A proposal by the Federal Energy Regulatory Commission (FERC) to demand greater transparency in the natural gas market has greater potential to create new problems than to address the problem it purports to solve—market manipulation. Market participants question the need for any changes, given that FERC has not clearly justified the need for additional information or shown that this information would combat market manipulation. In addition, the agency has limited jurisdiction over wholesale natural gas sales. Consequently, its proposal will likely harm transparency and will not improve confidence in price formation. Market participants, including a significant number of industrial end users who are not active traders, fear FERC’s approach will carry burdensome, harmful consequences.
FERC’s proposal, outlined in its Notice of Inquiry (NOI), would require quarterly reporting of each next-day or next-month delivery within the agency’s jurisdiction by all market participants engaged in the interstate, wholesale sale of physical natural gas. FERC has said that this information may be necessary for participants to better understand the market activities that produce the prices that are reported to indices. The information would be filed in a standardized, electronic format and, after some period of time, would possibly be made public.
Many transactions, however, fall outside of FERC’s regulatory control. “First sales” were removed from FERC’s jurisdiction by the Wellhead Decontrol Act of 1989 and the Natural Gas Policy Act of 1978 (NGPA). According to FERC, all sales in the chain from the producer to the ultimate consumer are “first sales,” unless and until the gas is purchased by an interstate pipeline, an intrastate pipeline, or a local distribution company (LDC). This limits FERC’s jurisdiction to only a segment of the natural gas market, and more importantly, one that is impossible to fully identify.
As a result, requiring the reporting of only transactions within FERC’s jurisdiction raises two serious issues. The first is that the reporting would not capture the entire wholesale natural gas market, or even a representative portion. This is because FERC interprets the definition of “first sale” under the NGPA as the entire chain of sale transactions from the initial sale at the wellhead to the sale for ultimate consumption, unless there is a sale to a pipeline or an LDC. Interstate pipelines have largely left the merchant business, and generally only buy or sell gas to support their operations. LDCs also primarily make retail sales, and their wholesale sales are generally limited to occasional sales of excess gas.
Second, and more importantly, it is impossible to determine the exact scope of the sales still subject to FERC jurisdiction. FERC interprets the NGPA to mean that wholesale sales by pipelines, LDCs, and their affiliates “break” the first-sale chain and bring the transactions within FERC’s jurisdiction. Although it is unclear whether this interpretation is correct, even if it is, it creates a host of compliance issues, particularly for industrial end users, who buy gas for their own business use. An end user that sells a portion of its gas supplies—an occurrence sometimes necessitated by an unexpected surplus—cannot trace the chain of ownership back to the wellhead. This means the end user will have no way of knowing if the chain of first sales transaction has been “broken.” In short, no one traces molecules.
Disclosures Could Harm Market Participants
Given FERC’s limited jurisdiction over natural gas sales, the reporting of only jurisdictional sales would not improve market transparency unless the data collected was representative of the broader market. One example to consider is the sale of excess gas by an LDC that may occur due to reduced demand stemming from warmer-than-expected weather. Such a sale would not be representative of the broader market. The reporting of non-representative sales would provide a false sense of true supply and demand in the marketplace and even harm transparency. In addition, the reporting requirement would impose a special burden on pipeline and LDC affiliates because their sales would be considered jurisdictional and, therefore, reportable. This burden would not be shared by other market participants, a fact that would put pipeline and LDC affiliates at a competitive disadvantage.
The detailed information that market participants would need to report on each jurisdictional transaction under FERC’s proposal includes the name, address, and contact information of the trading company; the product traded; trade execution method; price; and name of each index publisher to which the transaction was reported. This raises industry concerns that public dissemination of such information would put the reporting companies at a disadvantage, to the detriment of consumers. Such disclosures would reveal to the market participants the sale and purchase strategies of the reporting party and potentially its counterparties. Industrial end users would therefore end up negotiating with market participants—both their natural gas suppliers and their customers—that are aware of their sale and purchase strategies. In addition, competitors could learn commercially sensitive information regarding an industrial’s energy costs and purchasing strategy.
The concerns over the public release of commercially sensitive information are particularly acute for privately held companies that generally do not publicly disclose revenues and profit. For energy-intensive companies, natural gas pricing information would provide an important window into the overall economics of the company’s operations. For all these companies, any public release of volume or pricing information would represent a serious and intolerable business risk.
Where Is the Problem?
As for FERC’s assertion that reporting of jurisdictional sales would improve its ability to detect market manipulation, the U.S. Department of Justice (DOJ) has suggested otherwise. In its February 1, 2013, comments on the NOI, the DOJ noted that public disclosure of firm-specific or transaction-specific information may reduce competition by facilitating coordinated supplier actions that harm consumers. The DOJ said such coordination could occur by suppliers reaching terms that are profitable to them, detecting deviations that would undermine the coordination, and punishing such deviations.
In addition, FERC offers no evidence to support its assertion that the proposed rule changes would combat market manipulation and fails to cite any current market problem necessitating action. In National Fuel Gas Supply Corp. vs. FERC, the U.S. Court of Appeals for the District of Columbia Circuit vacated a FERC order that significantly expanded the Standards of Conduct for interstate natural gas pipelines. The court found no record pointing to a "real problem" with pipelines’ relationships with non-marketing affiliates.
FERC already devotes significant resources to market monitoring and enforcement. The NOI mentions no shortcomings in the current information gathering FERC performs as part of its customary investigations of policy violations or market manipulation. This lack of justification is particularly troubling, given the limited data FERC’s proposal would produce, the competitive harm it would create, and the significant and insurmountable compliance burden.
—Dena E. Wiggins is a partner in the Energy and Project Finance Group at Ballard Spahr LLP in Washington, D.C.