Daily Rules, Proposed Rules, and Notices of the Federal Government
Before Commissioners: Joseph T. Kelliher, Chairman; Suedeen G. Kelly, Marc Spitzer, Philip D. Moeller, and Jon Wellinghoff.
1. On December 26, 2007, the Commission issued Order No. 704, which imposed an annual reporting requirement on certain natural gas market participants.
2. Order No. 704 has its genesis in the Energy Policy Act of 2005 (EPAct 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.”
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.
5. One of the Commission's responses to these developments was the issuance, on July 24, 2003, of a
6. In an April 19, 2007 Notice of Proposed Rulemaking, the Commission proposed regulations consistent with these new responsibilities.
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.
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. 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.
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.
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.
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,
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.
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.
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
[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
19. Copano Energy L.L.C. (Copano) requests rehearing of the
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
21. Shell requests that the Commission clarify whether purchases and sales should be aggregated for purposes of calculating an entity's total reportable volumes.
22. Regarding the appropriate
23. Nothing in Copano's request for rehearing provides new information regarding the establishment of a proper
24. Regarding APGA and Shell's requests involving how volumes are to be calculated to determine whether an entity meets or exceeds the
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 the
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.
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 the
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 (
29. Several commenters to the April 2007 NOPR objected to the inclusion of end-use transactions in the annual report.
30. However, the order did not adequately distinguish between two distinct types of end-use transactions (
31. Order No. 704 correctly, though summarily, describes these participants' comments,
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.”
33. We understand that a number of participants at the technical conference (including AGA, Encana,
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 (
35. While Order No. 704 utilized the phrase “retail” transactions interchangeably with “end-use” transactions,
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 indicate
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.
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,”
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's
The Commission shall not require natural gas producers, processors,
The logical corollary to this Congressional directive is that a user that has greater than
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 the
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.
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.
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.
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.
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.
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) markets
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.
51. In Order No. 704, we required market participants to report sale and purchase volumes related to cash-outs,
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.
53. Regarding intrastate pipelines, Copano seeks clarification or rehearing regarding whether “non-interstate pipeline” market participants must