Shifting from the current system of voluntary reporting of fixed-price trades to published indexes to a mandatory reporting system could significantly reduce market liquidity, would be costly and could undo the improvement in the price indexes that has occurred over the past couple of years, natural gas producer, industrial consumer and pipeline groups told FERC Friday.

Proponents of voluntary reporting of prices to published indexes called on the Federal Energy Regulatory Commission to focus on improving the credibility of the existing system, rather than mandating price reporting or designing a new hub system that would serve as a central repository for natural gas trading information. The industry groups’ remarks came during a FERC technical conference on price transparency, and were in response to a proposal by the American Gas Association (AGA) to make price reporting mandatory for market participants (see Daily GPI, Oct. 13).

“If you make every deal mandatory, you will drive [companies] to the indices alone, and you will actually have the opposite effect of what you’re trying to produce…You’ll have less liquidity, you’ll have less reporting, and you’ll have index deals which have less depth than [they] had before,” said Alex Strawn chairman of the Process Gas Consumers Group (PGC), which represents major industrial gas users.

“We’re gaining confidence in the current indices,” he said, adding that the natural gas market was responding in a “more vibrant, more cohesive” fashion. “If you make it mandatory, I think you reverse the trend” toward greater price transparency. “It is our opinion that it will drive more industrial end-users to [do] index” deals, rather than participate in price formation,” noted Strawn, who is also senior purchasing manager of Proctor & Gamble.

Chris Conway, chairman of the Natural Gas Supply Association (NGSA), agreed, saying that mandatory price reporting would probably cause more companies to back out of the fixed-price market and instead buy off of the index. This would reduce the number of volumes that are reported to published indexes to formulate prices. “Our concern is that the tail [could end] up chasing the dog,” he said.

The “natural gas markets have responded voluntarily to increase the level of transparency over the last two years. We’ve seen a rise in reported volumes and number of transactions, and [a] decline in the number of indices with insufficient reporting,” said Conway, who also is president of ConocoPhillips Gas and Power. NGSA believes “the natural gas market is already among the most transparent of the commodity markets in the U.S.”

Dexter Steis, executive publisher of Natural Gas Intelligence (NGI), which publishes a daily and monthly price index, said he has seen a “dramatic improvement” in the number of companies and gas volumes being reported to NGI over the past four years. At the low point in late 2002, he estimated that only 3.9 Bcf/d in volumes were being reported to the publication, compared to 25 Bcf/d now. “Voluntary price reporting is working.”

To help FERC get a better fix on the volumes of gas traded, Chairman Joseph Kelliher proposed that companies submit to the agency electronic quarterly reports identifying their gas transactions, as is currently required of power companies. None of the industry representatives at the conference signaled opposition to the idea.

“While we do see some potential benefits for mandatory reporting…we think the costs would far outweigh the benefits,” said Larry Foster, global editorial director for power at McGraw Hill’s Platts newsletters which publish natural gas price indexes, including Gas Daily and Inside FERC’s Market Report. Establishing a mandatory reporting system would be a “long, drawn-out proceeding here at FERC,” and developing a central hub would involve another “long, expensive, protracted proceeding,” he noted.

The “deep irony” is that the energy companies that support voluntary reporting are currently reporting fixed-price transactions to published indexes, while those that support mandatory reporting are not currently reporting, including most gas utilities that are represented by the AGA, Foster said. The AGA members make “very, very heavy use” of price indexes. But “we don’t understand why they don’t want to participate in the process that creates those index prices,” he noted.

NGI’s Steis proposed that FERC consider doing a survey of the companies that aren’t reporting to find out why they aren’t doing so. “They’re using the indices, but [they are] not reporting.” In effect, they’re getting a free ride, he said. Foster added that FERC should do all it could to incentivize reporting. He noted that some companies that report are now being audited by FERC, while companies that don’t report are not audited. That’s a disincentive, Foster pointed out.

Jane R. Lewis-Raymond, who represented the AGA at the conference, countered that many AGA members do not report under the voluntary process because the number of fixed-price deals are low. She further said that “the cost and administrative burden of putting together a compliance program that addresses the risks…are high” for gas utilities. Price reporting for gas utilities “does not always rise to the highest priority task.”

AGA members, who currently are price-takers, would engage in price formation if price reporting is mandated by the Commission, said Lewis-Raymond, who also is vice president and general counsel of Piedmont Natural Gas. Several commissioners had trouble understanding the AGA stance on mandatory reporting when most members don’t report voluntarily.

The AGA was one of a few gas trade groups to support mandatory price reporting, saying the current voluntary system does not go far enough to instill confidence in the market. When asked why AGA members index their transactions if they have no confidence in the indices, Lewis-Raymond clarified that AGA members do have confidence in the indices, but gas utilities, which are on the front lines interacting with consumers, have trouble defending them to the public.

“In other words, you’re talking about a PR problem,” one panel member said.

The Industrial Energy Consumers of America (IECA), another group of industrial consumers, is “considering” supporting mandatory reporting for large traders in the market, said IECA President Paul Cicio. FERC cannot adequately address price transparency of the physical gas market without taking into consideration the price transparency of the other gas markets — futures and nonregulated over-the-counter derivatives, he said. The only way to gain confidence in the market is for FERC and the Commodity Futures Trading Commission (CFTC) to oversee the volumes that major market players are controlling across all the natural gas markets, Cicio told FERC.

Les Fyock, vice president of the American Public Gas Association, said the municipal gas distributor group supported mandatory price reporting preferably to a central hub rather than to published indexes. An Energy Data Hub is in the process of being developed for submitting trade information on all types of natural gas and power transactions, according to Bob Anderson, executive director of the Committee of Chief Risk Officers and president of the data hub. “It’s the whole kitchen sink,” he told FERC.

Platts’ Foster said he had a “number of concerns” about how the data hub was being set up — specifically the fact that it would be controlled by CCRO members, the costs and the data submitted. “We would not know what company submitted that information to the data hub,” he noted. PGC’s Strawn questioned whether a data hub’s information could be considered reliable, given that the hub would be operating in an essentially competition-free environment. But Anderson noted that the data hub would be just one information source.

It was noted that the transparency conference, which was meant to address overall market transparency had focused almost exclusively on price reporting. However, Sheila Rappazzo, chief of the gas policy office for the New York Department of Public Service, said she was concerned that there was not more publicly available information from the federal government about production on a real-time basis. While it can be obtained by subscribing to services such as Bentek Energy LLC and Genscape it is too expensive for smaller companies to access.

Bentek President Porter Bennett said the production information could be more robust if FERC could encourage intrastate pipelines to post nomination data. Regulated interstates are required to do so, but intrastates generally do not post the information. There is a dearth of information coming from states heavily dominated by intrastate markets such as Texas, Louisiana and Oklahoma. Also, some interstates do not post all their nomination points.

Bennett said FERC also should consider encouraging storage facilities to post an inventory periodically. “Approximately 50% of the storage facilities associated with the interstate network do not post a total inventory balance at any time during the year.” FERC also should push states to have state regulated storage facilities post their injections, withdrawals and inventory levels.

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