Ken Silverstein EnergyBiz Insider Editor-in-Chief

Some energy publishers aggregate trading deals from buyers and sellers of natural gas to help market participants gauge short-term prices and assess price risks. When the news surfaced in late 2002 that some of the data was bogus, both regulators and private organizations began seeking ways to assure the integrity of pricing indexes. The result has helped resurrect a devastated industry and produced a liquid and transparent market.

"The market has survived the crisis and we all -- market participants and publishers -- are operating under new rules and under the watchful eye of the Federal Energy Regulatory Commission and the Commodity Futures Trading Commission," says Ellen Beswick, publisher of Intelligence Press, one of the publishers that aggregates and disseminates the pricing material to traders.

Beswick says all of the prosecutions for price manipulation are for transgressions that occurred during the 2000-2002 timeframe. She is not aware of any accusations targeting incidents since that time. But the prosecutions for a number of the earlier incidents are continuing today in several areas and courts involving traders that tried to deceive publishers such as Intelligence Press and Platts. The investigations in the different jurisdictions are wide-ranging, "which is probably why it is taking so long to prosecute the cases."

The FERC began looking into how pricing data was supplied to publishing houses during its investigation of Enron. It said the system was susceptible to "unscrupulous traders" and called the problem of false reporting "epidemic." Gas producers, meanwhile, were vocal in their complaints that traders routinely misreported pricing data in an effort to make millions in additional profits.

As a result of its discoveries, FERC established guidelines that require private publishers that gather pricing info to establish a code of conduct as well as create a system that verifies the authenticity of the data they receive. At the same time, companies must discipline violators and cooperate fully with regulators. The guideposts do not require traders to name their counterparties but it does allow FERC "reasonable access" to the information. Trading organizations must retain for five years all of their data -- just in case federal regulators need to reconstruct pricing scenarios.

Meantime, the Energy Policy Act of 2005 makes it clear that it is illegal to report false data while giving FERC authority to investigate and levy penalties.

Robust Samples

By nearly all accounts, the trading sector has rebounded. Intelligence Press' Natural Gas Intelligence reports that in the November 2002 "bidweek" -- when trade volumes were at the lowest point -- the total trades reported came to roughly 4 billion cubic feet a day. By contrast, the current monthly reports amount to 14-16 billion cubic feet per day, and they have been even higher in some months.

In the case of Natural Gas Intelligence, it now has the cooperation of almost all of the top 20 gas marketers participating in the price surveys. While the cooperation of companies is still on a voluntary basis, Beswick says that companies must report to FERC as to whether they participate in the surveys or not. If they do report, then they must do it in a form and process specified by FERC.

"Our members have confidence in the natural gas pricing indices published today and continue to use these indices when we structure our natural gas purchases," says Alex Strawn, chairman of the Process Gas Consumers Group that represents industrial gas users. Participation in pricing indices has at least tripled since the low point in November 2002, he says. The New York Mercantile Exchange adds that the market's reliance on natural gas basis contracts that utilize published index prices has grown more than four-fold since November 2002.

Today's traders are not the familiar names that dotted the landscape during the heyday of the merchant power sector. They are, instead, large producers, as well as investment banks with superb credit ratings and an expertise in commodities trading. As long as wholesale markets for both power and gas are open, a need to pair up buyers and sellers will exist -- and so will the need to aggregate pricing information.

Sadly, Jerry Futch, 43, formerly of Reliant, helped pave the way for these changes. He just pled guilty to one count of fraudulent reporting for trades occurring in 2000 and 2001. The court estimated he did about $7 million in damage. Donald Burwell, formerly of El Paso Corp., also just pled guilty and will be sentenced this summer.

Already, though, energy trading organizations have paid fines to settle allegations that they schemed to massage markets by spreading bad information to natural gas pricing indices. Subsidiaries of Aquila and Xcel as well as Entergy-Koch Trading, Oneok, Oneok Energy Marketing, Calpine Energy Services, American Electric Power, Williams Cos., CMS Energy Corp., Dynegy Corp. and El Paso Corp. also settled. Most of the settlements specified the companies were admitting no wrong-doing.

Market Confidence

The publishers are doing what they can to increase both market participation and the accuracy of the data they print. They are attempting to aggregate the most possible net buyers and net sellers -- to detect any obvious aberrations. If a price is outside the statistical range and it cannot be independently verified, then it will be thrown out. Meantime, the reporting no longer comes from traders, but from administrative offices where the process is automated.

Also, survey participants now report each transaction separately instead of submitting an average of their trades, and all now are keenly aware that FERC and the commodities board stand ready to investigate and take over the process, making participation mandatory, if necessary. These changes have restored confidence in the surveys and, as the marketing segment has recovered, their participation has grown to include almost all of the top 20 traders, as well as some of the smaller ones.

"A robust sample is the strongest defense against attempts to manipulate either the published prices or the underlying market," the editors of Natural Gas Intelligence wrote in testimony given to FERC a few years ago. "Thin markets are more easily pushed and may not be reflective of underlying supply and demand. They therefore will not provide the proper signals for needed investment in infrastructure and to allocate supply to its highest uses."

The industry is still smarting from the hoopla created over all of the energy scandals in the early part of the decade. While today's high natural gas prices are the result of supply and demand being out of kilter, consumers remain jaundiced. The restoration of market confidence is therefore a top priority, making the combined efforts of regulators, publishers and trading entities to improve transparency, accuracy and liquidity of natural gas markets more important than ever.