The “faith and trust” in the commercial reporting of the local cash price for natural gas has collapsed, according to Industrial Energy Consumers of America (IECA), whose members have suffered from the recent high gas prices.

“If the FERC and Congress do not act quickly there will not be any energy intensive manufacturing industry left standing,” the group said in a letter to FERC Chairman Pat Wood. “In all seriousness, these industries are on one leg, and time is running out. Many such plants have already shut down, and once they do it is unlikely they will ever start-up again.”

The IECA said that over the last decade many commercial buyers and sellers of gas have relied on a price index system published by Platts. The group said the system was believed to be working until the recent scandals surfaced regarding individuals and organizations providing false price information. Now “the cash market has lost credibility, transparency, liquidity and lacks real-time price data.”

The group noted that trading volume has fallen almost 70% from two years ago. As an example, the IECA said the March index for the Houston Ship Channel was determined by reported transactions of seven buyers and sellers, and all of the buyers were utilities.

In order to set things straight and assure accurate reporting in the near term, the IECA said the Federal Energy Regulatory Commission “must mandate” that all market participants who trade above a certain minimum volume report transactional data on a confidential basis to FERC or its “designated qualifying third party” concerning all sales or purchases of natural gas for physical delivery on a daily basis. Furthermore, the IECA recommends that the Energy Information Administration (EIA) take on that third-party role because the group contends that the government agency has “done a very good job” of improving gas storage reporting.

After FERC or its designee collects the data, the IECA believes FERC or its designated third-party should verify the accuracy and integrity of the data, remove all sensitive proprietary trade information; and, publish the aggregated data for the industry. If FERC chooses a third party, then that entity would have to submit a daily report on trading activity and any irregularities for FERC review and, if necessary, audit and/or further investigate.

IECA’s recommendations also include FERC ordering that a minimum of 25% of all gas sold by producers and marketers be sold on the basis of a price negotiated for a fixed period of a month or longer. This minimum would also apply to spot daily pricing.

“Today we believe this number to be well under 5% in most index locations,” the IECA said. “This will require that existing index-based gas contracts be changed. FERC should mandate that any purchaser be able to change an indexed-based contract to one that enables purchase of 50% of the supply on a negotiated price basis.”

Furthermore, the group said purchasers must be allowed to make these changes without fear of reprisal from producers or marketers. Cash transactions with utilities should be omitted in this minimum because utilities do not have “fuel risk exposure.”

“Including utilities in the minimum could result in inflated prices and an unrealistic index price,” the group said. “IECA believes utility regulations should be changed so that there is greater impetus for utilities to negotiate harder for lower fuel costs.”

The IECA would also like to change the way monthly pricing is established. Instead of aggregating bids in the last few days of the month for the following month, the industrials would take the average of the daily prices in the entire preceding month as the next month’s contract price. “With all monthly pricing concentrated into a short window of time, the potential for manipulation is increased,” the IECA claims. “FERC should mandate that any gas purchaser with a monthly index price be allowed to convert 20% of the volume to a contract based on the average of the preceding month daily prices.”

This near-term “emergency action” should remain in place for a minimum of 24 months, the IECA said. Beyond that period, the group looks for the EIA to be the long-term reporting entity, with reporting still mandatory. The group also noted that it feels it is important that improvements in price reporting not “be viewed as a substitute for developing balanced energy policy replacing the failed policy of over-reliance upon natural gas.”

In related news, the IECA said it also plans to write a letter to the New York Mercantile Exchange (Nymex) regarding perceived problems with its natural gas market.

“In general, we believe Nymex seems to operate to benefit speculators and not consumers or natural gas producers whose livelihoods are dependent upon the health of the natural gas market,” the IECA said. “We believe the great majority of trades are by speculators and the resulting trading is out of touch with reality and the value of natural gas.”

In short, the group recommends that Nymex terminate Access trading of the gas contract because it “unnecessarily increases volatility.” The group also believes measures should be explored to increase Nymex liquidity and trading in the natural gas outer months, because they are the “most useful to both producers and consumers for hedging purposes and most of the front month volume is from speculators and traders that desire volatility.” Among other things, IECA also thinks steps should be taken at Nymex to impose more controls, such as tighter range limits similar to the grain markets.

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