/low spread of 28 cents.
The Nymex high/low price prompt month differential on Thursday morning during the one-hour period surrounding the release of the EIA storage data has been 14 cents over the last 10 weeks, or one half of the daily spread of 28 cents for Thursday, Chapman said. This represents $50 million in uncertainty in the market, he told FERC staff members. This is “indicative of a marketplace whose price is significantly influenced by the Thursday data release.”
Chapman recommended that the EIA compile and publish the daily storage report, and that the current methods for making revisions to the weekly storage report also be employed in the daily storage reporting.
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