FERC Filings
Gas Transparency NOPR
Gas Transparency NOPR (Dockets RM 07-10-000 and AD06-11-000)
<center>UNITED STATES OF AMERICA
BEFORE THE
FEDERAL ENERGY REGULATORY COMMISSION</center>
<center>COMMENTS OF THE ELECTRIC POWER SUPPLY ASSOCIATION</center>
The Electric Power Supply Association (EPSA) supports sufficient transparency in competitive wholesale electric and natural gas markets. EPSA does not believe that further reporting is required for natural gas markets; however, if the Commission decides that further reporting is necessary, EPSA herein suggests changes to the proposed rule that (i) avoid the release of commercially sensitive information concerning electric generators operating on intrastate pipelines, and (ii) reduce the regulatory burden.
During the Commission's October 2006 inquiry into electric and gas transparency and the new EPAct 2005 provisions, EPSA expressed its confidence in natural gas markets as efficient and competitive, but urged the Commission to improve transparency and liquidity of electric wholesale markets. EPSA agrees that recent changes in Order 890 address transparency in the electric markets; any deficiencies that may occur during implementation of that rule can and should be addressed in that proceeding. Further, the natural gas markets are robustly competitive and have adequate transparency. For that reason, EPSA sees no need to require additional reporting burdens upon market participants.
However, if the Commission sees fit to require more reporting, the Commission should make changes that will improve the final rule. First, the Commission should exclude intrastate pipelines that serve only one customer from the requirement to post physical flows to avoid the release of confidential information. Second, the Commission should reduce the regulatory burden by (i) extending the time for the annual filing until April 30 of each year; (ii) providing that the reporting requirements be prospective only so that the first report will capture transactions in the first full calendar year after the adoption of the final rule; (iii) providing a safe harbor for inadvertent errors; (iv) giving companies the option to file either (a) aggregated data for all its affiliated companies that buy and sell gas, or (b) individual reports for each entity that buys or sells gas, and (v) clarifying the information that must be filed by making clear which transactions are indexed or fixed price and that cash-outs and inter-affiliate transactions should be excluded.
Under the NOPR, intrastate pipelines would have to post on the Internet their capacities (and the volumes physically flowing through), major receipt and delivery points, and mainline segments during the previous day. Information on gas flows is, in general, commercially sensitive information. For that reason, interstate pipelines do not make similar information available to the public at large - only registered shippers - and subscription services, such as Bentek, make available only static receipt/delivery point capability, not actual physical gas flows.
The commercial sensitivity of this information is heightened when there is only one customer on the pipeline - a situation common to EPSA companies who have generating facilities on intrastate laterals. In that situation, posting information on physical flows (even with a one day lag) would enable all other market participants to determine whether the unit is operating and at what capacity factor. Market participants obtaining this information could then use it to outbid the generating unit (or not bid against the generating unit), consequently reducing the competitiveness of the market.
Excluding intrastate pipelines from the posting requirement in these situations would be consistent with Congress' directive to facilitate price transparency but with due regard for "... fair competition." Providing greater transparency but reducing the competitiveness of a unit, or changing the bidding behavior of market participants, would not honor fair competition. Similarly, excluding posting would be consistent with the Department of Justice's caution to avoid the "rapid disclosure of highly-detailed firm- or transaction specific information... " Releasing information on pipeline flows is the type of highly-detailed transaction specific information that concerned the Justice Department. In these situations, the Department counseled against disclosing that information because the incremental benefits of increased transparency would be "small relative to the risks of coordination" - in this case the risk that market participants would use that information to change their bidding behavior to the detriment of the market.
Under the NOPR, the first report on natural gas transactions would be due February 15, 2008, and each February 15th thereafter. EPSA proposes to extend the annual filing date from February 15 to April 30. The February 15 date is too early to gather and submit verified transactions to the Commission. Estimates for December business are typically developed during the third week of January as part of the financial closing process. Those estimates are then verified and adjusted to actual, metered values in the next month's financial business cycle, i.e., through the third week in February. Thus, a company cannot even begin to create reports reflecting the prior year's actual settled business until the end of February, after the proposed February 15 date. Even then, such information must be transferred from the company's settlements systems to some other internal reporting process in order to generate the report to the Commission. That process will understandably also involve a reasonable set of checks and balances that must be completed and reviewed before releasing a final report.
The delay should not detract from the Commission's ability to assess the market - in fact it will ensure that the Commission is reviewing accurate data. This is clearly in the public interest when compared with the proposed tighter February 15 deadline, which would require companies to report estimated non-final data.
EPSA proposes that any reporting requirements should be prospective only such that the first report will capture a full year of the data required by the Commission. If the Commission adopts a final rule, the entities reporting will need to gather information, on a retroactive basis, on transactions adopted during the previous calendar year. For example, if the Commission adopts a final rule in December 2007, then the first report proposed for April 30, 2008, will include data on transactions in calendar year 2007 that were recorded well before the Commission approved the final rule.
Trying to fit transactions into a newly approved Commission form, on a retroactive basis, will be extremely difficult because it will involve making assumptions on reporting transactions that were not recorded with the Commission's form in mind. Moreover, several EPSA members currently do not have computer processes available to capture the data in the format requested by the Commission, raising the possibility that errors will be made in re-creating transactions.
Making retroactive assumptions and re-creating transactions would hinder the Commission's evaluation of the natural gas market. The first report will be the baseline of current natural gas activity upon which the Commission evaluates the changes in future reports. As such, it will be essential that the first report be a complete and accurate depiction of current natural gas activity. To that end, EPSA proposes that the first report capture a full calendar year of data prospective from the adoption of the final rule. Given that the Commission is currently monitoring the natural gas market, this proposal will not detract from the Commission's ability to assess the market. At the same time, such prospective data gathering will avoid the problems set forth above, thereby benefiting both the Commission and reporting entities.
As evidenced by the technical conference the Commission announced on June 1, 2007, the new reporting requirements proposed by the Commission will require further discussion about implementation and technical issues. While the reporting requirements may appear simple, compliance will not be easy. Inexperience with the rule along with the volume of transactions being requested will create a burden where even those companies taking every precaution to report accurately can inadvertently make a reporting error with no intentions whatsoever of willful misconduct. Therefore, violations should not be presumed when unintentional errors are occasionally discovered and corrected.
EPSA supports a "safe harbor" provision similar to the safe harbor that the Commission adopted for price reporting to index developers. A safe harbor could be structured as follows: If a shipper (1) conducts appropriate training of scheduling personnel, (2) has a compliance program targeted at identifying physical fixed price purchase and sale transactions, and (3) conducts an annual independent audit of the physical natural gas purchase and sales practices designed to identify reporting problems, there would be a rebuttable presumption that any misreporting of transactions was inadvertent. A provision of this nature would allow for Commission consideration of the overall program prior to launching an investigation or imposition of penalties, unless the violation was purposeful and caused harm to customers or other shippers.
The NOPR proposes that each market participant - defined as "any buyer or seller that engaged in physical natural gas transactions during the previous calendar year" - submit a report. EPSA members often organize generating facilities as single purpose entities, e.g., limited liability corporations, and each of these single purpose entities buys fuel. As defined, each of these single purpose entities would be a market participant and would be required to file a report, in addition to any reports required from affiliated marketers that sell gas.
Two problems could result from requiring reports from individual entities, within a larger company, that buy and sell gas. First, it increases the possibility that sensitive commercial information will be released - particularly the operation of the generating facilities owned by individual limited liability companies - the release of which will limit the competitiveness of these companies. Information on gas purchases can indicate how often a unit is operating. Information on unit operation is sensitive and can be used by competitors to outbid that generating unit, thereby reducing its competitiveness in the market. Second, requiring reports by individual companies could significantly increase the reporting burden. For example, one EPSA company estimates that as many as fifty (50) individual reports would have to be filed.
The Commission can address these two problems by allowing companies to file either (a) consolidated data for an entire company or (b) individual entity by entity data, should they so desire. The company would annually inform the Commission of its choice and the individual entities included in the report.
Giving companies this option will not detract from the Commission's goal of gaining information on gas markets but will avoid the problems identified. The purpose of the information to be provided in the report is to regularly estimate the (a) size of the physical domestic natural gas market, (b) use of index pricing in that market, (c) size of the fixed-price trading market that produces price indices, and (d) relative size of major traders. Such estimates can be made using aggregated information by company or from reports by individual entities within the company. For that reason, the Commission should allow companies the option to submit reports at the corporate level.
EPSA proposes three clarifications on the information that must be filed to avoid future confusion both for the Commission and market participants. First, the Commission should make clear which transactions are index transactions and which are fixed priced. Transactions based on daily indices are clearly reportable as indexed transactions under the proposed rule. However, deals of 30 days or longer are often based on either the first or close of the month index or an average of the last three days of the month. Such transactions could be considered either a fixed price transaction or an index price. To avoid confusion, the Commission should clarify that indexed transactions are transactions in which there is not a fixed price set at the time of the transaction but rather an amount will later be set based on some index.
Second, the Commission should exclude imbalance cash-outs. Resolving imbalances through cash outs could be considered a "buy" from the short shipper and a "sell" from a long shipper and thus reportable. But interstate pipelines currently report cash-outs to the Commission and reporting such information in the report would be duplicative. Moreover, such information has little to do with the current state of the gas market and more to do with the operation of interstate pipelines. Thus, to avoid any future confusion, EPSA proposes that the Commission exclude imbalance cash outs.
Third, the Commission should clarify that data on inter-affiliate transactions should not be reported regardless of whether a company reports at the consolidated or individual entity level. Excluding such transactions will provide the Commission with a more accurate depiction of current natural gas transactions. Inter-affiliate transactions are not reflective of market conditions because sales between affiliates are often done at index prices that do not reflect prices for "arm's length" sales made with third parties. The Commission's current policy on price reporting recognizes this fact by specifically excluding sales with affiliated entities from the transactions to be reported to price index developers. Moreover, reporting inter-affiliate transactions increases the possibility that data will be double-counted within the corporate family.
EPSA suggests that the Commission (i) avoid the release of confidential information concerning the operation of an electric generation facility by excluding the intrastate pipelines that serve only one electric generation facility from the posting requirement; (ii) reduce the regulatory burden by (a) extending the time for filing until April 30th, (b) providing for prospective data collection, (c) providing for a safe harbor, (d) giving companies the option to file either aggregated data for all its affiliated companies or individual reports for each entity; and (e) clarifying which transactions are indexed or fixed price and excluding cash-outs and inter-corporate affiliate transactions.
Respectfully submitted,
Nancy Bagot, Vice President of Regulatory Policy
Jack Cashin, Senior Manager of Policy
Electric Power Supply Association
1401 New York Ave, NW
11th Floor
Washington, D.C. 20005
Phone: 202-628-8200
July 11, 2007
Transparency Provisions of Section 23 of ) Docket Nos. RM07-10-000 the Natural Gas Act; Transparency ) AD06-11-000 Provisions of the Energy Policy Act )
Gas Transparency NOPR (Dockets RM 07-10-000 and AD06-11-000)