Producer and consumer groups told federal energy regulators that an industry-led price reporting process remains the most effective way to ensure natural gas price transparency.
But the system still needs refinements, the Natural Gas Supply Association, the Independent Petroleum Association of America, and the Process Gas Consumers (PGC) told the Federal Energy Regulatory Commission at a technical conference Apr. 24. They said in a joint statement that "significant improvements" are needed to restore market confidence in the wake of trader scandals surrounding the California power crisis.
"We recognize that confidence in current price indices has suffered due to the inappropriate activities of a few gas traders," said Mike Stice, president of Gas & Power at ConocoPhillips. "The index reporting process must create transparency and prevent manipulation."
The three trade associations called on companies to voluntarily improve the way data is reported for price indexes. "The reporting process must be enhanced, but not become so burdensome that it discourages companies from participating," said Stice.
In separate testimony, the Independent Petroleum Association of Mountain States largely endorsed the current system and industry efforts to improve price integrity.
FERC has not said officially whether it plans to take a more active role in overseeing natural gas price reporting. Industry speculation continues to be that the commission is extremely hesitant to be directly involved in the reporting process.
But a chance exists that congressional interest in the issue could mean the commission will have its decision made for it. FERC also is waiting for the Senate to confirm two additional commissioners, one Democrat and one Republican. Their views on the issue are unknown.
Dissenting view
A vocal minority of gas consumers and producer groups told the commission that the federal government should be an active participant in data collection.
The Coalition for Energy Market Integrity & Transparency (EMIT) wants FERC to replace the current system in which companies report prices to private index compilers such as Platts, an energy information news service owned by the McGraw-Hill Cos., with an independent third party. The independent party would collect data, and the commission would conduct "regular, periodic audits of price indexes" to ensure that the numbers accurately represented market conditions.
EMIT members include independent gas producers, royalty owners, local utilities, and individual consumers.
EMIT believes FERC "may" already have sufficient current authority to promulgate a rule supporting a new government-supported price reporting scheme. But in case there is any doubt, the coalition members are taking their message to Capitol Hill.
"EMIT and its members are urging the House and Senate to include in the pending energy bill a provision that expressively grants the commission sufficient authority and jurisdiction to undertake any necessary and appropriate rulemakings to effectuate this level of market transparency, integrity, and reliability," EMIT said.
Government role argued
The trade groups argue that while government has an oversight role to play in ensuring the integrity of the natural gas market, regulators must allow industry to develop a process for self-regulation and allow market forces to create price indices. The federal government's role should be to monitor markets and step in to penalize those who intentionally abuse it, the groups said.
The trade groups said energy marketers should include all reportable cash transactions—described as those that allow the index developer to correctly represent the natural gas physical spot market—concerning volume, price, location, transaction date, term, and buy-sell indicator. Companies should report each transaction separately and through an employee independent of those in the company who would have a direct, personal interest in the price reported. Finally, companies should perform periodic internal or external audits to provide sufficient assurance on their control process and strictly adhere to a corporate code of conduct or code of ethics.
The three trade groups also want Platts and other price indices developers to follow a set of principles, including expanding data collection for all price points to be as comprehensive "as feasible."
"Index developers may wish to employ a tiered system to accomplish this. For instance, the first tier might include only highly liquid points, the second tier illiquid points, and the third tier bid-ask spreads only because there are no transactions. As long as the market knows which is which, more information is better," Stice said.
The three associations also are open to the creation of a voluntary Self-Regulating Organization (SRO), Stice said.
"We need to learn from other industries where the clearing process ensures that a transparent spot market converges well with the monthly futures market," he said.
Meanwhile, the New York Mercantile Exchange made clear that it wants FERC to be more aggressive about supporting SRO models, proposing "Uthe adoption of a rule requiring that data submitted by data providers be routed with standardized technology through qualified SROs for validation and normalization before being disseminated to index publishers."
Platts response
Platts opposes the NYMEX approach and another competing data collection service plan proposed by the National Association of Security Dealers that would sidestep traditional price reporting.
The publisher told FERC that industry, not government, should be responsible for restoring market confidence.
Platts said it maintains a compliance department that provides oversight of its price reporting activities and plans to adopt oversight by an independent corporate auditor of its corporate parent McGraw-Hill, aligning it with "best practices" advocated by the Committee of Chief Risk Officers.
"Platts has responded to a FERC data request, has submitted comments on the draft Western crisis report, and has initiated meetings with commissioners and staff to explain what it is doing to help resolve the loss of confidence in gas price reporting. Platts also has reached out to numerous gas trade groups and individual companies to try to help forge a consensus on solutions," said Larry Foster, editorial director, US natural gas.
Foster said Platts is "well on the way to implementing solutions to the loss of confidence in gas price reporting." He said that the company's approach has answered concerns raised by recent FERC staff reports.
Weighted averages
Additionally, Platts criticized what it called "the desire by some market participants to rely solely on a weighted average of submitted data without any further review.
"We believe that this formulaic approach can pose serious drawbacks, and that in any scenario there is a role for editors' evaluation of the data. Quite simply, data providers sometimes make errors—submitting the wrong day's or month's data, or a deal that doesn't meet our definition—and, at least in the short term, the risks of mistaken submissions have increased, as back office personnel who may not be familiar with the data now are responsible," Foster said. "Platts editors need to verify that all transactions in our sample are comparable and meet our other standards."
FERC Apr. 30 ordered 11 energy marketing companies to prove within 45 days they have a better price reporting system for index compilers.
