Transparency Provisions of Section 23 of the Natural Gas Act

 
CONTENT

Federal Register: September 26, 2008 (Volume 73, Number 188)

Rules and Regulations

Page 55726-55749

From the Federal Register Online via GPO Access [wais.access.gpo.gov]

DOCID:fr26se08-9

DEPARTMENT OF ENERGY

Federal Energy Regulatory Commission 18 CFR Parts 260, 284 and 385

Docket No. RM07-10-001; Order No. 704-A

Transparency Provisions of Section 23 of the Natural Gas Act

Issued September 18, 2008.

AGENCY: Federal Energy Regulatory Commission.

ACTION: Order on Rehearing and Clarification.

SUMMARY: The Federal Energy Regulatory Commission affirms its basic

Page 55727

determinations in Order No. 704, while granting rehearing in part and clarification regarding requirements that certain natural gas market participants report information regarding their reporting of transactions to price index publishers and their blanket sales certificate status. These natural gas market participants must report annually certain information regarding their physical natural gas transactions for the previous calendar year. As clarified in the Order on Rehearing and Clarification, certain market participants engaged in a de minimis volume of transactions will not be required to report information regarding their transactions for the calendar year. The reported information will make it possible to assess the formation of index prices and the use of index pricing in natural gas markets. These regulations facilitate price transparency in markets for the wholesale sale of physical natural gas in interstate commerce as contemplated by section 23 of the Natural Gas Act, 15 U.S.C. 717t-2.

DATES: Effective Date: This rule will become effective October 27, 2008. The revisions to FERC Form No. 552 are applicable for the reporting of transactions occurring in calendar year 2008.

FOR FURTHER INFORMATION CONTACT:

Matthew L. Hunter (Technical), Office of Enforcement, Federal Energy

Regulatory Commission, 888 First Street NE., Washington, DC 20426,

(202) 502-6409. Matthew.Hunter@ferc.gov.

Christopher J. Peterson (Technical), Office of Enforcement, Federal

Energy Regulatory Commission, 888 First Street NE., Washington, DC 20426, (202) 502-8933, Christopher.Peterson@ferc.gov.

Gabe S. Sterling (Legal), Office of Enforcement, Federal Energy

Regulatory Commission, 888 First Street NE., Washington, DC 20426,

(202) 502-8891, Gabriel.Sterling@ferc.gov.

SUPPLEMENTARY INFORMATION:

Before Commissioners: Joseph T. Kelliher, Chairman; Suedeen G.

Kelly, Marc Spitzer, Philip D. Moeller, and Jon Wellinghoff.

  1. Introduction 1. On December 26, 2007, the Commission issued Order No. 704, which imposed an annual reporting requirement on certain natural gas market participants.\1\ The order requires certain natural gas buyers and sellers to file annually FERC Form No. 552 and report summary information about physical natural gas transactions for each calendar year.

    \1\ Transparency Provisions of Section 23 of the Natural Gas

    Act, Order No. 704, 74 FR 1014 (Jan. 4, 2008), FERC Stats. & Regs. ] 31,260.

    2. Order No. 704 has its genesis in the Energy Policy Act of 2005

    (EPAct 2005).\2\ EPAct 2005 added section 23 of the Natural Gas Act

    (NGA), 15 U.S.C. Sec. 717t-2 (2000 & Supp. V 2005) to authorize the

    Commission ``to facilitate price transparency in markets for the sale or transportation of physical natural gas in interstate commerce, having due regard for the public interest, the integrity of those markets, and the protection of consumers.'' Section 23 further provides that the Commission may issue such rules as it deems necessary and appropriate to ``provide for the dissemination, on a timely basis, of information about the availability and prices of natural gas sold at wholesale and interstate commerce to the Commission, State commissions, buyers and sellers of wholesale natural gas, and the public.''

    \2\ Energy Policy Act of 2005, Pub. L. No. 109-58, 119 Stat. 594

    (2005).

    3. Section 23 of the NGA enhances the Commission's authority to ensure confidence in the nation's natural gas markets. The Commission's market-oriented policies for the wholesale natural gas industry require that interested persons have broad confidence that reported market prices accurately reflect the interplay of legitimate market forces.

    Without confidence in the fairness of price formation, the true value of transactions is very difficult to determine. Further, price transparency makes it easier for us to ensure that jurisdictional prices are ``just and reasonable.'' \3\

    \3\ See sections 4 and 5 of the Natural Gas Act, 15 U.S.C. sections 717c and 717d.

    4. The performance of Western electric and natural gas markets early in the decade shook confidence in posted market prices for energy. In examining these markets, the Commission's staff found that some companies submitted false information to the publishers of natural gas price indices, so that the resulting reported prices were inaccurate and untrustworthy.\4\ As a result, questions arose about the legitimacy of published price indices, remaining even after the immediate crisis passed. Moreover, market participants feared that the indices might have become even more unreliable, since reporting (which has always been voluntary) declined to historically low levels in late 2002.

    \4\ See Initial Report on Company-Specific Separate Proceedings and Generic Reevaluations; Published Natural Gas Price Data; and

    Enron Trading Strategies--Fact Finding Investigation of Potential

    Manipulation of Electric and Natural Gas Prices, Docket No. PA02-2- 000 (August 2003).

    5. One of the Commission's responses to these developments was the issuance, on July 24, 2003, of a Policy Statement on Electric and

    Natural Gas Price Indices (Policy Statement) that explained our expectations of natural gas and electricity price index developers and the companies that report transaction data to them.\5\ The Policy

    Statement, among other things, directed the Commission's staff to continue to monitor price formation in wholesale markets, including the level of reporting to index developers and the amount of adherence to the Policy Statement standards by price index developers and by those who provide data to them.\6\ In adhering to this directive, Commission staff documented improvements in the number of companies reporting prices from back offices, adopting codes of conduct, and auditing their price reporting practices.\7\ These efforts resulted in significant progress in the amount and quality of both price reporting and the information provided to market participants by price indices.\8\ It is against this backdrop that Congress passed EPAct 2005 and provided us with expanded authority to mandate additional reporting and improve market confidence through greater price transparency.

    \5\ Price Discovery in Natural Gas and Electric Markets, 104

    FERC ] 61,121 (2003).

    \6\ Id. P 43.

    \7\ Federal Energy Regulatory Commission, Report on Natural Gas and Electricity Price Indices, at 2, Docket Nos. PL03-3-004 et al.

    (2004).

    \8\ See, e.g., GENERAL ACCOUNTING OFFICE, NATURAL GAS AND

    ELECTRICITY MARKETS: FEDERAL GOVERNMENT ACTIONS TO IMPROVE PRIVATE

    PRICE INDICES AND STAKEHOLDER REACTION (December 2005).

    6. In an April 19, 2007 Notice of Proposed Rulemaking, the

    Commission proposed regulations consistent with these new responsibilities.\9\ The April 2007 NOPR contained both an annual transaction reporting requirement for market participants as well as a daily posting requirement for pipelines. On December 26, 2007, the

    Commission issued Order No. 704 regarding the annual reporting requirement. The daily pipeline posting requirement proposal was separated from the annual filing requirement and a new Notice of

    Proposed Rulemaking regarding the pipeline posting requirement was issued concurrently in Docket No. RM08-2-000.\10\

    \9\ Transparency Provisions of Section 23 of the Natural Gas

    Act, 72 FR 20791 (Apr. 26, 2007), FERC Stats. and Regs. ] 32,614

    (2007) (April 2007 NOPR).

    \10\ Pipeline Posting Requirements under Section 23 of the

    Natural Gas Act, 73 FR 1116 (Jan. 7, 2008), FERC Stats. and Regs. ] 32,626 (2007). A technical conference has been held in Docket No.

    RM08-2-000 and the pipeline posting requirement is pending further action by the Commission.

    Page 55728

    7. Order No. 704 required natural gas wholesale market participants, including a number of entities that may not otherwise be subject to the Commission's traditional NGA jurisdiction, to identify themselves and report summary information about their physical natural gas transactions on an annual, calendar year basis. To facilitate such reporting, Order No. 704 created FERC Transaction Report FERC Form No. 552: Annual Report of Natural Gas Transactions (Form No. 552) and various implementing regulations. Form No. 552 is to be filed by May 1, 2009, for transactions occurring in calendar year 2008 and by May 1 of each year thereafter for each previous calendar year. 8. Thirteen requests for rehearing or clarification of Order No. 704 were timely filed. No request for rehearing or clarification argues that the rule is unnecessary or should not have been issued. Rather, the requests seek modification or clarification of specific aspects of

    Order No. 704. Commission staff held two technical conferences during which potential filers of Form No. 552 and other industry stakeholders discussed the form. Stakeholders at these two technical conferences represented a broad spectrum of market participants and observers, including producers, interstate pipelines, intrastate pipelines, natural gas marketers, commodities traders, local distribution companies (LDCs), electric generation end-users, industrial end-users, and natural gas price index developers. Many conference participants filed comments following one or both of these conferences. 9. As discussed below, we largely affirm Order No. 704, granting a limited number of rehearing requests and clarifying the order.

  2. Discussion

    1. The Value of Aggregated Annual Data Regarding Volumes That Utilize,

      Contribute to, or Could Contribute to the Development of Price Indices 10. Order No. 704 focused primarily on ``price formation in spot markets'' and accordingly sought information about the ``amount of daily or monthly fixed-price trading that [is] eligible to be reported to price index publishers as compared to the amount of trading that uses or refers to price indices.'' \11\ As we stated in the order, the

      ``information collected under this requirement is focused specifically on daily and monthly physical spot or `cash' market activity and the contracting based on the prices developed in those markets.'' \12\ The rationale for this focus is that a ``[b]etter understanding of the role and functioning of wholesale natural gas spot markets can increase confidence that posted market prices of natural gas accurately reflect the interplay of legitimate market forces.'' \13\ Additionally, information on price index utilization and formation would greatly enhance the Commission's efforts to monitor price formation in the wholesale markets in support of the Commission's market-oriented policies.\14\ As we explained, ``without confidence in the basic processes of price formation, market participants cannot have faith in the value of their transactions, the public cannot believe that the prices they see are fair, and it is more difficult for the Commission to ensure that jurisdictional prices are `just and reasonable.' '' \15\

      \11\ Order No. 704 at P 3. See also id. P 13.

      \12\ Id. P 67.

      \13\ Id.

      \14\ Id. P 7 and 62.

      \15\ Id. P 66 (citing sections 4 and 5 of the NGA, 15 U.S.C. sections 717c and 717d).

      11. Our recognition of the importance of price formation on market confidence is, of course, not new. The Commission has often remarked on the need to ensure price transparency and accurate price reporting, including, for example, our 2003 Policy Statement on price reporting to index developers. As we there recognized:

      Price indices are widely used in bilateral natural gas and electric commodity markets to track spot and forward prices. They are often referenced in contracts as a price term; they are related to futures markets and used when futures contracts go to delivery; basis differentials in indices are used to hedge natural gas transportation costs; indices are used in many gas pipeline tariffs to settle imbalances or determine penalties; and state commissions use indices as benchmarks in reviewing the prudence of gas or electricity purchases. Since index dependencies permeate the energy industry, the indices must be robust and accurate and have the confidence of market participants for such markets to function properly and efficiently.\16\

      \16\ Policy Statement at P 6.

      We continue to believe that ensuring price transparency is a vital policy goal, especially as it relates to transactions that utilize, contribute, or could contribute to a price index. 12. Section 23(a)(4) of the NGA requires us to ``consider the degree of transparency provided by existing price publishers and providers of trade processing services, and [] rely on such publishers and services to the maximum extent possible.'' We have reviewed existing price index publications and, while the Commission recognizes the substantial value that these publications have enhancing market transparency, we determine that the additional data required on Form

      No. 552 is necessary. Section 23 is consistent with our belief that transparency is furthered by shedding light on price indices and their formation. 13. The Commission reiterates that the focus of Form No. 552's data collection is transactions that utilize an index price, contribute to index price formation, or could contribute to index price formation.

      Specifically, the Commission finds that volumes reportable on Form No. 552 should include volumes that utilize next-day or next-month price indices, volumes that are reported to any price index publisher, and any volumes that could be reported to an index publisher even if the respondent has chosen not to report to a publisher. By ``could be reported to an index publisher,'' we mean bilateral, arms-length, fixed price, physical natural gas transactions between non-affiliated companies at all trading locations.\17\ Transactions that do not occur at a specific location currently designated by an index developer as a reporting location are nonetheless reportable on Form No. 552.

      \17\ We note that this understanding tracks closely with our discussion of transactions that are reportable to index developers in the Policy Statement. See Policy Statement at P 34.

      14. This focus on index price-related transactions will increase market participant confidence by providing greater transparency in the use of index prices and how well index prices reflect market forces.

      This data will also allow the Commission's staff, state commissions, and all other industry observers to evaluate the level of index price usage at both a company level and nationally.\18\ Data on index development and use would be of substantial value in the Commission's transparency and market monitoring missions.

      \18\ Further, as discussed in greater detail below, observers will be able to parse data to compare activities of purchasers and sellers in the market.

      15. We also clarify that Form No. 552 does not seek the broader range of transaction data necessary to evaluate the size of the national physical natural gas market. While Order No. 704 mentioned such a calculation as one result of the data to be collected,\19\ we elect not to craft Form No. 552 to

      Page 55729

      capture the data necessary to calculate a national market. At this time, we do not believe that such data would further the transparency of the natural gas markets other than determining an aggregate approximation of the entirety of physical gas transactions. Further, unless volumes that utilize price indices or that could contribute to such indices were separately reported on Form No. 552 (with an additional, substantial reporting burden), the analytical benefits noted above would be lost. Lastly, any attempt to rationally estimate the size of the physical gas market on a national level would require reporting from a substantially larger group of respondents than the narrower focus adopted in Order No. 704. Respondents would necessarily include smaller market participants for whom the reporting burden would be undue. For these reasons, we reiterate and emphasize our determination that data provided on Form No. 552 should be limited to transactions that utilize, contribute to, or could contribute to index price formation. However, the Commission understands that the natural gas market is ever evolving and dynamic. At a future date we may elect to amend Form No. 552 to obtain additional information necessary to facilitate transparency of the market.

      \19\ Order No. 704 at PP 18 and 69. Similarly, P 5 of the order indicates that an understanding ``in broad terms'' of the extent of the natural gas market is a goal of the rule.

    2. Both Sales and Purchase Data Are To Be Included on Form No. 552 16. Order No. 704 required the annual reporting both of relevant natural gas sales and purchases. We explained that purchase information was the opposing side of a sale transaction and, thus, was as relevant to the Commission's transparency mission as the reporting of sales.\20\

      Further, we noted that we have often found the reporting of purchase information beneficial both independent of sales figures and as a cross-check on such volumes.\21\

      \20\ Id. P 86.

      \21\ Id. PP 85-86.

      17. Although we understand that some participants in the technical conferences objected to the collection of purchase data in various contexts, we continue to believe that purchase data is a vital component to Form No. 552 and the Commission's transparency goals. Not only is purchase information important as a cross-check on reported sales volumes, but it has independent value. If only sales were reported on Form No. 552, Commission staff, state commissions, and other market observers would be unable to discern, for example, whether significant numbers of gas purchasers were transacting under contracts referencing an index price. Analysis of Form No. 552 purchase information will also provide trend data regarding purchase activity, which would be very useful for those charged with monitoring the natural gas markets. With purchase data, the public will be able to discern which purchasers are utilizing index-based contracts, whether there is geographic disparity regarding use of price indices among purchasers, the overall reliance upon gas price indices by purchasers, and other information relevant to market analysis and market confidence. While we acknowledge that removing purchases from volumes that must be reported on Form No. 552 would somewhat reduce the reporting burden on certain market participants, we continue to believe that the substantial benefits of having such data publicly available outweigh this burden.

    3. The De Minimis Reporting Threshold 18. Section 23(d)(2) of the NGA requires the Commission to exempt from new transparency reporting requirements ``natural gas producers, processors or users who have a de minimis market presence.'' \22\

      Consistent with this directive, Order No. 704 provided that most buyers or sellers of less than a de minimis volume of natural gas are not required to submit Form No. 552.\23\ The order set the de minimis threshold at 2.2 million MMBtus; that is, annual sales plus annual purchases of more than 2.2 million MMBtus required a market participant to report transaction information. In setting this threshold, the

      Commission ``sought to require reporting from a sufficient number of significant market participants to ensure, in the aggregate, an accurate picture of the physical natural gas market as a whole.'' \24\

      The Commission explained that:

      \22\ 15 U.S.C. section 717t-2(d)(2).

      \23\ Form No. 552 must be submitted by any section 204.402 or section 284.284 blanket certificate holder even if the entity has aggregate purchases and sales less than the de minimis threshold.

      Such an entity must provide identification information on Form No. 552 and must answer questions regarding price reporting to price index publishers, but need not submit Form No. 552's aggregate volume data. Order No. 704 at P 60.

      \24\ Id. P 78.

      T he [2.2 million MMBtu] figure was based on the simple calculation of one-ten thousandth (1/10,000th) of the annual physical volumes consumed in the United States, which is approximately 22 trillion cubic feet (Tcf) (or roughly 22 billion

      MMBtus). Looked at another way, a de minimis market participant would trade the equivalent of less than one standard NYMEX futures contract per day. Although a market participant that contracts for 1/10,000th of the nation's annual physical volume may appear to have little effect on natural gas prices, that participant may be transacting only at one location and, thus, have a much greater pricing effect there.

      Requests for Clarification or Rehearing 19. Copano Energy L.L.C. (Copano) requests rehearing of the de minimis threshold and argues that 2.2 million MMBtu is such a low threshold so as to render meaningless the NGA's directive that the

      Commission exempt from annual reporting requirements market participants that have a de minimis market presence.\25\ Copano argues that the Congressional purpose behind the de minimis threshold was to exclude entities that are too small to have an impact on market prices in the interstate, wholesale gas market. Copano states that a threshold one-hundred times as large (i.e., 220 million MMBtu/year) would represent less than 1 percent of annual physical volumes of gas consumed in the country and ``would therefore have no ability to impact prices in the wholesale, interstate natural gas market.'' \26\ Copano notes that Order No. 704 justifies the selected threshold by noting that even small amounts of gas purchases can have a price effect at certain locations.\27\ Copano believes that this reinforces its conclusion that a threshold should be established that measures market presence at market hubs.\28\ Instead of a single-number de minimis threshold, Copano suggests a two-pronged approach that considers both the impact of a market participant's transactions on the overall wholesale gas market (a twenty-two million MMBtu threshold) and the impact of a market participant's transactions at market hubs (5 percent of the total jurisdictional sales at the hub).\29\

      \25\ Copano comments at 8.

      \26\ Id. 5.

      \27\ Id. at 6.

      \28\ Id. at 7.

      \29\ Id. at 7-8.

      20. American Public Gas Association (APGA) requests clarification of section 260.401(b) of the Commission's regulations. As currently written, the regulation exempts an entity that does not hold a blanket sales or marketing certificate from the reporting requirement if the entity either made fewer than 2.2 million Dth of wholesale sales or 2.2 million Dth of wholesale purchases. APGA proposes that the Commission clarify this language so as to ensure that an entity with fewer than 2.2 million MMBtu of purchases is exempted from reporting purchases and an entity with fewer than 2.2 million

      Page 55730

      MMBtu of sales is exempted from reporting sales.\30\

      \30\ APGA comments at 2.

      21. Shell requests that the Commission clarify whether purchases and sales should be aggregated for purposes of calculating an entity's total reportable volumes.\31\ Additionally, Shell seeks guidance regarding how market participants are to determine whether they fall into the de minimis exception when part of the relevant total sales or purchases are to an affiliate or under other circumstances.\32\ Shell also requests clarification as to whether volumes that total exactly 2.2 TBtu fall into or out of the de minimis exception as the rule references amounts above and below the threshold, but not precisely at the threshold.\33\

      \31\ Shell is, collectively, Shell Gulf of Mexico, Shell

      Offshore, Inc., Shell Rocky Mountain Production LLC, and SWEPI LP.

      Shell comments at 28.

      \32\ Id. at 28-29.

      \33\ Id. at 29.

      Commission Determination 22. Regarding the appropriate de minimis threshold, we affirm our findings in Order No. 704 and retain the 2.2 million MMBtu level. As the Commission stated in Order No. 704, even market participants with total reportable volumes slightly above the threshold may have a significant effect on local wholesale markets.\34\ While it is possible that a respondent that exceeds the de minimis threshold exemption does not actually contribute to price formation, it is certain that some do and, in any event, market observers cannot yet know with any degree of assuredness which market participants have or do not have local price relevance. Likewise, these entities may rely upon price indices for a sizeable portion of their natural gas transactions. Form No. 552 seeks data only for volumes that either reference price indices or could contribute to the formation of price indices. A number of transactions are not reportable (as identified on Form No. 552, as discussed in

      Order No. 407, and as clarified in this order). Market participants should bear in mind that the Commission is not seeking data on all gas sales and purchases made by an entity, but rather a subset of these transactions.\35\

      \34\ Order No. 704 at P 81.

      \35\ For example, we clarify below that a bundled retail transaction made at a state-approved tariff rate is not reportable.

      We anticipate that this clarification will significantly limit the reporting obligation on smaller market participants.

      23. Nothing in Copano's request for rehearing provides new information regarding the establishment of a proper de minimis threshold. While we acknowledge that there are a number of rational ways to establish a de minimis threshold consistent with our

      Congressional mandate, we continue to believe that 2.2 million MMBtu is an appropriate threshold for the reasons expressed herein and in Order

      No. 704. 24. Regarding APGA and Shell's requests involving how volumes are to be calculated to determine whether an entity meets or exceeds the de minimis threshold, the Commission clarifies that an entity that has 2.2 million MMBtu of reportable sales or purchases must file Form No. 552.

      That is, a potential respondent with either reportable purchases equal to or greater than 2.2 million MMBtu or reportable sales \36\ equal to or greater than 2.2 million MMBtu must submit the form. The following table, regarding reportable purchase and sale volumes, explains how the de minimis threshold will apply:

      \36\ Reportable sales include off-system, balancing, and other assorted reportable sales as discussed elsewhere in this order.

      Reportable

      Does the entity

      Reportable sales volumes

      purchase volumes

      report?

      >= 2.2 million MMBtu.......... >= 2.2 million

      Yes, both sales and

      MMBtu.

      purchases.

      >= 2.2 million MMBtu.......... = 2.2 million

      Yes, both sales and

      MMBtu.

      purchases.