Good morning Chairman and Commissioners, today, staff presents two items, G-2, a Proposed Revised Policy Statement on Price Indices, and G-3, a Notice of Proposed Rulemaking (NOPR). The proposed policy statement revisions would change standards for natural gas index developers and change reporting requirements for those who report prices to those index developers. The draft NOPR proposes to codify in the Commission's regulations the Safe Harbor policy for data providers to price index developers. The changes proposed in items G-2 and G-3 are intended to support the formation of physical natural gas price indices.
A natural gas price index is a weighted average price derived from a set of fixed-price natural gas transactions within distinct geographical boundaries that market participants voluntarily report to a price index developer. Natural gas price indices play a vital role in the energy industry as they are used to price billions of dollars of natural gas and electricity transactions annually in both the physical and financial markets. Natural gas markets depend on robust and accurate indices in order to ensure just and reasonable prices. Natural gas price indices serve as a proxy for the locational cost of natural gas in the daily and monthly trading markets, as many market participants reference natural gas index prices in their physical and financial transactions. Interstate natural gas pipelines, public utilities, Independent System Operators (ISOs), and Regional Transmission Organizations (RTOs) reference natural gas price indices in their tariffs for various terms and conditions of service. State commissions also use natural gas price indices as benchmarks when reviewing the prudence of natural gas or electricity purchases. Finally, many natural gas financial derivative contracts that are used in hedging and speculation settle against natural gas price indices.
In 2003, the Commission issued its Policy Statement on Natural Gas and Electric Price Indices, effectively known as its Policy Statement, to explain what the Commission expects of natural gas and electricity price indices. The following year it issued its Price Index Order to establish guidelines to ensure that natural gas price indices that
are used in tariffs are robust, free from manipulation, and reflect market fundamentals. After issuance of the Policy Statement and Price Index Order, market participants increased the reporting of their fixed-priced natural gas transactions to price index developers, which, we believe, resulted in greater confidence in those indices. However, after 2010, the estimated traded volume of fixed-price natural gas transactions reported to price index developers declined significantly. Data from the Commission’s Form No. 552 shows that the estimated volume of fixed-price transactions voluntarily reported to price index developers declined by approximately 54 percent from 2010 until 2019. At the same time that fixed-price reporting to price index developers decreased, the use of indices increased: the traded volume of natural gas transactions that referenced natural gas indices, known as index gas, increased from 69 percent of the traded volumes in the U.S. physical natural gas market in 2010 to 82 percent in 2019.
To address the relative low number of fixed price volumes reported to index developers and the potential effects on market liquidity, G-2 proposes several revisions to the Commission’s price index policy set forth in its Policy Statement. The revisions would reduce perceived reporting burdens, encourage more reporting, and provide greater transparency into the natural gas price formation process. As a result, the revisions would increase confidence in the accuracy and reliability of wholesale natural gas prices.
The draft in G-2 proposes two revisions to reduce the burden on market participants that report transaction data to price index developers, also known as data providers. First, it proposes to allow data providers to report either their non-index based next- day natural gas transactions, their non-index based next-month natural gas transactions, or both types of transactions, to price index developers. Second, it proposes to allow data providers to self-audit the transactions they provide to price index developers on a biennial basis. Currently, data providers are required to perform a self-audit on an annual basis. The revisions are aimed at reducing the burden associated with price reporting in the hope that it may lead to additional market participants reporting their transactions to index developers. In addition, it
proposes to encourage data providers to report to all available Commission-approved price index developers.
The draft Proposed Revised Policy Statement in G-2 also proposes two revisions to increase transparency in the natural gas price formation process. It proposes to modify the Commission’s standards to remain an approved natural gas price index developer such that price index developers should: (1) indicate whether a published index price is assessed in their published indices and (2) obtain re-approval in order for their indices to continue to be included in FERC-jurisdictional tariffs. Finally, it proposes to clarify the review period for assessing the liquidity of price indices submitted for reference in FERC-jurisdictional tariffs. Staff notes that the modifications in this proposed Revised Policy Statement would apply solely to natural gas price indices and natural gas price index developers. However, we recognize that the Policy Statement applied to both the electric and natural gas industries. For that reason, Commission staff will conduct outreach to explore the need for, and scope of, any potential policy updates for the electric industry. And now I turn it over to my colleague Max Multer to discuss item G-3.
The draft NOPR in G-3 proposes to amend the Commission’s regulations at 18 CFR 35.41(c), 284.288(a), and 284.403(a) to codify the Safe Harbor Policy established in the Commission’s Policy Statement. Pursuant to the Commission’s Safe Harbor Policy, if a data provider can demonstrate that it has adopted and followed the standards for reporting set forth in the Commission’s Policy Statement, it is afforded a rebuttable presumption that its transaction data is accurate, timely, and submitted in good faith.
The draft NOPR in G-3 proposes to amend the regulations to add language to indicate:
(1) that there will be a rebuttable presumption of accuracy, timeliness, and good faith for data providers who submit transactions to price index developers in a manner consistent with the Policy Statement; and (2) that inadvertent reporting errors by such data providers will not constitute violations of those regulations. The proposal in G-3 does not modify the existing policy and is intended to promote voluntary reporting of wholesale natural gas and electricity transactions to price
index developers by alleviating market participant concerns that the Safe Harbor Policy is not binding on the Commission.
This is the end of our prepared remarks. We would be happy to answer any questions you may have.