Report of the Natural Gas Regulation Committee1

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This Report summarizes several major natural gas decisions and policy developments that were issued by or are under consideration at the Federal Energy Regulatory Commission (Commission or FERC), the courts and various states in 2003. The topics are covered in the following order:

I. Natural Gas Price Formation - Issues and Developments,

II. Quarterly Financial Reporting and Revision to the Annual Reports,

III. Regulation of Cash Management Practices,

IV. Orders Nos. 630 and 643: The FERC's New Regulations Relating to Disclosure of Critical Energy Infrastructure Information,

V. Regulatory Developments on the Outer Continental Shelf in 2003,

VI. The FERC's Findings Regarding Manipulation of Natural Gas in California and Western Markets and Related Proceedings and Settlements,

VII. Code and Standards of Conduct Developments and FERC Proposal for Behavioral Constraints on Gas Marketing Certificates,

VIII. Update on Creditworthiness Issues,

IX. Update on Order No. 637 Issues, and

X. State Regulatory Oversight of the Gas Procurement Function.

I. NATURAL GAS PRICE FORMATION - ISSUES AND DEVEEOPMENTS

On March 14, 2003, the Commission staff issued a "Notice of Staff Technical Conference" to be held to discuss issues related to the adequacy of natural gas price formation.2 The Conference, which convened on April 24, 2003, was intended to address "ways to fix deficiencies in the manner price data are currently collected; how to increase reliability; and what alternative models might produce reliable natural gas price discovery."3 At the Conference, senior FERC staff, as well as representatives from the Commodities Futures Trading Commission (CFTC), heard testimony from the trade press, the electronic exchanges, industry representatives, and others on how to improve the reporting process and market transparency, and restore confidence in the gas price indices. During the Conference, three lightening rod issues emerged: (1) whether government, the FERC or some other agency, should step in and take over the gas price reporting process; (2) whether reporting trades to price index developers and publishers should be mandatory; and (3) whether disclosure of counterparty information should be mandatory.

The scrutiny of the natural gas price indices in 2003 stemmed from disclosures that some natural gas traders intentionally tried to manipulate gas price indices through the false reporting of price data, primarily to the industry trade publications such as Platts and Natural Gas Intelligence.4 These revelations led to widespread distrust of the price indices and also led to the withdrawal of some industry participants from the reporting process. In turn, the drop in the number of reporting parties and reported transactions fostered increased skepticism of the indices and, at times, made it impossible for the trade press to compile indices for some pricing points. Finally, these events led to scrutiny from the FERC, as well as political pressure from Congress, demanding improvements in the reporting process.5

Following the Conference, the Commission held another Technical Conference on June 24, 2003,6 to continue the price indices debate and to address the questions raised in a June 19, 2003, "Staff Paper on Price Formation Issues,"7 which set forth criteria for developing natural gas and electric price indices.8

Prior to the second Conference, representatives of many segments of the industry met in Kennesaw, Georgia. The representatives met to attempt to reach a consensus on a number of areas regarding the price indices debate in order to present an industry solution at the second Conference. The industry stakeholders agreed that the consensus items adopted at the meeting in Kennesaw supported the five criteria endorsed by the Staff Paper.9

It was clear at the second Conference that the level of concern regarding the current indices varied among the participants. …