Participation in natural gas price surveys is increasing, price publishers told FERC staff last Tuesday, at the same time companies reported there is much less complaining from traders about the results of the surveys.

Both Dexter Steis, executive publisher for the Natural Gas Intelligence (NGI) newsletters, and Larry Foster, Platts global editorial director for power, which encompasses both gas and power, reported the number of transactions in the monthly bidweek surveys have tripled and volumes have more than doubled between November 2002 and November 2003. Both said the quality of the data also has improved, although a very few companies still are reporting only at selected points contrary to FERC’s guidelines for full and complete reporting.

Executives Bob Levin of the New York Mercantile Exchange, Jim Allison of ConocoPhillips, and Chris Evans of the Energy Marketers Association said complaints from customers and traders that the published indexes were out of line with the market had almost disappeared in the last three to four months.

Noting that some NYMEX settlements are based on the published indexes, Levin said in the past they would hear from customers unhappy with the indexes, but lately “the complaint factor has been low.” And having multiple indexes, including electronic and published indexes “is reassuring.” The current system “has a lot of positives as long as everyone is at arm’s length and there are choices.”

Allison said his ConocoPhillips traders assess what they believe the indexes will be before the final numbers are issued, and for the latest bidweek, they were only off at one point from the published numbers. “There has been a tremendous improvement in the quality of the information,” Allison said.

Bill Hederman, head of FERC’s Office of Market Monitoring and Investigations, said he was encouraged by the testimony. At the start of the staff workshop on market activity and price indicators, Hederman had said that although the Federal Energy Regulatory Commission had received good response to its survey of about 300 market participants, questioning whether and how they participated in the price surveys, he was disappointed in the content of those responses. After hearing the testimony, he noted that it may be too soon to judge. The Commission plans another survey in March.

Foster pointed out that for the large companies to re-arrange their processes to conform to FERC guidelines and get confidentiality agreements in place with the publishers is time-consuming, both for the publishers and the companies, but “we are slowly, but steadily adding companies.” NGI also is continuing its efforts and bringing in new participants. Steis credited FERC’s pressure with helping those efforts.

Discussion focused on the relative reliability of the tiers to which NGI and Platts started in July to assign bidweek points: Tier 1 has volumes reported over 100,000 MMBtu/d; Tier 2, volumes reported over 25,000 MMBtu/d and Tier 3, volumes less than 25,000 MMBtu/d.

In October and November 69% of the points Platts reports on were in Tiers 1 and 2. Points in recent NGI bidweek reports have been about evenly divided with about one-third in each of the three tiers. NGI’s bidweek volumes have increased from 3.9 Bcf/d in November 2002 to 9.8 Bcf/d in November 2003.

The number of transactions reported, both daily and bidweek, has increased markedly for both publishers, reflecting the fact that all data coming in is now in individual transactions. Transactions reported for bidweek have tripled, with transactions for Platts going from 540 in November a year ago to 1,548 this November. NGI’s transactions have gone from 435 to 1,381 in the same time period.

Both Steis and Foster said daily volumes had remained about even over the time period, with Platts reporting an average 12.5 Bcf/d and NGI averaging 10 Bcf/d.

The publishers noted the greater reliability of Tier 1 and Tier 2 points, but some witnesses said that while a Tier 3 designation might be viewed as a warning sign, those points should not be discounted.

Allison suggested that “if there is enough activity to publish an index, that should be sufficient.” He pointed out that there may be a number of people “in” the market, who are watching the market at a certain point, but don’t make a trade because the price is dead on and they don’t see any arbitrage opportunities. “They are on the sidelines waiting to jump in at the right price.” In that case a lack of reported volumes traded does not mean it is not a liquid point.

FERC staff questioned why the publications don’t print actual volumes for each point, instead of using the more generalized tiers. Mark Curran, NGI’s price editor, said the question should be “how much transparency is too much?” He noted that over the last year when volumes were low, there was concern that if some in the market saw how little liquidity there was at some points, they would target those points for gaming. Foster agreed, saying Platts had a continuous internal debate on the subject, worrying about handing over too much information to potential “market movers.”

Discussion over the definition of market liquidity versus volumes and transactions reported to price surveyors generally ended in agreement that since there was no way to know what the actual market universe was, the “liquidity” would refer to volumes reported. The staff investigation is to determine criteria for price indexes that are used as cash-out mechanisms in pipeline tariffs. The Commission has three cases before it in which pipelines are seeking to change the indexes used. The workshop discussion was confined to investigating indexes in general.

Don Santa, head of the Interstate Natural Gas Association of America, cautioned FERC against “unworkable” formulas, noting the pipelines’ interest in avoiding gaming of the cash-out price. If only a few locations are deemed reliable for use in the formulas, a wide spread between those few locations and where the gas is actually sold and purchased would be a tremendous incentive to arbitrage. Santa urged “a workable, practical set of criteria.”

Tom Jefferson with Questar said his company was comfortable with the index prices and urged FERC to “keep the system simple.”

Staff continuously questioned what those criteria should be, and received a variety of answers. About 120 attended the FERC conference in the Commission meeting room and a number of witnesses contributed through a teleconference hook-up. Goldman Sachs representatives called in to note that the pricing points had all been developed because customers had requested them, and it was doubtful that a hard set of criteria could be developed that would satisfy everyone.

“In a perfect world we would love to trade just Tier 1 for customers,” a Goldman Sachs spokesman said. However, if even after they would tell a customer the risks involved with a less liquid point, the customer still wanted that point, they would hedge it for him and charge him more because it was more difficult to hedge.

Asked by staff to cite comparables to other markets, the Goldman Sachs spokesman said natural gas trading does not come close to the crude oil market. He likened trading at Tier 1 points to the heating oil market; Tier 2 to 1% fuel oil and Tier 3 to propane.

Arthur Corbin, head of the Coalition for Energy Market Integrity and Transparency (EMIT), said the process appeared to be “heading in the right direction,” but his group still favors mandatory reporting and full transparency, so all participants will know “100% of what is going on.”

Producers mainly said they were relatively unconcerned with the cash-out formula because their whole focus was on staying as close to in balance as possible to avoid pipeline penalties. “Our goal is to stay within the pipeline tolerance,” said John Bretz, vice president of gas marketing for Anadarko Energy Services. Executives with ChevronTexaco and Burlington Resources agreed that their efforts were oriented to reducing imbalances. “We’re more worried about the penalty structure,” Burlington’s director of marketing said. The company indexes 90-95% of its gas and very rarely changes an index. Most of Anadarko’s gas is indexed, Bretz said.

Representing small producers, Bill Kinney, founder of Summit Petroleum and head of the Ohio Oil and Gas Association, said he and other Ohio producers “have complete confidence in the indexes. We like the market the way it is.” Kinney pointed out that it is difficult, particularly for small producers with limited staff, to rewrite contracts, and while, because of his small volumes, he may not “be a full bona fide market participant, in a sense I am, because I’m watching the market closely.”

Representatives of Chicago’s People’s Energy, joining in the teleconference, suggested that there should be an additional measurement system for monthly prices, which like prices collected for Aeco in Canada, records transactions made in the entire preceding month for the following month, instead of just recording transactions made during the last five business days, which is the system used in the U.S.

Both Foster and Curran said they feared that such a lengthy trading measurement term would introduce more volatility.

©Copyright 2003 Intelligence Press Inc. Allrights reserved. The preceding news report may not be republishedor redistributed, in whole or in part, in any form, without priorwritten consent of Intelligence Press, Inc.