"We really dug in deeply," said William Hederman, director of FERC's Office of Market Oversight & Investigations (OMOI).

He was telling NARUC's winter meeting about how OMOI dug into the historic gas price spike in February last year.

They looked at 16,000 transactions around the price spike.  "We looked at over 100,000 bids and offers."

OMOI worked closely with the CFTC and found that while relatively few buyers and sellers were active at the time, the issue was the industry's liquidity problems rather than conspiracy.

"When we went and interviewed specific traders who had relatively large positions we were convinced that what they were doing had a legitimate business purpose to it and had not led to any changes in the numbers," he reported.

OMOI compared behaviors and patterns in different markets and decided manipulation hadn't occurred, said Hederman.

The sharp drop in reported trading stemmed from a drop in trading and reporting.

"We saw that drop as a danger to the industry but an attempt by the commission to be proactive and deal with a problem before it became a crisis," said Hederman.

The problem was that if you don't have price discovery in the market, "you can't possibly have a market."

So OMOI was sent by the commission "to do what we could to restore confidence in these indices.

"We've been working hard to get assurances" about accuracy, reliability and transparency, he added.

The commission's July policy statement included voluntary price reporting guidelines.

Lawyers at some publishing firms warned against voluntarily reporting and thus risking getting in trouble if a mistake crept into the numbers.

The commission added safe harbor assurances to quell those fears - as long as the reporting follows certain conditions that assure an independent and valid set of numbers, he added.

Those conditions include modes of conduct for the folks that handle the data.
     "We want to see completeness.
     "We don't want to see selective reporting.
     "We want to see verification.
     "We want an audit by some kind of independent auditor of the process to make sure that the conditions the commission expects to see are in place.

Hederman wants access to the data if OMOI needs a follow-up probe "and customers need to be able to get this information."

The firms doing the deals and reporting to the publishers have a similar code of conduct.
     "You need the data to be provided not by the traders who may have a conflict of interest," but from the back office or the mid-office, he explained.     "You want each trade reported - not selective trading - and you want data retention," the data should be around for three years and subject to independent audit, noted Hederman.

Index developers put new procedures in place shortly after the policy statement, Hederman reported, and are working with the back offices more now than with the traders.

OMOI is about to do "our second survey" very soon, he predicted.

The first survey last fall elicited some essay-style responses.

The next survey is to be much more focused and looking for specifics in terms of numbers and yes-and-no answers.

"I would ask you to encourage companies subject to your jurisdiction to cooperate in that survey," he added.

LDCs are to be included in the survey, he noted.
Hederman gave fixed-price contracts a big push.

He urged state commissions to talk with LDCs because "while indices are fine, somebody needs to be making price set deals and the more people doing that the richer that will be and the less subject to any kind of undue influence."

 (Story originally published in Restructuring Today 3/11/04)