Even though the Federal Energy Regulatory Commission has direct authority to impose its proposed “code of conduct” only on pipelines and LDCs and their affiliates by attaching it to blanket sales certificates, the California Public Utilities Commission (CPUC) believes “this is a sufficiently large group of sellers of natural gas to warrant adoption of the rules…since many of the affiliates of interstate pipelines or LDCs are among the largest natural gas marketers in the nation” (RM03-10).

In contrast to the CPUC, industry stalwart New Jersey Resources (NJR) said if FERC imposes the proposed rule only on a portion of the market it “would deter much-needed investment in regulated energy companies, reduce the number of market participants, and thereby reduce liquidity and weaken markets.”

The CPUC for the most part supports “both in concept and in substance” adoption of the proposed rules” — which prohibits manipulation, false reporting, prearranged offsetting trades (e.g., wash trades), collusion and reporting sales between affiliates to publishers of industry indices. But like others on the consumer end of the market, the CPUC would like FERC to allow for broader penalties and a longer time for complaints to be filed.

On the producing end, companies have filed comments requesting a clearer definition of proscribed activities and the re-instatement of the limitation on FERC’s jurisdiction over blanket sales certificates.

In the middle, the Public Service Commission of New York (PSCNY) notes that FERC’s policy statement, along with its safe harbor provision, “represents a good first step towards developing standards and a code of conduct to restore integrity to the price indices, while encouraging price reporting.”

PSCNY said it “is concerned that recent events, including bankruptcies, have caused companies to exit the gas marketing business. These events generate a concern that the proposed remedies for violation of the reporting of false or inaccurate data (i.e. disgorgement of profits or revocation of the blanket certificate), may discourage market participants from reporting transaction information to publishers of gas price information.” The New York agency agrees with FERC that it will be “necessary to monitor the level of price reporting to ensure that there are sufficient volumes being reported. Without this assurance, the Commission may need to revisit these issues.”

Instead of making reporting of prices to price publishers voluntary, the Coalition for Energy Market Integrity and Transparency (EMIT) would ensure sufficient price reporting by having FERC require all blanket certificate holders to report all trades to index developers “to provide a much-needed boost to the restoration of liquidity and confidence to the natural gas marketplace.”

Meanwhile, NJR, sees a lot not to like in FERC’s proposal, advising that the proposed rule could undermine the market. For instance, if a company has to prove that its prices are the result of supply and demand “one obvious way in which a transaction’s pricing might withstand scrutiny is to base the price term on an index (i.e. to allow ‘the market’ to determine the price). While fixed-cost pricing is necessary for a robust market, it also carries, under the proposed rule, a new and unprecedented level of regulatory risk. To the extent that the proposed rule would strongly encourage greater use of and reliance upon price indices, it would in effect, weaken such indices and create more — not less — opportunities for manipulation.”

Among those who favor stricter rules, the CPUC said penalties should be decided on a case by case basis without limitations. FERC’s proposed disgorgement of profits is not a sufficient disincentive, it said, adding, “The appropriate remedy may be that the manipulating seller make the market whole.” The California commission suggested that disgorgement not be limited only to unjust profits or to a specific transaction, but should be extended to “all profits by a wrongdoer,” it said.

The CPUC also suggested that the statute of limitations should be extended to one year or upon discovery of the violation if that does not occur within the time limit. The FERC’s proposed 60-day limitation does not allow a meaningful opportunity for discovery and reporting of manipulation.

If FERC goes ahead with the rules, PSCNY agrees that FERC should retain broad discretion to fashion equitable remedies in response to various situations, “with lesser penalties for lesser violations and in extreme cases to require the offender to restore the market to the status quo ante.”

BP America Production Co. and BP Energy said FERC needs to clarify the rules as to what it means by a company reporting “all sales” to pricing publications. BP doesn’t think it should include, for example, “long term sales, de minimis volumes, sales at locations not covered by the geographic scope of the particular price index, non-jurisdictional sales and sales which include risk management components in their pricing.”

To cut record-keeping requirements BP suggests that “relevant data” be retained for three years and be limited to accounting data that records the details of each reported transaction, along with a record of the data transmitted to the index developer, but not preliminary discussions or negotiations leading up the transaction.

BP also questioned FERC’s elimination of the blanket certificate condition that states the certificates convey to FERC “limited jurisdiction which will not subject the certificate holder to any other regulation under the Natural Gas Act jurisdiction of the Commission by virtue of transactions under the certificate.” Rather than remove the original condition, it should simply be modified to “recognize the new regulations under the [Notice of Proposed Rulemaking] as an exception to the otherwise applicable limitation.”

Adhering to code of conduct rules would not be a significant burden, BP believes, and would not put jurisdictional sellers at a disadvantage. “Buyers are more likely to see adherence to the code of conduct as a plus, not a minus” since they would have recourse to Commission action on a complaint.

Shell Offshore Inc. would like to see greater precision in terminology and notes there already are laws banning illegal acts and collusion. “Legitimate business practice” may include legally acceptable “manipulation. What is considered to be legitimate, vigorous competition from one perspective could be argued to be manipulation from another perspective.” The company notes that illegal activity by definition already is not permitted, and anticompetitive acts are banned under antitrust laws.

Shell points out that a seller’s decision to sell to one pipeline rather than another or take more liquids out of the gas stream are legitimate business decisions, but could be alleged to “manipulate market prices, conditions or rules.”

“What price level reflects the legitimate forces of supply and demand?” Shell asked, noting that Commissioner Nora Mead Brownell had questioned what defines scarcity pricing. “Economic tomes have been written on this subject. The point is that any price for natural gas which a customer does not want to pay could be argued not to reflect the legitimate forces of supply and demand.”

Shell noted staff’s report on the February price spike found no market manipulation was involved. “What methodology was employed to reach that subjective conclusion? Would the conclusions and/or methodology change as a result of changes in market conditions, or market demand? For example, if the price spike was sustained over a longer period of time? Will other FERC Staff reach the same conclusions? What evidentiary weight would a Staff report have in litigation? Is the Commission bound by the conclusions in the staff report?”

“Collusion” is prohibited under the antitrust laws, the producer noted. For example, the Sherman Antitrust Act prohibits contracts, combinations, and conspiracies in restraint of trade and monopolization. Violations can result in substantial fines and civil and criminal penalties.”

“Wash trades” will have to be better defined, Shell said. What is the difference between a legitimate “exchange” of natural gas — such as those exchanges that have been common in the natural gas industry for decades for various legitimate commercial reasons — and an illegitimate “wash trade?” it asked.

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