Natural Gas and Electricity Markets
Federal Government Actions to Improve Private Price Indices and Stakeholder Reaction Gao ID: GAO-06-275 December 15, 2005Since the 1970s, the natural gas and electricity industries have each undergone a shift toward greater competition, referred to as restructuring. This restructuring has moved these industries from regulated monopolies to markets in which competitors vie for market share and wholesale prices are largely determined by supply and demand. Amid this restructuring, private companies have published information about these markets, including reports of market prices in various locations--referred to as price indices. These indices, whether for short-term "spot" or long-term "forward" markets, are developed by surveying selected market participants who voluntarily supply price information. Market participants rely on these price indices to help them make informed decisions about trading these commodities and to evaluate new investments. In recent years, confidence in price indices has been shaken due to misreporting and other abuses. During the energy crisis in the West in 2000-2001, several market participants were found to have purposefully misreported prices in order to manipulate these indices for financial gain. In this context, GAO agreed to answer the following questions: (1) What federal regulatory and statutory efforts have been taken to improve price indices in electricity and natural gas markets? (2) Have federal efforts improved industry stakeholders' confidence in these price indices?
Since 2003, the federal government has undertaken a series of regulatory and statutory efforts to improve the availability and accuracy of price information in price indices. First, FERC issued standards on voluntary price reporting and rules of conduct in a July 2003 policy statement. Second, FERC has taken steps to improve its ability to monitor price indices and enforce market rules by (1) reviewing wholesale prices for anomalies that could indicate market problems and (2) collaborating with other entities, such as the Commodity Futures Trading Commission (CFTC), and independent market monitoring units that monitor organized electricity markets to detect market manipulation. Third, the Energy Policy Act--enacted in August 2005--increases the amount and types of civil penalties that FERC may impose on companies that participate in anticompetitive behavior, including knowingly misreporting price information to index developers and gives FERC authority to collect additional transaction information if such information is necessary to ensure price transparency. Fourth, FERC and the CFTC entered into a memorandum of understanding to share and coordinate requests for information, which they say will allow FERC to more readily identify and sanction market manipulation. Many industry stakeholders reported that they now have greater confidence in most price indices, but some expressed concern about price indices for long-term electricity markets. FERC reported that stakeholders are generally satisfied with current price indices and that the quality of information has improved. For example, in a recent survey FERC found that two-thirds of respondents reported their confidence in price indices, on a scale of 1 to 10 (10 being most confident), as a 7 or greater. Further, FERC reported that since 2002 the quality of information has improved because (1) more companies are reporting data to publishers and (2) major publishers are providing more information about the number of transactions and volume of electricity and natural gas trades. GAO's own investigations corroborated what FERC found in its survey. Specifically, natural gas and electricity industry stakeholders reported that, in general, they are reasonably confident in the short-term prices now reported by trade publications and the improved quality of overall information. While stakeholders expressed general satisfaction with most price indices, some reported concerns about price indices in long-term electricity markets. Furthermore, stakeholders are now able to see that some of these markets witness fewer transactions and, as a result, are less developed than others. In the absence of a reliable long-term electricity market and information about prices, market participants noted that they rely on long-term natural gas markets and indices that are more developed. Stakeholders told GAO that, because natural gas is widely used to generate electricity, their prices often move together and, therefore, natural gas forward prices can substitute, to some extent, for electricity futures prices. They also said that the use of these natural gas markets only partly mitigates the lack of robust long-term electricity markets, because electricity and natural gas prices sometime move independently.
GAO-06-275, Natural Gas and Electricity Markets: Federal Government Actions to Improve Private Price Indices and Stakeholder Reaction
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Report to the Ranking Minority Member, Committee on Energy and Natural
Resources, U.S. Senate:
December 2005:
Natural Gas and Electricity Markets:
Federal Government Actions to Improve Private Price Indices and
Stakeholder Reaction:
GAO-06-275:
GAO Highlights:
Highlights of GAO-06-275, a report to the Ranking Minority Member,
Committee on Energy and Natural Resources, U. S. Senate:
Why GAO Did This Study:
Since the 1970s, the natural gas and electricity industries have each
undergone a shift toward greater competition, referred to as
restructuring. This restructuring has moved these industries from
regulated monopolies to markets in which competitors vie for market
share and wholesale prices are largely determined by supply and demand.
Amid this restructuring, private companies have published information
about these markets, including reports of market prices in various
locations”referred to as price indices. These indices, whether for
short-term ’spot“ or long-term ’forward“ markets, are developed by
surveying selected market participants who voluntarily supply price
information. Market participants rely on these price indices to help
them make informed decisions about trading these commodities and to
evaluate new investments.
In recent years, confidence in price indices has been shaken due to
misreporting and other abuses. During the energy crisis in the West in
2000-2001, several market participants were found to have purposefully
misreported prices in order to manipulate these indices for financial
gain.
In this context, GAO agreed to answer the following questions: (1) What
federal regulatory and statutory efforts have been taken to improve
price indices in electricity and natural gas markets? (2) Have federal
efforts improved industry stakeholders‘ confidence in these price
indices?
What GAO Found:
Since 2003, the federal government has undertaken a series of
regulatory and statutory efforts to improve the availability and
accuracy of price information in price indices. First, FERC issued
standards on voluntary price reporting and rules of conduct in a July
2003 policy statement. Second, FERC has taken steps to improve its
ability to monitor price indices and enforce market rules by (1)
reviewing wholesale prices for anomalies that could indicate market
problems and (2) collaborating with other entities, such as the
Commodity Futures Trading Commission (CFTC), and independent market
monitoring units that monitor organized electricity markets to detect
market manipulation. Third, the Energy Policy Act” enacted in August
2005”increases the amount and types of civil penalties that FERC may
impose on companies that participate in anticompetitive behavior,
including knowingly misreporting price information to index developers
and gives FERC authority to collect additional transaction information
if such information is necessary to ensure price transparency. Fourth,
FERC and the CFTC entered into a memorandum of understanding to share
and coordinate requests for information, which they say will allow FERC
to more readily identify and sanction market manipulation.
Many industry stakeholders reported that they now have greater
confidence in most price indices, but some expressed concern about
price indices for long-term electricity markets. FERC reported that
stakeholders are generally satisfied with current price indices and
that the quality of information has improved. For example, in a recent
survey FERC found that two-thirds of respondents reported their
confidence in price indices, on a scale of 1 to 10 (10 being most
confident), as a 7 or greater. Further, FERC reported that since 2002
the quality of information has improved because (1) more companies are
reporting data to publishers and (2) major publishers are providing
more information about the number of transactions and volume of
electricity and natural gas trades. GAO‘s own investigations
corroborated what FERC found in its survey. Specifically, natural gas
and electricity industry stakeholders reported that, in general, they
are reasonably confident in the short-term prices now reported by trade
publications and the improved quality of overall information. While
stakeholders expressed general satisfaction with most price indices,
some reported concerns about price indices in long-term electricity
markets. Furthermore, stakeholders are now able to see that some of
these markets witness fewer transactions and, as a result, are less
developed than others. In the absence of a reliable long-term
electricity market and information about prices, market participants
noted that they rely on long-term natural gas markets and indices that
are more developed. Stakeholders told GAO that, because natural gas is
widely used to generate electricity, their prices often move together
and, therefore, natural gas forward prices can substitute, to some
extent, for electricity futures prices. They also said that the use of
these natural gas markets only partly mitigates the lack of robust long-
term electricity markets, because electricity and natural gas prices
sometime move independently.
www.gao.gov/cgi-bin/getrpt?GAO-06-275.
To view the full product, including the scope and methodology, click on
the link above. For more information, contact Jim Wells at (202) 512-
3841 or Wellsj@gao.gov.
[End of section]
Contents:
Letter:
Results in Brief:
Background:
The Federal Government Has Undertaken Multiple Efforts to Improve Price
Indices:
Industry Stakeholders Are Reasonably Confident in Most Price Indices:
Concluding Observations:
Agency Comments:
Scope and Methodology:
Appendixes:
Appendix I: Comments from the Federal Energy Regulatory Commission:
Appendix II: GAO Contact and Staff Acknowledgments:
Figure:
Figure 1: Customer Satisfaction with Price Indices in 2004:
Signed by:
CFTC: Commodity Futures Trading Commission:
FERC: Federal Energy Regulatory Commission:
FTC: Federal Trade Commission:
ISO: Independent System Operators:
NARUC: National Association of Regulatory Utility Commissioners:
RTO: Regional Transmission Organizations:
Letter December 15, 2005:
The Honorable Jeff Bingaman:
Ranking Minority Member,
Committee on Energy and Natural Resources:
United States Senate:
Dear Senator Bingaman:
Since the late 1970s, the natural gas and electricity industries have
each undergone a shift toward greater competition, referred to as
restructuring. This restructuring has moved these industries from ones
in which local monopoly utilities provided services and regulators set
prices to ones in which competitors vie for market share, and wholesale
prices are largely determined by supply and demand. Amid this
restructuring, private companies have routinely published information
about these markets, including reports of market prices in various
locations--referred to as price indices--developed by surveying market
participants who voluntarily supply price information. In some cases,
these price indices refer to short-term markets--so called "spot"
markets where the electricity or natural gas is sold for delivery in
the near term (e.g., the next hour or the next day). In other cases,
price indices refer to long-term markets, such as "forward" and other
markets--for the purposes of this report, we refer to all of these as
occurring in long-term markets--where the delivery of natural gas or
electricity is expected to occur in the future (e.g., 30 days, 1 year,
or longer). Utility companies and other energy market participants rely
on these price indices to help them make informed decisions about
buying and selling electricity and natural gas and as a guide for
potential new investments. Because price indices play such a pivotal
role in the market, it is vital that energy market participants have
confidence that these indices are robust, transparent, reliable, and
accurate. To help ensure that wholesale market prices are fair and that
the information in price indices is reliable and accurate, the Federal
Energy Regulatory Commission (FERC) has issued regulatory rules
supporting competition, routinely monitored markets for anticompetitive
behavior, and enforced and revised market rules as needed.
In recent years, confidence in price indices had been shaken due to
misreporting and other abuses. Most notably, during the energy crisis
in California and the West in 2000-2001, several market participants
were found to have purposefully misreported prices in order to
manipulate these indices for financial gain. As part of FERC's efforts
to remedy price manipulation and consumer overcharges that occurred
during that electricity crisis, it has ordered more than $4 billion in
refunds. In addition to concerns about misreporting, some market
participants have noted that the entities that publish price indices
often failed to convey information necessary for them to assess the
quality and validity of the indices, such as information about the
volume of transactions represented and the number of participants
trading at various locations. As a result, some stakeholders raised
concerns about the federal government's ability to adequately regulate
and oversee natural gas and electricity markets and the reliability and
accuracy of prices reported in indices.
In this context, we agreed to answer the following questions: (1) What
federal regulatory and statutory efforts have been taken to improve
price indices in electricity and natural gas markets? (2) Have federal
efforts improved industry stakeholders' confidence in these price
indices? To answer these questions, we reviewed federal reports
documenting efforts to improve price transparency and examined
literature on price transparency in the natural gas and electricity
markets. In addition, we interviewed officials at FERC, representatives
of relevant trade associations, and experts. We examined FERC survey
data and assessed its reliability by reviewing existing information
about the data, interviewing agency officials knowledgeable about the
data, and examining comments by the entities surveyed. We conducted our
work from June 2005 to November 2005 in accordance with generally
accepted government auditing standards.
Results in Brief:
Since 2003, the federal government has undertaken a series of
regulatory and statutory efforts to improve the availability and
accuracy of price information in price indices. First, FERC issued
standards on voluntary price reporting and rules of conduct in a July
2003 policy statement. Second, FERC has also taken steps to improve its
ability to monitor price indices and enforce market rules by reviewing
wholesale prices for anomalies that could indicate market problems. In
this regard, FERC has also collaborated with other entities, such as
the Commodities Futures Trading Commission (CFTC) that oversees futures
markets, some of which are tied to long-term markets for electricity
and natural gas and independent market monitoring units that monitor
organized electricity markets to detect market manipulation. Third, the
Energy Policy Act--enacted in August 2005--increases the amount and
types of civil penalties that FERC may impose on companies that engage
in anticompetitive behavior, including knowingly misreporting price
information to index developers, and gives FERC authority to collect
additional transaction information if such information is deemed
necessary to ensure price transparency. Fourth, in response to
requirements in the Energy Policy Act, FERC and the CFTC entered into a
memorandum of understanding to share and coordinate requests for
information, which they say will allow FERC to more readily identify
and sanction market manipulation.
Many industry stakeholders report that they now have greater confidence
in most price indices, but some expressed concerns about price indices
for long-term electricity markets, such as price indices reported for
forward energy trades. For example, in a recent survey, FERC found that
two-thirds of respondents reported their confidence in price indices,
on a scale of 1 to 10, as a 7 or greater (10 being most confident).
Further, FERC reported that since 2002, the quality of information has
improved because more companies are reporting transaction data to
publishers of price indices and because major price index publishers
are providing greater information about the number of transactions and
volume of electricity and natural gas bought or sold at specific
trading locations. Our own investigations corroborated what FERC found
in its survey. Specifically, in our meetings with natural gas and
electricity industry stakeholders, they reported that, in general, they
are reasonably confident in the prices now reported by trade
publications. They also noted that the quality of overall information
has improved, which has increased their confidence that these indices
can be used to evaluate potential new investments. While stakeholders
expressed general satisfaction with most price indices, some reported
concerns about price indices for long-term electricity markets.
Specifically, they now recognize that some of these long-term markets
witness fewer transactions and, as a result, are less developed and
less reliable than their short-term counterparts. Consistent with this,
stakeholders told us that it is sometimes difficult to find a willing
trading partner in some long-term electricity markets. In the absence
of reliable information on long-term electricity prices, electricity
market participants noted that they instead trade in more developed
long-term natural gas markets as a substitute. These stakeholders
explained that, because natural gas is used extensively to generate
electricity, natural gas and electricity prices often move together
and, therefore, natural gas forward prices can substitute, to some
extent, for electricity futures prices. However, they also said that
the availability and use of these long-term natural gas markets only
partly mitigate the lack of robust long-term electricity markets,
because electricity and natural gas prices can and do sometimes move
independently.
Background:
The natural gas and electricity industries perform three primary
functions in delivering energy to consumers: (1) producing the basic
energy commodity, (2) transporting the commodity through pipelines or
over power lines, and (3) distributing the commodity to the final
consumer. Historically, many local utilities in the electricity sector
built their own systems of power plants and electricity transmission
and distribution lines to serve the needs of all consumers in their
local areas. Similarly, natural gas companies built networks of
pipelines to deliver natural gas from areas where it was produced to
the markets where local distribution companies served all local
customers. These local monopolies were overseen by regulators, who
restricted the entry of new companies and also approved investments,
approved prices paid by customers, and determined profits of these
utilities. However, due to rising electricity prices and technological,
economic, and policy developments beginning in the 1970s, the
electricity and natural gas industries have restructured from a
regulated environment to one that places greater reliance on
competition to determine entry, investment, prices, and profits. The
passage of the Natural Gas Policy Act of 1978, the Natural Gas Wellhead
Decontrol Act of 1989, and subsequent FERC orders in 1985 and 1992
opened access to pipelines and required pipeline companies to
completely separate transportation, storage, and sales services, all of
which facilitated the shift of natural gas to more competitive markets.
Similarly, the 1978 passage of the Public Utility Regulatory Policies
Act of 1978 and the 1992 passage of the Energy Policy Act facilitated
restructuring in the electricity industry. FERC built upon these
efforts through major regulatory actions in 1996 and 1999 that required
utilities under its jurisdiction to, among other things, provide
nonutility companies that generated electricity with access to the
utility's interstate transmission lines and encouraged utilities to
join in the creation of independent organizations to operate the
transmission system, such as Independent System Operators (ISO) and
Regional Transmission Organizations (RTO).
Under federal statutes, FERC is the principal federal agency that
regulates the natural gas and electricity industries to ensure that
wholesale electricity and natural gas prices are fair.[Footnote 1] FERC
is responsible for developing and maintaining the regulatory framework
that approves or otherwise influences the utilities' terms, conditions,
and rates for the sale or resale and transmission of natural gas and
electricity in interstate commerce. Historically, to ensure that the
prices these utilities charged were just and reasonable, FERC regulated
rates by basing the prices on the utilities' costs to provide service
plus a fair return on investment. Now, FERC seeks to ensure that
wholesale natural gas and electricity prices are just and reasonable by
promoting competitive markets, issuing market related rules that
encourage efficient competition, and enforcing and correcting market
rules as needed.
In the newly restructured markets, many energy market participants rely
on price information obtained from various sources, including price
indices published in trade press because some companies can be
reluctant to freely provide data on purchases and sales. Private
companies develop these price indices by collecting information about
market prices from market participants in a variety of ways, including
phone calls to individuals within energy trading companies. Market
participants use these indices to, among other things, help them make
informed decisions about buying and selling natural gas and
electricity. For example, energy market participants use price indices
as a benchmark in reviewing the prudence of gas and electricity
purchases and often reference price indices in the contracts they
develop for gas and electricity purchases. As part of its market
oversight efforts, FERC also monitors these price indices to detect
anticompetitive behavior.
Other federal agencies have roles affecting the electricity and natural
gas markets. The Commodity Futures Trading Commission (CFTC) oversees
markets and transactions related to the sale of commodity and financial
futures and options, while the Federal Trade Commission (FTC) and
Department of Justice police deceptive selling practices. In addition
to these federal agencies, states also oversee aspects of natural gas
and electricity delivery, often through public utility commissions.
The Federal Government Has Undertaken Multiple Efforts to Improve Price
Indices:
Since 2003, FERC has undertaken a series of efforts to improve the
availability and accuracy of price information, including specifically
addressing price indices. In 2000 and 2001 during the energy crisis in
the West, some market participants knowingly misreported data to index
providers in order to influence these indices for financial gain.
Following that, FERC convened a series of conferences and workshops
that included regulators, energy market participants, price index
publishers, and industry experts. One of these events included
participation by the CFTC and another included participation by the
National Association of Regulatory Utility Commissioners
(NARUC).[Footnote 2] As a result of these efforts, FERC staff developed
a better understanding of market participants' desired characteristics
of the price indices and behavior of other market participants. These
conferences and workshops also revealed some practical short-and long-
term solutions to problems such as how market price indices are
developed and why reduced energy trading activity was occurring.
Using the information that it developed through its conferences and
workshops, FERC developed new standards and rules of conduct for both
market participants submitting trade data and for price index
publishers, to help ensure that price indices were more accurate and
reliable and to strengthen market participants' confidence in price
indices. FERC outlined the standards that energy market participants
and index developers should follow in a 2003 policy statement.
According to FERC, these standards were designed to encourage
standardization in the voluntary reporting of price and other market
information, among other things, and to assure companies that they will
not be subject to administrative penalties for inadvertent errors in
reporting.[Footnote 3] These standards also encourage energy market
participants to report not only prices but also the volume of the
traded commodity and the date and time of the transaction, and
encourage the entities that publish price indices (e.g., Platts,
Natural Gas Intelligence, and Dow Jones) to also publish this relevant
market information. In addition, FERC standards encourage index
publishers to verify the price data obtained from companies that
provide price data, to indicate when a published price is an estimate
made by the publisher rather than data reflecting only the results of
actual trades, and to monitor the data to identify attempts to
manipulate energy price indices. Finally, FERC standards encourage
price index publishers to explain to users how the index is developed
and include the formulas used to calculate the index.
With regard to rules of conduct, FERC issued two orders in November
2003 designed to establish clear guidelines for sellers of wholesale
electricity and natural gas subject to its jurisdiction.[Footnote 4]
These guidelines prohibit actions that do not have a legitimate
business purpose and are capable of manipulating prices. For example,
they prohibit submitting false or misleading information to FERC or
price index publishers.
FERC has also taken steps to improve its ability to monitor price
indices and enforce related market rules. Recently, we reported that
FERC had made significant efforts to revise its oversight approach to
better align with its new role in overseeing restructured markets. In
particular, we have reported that through the establishment of its
Office of Market Oversight and Investigations in 2002, FERC had taken a
more proactive approach to monitoring by reviewing large amounts of
data, including wholesale prices, for anomalies that could lead to
potential market problems.[Footnote 5] In addition, FERC, which
oversees the operators of electricity grids, including ISOs and RTOs,
has worked with these organizations' market monitoring units--many of
which collect substantial amounts of information on prices and other
data to determine, among other things, whether prices are the result of
fair competition or appear to be a result of market manipulation.
Finally, the passage of the 2005 Energy Policy Act included FERC's
proposed statutory changes to address misconduct of market participants
by increasing civil penalties imposed on companies that participate in
anticompetitive behavior or manipulate the market. These changes
increase FERC's ability to levy civil penalties under existing laws,
raising potential fines to as much as $1 million per day per violation
for as long as the violation continues.[Footnote 6] A FERC official
said that increasing civil penalties would allow it to more effectively
deter market manipulation and misconduct that is damaging to
competitive markets. Moreover, FERC officials said that it would lead
to greater certainty for market participants, thereby increasing
participation in markets. The Energy Policy Act also gives FERC
authority to collect transaction information if necessary to ensure
price transparency. A FERC official said that this authority would give
FERC additional tools if the current voluntary system of reporting
prices to price index publishers proves inadequate. In addition, in
response to requirements in the Energy Policy Act, FERC and the CFTC
entered into a memorandum of understanding to share and coordinate
requests for information, which they say will allow FERC to more
readily identify and sanction market manipulation.
Industry Stakeholders Are Reasonably Confident in Most Price Indices:
Many industry stakeholders report that they are now reasonably
confident in short-term price indices, although some concerns about the
transparency of long-term electricity markets remain. As part of its
effort to assess its efforts to improve price indices, FERC surveyed
industry participants in March 2004, asking them to rate their
confidence in price indices--with 1 representing no confidence and 10
representing total confidence that price indices accurately represent
market pricing. Confidence in price indices ranged from an average of
7.5 for gas utilities to 6.7 for marketers, with nearly half reporting
a confidence of 8 or greater.[Footnote 7] (See fig. 1.) In addition, in
2004, FERC reported that price index publishers have submitted
information showing that the volume and number of transactions have
increased significantly since 2002 and is influenced by at least two
factors. First, companies that had been reporting transactions began
reporting more transactions to publishers of price indices. Second,
companies that had not been reporting had begun reporting transactions
to publishers of price indices. Furthermore, many of the companies
reporting in 2004 are among the industry's larger and more active
participants.
Figure 1: Customer Satisfaction with Price Indices in 2004:
[See PDF for image]
[End of figure]
Consistent with what FERC found, industry trade and research
organizations and others that we interviewed reported to us that their
members have few significant concerns about the short-term, also called
spot, price indices or long-term natural gas indices. They report that,
overall, FERC's efforts to improve the transparency of spot price
indices achieve sufficient oversight without being heavy-handed. In
addition, industry participants told us that the quality of data being
provided to publishers of price indices has improved since 2002. For
example, according to a major price index publisher, the reporting of
price information has significantly improved in the last 2 years, and,
further, the quality of analysis and reliability of the prices that
they report has improved. Finally, publishers are providing more
information about the market, such as the number of transactions and
the amounts of energy bought and sold at specific trading locations.
For example, a major publisher reported to us that, as of August 2004,
it includes volume and transaction data for each pricing point in the
spot market.
Despite their general satisfaction with most price indices, some
stakeholders reported concerns about price indices for long-term
electricity markets. In particular, representatives of one trade
organization told us that while data regarding spot prices and long-
term natural gas prices have improved, they still have concerns about
electricity prices involving long-term purchase arrangements and
similar long-term contracts (e.g., forward and futures markets, where
long-term contracts for electricity and related financial instruments
are bought and sold).[Footnote 8] Stakeholders are now able to see that
these markets witness fewer transactions and, as a result, are less
developed than others. One factor affecting price transparency in these
long-term markets is that the use of these markets collapsed in 2002
over concerns that prices were manipulated. This collapse, in turn, has
resulted in fewer market participants and a market that is less
developed, making it difficult for those still wanting to participate
in these markets to find a willing trading partner. In addition, two
stakeholders told us that there are not many options for obtaining data
regarding longer term energy market transactions. Complicating this
concern, FERC does not have jurisdiction for overseeing futures markets
and has only a limited direct role in long-term markets. As a result,
FERC does not formally collect extensive data on futures or long-term
markets.[Footnote 9] As a result, one energy market participant
reported that it relies on limited data when developing or valuing long-
term electricity contracts. In the absence of a mature and reliable
long-term electricity market and information about prices, market
participants noted that for now they rely on long-term natural gas
markets and indices, which are more developed. These market
participants told us that because natural gas is used extensively to
generate electricity, the prices often change together. They also said
that the availability and use of these natural gas markets only partly
mitigates the lack of robust electricity markets, because electricity
and natural gas prices can, and do, sometimes move independently.
Concluding Observations:
The move away from regulators setting prices and toward markets where
prices are increasingly a function of competition has raised the
importance of price indices as a mechanism to communicate information
to the market. In recent years, market participants have used these
indices in structuring their transactions and regulators have used them
to judge how the market is performing. As a result, it is important
that they accurately and reliably reflect actual prices.
The federal government has taken a number of steps to encourage
improved availability and accuracy of price indices, which has
increased industry confidence in price and other market information
provided in spot price indices. Although federal efforts appear to have
had a positive impact on short-term (spot) price indices, some concerns
remain about price indices for long-term electricity markets. It does
not appear that there is an easy way to improve reporting on these long-
term electricity markets until the markets themselves mature. Because
of the importance of price indices, it will be important for FERC,
Congress, and others to remain vigilant in their monitoring of existing
price indices and attentive for alternatives to address the remaining
issues in longer term markets.
Agency Comments:
We provided a copy of our draft report to FERC for comment. FERC
provided written comments, which are presented in appendix I. In its
comments, FERC generally agreed with our findings and conclusions. In
addition, FERC provided a variety of technical and other comments,
which we incorporated as appropriate.
Scope and Methodology:
To obtain information about efforts FERC has taken to improve natural
gas and electricity price indices, we reviewed reports and other
documents describing federal efforts to improve price transparency and
examined literature on price transparency in the natural gas and
electricity markets. In addition, we interviewed government officials
at FERC, representatives of trade associations, and industry and
academic experts in the field. We assessed the reliability of FERC
confidence survey data by reviewing the survey instrument and
methodology used to tabulate results, interviewing relevant agency
officials knowledgeable about the data to understand any limitations of
the data, and corroborating results by interviewing some of the
entities surveyed.
We conducted our work from June 2005 to November 2005 in accordance
with generally accepted government auditing standards.
We are sending copies of this report to the Chairman of FERC as well as
other appropriate congressional committees. We also will make copies
available to others upon request. In addition, the report will be
available at no charge on the GAO Web site at http://www.gao.gov.
If you or your staff have any questions about this report, please
contact me at (202) 512-3841 or [Hyperlink, Wellsj@gao.gov]. Contact
points for our Office of Congressional Relations and Office of Public
Affairs may be found on the last page of this report. GAO staff who
contributed to this report are listed in appendix II.
Sincerely yours,
Signed by:
Jim Wells:
Director, Natural Resources and Environment:
[End of section]
Appendixes:
Appendix I: Comments from the Federal Energy Regulatory Commission:
FEDERAL ENERGY REGULATORY COMMISSION:
OFFICE OF THE CHAIRMAN:
WASHINGTON DC 20420:
December 2, 2005:
Mr. Jim Wells:
Director, Natural Resources and Environment:
United States Government Accountability Office:
441 G Street, Room 2962:
Washington, D.C. 20548:
Dear Mr. Wells;
Thank you for the opportunity to comment on your report entitled
Federal Government Actions to Improve Private Price Indices and
Stakeholder Reaction. As you discuss, the Commission has taken many
steps over the past three years to improve the accuracy, reliability,
and transparency of price formation in wholesale natural gas and
electricity markets. These efforts have contributed to increased
confidence in price indices published by private companies.
Price formation in wholesale natural gas and electricity markets is a
voluntary process, and abuses in 2000-2001 undermined market
participants' confidence in reported natural gas prices. The Commission
worked with industiy and many private publishers of price indices to
improve the way prices are reported to index publishers and to make
more information available about the volume of trading and the number
of trades and parties trading in spot energy markets. Several process
improvements initiated by the Commission have been adopted by companies
reporting transaction data and by publishers of price indices. These
process improvements have contributed to greater overall confidence in
price indices.
The Commission continues to observe wholesale energy markets and the
price information available to market participants, including the
contributions to price formation of published indices. Recently, with
the enactment of the Energy Policy Act of 2005, the Commission has been
given new authority to facilitate price transparency in wholesale
energy markets and interstate transportation and transmission markets.
The Commission will utilize this authority as needed so that market
participants have adequate price information available to them.
Sincerely,
Signed by:
Joseph T. Kelliher:
Chairman:
[End of section]
Appendix II: GAO Contact and Staff Acknowledgments:
GAO Contact:
Jim Wells (202) 512-3841:
Staff Acknowledgments:
In addition to the individual named above, Jon Ludwigson, Kristen
Massey, Frank Rusco, Barbara Timmerman, Alison O'Neill, Chris Pacheco,
and Kim Wheeler-Raheb made key contributions to this report.
(360590):
FOOTNOTES
[1] Established in 1977 as the successor to the Federal Power
Commission, FERC is an independent agency that is the principal agency
that regulates the electricity industry. Some entities, including the
Tennessee Valley Authority and the Department of Energy's four Power
Marketing Administrations, as well as publicly owned utilities, public
power districts, and irrigation districts, as well as most
cooperatively owned utilities, are outside of FERC's jurisdiction.
[2] NARUC is a membership association of regulatory commissioners that,
among other things, is designed to study subjects concerning the
operation of public utilities.
[3] To encourage a greater volume of price reporting by these
companies, FERC presumes that companies that report trade data in
accordance with the standards of the Policy Statement are doing so in
good faith and, thus, these companies will not be subject to
administrative penalties for inadvertent errors in reporting--commonly
referred to as "safe harbor." FERC's guidance also stipulates that
companies should verify the accuracy and completeness of the
transaction data before submitting them.
[4] As previously discussed in this report, some entities, including
the Tennessee Valley Authority and the Department of Energy's four
power marketing administrations, as well as publicly owned utilities,
public power districts, and irrigation districts, as well as most
cooperatively owned utilities, are outside of FERC's jurisdiction.
[5] GAO, Energy Markets: Additional Actions Would Help Ensure That
FERC's Oversight and Enforcement Capability Is Comprehensive and
Systematic, GAO-03-845 (Washington, D.C. Aug. 15, 2003).
[6] Energy Policy Act of 2005, Pub. L. No. 109-58, Sections 314(b) and
1284(e).
[7] A limitation of the 2004 survey is that it is not a random,
statistically representative sample of industry participants.
[8] Futures contracts are financial arrangements, such as contracts
tied to prices of electricity or natural gas to be delivered in the
future, and are used to protect companies from price changes.
[9] CFTC has jurisdiction over certain futures markets where financial
instruments are sold. However, some forward physical and financial
markets, including electronic trading systems such as the
Intercontinental Exchange, are exempt from much, but not all, of the
CFTC's jurisdiction.
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