Originally published October 24, 2006
On Friday, October 13, 2006, the Federal Energy Regulatory Commission (FERC) held a technical conference to address the issue of price transparency in markets for the sale or transportation of physical gas in interstate commerce. Representatives from various sectors of the natural gas industry testified before FERC Commissioners to discuss whether the Commission’s current price reporting policies foster efficient and competitive gas markets and promote consumer confidence. Noting the refinement of the issue over the past few years, FERC Chairman Kelliher stated, "the issues of transparency appear to have shifted away from a narrow focus on index development toward other issues like access to information about term contract prices, understanding the relationship between physical and financial trading, and getting more information about supply and demand."
The Commission directly addressed the issue of interstate natural gas market transparency in a 2003 policy statement on natural gas and electric price indices. At that time, the Commission had received reports that certain market participants were manipulating natural gas commodity prices in an attempt to influence the price indices. This anti-competitive behavior, coupled with the perception that the indices were not being supplied with adequate or accurate information, purportedly had eroded consumer confidence in the natural gas markets. The policy statement identified minimum standards for both price index developers and market participants that report transaction data to the indices in order to improve the accuracy and transparency of wholesale price information. In addition, the policy statement established a "safe harbor" provision for data providers that adopt and follow the minimum standards. Under this provision, a presumption was created that data is submitted in good faith and FERC will not penalize parties for inadvertent reporting errors. A 2004 Commission staff report found that voluntary reporting had improved the accuracy and credibility of the indices.
The topic receiving the most attention during the conference was mandatory price reporting. Congress provided FERC with additional powers under the Energy Policy Act of 2005 ("EPACT") to oversee, and if necessary, regulate price reporting in the interstate markets. Chairman Kelliher noted that, while the Commission has "always had authority" to collect information from regulated entities, EPACT authorizes FERC to "facilitate price transparency" and "protect the integrity of the markets themselves." Importantly, however, the Chairman also clearly stated that the Commission’s authority in this realm is discretionary and FERC should only invoke its statutory authority to collect and disseminate price information if a determination is made that the price publishers are not adequately promoting price transparency. The merits of both voluntary and mandatory reporting systems in the interstate markets were debated by the panelists.
The Process Gas Consumers Group ("PGC") and the Natural Gas Supply Association of America ("NGSA"), joined by the Independent Petroleum Association of America ("IPAA"), expressed their support for maintaining the voluntary price reporting system in the interstate markets, noting that the Commission significantly enhanced natural gas market price transparency through the issuance of its policy statement. Alex Strawn, the Chairman of PGC, said that market participants are "gaining confidence in the indices" and that mandatory price reporting may have the "unintended consequence" of driving consumers from the fixed priced market to avoid potentially onerous reporting requirements. American Gas Association ("AGA") representative Jane R. Lewis-Raymond disputed this claim and said mandatory reporting requirements would "call the bluff" of consumers that have threatened to leave the fixed price market if FERC requires reporting. Chris Conway, representing NGSA and IPAA, remained firm in his support of the current system, arguing that the market is already transparent and mandatory reporting would be "counterproductive in light of the voluntary response."
The strongest support for the implementation of a mandatory system for the reporting of fixed price trades in the interstate markets came from AGA. Once a supporter of the Commission’s policy statement, AGA’s recent policy reversal on the issue generated both praise and skepticism from the Commissioners. In its written statement, AGA said "voluntary reporting has been helpful, but does not appear to go far enough in ensuring greater market confidence today." Ms. Lewis-Raymond noted that mandatory reporting would "improve understanding of the marketplace." Larry Foster, the Global Editorial Director for McGraw Hill Platts, pointed out that, ironically, those who favor mandatory reporting, such as AGA, often choose not to report, therefore not seizing on their opportunity to bolster the amount of information supplied to the indices. Commissioner Wellinghoff was unable to square AGA’s position on mandatory reporting given the fact that its members generally elect not to report voluntarily. Commissioner Kelly, though, agreed with AGA that there appears to be a lack of consumer confidence in gas markets and further steps are needed to improve reporting. Commissioner Kelly suggested that the Commission consider methods to incentivize voluntary reporting.
A related issue generating discussion was whether the price indices currently receive enough data to make them reliable. Dexter Steis, the Executive Publisher of Natural Gas Intelligence, said that a "substantial portion" of the top gas marketers report to the indices. Larry Foster added that under the voluntary reporting system, the "trend is clearly upward in the amount of data we are collecting in our surveys." The Commissioners floated the idea of requiring quarterly reports for interstate natural gas transactions, akin to the electric industry’s reporting requirements.
In a later session, a panel of industry representatives addressed the issue of price transparency in markets for the sale and transmission of electric energy in interstate commerce.
© 2006 Sutherland Asbill & Brennan LLP. All Rights Reserved.
This article is for informational purposes and is not intended to constitute legal advice.
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