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Daily Rules, Proposed Rules, and Notices of the Federal Government

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

AGENCY: Federal Energy Regulatory Commission.
ACTION: Order on Rehearing and Clarification.
SUMMARY: The Federal Energy Regulatory Commission affirms its basicdeterminations 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 ade minimisvolume 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.
Issued September 18, 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.

I. 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. § 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.”

2Energy 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 Seesections 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 SeeInitial 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 aPolicy 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.

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

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.

II. Discussion A. 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

11Order 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

16Policy 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.

17We note that this understanding tracks closely with our discussion of transactions that are reportable to index developers in the Policy Statement.SeePolicy 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.

18Further, 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 tocapture 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.

19Order 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.

B. 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.

C. 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 ade minimismarket presence.”22 Consistent with this directive, Order No. 704 provided that most buyers or sellers of less than ade minimisvolume of natural gas are not required to submit Form No. 552.23 The order set thede minimisthreshold 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:

2215 U.S.C. section 717t-2(d)(2).

23Form 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 thede minimisthreshold. 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, ade minimismarket 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 thede minimisthreshold 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 ade minimismarket presence.25 Copano argues that the Congressional purpose behind thede minimisthreshold 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-numberde minimisthreshold, 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

25Copano 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 salesormarketing certificate from the reporting requirement if the entity either made fewer than 2.2 million Dth of wholesale salesor2.2 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 millionMMBtu of sales is exempted from reporting sales.30

30APGA 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 thede minimisexception 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 totalexactly2.2 TBtu fall into or out of thede minimisexception as the rule references amounts above and below the threshold, but not precisely at the threshold.33

31Shell 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 appropriatede minimisthreshold, 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 thede minimisthreshold 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

34Order No. 704 at P 81.

35For 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 properde minimisthreshold. While we acknowledge that there are a number of rational ways to establish ade minimisthreshold 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 thede minimisthreshold, 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 sales36 equal to or greater than 2.2 million MMBtu must submit the form. The following table, regarding reportable purchase and sale volumes, explains how thede minimisthreshold will apply:

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

Reportable sales volumes Reportable purchase volumes Does the entity report? ≥ 2.2 million MMBtu ≥ 2.2 million MMBtu Yes, both sales and purchases. ≥ 2.2 million MMBtu < 2.2 million MMBtu Yes, both sales and purchases. < 2.2 million MMBtu ≥ 2.2 million MMBtu Yes, both sales and purchases. < 2.2 million MMBtu < 2.2 million MMBtu No (unless the entity has a blanket certificate, in which case it will provide non-volume information only).

25. We also clarify that sales and purchase volumes do not “net each other out” for purposes of determining whether an entity meets or exceeds thede minimisthreshold. Additionally, an entity that must file Form No. 552 must report both reportable sales and reportable purchases regardless of the total volumes associated with each component volume. For example, if a potential respondent has annual reportable sales of 2.0 million MMBtu and reportable purchases of 3.0 million MMBtu, then it must file Form No. 552 as its purchases exceed thede minimisthreshold of 2.2 million MMBtu. Further, it would report both its sales and purchases on the form.37

37APGA's request for clarification on this point is therefore denied.

26. We further clarify that, if a transaction is reportable on Form No. 552, then volumes associated with the transaction should be counted towards the threshold. The converse is also true: if a transaction volume would not be included on the form, then volumes associated with it should not be counted towards the threshold. We emphasize that not all physical natural gas purchases and sales count towards the threshold.38

38As detailed herein, physical transactions of companies that fall below thede minimisthreshold are excluded from the data collected by Form No. 552. Physical transactions need not be reported if they are not Next-Day or Next-Month transactions as those terms are defined in Form No. 552. In this same vein, financial transactions, transactions between affiliates, and traditional retail transactions (as discussed below), are not reportable on Form No. 552.

27. If a company chooses to aggregate volumes from affiliates, then such volumes are aggregated for purposes of determining whether the corporation meets or exceeds thede minimisthreshold. In response to Shell's requested clarification, Order No. 704 already makes clear that “a company with multiple affiliates may choose to report separately or in aggregate, as best meets its needs.”39 A company with multiple affiliates that chooses to aggregate must, however, aggregate all of its affiliates' data (i.e., it may not choose to aggregate some affiliates but not others). Consistent with Shell's other requests, we have modified Form No. 552 to make clear that entities that meet or exceed thede minimisvolume must submit the form.

39Order No. 704 at PP 60 and 97.

28. Regarding the format of amounts reported on Form No. 552, the Commission will require that volumetric entries on Form No. 552 be rounded to the nearest tenth of a TBtu. We understand that there was some confusion among participants at the technical conferences regarding the rounding of volume figures on Form No. 552. Form No. 552 currently requests reporting of volumes to the nearest TBtu (i.e., a reportable volume of 2.499 TBtu would be reported as 2.0 TBtu). Wedirect respondents to round volumes up or down, as appropriate, to thenearest tenthof a TBtu. Rounding to the nearest tenth of a TBtu will make the reporting obligation consistent with the proposedde minimisthreshold volume calculation, which is measured to the nearest tenth of a TBtu. Further, more precise reporting of data would allow for a more accurate review of market activity and we believe that aggregating volumes to the nearest tenth of a TBtu would be no more burdensome for respondents than the rounding currently required in the form.

D. Certain End-Use Transactions Should Be Reported on Form No. 552

29. Several commenters to the April 2007 NOPR objected to the inclusion of end-use transactions in the annual report.40 Order No. 704 addressed these concerns by exempting certain types of transactions from the reporting requirement. The order states that the rule “focuses the reporting requirement solely on wholesale buyers and sellers by excluding retail transactions.”41 The order did not require “end-use customers or retail buyers” to report transaction information unless those entities also made wholesale sales or purchases that were greater than thede minimisthreshold.42 Likewise, the order stated that “a transaction made to an end-user is not to be included in the volumes reported on the form.”43

40These commenters included American Forest & Paper Association (AF&PA), Industrial Energy Consumers of America (IECA), and Natural Gas Supply Association (NGSA).

41Order No. 704 at P 3.

42 Id.P 90.

43 Id.

30. However, the order did not adequately distinguish between two distinct types of end-use transactions (i.e.transactions that utilize or could contribute to a price index and transactions to customers as part of a bundled retail sale). The American Gas Association (AGA) and the National Energy Marketers Association (NEM), for example, specifically argued in comments on the April 2007 NOPR that end-use salesat retailshould be excluded from the reporting requirement.44 These types of end-use transactions involved retail service provided by a LDC to consumers subject to the LDC's state commission-approved tariff. Other commenters argued for a broader exemption, including all end-use transactions.45 These types of transactions would include not only bundled retail service subject to traditional state jurisdiction, but also direct end-use deliveries by interstate pipelines (an activity traditionally subject to the Commission's jurisdiction).

44AGA NOPR comments at 3; NEM NOPR comments at 5.See alsoNGSA NOPR comments at 12.

45AF&PA NOPR comments at 5.

31. Order No. 704 correctly, though summarily, describes these participants' comments,46 but then proceeded to utilize the term “retail” interchangeably with “end-use” when describing transactions that would be exempt from the reporting requirement.47 For example, under a section entitled, “Exclusion of Retail Transactions,” the order states that “[a]lthough some transactions reported to indices may include purchases by large end-users, the Commission is generally interested in wholesale prices.”48 Our exclusion in Order No. 704 is aimed at traditional retail transactions (i.e., those that are in markets functionally separate from the wholesale markets) rather than other end-use transactions involving volumes in the wholesale market—although the language of the rule's exclusion could easily be read so as to reach to all end-use transactions.

46Order No. 704 at PP 39-40.

47 See, e.g., Order No. 704 at PP 60, 89, and 90.

48 Id.P 90.

Requests for Clarification or Rehearing

32. NGSA requests clarification or rehearing regarding a seller's obligation to exclude end-use volumes from volumes reported on Form No. 552. NGSA quotes paragraph 90 of Order No. 704 indicating that “a transaction made to an end-user is not to be included in the volumes reported on the form.”49 NGSA argues that requiring the seller to delineate between end-use and non-end-use customers is unduly burdensome and that requiring such disclosure to sellers from purchasers would limit market liquidity.50 NGSA requests that the Commission clarify that, when in doubt, it is acceptable for a seller to include end-use volumes in Form No. 552.51 Any exclusion of end-use transactions should be applied from the buyers' perspective, argues NGSA.52

49NGSA comments at 3.

50 Id.4.

51 Id.

52 Id.5.

33. We understand that a number of participants at the technical conference (including AGA, Encana,53 and others) had both substantive and technical questions regarding Order No. 704's references to “end-use” transactions and “retail” transactions. There was significant confusion regarding whether certain types of transactions to consumers of natural gas were reportable. AGA filed supplemental comments in the docket requesting various clarifications regarding an LDC's responsibility to report sales to end-users, among other transactions.54

53Encana Marketing (USA) Inc. (distinct from its joint rehearing request as part of the Canadian Suppliers).

54AGA supplemental comments at 3-5.

Commission Determination

34. The Commission clarifies here that there will be no categorical exclusion of end-use transactions from Form No. 552. Nevertheless, Form No. 552 will collect only information regarding that subset of end-use transactions that relies upon price indices or that could be utilized to form a price index. Accordingly, as we explain below, reporting of traditional, bundled retail transactions made by an LDC at a state-approved tariff rate (i.e., the majority of transactions to retail customers) would not contribute to the Commission's transparency mission and are not subject to reporting. We believe that this is a “bright-line” rule easily understood by potential respondents.55

55NGSA's request for rehearing or clarification of this issue is, therefore, denied.

35. While Order No. 704 utilized the phrase “retail” transactions interchangeably with “end-use” transactions,56 the overall thrust of our order was that transactions that are typically perceived to be at retail are not reportable while transactions that utilize, contribute to, or may contribute to price indices should be reportable. Depending upon the type of transactions involved, end-use transactions can have a substantial impact on price formation and the functioning of the wholesale markets, particularly in localized areas.

56 See, e.g., Order No. 704 at PP 60, 89, and 90.

36. While precise data is not readily available (indeed, obtaining that data is one of the goals of Form No. 552), it is our experience and industry common knowledge that many end-use transactions utilize price indices and/or could be relied upon to form price indices. End-use transactions, specifically transactions involving large consumers of natural gas that compete directly with wholesale market participants, are very relevant to the Commission's transparency mission. For example, use of natural gas for power generation has increased markedly since 2000. According to annual figures from the Energy Information Administration (EIA), natural gas used to produce electric power is up from 14.2 Bcf/d in 2000 to 18.8 Bcf/d in 2007, an increase of 32 percent. As a result, natural gas generation's share of overall gas use is up, too. In 2000, EIA figures indicatethat natural gas used for power generation accounted for 18 percent of total U.S. natural gas consumption; by the end of 2007 it represented 30 percent.57 On a peak day in the summer, natural gas generation's share of gas use can be much higher. According to EIA, the U.S. delivered a total of 21.3 Tcf of natural gas to consumers in 2007 or on average about 58.3 Bcf per day.58 On August 8, 2007, estimates of gas use for power generation reached 38 Bcf/d or 65 percent of 2007 average daily gas use.59 Moreover, in many regional power markets, natural gas is the marginal fuel during the majority of hours power plants are being dispatched, therefore a better understanding of how natural gas indices are formed will aid the Commission and the public in understanding power market dynamics. For these reasons, we conclude that where a transaction could contribute to the formation of price indices and/or relies upon a price index, the transaction should be reportable even if the reporting entity is a natural gas end-user.

57Derived from information provided by EIA on their Natural Gas Navigator Web site,http://tonto.eia.doe.gov/dnav/ng/hist/n3045us2a.htm.

58Derived from information provided by EIA on their Natural Gas Navigator Web site,http://tonto.eia.doe.gov/dnav/ng/ng_sum_lsum_dcu_nus_a.htm.

59Derived from the “U.S. Power Burn Report”, Bentek Energy, LLC.

37. Requiring end-users to supply transaction data if the transaction utilizes, contributes to, or could contribute to price index formation is well within EPAct 2005's Congressional mandate. The Commission accurately stated in Order No. 704 that price formation in natural gas markets makes no distinction between transactions that are traditionally jurisdictional to the Commission and those that are not.60 Congress, recognizing this fact, gave the Commission expansive jurisdiction under the transparency provisions of EPAct 2005. The Commission's traditional jurisdiction under sections 4, 5, and 7 of the NGA is limited to “natural gas companies.”61 In contrast, section 23(a) of the NGA directs the Commission “to facilitate price transparency in markets for the sale or transportation of physical natural gas in interstate commerce”62 including obtaining information from “any market participant.”63 There is no applicable statutory limitation on the collection of information that may involve transportation through distribution-level facilities, as applies to the Commission's traditional jurisdiction.64

60Order No. 704 at P 6.

6115 U.S.C. section 717b-717i.

6215 U.S.C. section 717t-2(a)(1).

6315 U.S.C. section 717t-2(a)(3)(A).

64Section 1(b) of the NGA, 15 U.S.C. section 717(b), provides in part that the Commission's jurisdiction generally does not apply to “the local distribution of natural gas.”

38. In addition, the first sentence of section 23(a)(2) gives the Commission broad authority to “prescribe such rules as the Commission determines necessary and appropriate to carry out the purposes of this section,”i.e.facilitating price transparency. This broad grant of authority is followed, in the second sentence of the section, with the requirement that the “rules shall provide for the dissemination on a timely basis of information about the availability and prices of natural gas sold at wholesale and in interstate commerce.” The requirement in the second sentence, including the reference to “gas sold at wholesale,” does not limit the broad authority granted by the first sentence. Rather, the rules required by the second sentence should be viewed as a subset of the rules the first sentence of section 23(a)(2) authorizes the Commission to adopt. Put another way, section 23(a)(2) should be interpreted as providing that the Commissionmayadopt rules collecting information about any transactions, including non-wholesale end-use transactions, if necessary to facilitate price transparency, but such rulesmustinclude the collection of information about wholesale transactions in interstate commerce.

39. This interpretation is buttressed by the fact that section 23(a)(3)(A) expressly permits the Commission to obtain “the information described in paragraph (2) from any market participant,” a term which includes end-users. EPAct 2005'sde minimisthreshold requirement in section 23(d)(2) provides further support for this position. That provision states:

The Commission shall not require natural gas producers, processors,or userswho have ade minimismarket presence to comply with the reporting requirements of this section.65

6515 U.S.C. section 717t-2(d)(2) (emphasis added).

The logical corollary to this Congressional directive is that a user that has greater thande minimismarket presence could be made subject to the reporting requirement. By establishing ade minimisthreshold volume of 2.2 million MMBtu (and, as further explained herein, exempting traditional retail transactions from reporting), the Commission appropriately limits reporting by end-users only to those users with a more than ade minimismarket presence and only to those end-use transactions that utilize, contribute to, or could contribute to price index formation.

40. While a large industrial end-user may not be a customer “at wholesale,” it is doubtless a “market participant” in the interstate wholesale energy market and its actions may have a direct impact on the wholesale market or market indices, especially in a localized area. We also note that the collection of information on an annual basis is qualitatively different than our customary regulation of rates, terms, and conditions applicable to natural gas companies. Requiring reporting from large end-users that engage in 2.2 million MMBtu of annual sales or purchase transactions (other than transactions associated with bundled retail tariff service) is a conservative outcome compared to the broad authority granted to us by Congress in section 23 of the NGA. Our approach strikes a balance between the data that the Commission requires to meet its transparency-related obligations and the burden placed upon market participants to provide this data.

41. However, not all end-use transactions have the potential to contribute to the formation of price indices or rely upon price indices. For example, traditional retail transactions, even those involving annual volumes greater than thede minimisthreshold, neither utilize an index for a price nor contribute to index price formation. These retail transactions are not relevant to the Commission's transparency goals. A bundled retail transaction through an LDC at a state-approved tariff rate is properly excluded from purchase and sales volumes to be reported on Form No. 552.66 The reporting burden on retail consumers would greatly outweigh any minimal transparency benefit. To the extent that a potential respondent purchases or sells gas at a bundled retail tariff rate, it should notcount those volumes towards thede minimisthreshold and, if required to submit Form No. 552, it would not include those volumes in its report.67 We note that this “bright-line” clarification would also resolve NGSA's concerns regarding a selling entity's ability to identify what purchasers are consuming gas—if gas is sold by an LDC under a bundled retail tariff rate, then it need not be reported.

66We have drawn a parallel distinction in the electric context. In Order No. 888, the Commission exercised its jurisdiction over unbundled transmission to end-users in interstate commerce, yet declined to exert jurisdiction over bundled retail transmission.See Promoting Wholesale Competition Through Open Access Non-discriminatory Transmission Services by Public Utilities; Recovery of Stranded Costs by Public Utilities and Transmitting Utilities,Order No. 888, 61 FR 21540 (May 10, 1996), FERC Stats. & Regs. ¶ 31,036, at p. 31,781 (1996). The U.S. Supreme Court approved of this distinction inNew Yorkv.FERC,535 U.S. 1, 28 (2002). While not a jurisdictional question, in this rulemaking, we incorporate a similar distinction between unbundled natural gas transactions to consumers (which are reportable in Form No. 552 if they utilize or contribute to the formation of a price index) and bundled transactions through an LDC subject to state-approved tariff rates (which are not reportable).

67One caveat is that, if the end-user or other market participant holds a blanket certificate from the Commission, it must, at a minimum, submit the identification and price reporting data required on Form No. 552.

42. This proposed approach is similar, though not identical, to the Commission's jurisdictional reach over natural gas transportation service to end-users. FERC exerts its customary jurisdiction over direct transportation of natural gas from an interstate pipeline to an end-user.68 However, the Commission has traditionally declined to exercise jurisdiction over transportation to “retail customers in a localized geographical area behind either a town border station or behind facilities * * * that connect to rural delivery points outside the boundaries of towns.”69 Where transportation to an end-user occurs in interstate commerce and not as part of local distribution, the Commission has jurisdiction.

68 See, e.g.,Public Utilities Commission of the State of Californiav.FERC,900 F.2d 269 (D.C. Cir. 1990).

69 Kinder Morgan Interstate Gas Transmission LLC,99 FERC ¶ 61,186, at n.30 (2002).

43. We conclude that exempting from reporting those volumes associated with bundled retail transactions made at state-approved tariff rates, while including volumes associated with direct pipeline-to-end-user and other end-user transactions, is appropriate. This modification regarding the reportability of certain end-use transactions necessitates changes to the language of Form No. 552.70

70One such modification is the definition of “Physical Natural Gas Transactions” in the Definitions portion of current Form No. 552. The definition clearly indicates that reportable volumes areonlythose that utilize, contribute to, or may contribute to the formation of price indices. The definition also explicitly excludes volumes associated with bundled retail sales and purchases at state-approved tariff rates.

E. Respondents Need Not Distinguish Between Transactions Based Upon Location

44. Order No. 704 provided that a market participant must categorize transaction volumes by whether each transaction was made at a “reportable location.” Reportable locations are locations where index developers currently collect fixed-price information for transactions with Next-Day or Next-Month Delivery obligations, and produce index prices. Thus, Order No. 704 tied the meaning of “fixed-price” reported volumes to volumes that may be reported to index developers at specific points. To this end, we directed our staff to list on the Commission's Web site all reportable locations at which fixed-price volumes were to be reported on Form No. 552.71

71Order No. 704 at PP 60 and 101-102.

Requests for Rehearing and Clarification

45. NGSA requests rehearing of Order No. 704 so as to require submission of data at all trading locations rather than limited to specific reportable locations.72 NGSA argues that this approach would be consistent with the Policy Statement on price reporting.73 Further, NGSA states that designated “reportable locations” will change over time, hampering the Commission's long-term analysis of the market.74 NGSA argues that limiting reported data only to specific reportable locations would be more burdensome to most respondents than reporting all aggregate, relevant data.75 Lastly, NGSA asserts that different index developers utilize different means to collect data at the same index point and, thus, data collected from market participants for particular reportable points will not offer a reasonable comparison to reported indices.76

72NGSA comments at 5.

73 Id.at 6 (citing the Policy Statement).

74 Id.at 6-7.

75 Id.at 7.

76 Id.

46. Participants at the technical conferences echoed some of these themes. The NiSource Companies (NiSource) and Encana, for example, questioned how reporting was to be accomplished for certain reportable locations given that different reporting services defined the locations in multiple ways.

Commission Determination

47. We grant rehearing of Order No. 704 on this issue and provide that respondents need not categorize volumes based upon whether such volumes relate to transactions at specific price index locations. We agree with NGSA that: (1) It would be substantially less burdensome for market participants to provide aggregate data regarding their transactions than to differentiate between volumes that occur within or outside reportable locations; (2) defining workable “reportable locations” would be difficult, would require substantial detail regarding geographic scope and types of transactions at specific locations, and would unduly complicate respondents' Form No. 552 responses; and (3) specific reportable locations would change on a yearly basis, limiting the value of data collected by location. We also understand that participants at the technical conferences indicated a substantial preference for this modification.

48. The Policy Statement provides that the minimum standards for data providers include a commitment to report “each bilateral, arm's-length transaction between non-affiliated companies in the physical (cash) marketsat all trading locations.77 Modification of Form No. 552 to eliminate data collected at specific reporting locations would make the annual reporting obligation consistent with the Policy Statement. Consequently, for respondents that already comply with the Policy Statement standards, data collection and reporting on Form No. 552 would be significantly less burdensome. In fact, we believe that it would be easier for most entities thatdo notcomply with the Policy Statement standards to provide aggregate data for all reportable transactions rather than to segregate data regarding transactions at specific locations.

77Policy Statement at P 34 (emphasis added).

49. Further, comments by conference participants and NGSA's request for rehearing make clear that it would be administratively difficult to geographically define each reportable location in a way that would capture all transactions that were eligible for reporting to the various price indices. This is due to the fact that different data collection methodologies are used by index developers at the same point as well as the fact that different index developers accept different transactions from these points to form indices.

50. For these reasons, we grant rehearing of Order No. 704 and determine that respondents need only provide aggregated data for reportable transactions at all transaction locations. Respondents need not provide data segregated by reportable location.78

78Consistent with the determination, we will no longer direct the Commission's staff to retain a list of reportable locations on the Commission's Web site.

F. Balancing, Cash-out, Operational, and In-Kind Transactions Are Reportable

51. In Order No. 704, we required market participants to report sale and purchase volumes related to cash-outs,imbalance make-ups, and operations.79 We noted that, while some volumes related to such transactions are not utilized to create price indices, many volumes do refer to or utilize such indices.80 The Commission concluded that the data collected from such transactions is useful in assessing how spot prices are being used commercially. Specifically, the order required market participants to include on Form No. 552 volumes related to royalty-in-kind transactions and purchases and sales related to production and gathering functions.81

79Order No. 704 at P 107.

80 Id.P 108.

81 Id.

Requests for Rehearing or Clarification

52. Regarding transactions on interstate pipelines, Shell and NGSA seek rehearing of Order No. 704 so as to exclude cash-out, imbalance makeup, and operational volumes from the realm of reportable transactions. Both Shell and NGSA argue that such transactions do not affect the interstate natural gas market, though they may often rely upon natural gas indices for their price.82 Shell states that data regarding such transactions may not reflect actual market activity as prices may vary according to whether the pipeline or shipper owes gas and there is a one-month lag on the timing of many makeup transactions.83 For this reason, the use of index prices in makeup transactions, Shell argues, does not reflect the value of natural gas for purposes of assessing wholesale natural gas spot markets and will actually distort relevant data received by the Commission.84 In the alternative, if rehearing on this point is denied, Shell seeks clarification that, if a pipeline provides imbalance cash-out data, then shippers need not provide the identical data on Form No. 552.85 NGSA reiterates many of these arguments, adds that pipeline balancing transactions are governed by the pipeline's tariff, and argues that balancing should not be considered a purchase or sale in the wholesale market.86

82Shell comments at 14-15; NGSA comments at 11.

83Shell comments at 14-15.

84 Id.at 15.

85 Id.at 16.

86NGSA comments at 9-10. NGSA repeats many of these same arguments in its subsequent supplemental comments at 4-6.See alsoShell comments at 15-16 (stating in passing that imbalance trading transactions should not be considered a purchase or sale).

53. Regarding intrastate pipelines, Copano seeks clarification or rehearing regarding whether “non-interstate pipeline” market participants must