A database of actual prices in 18,320 natural gas transactions by five major generators and Coral Energy in California from October 2000 through June 2001 closely tracks the spot gas prices from publications as specified in the original power market mitigation formula by the Federal Energy Regulatory Commission, according to a report by an independent analyst.

The published prices used in the California refund case “are an economically reasonable, statistically reliable, and robust measure of the value in that market,” according to the report by Lexecon Inc. The report’s authors, analysts David Reishus and Patrick Wang, described the process of amalgamating arm’s-length natural gas spot transactions for California from “course-of-business records” from Duke Energy, Dynegy, Mirant, Reliant Energy and Williams (the generator group), and Coral Energy. The report was included with Mirant’s comments in the refund case (EL00-95).

Lexecon aggregated individual company data into “a statistically significant, robust and balanced database where no market is predominantly represented by a single company’s data.”

Following FERC’s market mitigation formula, the analysts used price quotes for Malin and PG&E Citygates markets from NGI’s Daily Gas Price Index, Inside FERC’s Gas Market Report and Gas Daily, and a Southern California quote from Gas Daily, finding a close correlation with the actual prices.

The database assembled by Lexecon included 18,320 transactions representing 392 million MMBtu of gas. The overall average across the three regions of the differences between the weighted average of arm’s-length spot transactions prices and the published index is $0.01, with the published indices coming in a penny higher. Broken down, the northern prices indices came in an average of $0.28 below the actual transactions, while the Southern California published index came in $0.25 above the actual transactions.

Also, “apart from one small correction for an inconsistency in the California ISO methodology, the resulting price index we calculated is identical to the prices submitted on behalf of the California ISO.”

The alternative price index, based on producer basin published prices, recommended by FERC staff in a recent report, “does not track prices paid in actual purchase and sale transactions and is, therefore, not representative of values realized in those markets.”

Another in-depth report submitted by Mirant from noted economist Philip Verleger finds the published prices in California during the refund period fully consistent with economic theory on the behavior of commodity markets and with actual arm’s-length transactions. In addition he offers studies of similar situations in other markets where challenged published prices reports were found to be accurate.

Verleger likens the behavior of the California spot market to periods in other energy spot markets in the last 10 years. He points to the spot markets for heating oil and natural gas in New York, which periodically diverge from Gulf Coast prices when demand locally is very strong and supply is restricted. Also there has been a breakdown several times in the last six years in the gasoline prices Californians pay, compared to other parts of the country. These incidents have all been investigated by regulatory authorities, and “on no occasion have accusations of market manipulation been sustained. Instead the higher prices have been explained by factors related to supply and demand.”

The high price episode FERC is currently investigating in California had one unique characteristic: “it lasted roughly five times longer than any previous episode.” Verleger points to the long and sustained increased use of natural gas “explained by the need to substitute thermal electric generating capacity for hydro capacity in the Northwest and by the exhaustion of pollution credits.”

“California’s problems were far worse than those ever experienced in any East Coast city because the incident lasted at least nine months and because….the level of gas consumption was 25% above the level projected from trend….In only two months of the relevant period was actual consumption less than 20% greater than average consumption during the same month in prior years.”

Verlager’s statistics, taken from Energy Department data, “reveal that the incremental demand for natural gas in California exceeded by a wide margin the incremental demand for heating fuels experienced in the Northeast in one of the worst heating fuel crises of the last century. ….Under the circumstances, it is a tribute to market participants that markets continued to function. Increases in prices should have been expected.”

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