Monitoring Price Integrity: A Critical Market Component

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Monitoring Price Integrity A CriticalMarket
Component
William F. Hederman, DirectorOffice of Market
Oversight and Investigations Federal Energy
Regulatory Commission
Presented toAnnual Membership Meeting and
National EnergyRestructuring ConferenceWashingto
n, DCMarch 31, 2004
WFH-3/17/04
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Outline

• FERCs Overall Strategy
• Market Overview
• Confidence building price index/reporting
  initiative
• Conclusion
• (Opinions my own, not Commissions)

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FERC has a 3-pronged strategy.
Infrastructure
Effective Rules
Competitive Markets
Just Reasonable Outcomes
Strategic Approach
Rules
Enforcement
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Natural Gas Electric Market Space
Nat Gas Electric Derivatives
Nat Gas Electric Clearing
Trading Venues
Futures (NYMEX)
Electronic Platforms
Physical Nat Gas
Phys Electric Power
Voice Brokers
Bilateral Trading
RTOs ISOs
Generation
Gas Supply
Players
Transmission Pumped Storage
Pipelines Storage

• Price Contributors
• Fixed price
• buyers sellers
• Speculators

Price Takers -Indexed price buyers sellers
Delivered Market
Delivered Market
Gas to fuel power generation
Source FERC-OMTROMOI
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Price Index Background

• Sharp reduction in energy trading in 2002
• Instances of index manipulation led to FERC and
  CFTC scrutiny
• Many companies decided not to risk reporting
• Fewer fixed price deals, more at index
• Price index developers had less data to create
  indices
• Indices still essential component of markets for
  pricing deals setting royalty payments tracking
  prices settling futures contracts hedging gas
  transportation costs pricing cash-outs or
  penalties in tariffs and benchmarking prudent
  transactions
• Need to restore confidence in indicesthey must
  be accurate, reliable, and transparent

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Essentials in the Policy Statement

• Focuses on near-term improvements to existing
  system of voluntary reporting
• Outlines standards expected of both index
  developers and price reporters
• Embraces safe harbor approach to encourage more
  reporting
• Prospectively requires indices in gas tariffs
  (i.e., for cash-outs) to meet standards and
  reflect adequate liquidity
• Directs Staff to monitor and report developments
  under Policy Statement
• Notes that failure of industry to respond could
  result in mandatory price reporting

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Standards for Price Index Developers

1. Code of conduct and confidentiality
2. Completenessmaximum information and liquidity
   measures
3. Data verification, error correction, and
   monitoring
4. Verifiabilityprocess audit
5. Accessibilityfor customers and FERC

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Standards for Reporting Prices

1. Code of conducton trading and reporting
2. Source of dataindependent from traders
3. Data reportedeach bilateral physical trade, with
   price, volume, buy/sell indicator,
   delivery/receipt location, date and time, term
4. Error resolution process
5. Data retention and review3 year retention,
   independent audit

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Monitoring the Policy Statement

• OMOI is engaging in proactive monitoring, sending
  message to industry that FERC is impatient to see
  improvement
• Status report given to FERC at October 22 meeting
• Survey of industry on trading and reporting
  before and after issuance of Policy Statement
  conducted in October
• OMOI is meeting with trade associations to get
  input and encourage members to report trades
• OMOI is meeting with index developers to review
  adherence to standards
• Workshop on liquidity held at FERC in November

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Survey

• Sent to 266 companiesproducers, generators,
  traders, LDCs, utilities, industrial users
• Covers trading and reporting practices before and
  after Policy Statementten questions
• Do you trade? What do you trade? Do you
  report? What portion of trades are reported?
  Are trades reported to one or to more than one
  index developer? Do you report through exchanges
  or to publications? What transaction details to
  you report? Who submits the report? Do you have
  an audit process? Do you have a code of conduct
  for trading and/or reporting?

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Liquidity Issues

• Index used in gas tariff must meet standards and
  reflect adequate liquidity at the relevant
  location
• Economic literature on liquidity not helpful
• OMOI must report to FERC on index publishers and
  liquidity January 2003
• Workshop on how to measure adequate liquidity
  held at FERC in November

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Market Integrity is Everyones Business

• FERC Hotline
• 1-888-889-8030