An independent, not-for profit “central transaction database” that would provide “sanitized” prices for energy trades on a real-time basis would go a long way to restore the credibility of the natural gas and electricity industries, according to the Global Energy Market Institute of the University of Houston’s Bauer College of Business (GEMI-Bauer-UH).

“This is not pie-in-the-sky, but a real initiative that can be implemented in a timely fashion,” said Craig Pirrong, GEMI’s energy markets director, at the FERC-sponsored technical conference last Thursday exploring reforms of the current system for calculating index prices for natural gas and electricity (see related story). “Indeed, we are currently in extensive discussions with major IT and data companies, including IBM, LIM [Logical Information Machines] and Reuters [newswire], regarding the implementation of this proposal.”

The proposed central transaction database would be a hub that stores data, matches trades and sells sanitized data to index price publishers, according to GEMI [AD03-7]. The hub would be run by an “entity” with no economic interest in energy trading. It also would have an independent board of directors and advisory committees, which would be made up of energy companies that supply price and volume data, energy publications that publish index prices, other industry representatives and regulatory officials.

Energy companies would be required to submit “raw data” on their trades (counterparty, a buy/sell indicator, product, price, volume, location and date) to the central transaction database or hub, which after processing the information, would sell the “cleansed data” to publishers, regulators, academics, industry and others, GEMI noted. The hub primarily would be financed by publishers of energy indexes, which would re-distribute the data on trading transactions to their readerships.

In proposing its plan, GEMI said similar centralized bodies were set up to collect transaction information on stocks, bonds and options after Congress passed laws directing federal agencies to gather data and monitor those markets.

The GEMI proposal also calls for the data hub to be housed within a public university, namely the University of Houston. “GEMI-Bauer-UH can fill the existing void, and can do so quickly — which is important given the pressing need to restore credibility to the industry,” Pirrong said.

“GEMI-Bauer-UH is uniquely placed to be the independent energy price and volume data hub…We at UH recognized the problem well before it gained prominence, and have made considerable progress toward creating a system that will meet the industry’s pressing needs in a timely fashion — we are already well down the learning curve.”

The GEMI-sponsored plan and other proposed reforms are in response to charges that energy traders manipulated the published indices. Several traders, including former El Paso Corp. and Dynegy Corp. traders, currently are awaiting trial on charges that they reported fake trades to a publisher of a gas price index in an attempt to skew prices in their favor.

Getting industry-wide participation in GEMI’s proposed hub may require some doing. In order to get it up and running, the hub will require either the voluntary participation of energy companies or a mandate from Capitol Hill lawmakers requiring their participation.

So far the proposal hasn’t found much favor among many producers and traders. One industry representative questioned the ability of academics to operate a real-world, real-time enterprise. And he suggested that in the “publish or perish” world of academia, professors would be tempted to extract raw data for their research projects.

Another industry executive noted that so far the only regulated transaction aggregators are for speculative paper trading products, not physical commodities. “This could set a precedent for government to require strict monitoring of other markets such as steel, coal or left-handed widgets.”

The energy bill which passed the House of Representatives earlier this month contains a provision authorizing FERC to set up a database — or have a third party do it — to collect and monitor natural gas transactions. The monitoring would be confined to interstate transactions. The Senate bill, which is still in committee, has no similar provision at this point.

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