Gas industry consultant Benjamin Schlesinger, president of Maryland-based Schlesinger and Associates, believes that federal regulators may require all natural gas companies to begin reporting their transactions to FERC in a way similar to what electric companies already do on a quarterly basis. Schlesinger, a 30-year gas industry veteran and former vice president at the American Gas Association, said in an interview that he wouldn’t be surprised at all if FERC issued a notice of proposed rulemaking on the matter sometime between now and December.
The marketing and trading sector of the industry is in the midst of a major scandal that has shaken the confidence of trading counterparties, investors, credit rating agencies and regulators. The Federal Energy Regulatory Commission is in the middle of an investigation of round-trip or wash trades and has been looking into the situation in the California market for months. Schlesinger said moving into some kind of permanent reporting phase would be a very simple step for the Commission to take.
“There was a time prior to Order 436 in November 1985 when every spot [gas] deal had to be reported by the pipeline carrying the gas,” said Schlesinger. “The buyer, the seller, the price, the receipt and delivery points, the volume, the marketer, the marketer’s margin [all were reported]. There was a wealth of data, and there were thousands and thousands of transactions. We still have all this data,” he said. “But all that came to an abrupt stop in November 1985 following Order 436.
“While we were really disappointed as analysts, the good news was that the market was really unencumbered and I think it was one of the things that contributed to the rapid growth of trading.” Through the late ’80s and the entire decade of the 1990s the marketing and trading business grew rapidly jumping from a handful of marketers to 300 or more and showing continuous annual trading volume growth. Now with the fall of Enron, the increased requirements and scrutiny by credit rating agencies and additional wash trading scandals, it appears the industry is entering a new retraction phase.
“Now that trading clearly has shifted gears into a shake-out phase after 18 years of growth, maybe it is ready for some kind of reduction and some kind of [data] reporting,” said Schlesinger. “I think from a perspective of lending credibility and comfort to the industry, this maybe a step that people will be happy to consider. It won’t take an act of Congress of course; it was really FERC’s decision to take away that burden.”
Schlesinger said it might scare observers and market participants initially, but he noted that data reporting isn’t a nightmare scenario. In fact, it’s already part of the everyday business. The New York Mercantile Exchange (Nymex) had 18 million gas contracts traded in 2000, 16 million in 2001 and is headed into the low 20 millions this year. At today’s prices that’s $600-700 billion worth of natural gas traded in a highly liquid market. But every deal has a deal ticket.
“There are significant reporting requirements, and it doesn’t seem to be slowing Nymex down any,” said Schlesinger. “It wouldn’t surprise me if we begin to see certain requirements like that, something that will come out of this current malaise and set of investigations.
“Six months ago, I wouldn’t have thought it would happen, but it’s June 2002 and I don’t think it’s out of the question anymore. I wouldn’t be surprised if in December we have a rulemaking. They may want something like what they get on the power side, which is very light, much less than what was required under Order 319.”
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